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RBI credit restructuring scheme – it it risk-free?

Good gift but with loop-hole


Good gift but with loop-hole


Will Reserve Bank of India’s (RBI) credit restructuring scheme for Micro, Small and Medium Enterprises (MSMEs) work well for the banks and non- banking financial companies as the country seeks solutions to financial woes of businesses.

The RBI in its Fiscal Stability Report, released on 31 December 2018, has highlighted continuing stress in the MSME sector where the Non-Performing Assets (NPAs) for the micro segment (exposure less than Rs.10 million) increased to 8.7% in June 2018 from 7.9% in March 2016 and the SME segment’s (exposure of Rs.10 million-Rs.250 million) increased to 11.5% from 9.8% during the same period.

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, Public Sector Banks (PSBs) have seen an increase to 15.2% from 14.3% (Figure 4 and 5).

On 1 Jan 2019, the RBI has offered a one-time restructuring scheme for loans given to MSMEs with an aggregate exposure (both fund and non-fund based) not exceeding Rs.250 million. MSMEs are recognized as backbone of Indian exports.

Commenting on the offer, India Ratings and Research (Ind-Ra) opines that the RBI’s 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.

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.

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.

Having highlighted the cautious note, Ind-Ra elaborated on the scheme in its 3 Jan 2019 analysis.

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, it said.

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, said the credit rating agency.

Ind-Ra’s analysis of PSBs exposure to all loans less than Rs.50 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.

However, the share of SMA1 of less than Rs.50 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.

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