Long-Term Financing: The Impact Of Loan Restructuring On MSME Books

Due to stress among the borrowers on account of COVID-19, the Reserve Bank of India (RBI) announced a one-time restructuring scheme as an integral part of resolution plan and framework

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By Jyoti Prakash Gadia


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A change in the repayment period, repayable amount, number of instalments or rate of interest, or additional loans is categorized as loan restructuring which is applicable to lending institutions. Due to stress among the borrowers on account of COVID-19, the Reserve Bank of India (RBI) announced a one-time restructuring scheme as an integral part of resolution plan and framework.

The notification states the lenders have to repay the EMI after the moratorium period of six months (March 31-August 31, 2020). (The government has informed the Supreme Court that for loans upto INR 2 crore taken by individuals and MSMEs will be having waiver of compound interest for loans from March to August 31, 2020).

In the case of MSME borrowers, the aggregate exposure should exceed INR 25 crore. Loans in default for more than 30 days as on March 1, 2020 will not qualify for this plan. Specific eligibility criteria and benchmark parameters have been stipulated are being eligible under this scheme. These companies have to be GST-registered and banks and NBFCs have time till March 31, 2021, to implement the plan. Banks will have to make an additional 5 per cent provision for these accounts.

The lending institutions may allow extension of the residual tenor of the loan, with or without payment moratorium, by a period not more than two years in the considered cases. An escrow mechanism is to be enforced for timely disbursement of credit facilities by lending institutions for routing all receipts, repayments and disbursements.

The financial parameters to be considered under the resolution plan include ratio of total outside liabilities to adjusted tangible net worth; ratio of total debt to earnings before interest, tax, depreciation and amortization; current ratio: ratio of current assets to current liabilities; debt service coverage ratio; and average debt service coverage ratio.

The scheme permits 180 days for implementation after invocation date. Based on the recommendations of the expert committee headed by K. V. Kamath, RBI has notified the benchmark threshold financial parameters and ratios for 26 sectors based on the outstanding and severity of the impact and the sector-specific characteristics. Further, the resolution plan with exposure of INR 100 crore or more will require Independent credit evaluation by a credit rating agency. Moreover, where the exposure is INR 1,500 crore or above, the resolution plans will require vetting by the expert committee.

In case of corporate borrowers, if there are multiple lending institutions with exposure to the borrower, the resolution process shall be treated as invoked in respect of any borrower if lending institutions representing 75 per cent by value of the total outstanding credit facilities (fund based as well non-fund based), and not less than 60 per cent of lending institutions by number agree to invoke the same. Upon the implementation of resolution plan the account, if downgraded between the invocation and implementation, shall be upgraded to standard account.

However, any additional facilities on account of any irregularity needs to be repaid within two years including moratorium. For example, an existing loan having last repayment date as February 29, 2020, the revised repayment including moratorium if any cannot be beyond February 28, 2022.

In all cases involving multiple lending institutions, where the resolution process is invoked and consequently a resolution plan has to be implemented, inter-creditor agreement (ICA) shall be required to be signed by all lending institutions within 30 days from the date of invocation. Banks that fail to sign the ICA within 30 days have to make a 20 per cent provision on these loans compared to 10 per cent for banks which have signed the ICA. The resolution plan under this scheme will not render the account to be treated as NPA.

As reviled from the above scheme has been evolved to address the problem arising out of the unprecedented situation emerging from the COVID pandemic. The scheme aims to mitigate financial stability risk and is to ensure the survival of the MSME, corporate borrowers providing them liquidity support breathing space to revive themselves towards sustainable growth. The banks are expected to provide the necessary support to the eligible borrowers with a positive approach in the interest of the overall revival of the economy.

Jyoti Prakash Gadia

Managing Director, Resurgent India

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