For years MSME sector has remained one of the key drivers of the economy owing to its massive presence and contribution. But after being dented by Covid-19, the growth of this sector has hardly witnessed any positive sign; while pandemic obliterated their chances of survival, the Indian Government strived to fix the situation by releasing plenty of schemes. The situation for MSME today is not as worse as it was a few months back. They are still in the recovery phase but showing marginal growth as per various government data. In view of their deteriorating condition triggered by the Covid 19, the Government released the second version of their promising scheme, viz Resolution Framework 2.0. This scheme is meant to serve MSMEs on account of improved credit threshold. The fresh scheme comes up with a revised credit limit which is two times the threshold available in the previous version. The Reserve Bank notified on June 4 2021, that the max limit for loan restructuring * had been increased from Rs 25 crores to Rs 50 crores for MSMEs, small entities or loans to business owners.
What is loan restructuring*?
Loan restructuring refers to the facilities offered by the financial institution to the borrower owing to their fiscal woes arising from either legal or economic reasons. This facility is not applied to other scenarios & in general, shall include: facilities on lending t & c by changing some contract terms (inclusive of product change & interest capitalization), which primarily relate to the interest, maturity term, collateral execution to cover up the loan debt, supersession of the original borrower.
An Overview on Resolution Framework 2.0
In May, the RBI unveiled the second round of loan restructuring for MSMEs and small businesses that didn’t access the facility in the preceding round.
Resolution Framework 2.0 permits small entities and businesses to access the option of loan restructuring for upto Rs 25 crores dues. Reserve bank has now decided to increase the threshold to Rs 50 crores.
Read our article:What are the Essentials of MSME Registration?
Who can have access to Resolution Framework 2.0?
As per RBI, borrowers having max exposure of up to Rs 50 crore and those who failed to access restructuring under the preceding restructuring framework & and who were classified as Standard as of March 31, 2021, can have access to the Resolution Framework 2.0.
It implies that any individual & any small entities may access this scheme. The loan restructuring limit has been cranked up to Rs 50 crores against the previous limit, which was capped at Rs 25 crores.
But, only those credit seekers are eligible under this scheme whose loan account was standard as of March 31, 2021.
It is vital to understand the notion of “Standard account” in this context.
Oftentimes, this term is confused with an overdue account. A standard account refers to a loan that is not a non-performing asset, aka NPA.
A Non-performing asset is a loan that has been overdue for the last 90 days. On the 91st day of overdue, such a loan is converted into a bad debt or NPA.
Therefore, an account that was not classified as NPA on March 31, 2021, can have access to resolution framework 2.0.
Who can access the benefits under resolution framework 2.0?
Following individual can have access to the benefits available under the resolution framework 2.0.
Individuals who obtained credits and advances for business purposes & to whom the financial avenues have aggregate exposure of up to Rs 50 crore as of March 31, 2021.
Small entities, including those that are ventured into retail and wholesale trade, other than those functioning as MSME as on March 31, 2021 and to whom the financial avenues have aggregate exposure of up to Rs 50 crore as on March 31, 2021.
Last date to apply for loan restructuring for MSME
Banks, as well as financial avenues, can invoke restructuring under the said framework until September 30. The moratorium period should be inculcated within 90 days post invocation.
As per the professionals and experts, the augmentation of the resolution framework 2.0 to Rs 50 crore shall increase the credit coverage to a great pool of businesses and individuals. In view of MSME’s contribution toward the nation’s economy, the relief measures will stimulate the MSME recovery and improve financial stability.
For those who availed of the one-time loan restructuring earlier
Banks and the private lender can render the loan restructuring option for up to 2 years for those who have chosen moratorium in the earlier round.
The Reserve Bank has confirmed that the small entities could access this option to address their prevailing liabilities.
As per the trusted credit rating agency Crisil, nearly 2/3rd of the mid-sized entities can have access to loan restructuring for MSMEs after the augmentation of the aggregate exposure threshold up to Rs 50 crores. The said agency rates approx 6800 mid-sized entities, of which nearly 4700 are small scale entities. These entities having a bank loan exposure of up to Rs 50 crores & standard accounts as on March 31, 2021.
Read our article:MSME Registration – Know the Entire Procedure