The Reserve Bank of India’s (RBI) restructuring scheme for MSMEs could provide some respite to banks and non-banking financial institutions (NBFCs) on non-performing asset recognition and thereby credit costs that they could have witnessed over 2019-2020, says India Ratings and Research (Ind-Ra). It would also improve credit flow to the sector which has been constrained on account of banks’ and NBFCs’ cautious and tight lending approach to the segment. Ind-Ra estimates that SME segment comprises about 1/10th of banking system credit and approximately one/fifth in case of retail credit outstanding for NBFCs.
Ind-Ra believes that the dispensation, which is the latest in a series provided by the RBI in the post demonetisation period, would delay the recognition of stress in the segment, thereby postponing credit costs recognition for banks and NBFCs. From a sectoral perspective, while stress in the corporate segment seems to be stabilising, the non-corporate segment is increasingly showing signs of higher stress. Earlier dispensations have also not displayed any material improvement in asset quality for the sector, as MSMEs’ cash flows remain under pressure. Furthermore, operations of MSMEs with inherent weakness in operations beyond the ambit of temporary mismatches related to demonetisation and GST could still play out and manifest post the dispensation period is over. Ind-Ra also believes that this dispensation may encourage some of the MSME borrowers, which are otherwise operating satisfactorily, to opt for the scheme and impair the credit discipline.
Ind-Ra’s analysis of PSBs exposure to all loans less than INR50 million reflects an increase in special mention accounts (SMAs) pool in FY18 over FY17. Also, the exposure of PSBs to accounts under SMA1 increased about 10% yoy in FY18 while for accounts under SMA2 decreased about 22% yoy, based on the data available and Ind-Ra’s estimates (Figure 1 and 2). However, the share of SMA1 of less than INR50 million increased to 40% in FY18 (FY17: 29%) and SMA2 to 68% (12%). Gross NPAs for the SME/MSME segment for PSBs increased to 10.8% in FY18 from 8.2% in FY16 (Figure 3).
The RBI in its Fiscal Stability Report (released on 31 December 2018) has highlighted continuing stress in the MSME sector where the NPAs for the micro segment (exposure less than INR 10 million) increased to 8.7% in June 2018 from 7.9% in March 2016 and that for the SME segment (exposure of INR10 million-250 million) increased to 11.5% from 9.8%. The report also points out that from a lender segment perspective, while non-banking financial companies and private banks have seen a marginal decline in NPAs from the segment over March 2017 to June 2018, PSBs have seen an increase to 15.2% from 14.3% (Figure 4 and 5).
The RBI in its announcement on 1 January 2019 has come out with a one-time restructuring scheme for loans given to MSMEs with an aggregate exposure (both fund and non-fund based) not exceeding INR250 million. There will be no downgrade in the classification of loans under the scheme, subject to the following conditions: 1) While the borrower account could be overdue, it should still be classified as standard as on 1 January 2019 and should continue to be classified as standard till the date of restructuring; 2) The scheme is applicable for loans extended by both banks and non-banking financial companies; 3) The borrower should be registered with GST as on the date of restructuring; 4) The restructuring should be completed before 31 March 2020; 5) Additional provision of 5% will be required for accounts restructured under the scheme in addition to the provisions already held.
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