While the RBI's AQR move was a master stroke to clean bank books and stop the evergreening of stressed loans, the move to restructure MSME loans can have an opposite effect, warns Religare Capital in a report
The Reserve Bank of India (RBI) has allowed banks to restructure micro, small and medium enterprises (MSME) loans up to Rs25 crore by devising a corrective action plan (CAP) and opting for the rectification or restructuring and recovery of such stressed accounts. However, this move can have an opposite effect, says a research report from Religare Capital Markets Ltd.
"While with this move, the RBI is looking at faster resolution of stress in MSME accounts, we think the impact would be starkly opposite to the central bank’s asset quality review (AQR) drive which aimed at cleaning up bank books. Banks may also witness a surge in MSME restructuring, making it difficult to keep a tab on such loans," the report says.
The RBI has issued guidelines for restructuring of MSME accounts with outstanding debt up to Rs25 crore. Banks have been directed to form a committee and devise a corrective action plan (CAP) for all stressed MSME loans, of which accounts with loan limits up to Rs 1mn have to be dealt with at the branch level. Moreover, a stressed MSME with debt in excess of Rs10 lakh can directly apply for a CAP. The committee, within 30 days of convening its first meeting, has to zero in on any one of the following three options to be adopted under CAP:
(a) Rectification (fresh loan disbursement to stressed MSME accounts): Banks can grant MSME borrowers additional funding for six months in order to revive the account, while ensuring there is no net present value (NPV) hit on their books. While such accounts would retain their existing classification, fraud cases would fall under the restructured category if rectification along with the six-month funding option is availed more than once during a year. Only in exceptional cases, banks would be allowed to fund the working capital requirement of MSMEs, while in the normal course, an account would directly slip into NPA in case of diversion of funds.
(b) Restructuring of existing loans: This applies to standard accounts, special mention accounts or sub-standard accounts with one or more lenders (but not majority of lenders). The moratorium for restructuring would be six months and the restructuring package should outline the milestones to be achieved after this period. No timeline however has been prescribed for attending full normalcy with respect to MSME loans. Also, restructuring can be done only if the borrower is not a wilful defaulter and if majority of creditors approve the same. In addition, MSME promoters would have to extend personal guarantees for restructuring.
(c) Recovery: Banks can resort to the recovery of loans if either rectification or restructuring is not found viable, and initiate the process at the earliest.
Religare Capital says while the RBI's AQR move was a masterstroke to clean bank books and stop the evergreening of stressed loans, the move to restructure MSME loans can have an opposite effect. It feels, the volume of loans under MSME restructuring will be large compared with corporate debt restructuring (CDR), making it difficult to monitor them.
"We think even standard accounts will opt for this scheme (as done by many corporates earlier) since it eases the interest and debt repayment burden in the near term. Note that lower provisions on stressed loans don’t go down too well with investors. Loans to MSME sector form 12-15% of total system loans. It is difficult to ascertain the exact impact of the RBI’s move, as MSME exposure already classified as NPAs in the books of banks is not known. However, we believe PSBs are likely to offer this scheme to a large number of MSMEs," it concluded.