A brief overview: Resolution Framework – 2.0: Resolution of Covid-19 related stress of Micro, Small and Medium Enterprises (MSMEs)
Upon perusal of Reserve Bank of India’s (‘RBI’) circular bearing no. DOR.STR.REC.12/21.04.048/2021-22 dated 05.05.2021 titled “Resolution Framework 2.0 – Resolution of Covid-19 related stress of Micro, Small and Medium Enterprises (MSMEs)1 (“Resolution Framework”) it can be ascertained that the said Resolution Framework has been brought out to provide restructuring options for the borrowers who are finding it difficult to repay loans on time due to uncertainties created by the resurgence of the Covid-19 pandemic in India in the recent weeks.
By virtue of the said Resolution Framework the lending institutions i.e. all commercial banks (including Small Finance Banks, Local Area Banks and Regional Rural Banks), All Primary (Urban) Co-operative Banks/State Co-operative Banks/ District Central Cooperative Banks, All All-India Financial Institutions and All Non-Banking Financial Companies (including Housing Finance Companies) (hereinafter collectively referred to as the “Lending Institutions”) are permitted to restructure the advances of MSME borrowers subject to the conditions specified in the said Resolution Framework, detailed herein below.
The Resolution Framework provides that the restructuring measures shall be contingent on the Lending Institutions satisfying themselves that the same is necessitated on account of the economic fallout from Covid-19. Further, accounts provided relief under these instructions shall be subject to subsequent supervisory review with regard to their justifiability on account of the economic fallout from Covid-19.
The Resolution Framework provides the facility for restructuring of existing loans without a downgrade in the asset classification, which is subject to the following conditions:
- The borrower should be classified as a micro, small or medium enterprise (MSME) as on March 31, 2021 in terms of the Gazette Notification S.O. 2119 (E) dated June 26, 2020 of the Ministry of Micro, Small and Medium Enterprises.
- The borrowing entity is GST-registered on the date of implementation of the restructuring. However, this condition will not apply to MSMEs that are exempt from GST-registration. This shall be determined on the basis of exemption limit obtaining as on March 31, 2021.
- The aggregate exposure, including non-fund based facilities, of all lending institutions to the borrower does not exceed ₹25 crore as on March 31, 2021.
- The borrower’s account was a ‘standard asset’ as on March 31, 2021.
- The borrower’s account was not restructured in terms of earlier MSME restructuring circulars2.
- The restructuring of the borrowers account is invoked by September 30, 2021. For this purpose, the restructuring shall be treated as invoked when the Lending Institution/s and the borrower agree to proceed with the efforts towards finalizing a restructuring plan to be implemented in respect of such borrower. The decisions on applications received by the Lending Institutions from their customers for invoking restructuring under this Resolution Framework shall be communicated in writing to the applicant by the Lending Institutions within 30 days of receipt of such applications. The decision to invoke the restructuring under this facility shall be taken by each Lending Institution/s having exposure to a borrower independent of invocation decisions taken by other Lending Institutions, if any, having exposure to the same borrower. The restructuring of the borrower account has to be implemented within 90 days from the date of invocation.
- The borrower needs to be registered in the Udyam Registration portal before the date of implementation of the restructuring plan for the plan to be treated as implemented.
- Upon implementation of the restructuring plan, the Lending Institutions shall keep provision of 10 percent of the residual debt of the borrower.
- It is reiterated that Lending Institutions shall put in place a Board approved policy on restructuring of MSME advances under these instructions at the earliest, and in any case not later than a month from the date of this circular.
- All other instructions specified in the circular DOR.No.BP.BC/4/21.04.048/2020-21 dated August 6, 2020 shall remain applicable 3.
The RBI has specified that in respect of restructuring plans implemented as per the aforementioned conditions, asset classification of borrowers classified as standard may be retained as such, whereas the accounts which may have slipped into NPA category between April 1, 2021 and date of implementation may be upgraded as ‘standard asset’, as on the date of implementation of the restructuring plan.
Review of accounts restructured in terms of earlier MSME Restructuring Circulars:
In respect of accounts of borrowers which were restructured in terms of earlier MSME restructuring circulars, Lending Institutions are permitted, as a one-time measure, to review
January 1, 2019 (“earlier MSME restructuring circulars”).
the working capital sanctioned limits and / or drawing power based on a reassessment of the working capital cycle, reduction of margins, etc. without the same being treated as restructuring. The decision with regard to above shall be taken by Lending Institutions by September 30, 2021. The reassessed sanctioned limit / drawing power shall be subject to review by the lending institution at least on a half yearly basis and the renewal / reassessment at least on an annual basis. The annual renewal/reassessment shall be expected to suitably modulate the limits as per the then-prevailing business conditions.
Compliance of the Resolution Framework by Lending Institutions:
- In view of the said Resolution Framework the Lending Institutions shall firstly put in place a board approved policy on restructuring of MSMEs within a period of one month from the date of the said Resolution Framework i.e. 05.05.2021.
- Pursuant thereto upon receipt of an application for restructuring from the concerned borrowers in writing the Lending Institutions shall, within a period of 30 days of receipt of such application, communicate in writing its reasons to either permit or reject the borrower’s application for restructuring.
- The Lending Institutions before permitting restructuring under the said Resolution Framework shall satisfy themselves that the same is necessitated on account of the economic fallout from Covid-19.
RBI, while issuing the said Resolution Framework has been pragmatic in its approach by announcing restructuring rather than moratorium. By this way, stressed borrowers have been given a choice to opt for resolution if required. This will ensure that only those who genuinely need the restructuring of their loans will approach the Lending Institutions and the same wouldn’t be counter-productive for the Lending Institutions, as was the case with RBI’s grant of Loan Moratorium provided earlier.
2. MSME restructuring circulars bearing no. DOR.No.BP.BC/4/21.04.048/2020-21 dated August 6, 2020; DOR.No.BP.BC.34/21.04.048/2019-20 dated February 11, 2020 and DBR.No.BP.BC.18/21.04.048/2018-19 dated