RBI Relaxes Loan Repayment Deadline for MSMEs, Opens up Lending Limits

India’s micro, small, and medium enterprises (MSMEs) will benefit from a further extension to their standing loan repayments to banks and Non-Banking Finance Companies (NBFCs).

The first extension was announced by the Reserve Bank of India (RBI) in February this year (see notification here).

The relaxation by the country’s central bank provided immediate relief to MSMEs hurt by blocked cash flows due to the implementation of the Goods and Services Tax (GST).

Now, in continuation of support and relief to MSMEs, the NPA recognition for all MSMEs (both registered and non-GST entities) will be 180 days – for dues up to December 31, 2018 – according to the finance ministry.

However, the relaxed NPA norms will be brought back to 90 days – in a phased manner – starting January 1, 2019,  for GST registered MSMEs.

For non-GST registered MSMEs, NPA norms will immediately revert to 90 days from January 1, 2019.

With the introduction of the GST, many MSMEs were forced to comply with a formal tax structure for the first time.

This is because the complicated structure of multiple taxes at multiple stages in the previous indirect tax regime made it easier for small companies to remain outside the tax structure.

So far, the shift to the GST regime has been far from smooth for MSMEs – it has restricted the liquidity of these companies due to input credit linked challenges, resulting in their inability to meet their repayment obligations to banks and NBFCs.

Change in NPA recognition

Generally, banks classify loan accounts as non-performing assets (NPA) if repayment is due for 90 days or more, while NBFCs consider a 120-day inactive period for the same.

The latest RBI announcement now allows MSMEs to repay their dues within 180 days from the original due date, without their accounts being downgraded.

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Previously, MSMEs could avail this relief only if they were registered under GST as of January 31, 2018. As of June 6, this relief has been extended to unregistered MSMEs.

To qualify, the MSME’s loan account must be a standard account (not already downgraded) as on August 31, 2017.

The aggregate loan of the MSME from the bank or NBFC should also not exceed US$3.8 million (Rs 250 million) as of January 31, 2018.

After the extension, the relief will now apply to repayment obligations between September 2017 and December 2018.

Rise of NPAs in the banking system

The government has sought to bring MSMEs in the unorganized sector into the tax bracket through GST. However, given the GST’s own complicated structure and delays in processing refunds, small firms and exporters continue to suffer.

In 2017, NPAs among lenders in the MSME segment rose by 70-100 basis points due to a rocky start to the implementation of the new indirect tax system. Taking note of these concerns, both the federal government and the RBI offered intermediate relief measures.

The finance ministry now hopes that the extension of the repayment deadline to both registered and unregistered MSMEs will reduce the overall number of NPAs in the banking system.

In addition, the RBI has also introduced measures to create a more favorable credit environment for MSMEs. It has removed loan limits of US$770,000 (Rs 50 million) and US$1.5 million (Rs 100 million) for MSMEs.

Industry experts have reacted positively, stating that this will open up lending facilities for these enterprises.

Meanwhile, the federal government is working on a program with the GST Network, which will use member data to apprise MSMEs of new support schemes and handhold them to avail of those.

Edit: The article was originally published on March 20, 2018 and has been updated as per new regulations.

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