FIDC urges RBI to extend one-time restructuring of MSME advances

The Finance Industry Development Council (FIDC) has urged the Reserve Bank of India to consider extending the one-time restructuring of MSME advances till March 31, 2022, in the wake of the second wave of Covid-19.

The RBI had, in February last year, allowed one-time restructuring of existing MSME advances, classified as ‘standard’ without downgrade in the asset classification, subject to certain additional provisioning and compliance with the conditions prescribed in the said notification. The time limit for implementation of the said restructuring was till December 31, 2020.

Need urgent support

In a letter addressed to the RBI Governor, FIDC said that owing to the second wave of Covid-19, MSMEs and the retail and wholesale trader industry have not been able to revive their economic activities and, therefore, are in urgent need of support from lenders.

“Various surveys and reports are forewarning that the operating environment for banks will most likely remain challenging, as the second wave could dent the sluggish recovery in consumer and corporate confidence, and further suppress banks’ prospects for new business. Considering the challenging environment for MSMEs and lenders, it will be helpful if the RBI extends the said notification till at least March 31, 2022,” said Mahesh Thakkar, Director General, FIDC, in the letter.

The council further was of the opinion that restructuring should also be allowed for MSMEs, including the retail and wholesale trade segment accounts, which were restructured during the first wave, but are standard even after moving out from moratorium. This should further be without any downgrade in asset classification, and should be subject to the lending NBFCs undertaking necessary credit assessment of the future cash flows of the said entity.

Impact on credit offtake

According to Sanjay Chamria, Co-Chairman, FIDC, the above step will bring about a major relief to the already stressed MSME, retail and wholesale trade sectors.

Credit offtake to the MSME sector, which had been one of the worst-affected following the outbreak of the first wave of pandemic, is likely to receive a further setback due to the second wave, said industry experts.

“Credit offtake to the sector was poor from April to September last year, and the focus of most lenders was primarily on asset quality and taking care of existing customers. It is too early to comment on credit offtake to the sector this year; we will have to wait and see the impact of the second wave and how sooner or later we are able to contain it,” said Chamria.

MSMEs, which generate the largest employment in the country and contribute more than 35 per cent to GDP and 40 per cent of exports, are most vulnerable in any economic downturn and, in the present pandemic, they have been mostly locked down and are unable to perform any economic activity, said the council, highlighting the issues confronting the sector.

FIDC has further urged the RBI to regularise the benefit of PSL classification for lending by banks to NBFCs as part of the overall PSL policy. This will enable banks and NBFCs to cater to the needs to MSME sector in a more organised manner.

While the central bank has been extending, on an ad-hoc basis, the time-period for on-lending benefit by six months at the time of each review, however, it would be better if this was regularised.

Further, under the on-lending model, only fresh loans granted by NBFCs are allowed PSL benefit. The existing unencumbered pools of eligible PSLs do not qualify for such classification benefit.

“We, hereby, request the RBI to allow refinance, apart from by way of buy-out but also qualifying for hypothecation for DP for bank finance against existing unencumbered MSME pool originated by NBFCs,” said the letter.

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