Loan restructuring facility – Why it is a big boon for MSME borrowers
Article by
Jiz P Kottukappally
Chief Executive Officer
Yescalator Management and Financial Consultants
One of the most important questions that business owners have been asking themselves and each other during the month of August 2020 has been whether the moratorium announced by RBI on the loan payments will be extended again. No doubt the benefits of moratorium on loan repayments announced by RBI has helped a large number of borrowers to tide over or at least minimize the challenges of inadequate cash flows. Though the lockdown was for less than 2 months and more than 2 months have passed since the partial lifting of lockdown has started, business is not back to normal for most of the firms. Revenues and cash flows are still under stress and naturally many of the borrowers are looking at an extension of the moratorium and hence the questions regarding possibility of extension of moratorium were being asked.
No doubt COVID 19 has created unprecedented challenges in almost all areas of life of human beings be it health, education, travel, entertainment or business. Governments across the world have been taking various initiatives for minimizing the impact of COVID 19 on all these areas. The impact of COVID 19 and the national lockdown has been very severe on industry and trade, and thus government and RBI has come out with a lot of initiatives and relaxations for supporting these areas. Recognizing the role MSME units play in terms of employment generation and economic growth of the country, the government has been coming out with various schemes to support the revival of such units. Moratorium on loans, extension of moratorium, maintaining status quo of accounts for which moratorium has been granted, recalculation of the ‘drawing power’ by reducing the margins and/or by reassessing the working capital cycle, additional funding without additional collateral security under the Emergency Credit Line Guaranteed Scheme (ECLGS) and funding promoters of stressed MSME units under the Subordinated Debt for Stressed MSMEs scheme have been some of the major initiatives by the Govt and RBI for supporting MSME units.
Are these measures sufficient?
Of the various measures initiated by Govt and RBI for supporting MSME borrowers, there has been both short-term and long-term measures. The declaration of moratorium, recalculation of DP and reassessment of working capital cycle are short term measures. The ECLGS and subordinate debt funding are comparatively longer term support measures that have been announced. But all these schemes are broadly “one stich fit all” formula “broad brush” approach schemes and do not take into considerations the peculiarities and current situation of each business unit separately. Covid 19 has brought out a structural change in a lot of the businesses, and thus a one stich fit all formula will not work in most of these cases. What is required for businesses to come out of their financial mess is the facility for the borrowers and financial institutions to work out tailor made solutions considering the current situation and future prospects of the business activity. And it is in this context that the RBI has rather than extending the moratorium, during the first week of August come out with a scheme permitting banks and financial institutions for restructuring of MSME loans. Thus the restructuring of MSME loan facilities is great benefit that has been provided to the borrowers and would benefit the borrowers in huge way, if properly utilized.
How can restructuring benefit you?
Restructuring is an act in which a lender, grants concessions to a borrower for economic or legal reasons relating to the borrower’s financial difficulty. Restructuring would normally involve modification of terms of sanction. Restructuring can lead to repayment holiday, alteration of repayment period / repayable amount / the amount of installments / rate of interest, roll over of credit facilities, sanction of additional credit facility, enhancement of existing credit limits, modification of security etc.
Do you require restructuring?
It would be good for businesses to check out for the following symptoms to find out whether their business needs to be restructured. In the case of term loans, it would be difficulty in paying the EMIs, Delay in remitting EMIs or Non payment of EMI. In the case of units enjoying working capital limits the symptoms could be inability to maintain stipulated margins or drawings exceeding sanctioned limits, periodic interest debited remaining unrealized, delay in meeting commitments towards crystallized liabilities under LC/BGs, failure to pay statutory liabilities, non- payment of bills to operational creditors, etc. In addition to the financial parameters stated above, there could be non-financial symptoms like inability to adhere to financial loan covenants, non-submission or undue delay in submission or submission of incorrect stock statements, delay in publication of financial statements and adversely qualified financial statements; steep decline in production figures, downward trends in sales and fall in profits, margin erosion etc.; elongation of working capital cycle, excessive inventory build-up; significant delay in project implementation etc. If any of the symptoms are found in your business it is high time that you think of restructuring your loans.
