RBI monetary policy committee: Relief for MSMEs hit by GST transition

The Reserve Bank of India (RBI) has announced two relief measures for micro, small and medium enterprises (MSMEs) by providing them additional time to repay banks, and removing the credit limit on MSMEs in the services sector, which falls under the priority sector. 

The central bank has instructed banks and non-banking financial companies (NBFCs) to allow MSMEs registered under the goods and services tax (GST) to repay their dues occurring between September 1, 2017, and January 31, 2018, within 180 days of their due date. This extension is applicable only to MSMEs, which were standard as of August 31, 2017, and for which the aggregate exposure does not exceed Rs 250 million as of January 31.  

“The formalisation of business through registration under the GST adversely impacted cash flows of the smaller entities during the transition phase, with consequent difficulties in meeting their repayment obligations to banks and non-banking financial companies,” the RBI said in its ‘Statement on Developmental and Regulatory Policies’.

RBI Deputy Governor N S Vishwanathan, at the monetary policy press meet, said this relief was not applicable to payments due in the future but only to those which were overdue. The relief was very clearly targeted.

Bankers welcomed the move, saying this extension would benefit both MSMEs, by giving them some breathing space, as well as banks, by reducing addition to slippages.  “The forbearance on NPAs (non-performing assets) will go a long way towards improving their (MSMEs’) cash flows and will in turn help banks in managing delinquency levels,” said Dinabandhu Mohapatra, managing director and chief executive, Bank of India.  

All bank loans to MSMEs would now qualify under priority sector lending without any credit caps, the central bank said. It has removed the currently applicable loan limits of Rs 50 million and Rs 100 million per borrower to service MSMEs for classification under the priority sector. 

Mohapatra said the removal of the credit cap would “help banks seamlessly increase their priority sector lending portfolio, besides sparing the need to park funds under the Rural Infrastructure Development Fund at a low rate of return”.  

Meanwhile, the RBI also set sub-targets for lending to the priority sector for foreign banks with 20 branches or more for FY2018-19. Foreign banks’ lending to MSMEs will have to be 8 per cent of the adjusted net bank credit, or  7.5 per cent of a credit equivalent amount of off balance sheet exposure, whichever is higher.