Money & Banking
RBI’s MSME restructuring drive is a dicey move: Report
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.

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COMMENTS

B. Yerram Raju

1 year ago

First the MSME loan portfolio will not be as large as estimated by the Religare Capital. Second, standard assets do not qualify for restructuring as stressed assets under incipient sickness alone qualify for the three "R' effort.

As already mentioned in my article on the subject, a couple of tiers between Rs.10lakhs and Rs.2500lakhs are necessary to give proper effect to the guidelines.

It is a welcome move that the borrowers can now seek the review under this arrangement. The wearer knows where the shoe pinches.

FDI to reduce India's current account deficit: Moody's
Chennai : Credit rating agency Moody's Investors Service on Thursday said India's rising foreign direct investment (FDI) inflows reduces the current account deficit and also the external financing needs.
 
In a statement Moody's said it does not expect widening of India's current account deficit based on its assumptions that commondity prices will remain low in 2016 and 2017.
 
According to Moody's, FDI inflows are expected to climb due to central government's measures like liberalisation of foreign investment limits and 'Make in India' initiative.
 
"These trends are credit positive, as they lower India's susceptibility to external shocks at a time when capital flows to emerging markets are volatile and weak economic conditions globally, particularly in the Gulf states, may dampen remittances," said the Moody's statement, quoting Marie Diron, senior vice president for the Sovereign Risk Group.
 
According to Moody's, a lower energy import bill and policy measures to contain gold imports are contributing to keeping the trade deficit at moderate levels.
 
Going forward, the announcement in the latest budget of the imposition of an excise tax on gold is likely to dampen overall gold imports.
 
Additionally, the value of oil imports decreased by 37.5 percent - or Rs. three trillion (US$44.3 billion) - in the 12 months to February 2016 compared with the previous year, despite a 10 percent increase in the volume of petroleum imports, Moody's said.
 
However, the prospect of subdued global economic activity - in particular in the Gulf states where more than half of remittances to India originate - may lead to a significant and prolonged weakening of remittance inflows.
 
This development is likely to prevent India's current account from returning to balance and could lead to its renewed widening.
 
The rapid rise in FDI inflows mitigates the risks related to a possible widening of the current account deficit from weaker remittances by diminishing India's external financing needs from other inflows in the form of credit and equity inflows.
 
Net FDI inflows into India hit an all-time high in January 2016, at $3 billion on a 12-month moving average basis.
 
India's current account deficit is now more than covered by its FDI inflows. The rise in FDI points to stronger investor interest in India on the back of robust economic growth.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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Disclose your assets by April 21: SC tells Mallya
New Delhi : The Supreme Court on Thursday directed beleaguered liquor baron Vijay Mallya to disclose to it all his assets -- movable and immovable and tangible and intangible -- and other interests in India and abroad by April 21.
 
An apex court bench comprising Justice Kurien Joseph and Justice Rohinton Fali Nariman asked Mallya to disclose all the assets held by his wife and children and also indicate the date when he could appear before it in person. 
 
The order came after the consortium of 14 banks headed by the State Bank Of India (SBI) told the apex court that that it had rejected Mallya's offer to pay Rs.4,000 crore by September to settle his outstanding dues amounting to more than Rs.9,000 crore. 
 
The banks had given loans to his grounded Kingfisher Airlines.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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