Explained in 3 charts: Environment remains challenging for NBFCs, MSMEs

RBI has announced an extension of the one-time restructuring scheme for MSMEs

The Reserve Bank of India's (RBI) forbearance towards the stressed sectors marks a gradual shift from its earlier effort to enhance the quality and transparency of asset classification. Fitch Ratings says such regulatory forbearance will perpetuate moral hazard as it comes on the back of aggressive lending to certain sectors in the five years to FY19.

The RBI has announced an extension of the one-time restructuring scheme for micro, small and medium-sized enterprises (MSMEs) and in asset classification for certain real-estate projects. While it is not clear if the forbearance will be extended to non-banking financial companies, Fitch believes the probability of this is high.

The above should be seen in the context of the central bank’s observation in its Report on Trend and Progress of Banking (2018-19) that the quality of retail loans can be hit by the slowdown in consumption and economic growth. The environment continues to be challenging for NBFCs and MSMEs.