Govt does well to dovetail MSME loan rescheduling with GST, a carrot and stick policy beyond reproach

In a move that will benefit thousands of troubled small businesses, banks and finance companies will grant debt relief to micro, small and medium enterprises (MSMEs) saddled with loans of up to Rs 25 crore that are facing stress but are yet to be classified as bad loans or non-performing assets (NPAs). Announcing the scheme, the Reserve Bank of India (RBI) on 1 January, 2019 said the loan restructuring would be subject to the borrower being GST-registered on the date of implementation of restructuring. Stressed loans are those which have in the past got the bank’s indulgence in the form of rescheduling. The NPA, on the other hand, is a loan that has been classified as bad with the borrower having defaulted in servicing the principal and interest for more than 90 days. [caption id=“attachment_4761101” align=“alignleft” width=“380”] Representational image. Reuters.[/caption] The latest move is to apply balm on the MSMEs ravaged by demonetisation and Goods and Services Tax (GST). The IL&FS default of a massive order of about Rs 90,000 crore further exacerbated the problems of the sector with banks and financial institutions further tightening their belts besides being deprived of cash to the extent of IL&FS default. It is significant to note that despite being meant for GST-ravaged enterprises, the accent and insistence is on them being registered under the Goods and Service Tax Network (GSTN) portal. This is not a contradiction but an attempt at mainstreaming the economy with gusto throwing in the bait of loan relief. In other words, the attempt is a fine balancing act — MSMEs often have been accused of being outside the formal economy, doing business without caring for tax and other compliances. Cash was their calling card which is why they were the worst hit during the cataclysmic demonetisation. Now comes the carrot and stick measure. Mend your ways and join the mainstream if you want to make the grade for relief. Banks would keep an eye on the activities of the assisted enterprises thanks to the access to copious and relevant information made available in the GSTN portal. In terms of the scheme, the restructuring must be implemented by 31 March, 2020. Banks will need to make a provision of 5% towards these restructured loans. Each bank/non-banking financial company (NBFC) should formulate a policy for this scheme with board approval. This is the second major initiative taken by new Reserve Bank of India (RBI) governor Shaktikanta Das with the first one being dousing the flames of the government trying to dip into RBI’s reserves. He had a few days ago appointed an expert committee to go afresh into all the ramifications of the issue of RBI reserves. On 12 February, 2018, the RBI had ordered stoppage lock, stock and barrel of rescheduling of all loans where the loan amount was more than Rs 25 crore. That was to stop CDR (corporate debt restructuring), SDR (strategic debt restructuring) and what have you that were seen as indulgence shown to defaulters that more over gave room for mutual back scratching with the connivance of pliable bank managers. Now what the new governor has done is to soften the blow of the earlier circular in an extremely limited way by restricting it to the really needy. The caveat that they should be GST-compliant further makes the latest initiative a sound and safe one. One hopes stressed loan criterion is not applied very strictly in a manner of the rule being cast in stone but figuratively of the loans warranting rescheduling whether one was done or not. Otherwise there is a danger of cautious bank managers refusing rescheduling to those who had not availed of it at least once earlier. (The writer is a senior columnist and tweets at @SMurlidharan)