The Covid-19 induced disruptions are continuing to affect the normal functioning and cash flows. It is impacting the MSME sector and as such warranted much needed support from the Reserve Bank of India (RBI) to de-stress this sector.
Accordingly, the RBI has decided during meeting of Monetary Policy Committee (MPC), which met from 4th to 6th August 2020 that stressed MSME borrowers will be made eligible for restructuring their debt under the existing framework. Banks can restructure without a downgrade in the asset classification, existing loans to MSMEs classified as “Standard”, subject to the following conditions:
The aggregate exposure, including non-fund based facilities, of banks and NBFCs to the borrower does not exceed Rs. 25 crore as on March 1, 2020.
The borrower’s account was a ‘standard asset’ as on March 1, 2020.
The restructuring of the borrower account is to be implemented by March 31, 2021.
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 March 1, 2020.
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 under the scheme.
As hitherto, for accounts restructured under these guidelines, banks shall maintain additional provision of 5% over and above the provision already held by them.
GoI has also decided to enlarge the scope of Guaranteed Emergency Credit Line (GECL) for MSME by increasing the upper ceiling of loans outstanding as on February 29 from Rs. 25 crore to Rs. 50 crore. Under the scheme MSME units can avail loans up to 20% of outstanding as on February 29, accordingly maximum funding under the scheme has also been raised from Rs. 5 crore to Rs. 10 crore.
These measures would provide much needed relief to this vital sector of economy in present testing times and also help to play an important role in providing employment a large section of skilled, semi skilled and unskilled labour force and give impetus to the growth of economy.
The RBI, during the MPC meeting, also kept Repo and Reverse Repo rates unchanged. Repo rate, which is also called as benchmark rate, is a rate on which banks can borrow funds from RBI, whereas the reverse repo is rate at which banks can park their surplus funds with RBI.
Taking a study on why the policy rates kept unchanged there can be many factors like retail inflation, measured by Consumer Price Index (CPI) climbed to 6.1% in June 2020. Covid-induced supply side disruptions remained major contributors for increase in inflation rather than demand pull factors. The real rate of interest entered into negative trajectory.
Further, Union Finance Minister and Chief Economic Advisor, GoI had hinted for fiscal stimulus at a later stage, probably at a time when Covid curve stabilize. At international level also, US Federal Reserve raised concerns about a prolonged delay in global economic recovery. The MPC might have preserved some space for future reduction in policy rates when situation starts returning to normalcy and fiscal and monetary boost measures start generating impacts to encourage economic revival and growth.
Moreover, despite sharp decline in lending rates to near historic lows, there are few takers for credit. From the banks’ perspective, there are few creditworthy borrowers to lend without risking a surge in NPA some months down the line.
Theoretically speaking, demand for goods and services and demand for credit are directly related. At the present, on account of subdued aggregate demand in economy, leaving aside necessities, the capacity utilization of various industries is in range of 60% – 70%. Rationally additional demand for bank credit is likely to pick up after covid induced disruptions get settled and there is uptick in sales volumes, order book which would lead to enhanced working capital and capex related credit requirements. All these factors might have necessitated keeping policy rates unchanged.
Author is a former banker based at Ludhiana.Disclaimer: Opinion/facts in this article are author's own and famepunjabi.in does not assume any responsibility or liability for the same.