IBA demands recast of loan accounts of small firms amid Covid-19 crisis

The Indian Banks’ Association (IBA) has sought two set of relaxations from the Reserve Bank of India (RBI) to help resume economic activities — restructuring of all the micro, small and medium enterprises (MSMEs) loan accounts and withdrawal of additional provisioning norms on moratorium loans.

“The IBA has sought for a restructuring of loans given to the MSME across the board. Right now, according to the RBI guidelines, only the MSMEs, which are registered under the goods and services tax (GST), are eligible to restructure their loan accounts. This makes only a small number of MSMEs in India eligible for it and the IBA has sought a relief for non-GST accounts, too,” an official said.

The RBI had permitted a one-time restructuring of existing loans to GST-registered MSME units. However, the aggregate exposure, including non-fund based facilities, of banks and non-banking financial firms to such borrowers should not exceed Rs 25 crore, according to RBI guidelines. 

The restructuring was allowed till March 31, 2020 but was later on extended by the RBI till December 31, 2020. Around 900,000 MSMEs were eligible for benefit under the restructuring scheme announced by the RBI. Till January 31, 2020, around 619,562 MSME accounts were restructured by the public sector banks of amount involving Rs 22,650 crore.

The IBA’s request for a one-time restructuring of all MSME loans come at a time when the finance ministry is discussing the prospects of giving government guarantee to loans given to small businesses.

The IBA has further sought relaxation in the RBI’s recent directive to banks, asking them to make additional provisioning of 10 per cent on their books for all moratorium loans.

The RBI has allowed a three-month moratorium on all term loans, including agriculture, retail and crop loans, along with credit cards and working capital payments, as long as the account didn’t turn into an NPA before March 1. However, on April 17, the RBI asked banks to make an additional provisioning of 10 per cent for such accounts so that their balance sheets are risk-averse in case of possible losses in the future. Moreover, half of the provisioning requirement has to be made in the quarter ending in March.

The IBA has argued that the additional provisioning requirement will have a significant impact on the capital of lenders, impacting their profitability, at a time when they are bracing up to support economic activities, a bank executive said.

According to a report by Brickwork Ratings, the RBI’s requirement of additional provisioning may impact the banks’ profitability by Rs 35,000 crore in the March and June quarters if all the stressed accounts in the banking system are given a moratorium on their loans.