COVID-19 2nd Wave: Extension Of Or More Inclusive One-time Restructuring a Boon For MSME MSMEs, systemically important are, more exposed to failure. In the absence of immediate financial support, the business entities, more particularly the MSMEs may not survive

By Jyoti Prakash Gadia

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COVID-19 is a bio-war-like situation that has left the whole world shocked as to how one infection has brought everything to a halt. Though the economy as a whole has been hit very hard, the MSMEs in particular are facing the maximum backlash. Small and medium enterprises face the risk of shutting down the establishments despite a liberal package by the government during the first wave. While the entities were on the path of recovery with the reduction in restrictions and reinstatement of the economic activity, albeit at a very slow pace, the second wave of COVID, has further dampened the chances of any early recovery of the MSMEs. Those who have already received benefit of one restructuring are still facing challenges.

MSMEs, systemically important are, more exposed to failure. In the absence of immediate financial support, the business entities, more particularly the MSMEs may not survive. This calls for prompt support in the form of a restructuring package such as one more extension of onetime Restructuring originally announced by RBI on 1 January 2019 and extended from time to time.

MSMEs require a strong financial stimulus with concessional working capital loans to ensure that adequate liquidity is maintained in business operations from the Banks and the financial institutions.

MSME Loan Restructuring

The RBI also permitted a one-time restructuring scheme for micro, small and medium enterprise accounts. Such a scheme would only be applicable to MSMEs with outstanding debt of up to INR 25 crore.

The onetime restructuring scheme was originally announced in January 2019 and was extended in February 2020. The regulator on 6 August 2020, again extended the guidelines further to provide additional support to MSMEs owing to COVID-19 and to harmonize restructuring guidelines across borrower categories. The restructuring plans for such MSMEs would have to be implemented before 31 March 2021. For accounts which are restructured under these guidelines, banks would have to set aside additional provisions worth 5 per cent, over and above what they already held.

In view of the continued need to support the viable MSME entities on account of the fallout of second wave of COVID-19 and to align these guidelines with the Resolution Framework for COVID-19-related stress announced for other advances, RBI decided to extend the scheme permitted originally in January 2019.

Accordingly, existing loans to MSMEs classified as 'standard' could be restructured without a downgrade in the asset classification, subject to the following conditions:

  1. The aggregate exposure, including non-fund-based facilities, of banks and NBFCs to the borrower does not exceed INR 25 crore as on 1 March 2020.
  2. The borrower's account was a "standard asset' as on 1 March 2020.
  3. The restructuring of the borrower account is implemented by 31 March 2021.
  4. The borrowing entity is GST-registered on the date of implementation of the restructuring. However, this condition will not apply to MSMEs that are exempt from GST-registration. This shall be determined on the basis of exemption limit obtaining as on 1 March 2020.
  5. Asset classification of borrowers classified as standard may be retained as such, whereas the accounts which may have slipped into NPA category between March 2, 2020 and date of implementation may be upgraded as "standard asset', as on the date of implementation of the restructuring plan. The asset classification benefit will be available only if the restructuring is done as per provisions of this circular.
  6. As hitherto, for accounts restructured under these guidelines, banks shall maintain additional provision of 5 per cent over and above the provision already held by them. This provision can be reversed after the end of the specified period which is one year.

There is imperative need for extending the one-time restructuring to address the COVID-period stress


  1. Bankers who are otherwise averse to restructuring shall be more willing than the borrowers to do MSME restructuring as they have to provide additional capital of only 5% for a period of one year (specified period) which otherwise, they would have to provide much higher capital in case they do not restructure and 10 percent in case of large corporate advances for two years

  1. A significant portion of the loan portfolio of the Banks is comprised by MSMEs. This will automatically address the capital adequacy norms issue of the Banks to some extent.


  1. Strict eligibility criteria particularly with respect to a maximum default of 30 days with any of the lenders
  2. The resolution is restricted to standard assets as on 1 March who have a potential of default in the near future.

It does not take care of the NPA MSMEs whose resolution is also equally


  1. Restructuring was available only for a limited time. It shall be extended again.
  2. Differentiation between standard assets and NPA is not fair unless some other scheme is on the way.
  3. The Resolution Framework for the Covid-19 Related Stress is not available for exposure of lending institutions to financial service providers (NBFCs). Thus, the loans given by NBFCs will have to be restructured whereas their liability side will not be restructured. There will be a severe Asset Liability Mismatch leading to their collapse.
  4. The limits of Rs. 25 crore is restrictive, while the definition of MSME has been revised by the Govt, similar and corresponding changes need to be incorporated in the restructuring guidelines.

Need for extension/modification.

One time scheme under Covid related stress has recently expired. Though there is imperative need for extending the same, it is suggested that there should be flexibility in quantum of the loan outstanding, period of default, waiver of additional provisioning and there shall be special dispensation for MSMEs where account has turned NPA.

It is also suggested that those who have already got relief under the scheme may be allowed a second relief/ amend their approved resolution plan.

The government shall make upward revision of the guarantee cover under Credit guarantee fund scheme for the MSMEs.

Jyoti Prakash Gadia

Managing Director, Resurgent India

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