RBI breather for MSMEs: Central bank's decision to offer loan recast scheme will put small-scale sector back on growth track

Providing credit support to capital-starved micro, small and medium enterprises (MSMEs) has always been a matter of importance for policymakers. However, the much-needed support has always been best served more in words than in action, past experiences suggest. But the Reserve Bank of India’s (RBI) decision to permit a one-time restructuring of existing loans of MSMEs that are in default but ‘standard’ by definition as on 1 January 2019, without an asset classification downgrade is the best new year gift that the sector could ask for from the regulator. The central bank’s decision to let banks and non-banks restructure their MSMEs loan portfolio, though subject to strict conditions, is indeed akin to the proverbial ‘a stitch in time saves nine’. This is because if this initiative is actually put to work, it will provide a huge fillip to the effort to get the vital small-scale sector back on the growth track. And considering the credit fault lines that have been running deep into the MSME sector, non-availability of timely credit has become a matter of great concern, ever since the credit cycle turned down after NBFCs were hit by liquidity issues and capital-starved banks had already largely vacated the space. The RBI took the call on MSME loans after going into the pros and cons of the issue. The view was taken to facilitate a meaningful restructuring of MSME accounts that have become stressed, but have a potential to be revived. [caption id=“attachment_4225997” align=“alignleft” width=“380”] Representational image. Reuters.[/caption] The restructuring has to be implemented by 31 March, 2020. To be eligible for the scheme, the aggregate exposure, including non-fund based facilities of banks and NBFCs to an MSME borrower should not exceed Rs 25 crore as on 1 January, 2019. RBI’s decision to allow NBFCs to restructure MSME loans of ticket size up to Rs 25 crore without an asset classification downgrade will save the lenders from higher provisionings. This, in turn, spins two binary narratives. The first is pertaining to the non-bank lenders itself. They can now rest assured that their provision coverage ratio will not slip beyond threshold levels. In other words, they can keep the stipulated percentage of capital to be set aside for covering prospective losses due to sub-standard loans much above the ‘watermark’ level. This will go a long way in keeping their capital adequacy ratio at healthy levels. This also gives them enough headroom to raise short-term resources from the market as and when market conditions improve, without further dipping into their reserves. Another positive spin of the apex bank’s decision is that it will spur fresh funds to capital-starved MSMEs, that will help them ease their working capital constraints, and improve their capacity utilisation levels as the picks up. Ever since the IL&FS imbroglio unfolded impacting almost all NBFCs, their loan books to the small-scale sector have been reeling under an acute cash crunch. The limited availability of liquidity also now comes with a significantly increased cost. This has put the entire sector between in a rock and a hard place. But with this RBI initiative, the situation is likely to change for the better, as it will encourage banks and NBFCs to take up restructuring for MSMEs on a large scale. It will also provide banks and non-banks with the ability to raise additional funding that they can now use to lend to the small-scale sector. This will allow the sector to ride out of the current storm though they may not hit a purple patch immediately. Therefore, RBI and the lenders should not treat this one-time restructuring of MSME loans as an end in itself, but should back this move with bolder though pragmatic measures. (The writer is Managing Director & Chief Executive Officer of LivFin)