RBI Gives MSMEs a leg-up by Relaxing Asset Classification Norms
Yutika Lohia 31 July 2018
In order to cure the repayment cycle of borrowers post demonetization and goods and services tax (GST), the Reserve Bank of India (RBI) has intended to change classification of non-performing assets (NPA) for Micro, Small & Medium Enterprises (MSMEs). This will bring a relief to the economy as a whole.
With the advent of GST in the Indian economy, three sectors agriculture, industry and service, have been facing several challenges. The majority of small entities in the country have been impacted in some way or the other, irrespective of whether they required registration under GST or not. 
MSMEs requiring registration faced difficulties due to disruption of their business for ensuring compliance with the new regime. Even unregistered MSMEs faced complications as they were dealing with businesses, which were directly disrupted due to GST implementation, eventually affecting their cash flows to honour financial obligations. 
To alleviate the worries of small enterprises, the government has introduced several relaxations so as to enable them to adapt themselves to the revolutionary change of indirect taxation scheme being implemented in the country. 
Another respite has been given by the RBI on 6 June 6 2018, by allowing banks and NBFCs to classify their exposure to all MSMEs, whether registered or not under GST, as per the 180 days past due (DPD) criterion. By extending the benefit to unregistered MSMEs as well, the government aims to encourage their registration under GST by 31 December 2018. 
Scope of the notification
  • This notification focuses on all the banks and NBFCs, irrespective of the financier classification and also brings all MSMEs, whether registered or not, under GST.


  • All MSMEs, whether registered under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) or not, are covered under this notification.


  • The benefit is extended to those MSME borrowers whose aggregate fund-based and non-fund based exposure to all banks and NBFCs does not exceed Rs25 crore as on May 31, 2018.
Asset classification benefit under the notification
The notification extends the asset classification benefit to the banks and NBFCs with respect to stressed MSMEs accounts, not registered under GST.
The February notification provided that MSME accounts registered under GST, that would become 90 days/ 120 days delinquent due to non-payment of amount overdue on 1 September 2017 and any amount falling due between 1 September 2017 and 31 January 2018, shall continue to be classified as a ‘standard asset’ in the books of banks and NBFCs, provided:
  • the account was classified as standard in the books of the lender as on 31 August 2017; and


  • the overdue amount is paid within a period of 180 days from the original due date.
The extant notification extends the scope till 31 December 2018 and covers MSME accounts not registered under GST within its purview. Accordingly, all MSME accounts shall be classified as ‘standard asset’ if the payments due from the borrower as on 1 September 2017 and falling due thereafter up to 31 December  2018 were/are paid not later than 180 days from their original due date, provided they were classified as standard in the books as on 31 August 2018.
The notification further provides the alignment of non-performing assets (NPA) classification for GST registered MSMEs, with the extant Income Recognition and Asset Classification Norms (IRAC) norms in a phased manner. However, for a non-registered GST entity, NPA classification shall regress to 90 days from 1 January 2019 itself.
Accordingly, dues payable on borrowings by MSMEs that are registered under GST or register themselves by 31 December 2018 shall align their NPA classification from 1 January 2019 as per the table mentioned below:
The illustrations below would help us to understand the position better:
From the language and intent of the notification it seems that for accounts which have been already reported as NPA in the September or December quarter, the banks and financial institutions will be free to roll back the asset to standard category.
Provisioning and income recognition norms
The notification states that the other terms and conditions of the February notification shall remain unchanged. Accordingly, the additional provisioning requirements for these accounts shall be as follows:
  • The accounts retained as standard will be subject to provisioning at the rate of 5% instead of 0.40%. However, this provisioning requirement shall apply only in case of accounts having delinquency of more than 90 days/ 120 days but less than 180 days.


  • The excess provision created under this notification can be reversed only when the amount due from the borrower falls below 90 days/ 120 days past due.


  • If the account moves beyond 180 days past due (DPDs), then the same shall attract provisioning as per the normal IRAC norms.
With respect to the income recognition, for accounts with more than 90/120 DPDs, the income will be recognised on cash basis only. 
 (Yutika Lohia works at Vinod Kothari & Co)
B. Yerram Raju
6 years ago
Long overdue relief to MSMEs. RBI deserve thanks.
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