Who all are eligible?
Under the recent scheme for restructuring of MSME units announced by RBI in August, 2020, all MSME borrowers who have borrowed up to Rs 25 Crore from Commercial Banks including Small Finance Banks, Local Area Banks and Regional Rural Banks, Primary (Urban) Co-operative Banks/ State Co-operative Banks/ District Central Cooperative Banks, All-India Financial Institutions and Non-Banking Financial Companies regulated by RBI are eligible for the benefits given under the scheme. However, the benefits under the scheme are available only for accounts which are standard as on 01st March, 2020. In other words, even SMA 2 accounts can be considered for restructuring but accounts which are NPA as on 01st March, 2020 are not eligible for restructuring under this scheme. Further the total borrowings by the unit from all the above institutions put together should not exceed Rs 25 Crore. Borrowings will include both fund based and non fund based limits. The restructuring exercise has to be completed before 31st March, 2021. A restructuring exercise will be considered as completed, only when all related documentations are completed and conditions of the loans get duly reflected in the books of all the lenders and the borrower. For entities for which GST registration is applicable GST registration should be obtained before the date of implementation of the restructuring, if not already registered.
How is this scheme different from earlier schemes?
Unlike a normal restructuring, where borrower accounts are downgraded to non performing category post restructurings for period of one year, any account which is restructured under this scheme need not be downgraded to NPA category. This would be a major incentive for Banks and lending institution for restructuring of advances and helping out the borrowers.
In some of the cases, the borrowers would not have applied for moratorium or even if moratorium would have been applied banks / lending institutions would not have given it due to some reasons. Some such accounts would have subsequently turned NPA after 02nd March, 2020. Those accounts are also eligible for restructuring under the above scheme announced by RBI. The advantage for a borrower and the lending institution in restructuring such accounts which have turned NPA since 02nd March, 2020 is that once the restructuring is done the accounts can be treated as standard account. Thus MSME accounts which have been classified as NPA by banks and financial institutions from 02nd March, 2020 can come out of NPA status, if a restructuring of that account has been done before 31st March, 2021 under this scheme announced by RBI. This would definitely be of help for many of the financially stressed MSME units.
What should MSME borrowers do?
Though the scheme announced by RBI provides sufficient incentive for banks for restructuring of MSME advances, approval of a restructuring scheme can never be considered as a right by the borrowers. The bankers need to be convinced as to what went wrong in the past and how such instances will not recur in future. Better understanding of the business by the borrowers, the new management team, specific improvements from the past, new customers acquired, new products added, cost reduction initiatives undertaken, the risk mitigates that have been implemented, improving profitability and cash flows, recent transaction history etc are some of the factors which positively impact the bankers for a restructuring of the account. Borrowers should be clearly able to give confidence to the bankers that the past mistakes will not be repeated and there will be definite improvements in revenues, profits and cash flow.
A once in a lifetime boon
While moratorium on repayment of loans is a short term measure that will help units for tiding over the temporary cash flow issues the current option given for restructuring of advances will help address the long term structural issues the units were facing or will face in future. Applying for a moratorium might have been almost a mechanical act for many MSME units. But the current option of restructuring of advances in the MSME sector is a once in life time opportunity that is made available for MSME units and therefore it would be prudent on their part to use it properly after a thorough analysis of their business situation including the future business prospects, profitability and cash flow. A properly worked out financial restructuring plan with necessary corrections in business like value addition, augmenting revenue sources, product rationalisation, cost optimisation, terms of credit, efficient working capital management etc can help the business to turnaround and come out of stress. If such a detailed and comprehensive exercise is not done a restructuring of loan accounts will only result in postponing the financial stress and not solve it.
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