India’s central bank just gave the country’s small businesses a one-time breather from some of their bad loans — but with a few conditions

• The Reserve Bank of India (RBI) released guidelines for a restructuring scheme for the stressed accounts of micro, small and medium-sized enterprises (MSME).
  
• The scheme will only be applied to accounts with an outstanding value of ₹250 million or less. In addition, a loan, whether it is in default or not, has to remain classified as “standard” as of 1 January 2019 to be eligible for restructuring.
  
• The program was a key demand of the central government, which has been looking to give a boost to the country’s small businesses.
  
• Separately, the RBI announced earlier this week that the overall non-performing asset ratio, which is a proportion of bad loans to all loans, in the banking sector declined for the first time since 2015.

In a move that has been in the works for a while, the Reserve Bank of India (RBI) released guidelines for a restructuring scheme for the stressed accounts of micro, small and medium-sized enterprises (MSME). The scheme will prevent the restructured loans from being classified as “non-performing”.

The scheme will only be applied to accounts with an outstanding value of ₹250 million or less. In addition, a loan, whether it is in default or not, has to remain classified as “standard” as of 1 January 2019 to be eligible for restructuring. If the account has been downgraded, then it won’t fall into the scheme.

Under the one-time scheme, banks and non-banking financial entities will have until the end of the 2019-2010 financial year to restructure the eligible accounts. They will also have to incur a 5% provision charge on each restructured loan in addition to existing provisions. Finally, to avail the program, borrowers need to be GST-compliant.

The program was a key demand of the central government, which has been looking to give a boost to the country’s small businesses. The issue of credit to MSMEs became a sticking point in the spat between the central government and the RBI towards the end of last year.

Despite some hesitation at what the scheme might mean for the banking sector’s bad loan crisis, the central bank eventually relented. At the end of November, it announced that it would formulate a scheme to help small businesses restructure their bad loans.

The program will not only provide some relief to India’s small businesses from loans they’ve defaulted on, but will allow them further access to financing. In addition to forming the backbone of the Indian economy with regards to employment and manufacturing, small businesses are also an important vote bank. All that means is catering to the needs of small business owners will be crucial in an election year.

The central government is also said to be mulling a plan to raise the minimum sales requirement for small businesses in regards to GST registration. The sales threshold, which is currently ₹2 million could be reportedly raised to as much ₹7.5 million, which will spare smaller businesses from having to comply with the requirements of the taxation policy.

Separately, the RBI announced earlier this week that the overall non-performing asset ratio, which is a proportion of bad loans to all loans, in the banking sector declined for the first time since 2015, falling from 11.5% in March 2018 to 10.8% by September 2018. In its Financial Stability Report, which was released on 31 December, the central bank also predicted that the bad loan ratio would decline to 10.3% by the end of March 2019.


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