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

Posted by Written by Ramya Boddupalli

India’s micro, small, and medium enterprises (MSMEs) will benefit from an extension for standing loan repayments to banks and Non-Banking Finance Companies (NBFCs). The announcement, made last month by the Reserve Bank of India, the country’s central bank, provides immediate relief to MSMEs hurt by blocked cash flows due to the implementation of the Goods and Services Tax (GST).

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, resulting in their inability meet their repayment obligations to banks and NBFCs.

Registered MSMEs to benefit

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.

MSMEs can avail this relief only if they are registered under GST as of January 31, 2018.

Further, the MSME’s loan account must be a standard account (not already downgraded) as on August 31, 2018.

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.

Finally, the relief will apply only to repayment obligations between September 2017 and January 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 RBI hopes that the extension of the repayment deadline will significantly 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.

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