India’s economic growth and development depend heavily on Micro, Small, and Medium Enterprises (MSMEs). However, these businesses may face financial difficulties for various reasons, including changes in technology, market volatility, and unforeseen events such as the COVID-19 pandemic. Under such circumstances, MSME Restructuring becomes a necessary instrument to enable small companies to survive their financial challenges and continue their operations.
Restructuring MSMEs by modifying the terms and conditions of existing loans helps them during times of financial difficulty. This can include actions such as extending the loan term, offering a moratorium on repayments, and turning interest into Funded Interest Term Loans (FITL). Restructuring their loans helps them alleviate their immediate financial burden and focus on running their companies.
Understanding MSME Loans
To satisfy their working capital needs and support their expansion goals, MSMEs in India seek various types of loans from banks and financial institutions. Term loans, working capital loans, and project finance loans are three ways you may classify these loans. While working capital loans provide temporary financing for temporary needs, term loans are utilized to purchase permanent assets, such as machinery and equipment. Project finance loans are typically used to fund specific projects or expansion initiatives.
Even with various loan choices available, MSMEs can struggle to repay their loans due to factors such as customer delayed payments, changes in raw material pricing, and a lack of access to new markets. These difficulties could lead to the development of non-performing assets (NPAs) in the financial sector, thereby affecting the overall state of the economy.
One-time Restructuring of MSME Loans
The Reserve Bank of India (RBI) launched the One-Time Restructuring (OTR) initiative for MSME loans to assist them in overcoming financially challenging situations. Under the OTR application, banks and various economic establishments allow eligible MSMEs to restructure their loans without declaring them as non-performing assets (NPAs).
Micro, Small, and Medium Enterprises must have been registered as general accounts as of March 1, 2020, and their overall exposure—which includes non-fund-based total facilities—shall not be more than ₹25 crore as of March 1, 2020. The restructuring technique involves modifying the loan terms and conditions, along with extending the loan period, granting a moratorium on payments, and converting interest into a Funded Interest Term Loan.
Salient Characteristics of One-time Restructuring
One-time restructuring of MSME loans has numerous essential characteristics that help MSMEs in financial difficulty:
- Depending on the cash flow predictions of the MSME, the OTR plan lets banks and other financial institutions provide a moratorium on loan repayments of up to two years.
- Depending on the MSME’s cash flow projections, the loan duration might be increased by up to five years.
- A Funded Interest Term Loan (FITL) may be paid back over five years from the interest collected during the moratorium period.
- Under the OTR program, banks and other financial institutions are required to waive punitive interest and other expenses for MSMEs.
One-Time Restructuring: Benefits
MSMEs, banks, and the whole economy gain from the one-time restructuring of MSME loans in numerous ways.
- The OTR initiative enables MSMEs to alleviate their immediate financial burden and focus on rebuilding their business by modifying the terms and conditions of existing loans, thereby addressing their financial situation.
- The OTR plan helps banks keep the quality of their loan portfolios and avert any losses by keeping MSMEs from sliding into NPA status.
- The OTR plan supports the sustainability and expansion of MSMEs by providing financial relief to small businesses, thereby enabling their operations, retaining workers, and investing in development prospects.
- The OTR program supports the MSME sector, a significant contributor to India’s GDP and employment, thereby assisting in the general economic recovery and growth.
MSME Restructuring Regulatory Framework
To control and track the MSME Restructuring process, the Reserve Bank of India (RBI) has issued several policies and circulars. These rules address several key aspects of MSME Restructuring, including eligibility requirements, implementation timelines, and the role of banks and financial institutions.
The RBI rules mandate that banks and other financial institutions establish a Board-approved policy for the implementation of MSME Restructuring. The qualifying criteria, the procedure for evaluating the financial feasibility of the MSME, and the terms and circumstances of the restructured loan have to all be part of this policy.
The RBI has also laid deadlines for the implementation of MSME Restructuring. Within ninety days after the date of invocation, banks and other financial institutions have to carry out the restructuring plan. The date on which the borrower and lender have decided to start the restructuring procedure is the invocation date.
COVID-19’s Effect on MSME Restructuring
The COVID-19 outbreak has had a significant impact on the MSME sector, with interruptions in supply chains, reduced demand for their products and services, and an economic crisis; many businesses are experiencing financial difficulties. To assist MSME Restructuring at this difficult period, the RBI has acted in many ways.
One such action is the extension of the OTR program for MSME loans. The RBI has pushed the implementation date from March 31, 2021, to September 30, 2021. This extension supports general economic recovery and gives MSMEs more time to take advantage of the initiative.
The RBI also unveiled the Resolution Framework 2.0 for COVID-19-related stress, which allows banks and other financial institutions to restructure loans taken out by individuals and small companies affected by the pandemic. MSMEs having total exposure of up to ₹50 crore as of March 31, 2021, are qualified for restructuring under this framework.
Conclusion
Helping MSMEs overcome their financial challenges and remain operational depends on the effective restructuring of MSMEs. By changing the terms and circumstances of their loans, the RBI’s One-Time Restructuring Program offers qualified MSMEs relief. Among the various advantages the program provides are a moratorium on loan repayment, loan term extension, conversion of interest into FITL, and elimination of punitive interest and penalties.
The success of MSME Restructuring hinges on banks and financial institutions effectively applying RBI policies. Government and regulatory agencies also need to be supported in building a climate that enables MSMEs to flourish. Supporting the MSME industry will help the nation expand and flourish economically.
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