Relief Measures to MSME by RBI — K B Singh Former Deputy Zonal Manager, Punjab National Bank
To give some life support to MSME sector crippled by
shutdown, RBI on 22 nd May 2020 has reduced Repo Rate
second time in two months by 40 bps to 4%, which is low for
decade and also reduced Reverse Repo Rate to 3.35% from
3.75%. The reduction in repo rate, would lead to further bring
down cost of borrowing for retail and MSME borrowers. As
banks are required to keep a spread between lending and
deposit rates, it is likely that deposit rates would also be
brought down to some extent. Further, with reduction in
Reverse Repo Rates it would be less remunerative for banks to
park their surplus funds with RBI. Alternatively, banks would be
encouraged to lend these funds to productive sectors of the
economy including MSME.
On 27 th March 2020, RBI permitted all banks and NBFCs
to allow moratorium of three months on payment of instalments
in respect of all outstanding TLs as on 1 st March 2020. Similarly
in respect of working capital facilities availed by borrowers as
on 1 st March 2020 the lending institutions were permitted to
defer the payment of interest for a period of three months. This
relief was going to expire on 1 st June 2020. Now, RBI has
extended this facility for another three months up to 31 st August
2020.
There are two important points to be noted in regard to
this relief, firstly it is not waiver of instalment or interest it is only
deferment for a short period due to hardships faced due to
shutdown. As impact of deferment, in case of TLs the
repayment schedule as also the residual tenor will be shifted
across the board and interest shall continue to accure on the
outstanding portion of TL during the moratorium period. For
example, if the remaining EMIs are for 10 months and
deferment for six months is availed, now the currency of loan
would be extended to 16 months, 10 plus 6 months and after
moratorium period EMI would be recalculated capitalizing the
deferred interest. Second important aspect for borrower to
know is, that moratorium is not automatically given by lending
institutions but borrower has to apply for the same at concerned
branch.
shutdown, RBI on 22 nd May 2020 has reduced Repo Rate
second time in two months by 40 bps to 4%, which is low for
decade and also reduced Reverse Repo Rate to 3.35% from
3.75%. The reduction in repo rate, would lead to further bring
down cost of borrowing for retail and MSME borrowers. As
banks are required to keep a spread between lending and
deposit rates, it is likely that deposit rates would also be
brought down to some extent. Further, with reduction in
Reverse Repo Rates it would be less remunerative for banks to
park their surplus funds with RBI. Alternatively, banks would be
encouraged to lend these funds to productive sectors of the
economy including MSME.
On 27 th March 2020, RBI permitted all banks and NBFCs
to allow moratorium of three months on payment of instalments
in respect of all outstanding TLs as on 1 st March 2020. Similarly
in respect of working capital facilities availed by borrowers as
on 1 st March 2020 the lending institutions were permitted to
defer the payment of interest for a period of three months. This
relief was going to expire on 1 st June 2020. Now, RBI has
extended this facility for another three months up to 31 st August
2020.
There are two important points to be noted in regard to
this relief, firstly it is not waiver of instalment or interest it is only
deferment for a short period due to hardships faced due to
shutdown. As impact of deferment, in case of TLs the
repayment schedule as also the residual tenor will be shifted
across the board and interest shall continue to accure on the
outstanding portion of TL during the moratorium period. For
example, if the remaining EMIs are for 10 months and
deferment for six months is availed, now the currency of loan
would be extended to 16 months, 10 plus 6 months and after
moratorium period EMI would be recalculated capitalizing the
deferred interest. Second important aspect for borrower to
know is, that moratorium is not automatically given by lending
institutions but borrower has to apply for the same at concerned
branch.
In respect of Working Capital facilities in the form of cash
Credit / Over Draft banks are permitted tom allow a deferment
of another three months up to 31 st August 2020 on recovery of
interest applied in respect of such facilities. Keeping in view the
hardships faced by borrowers in repaying the accumulated
interest for the deferment period on such facilities in one shot,
RBI now has permitted banks to convert the accumulated
interest on working capital facilities over the deferment period
up to August 31, 2020 into a Funded Interest Term Loan (FITL)
which shall be repayable not later than the end of the current
financial year (i.e., March 31, 2021). Though it is a major relief
for MSME sector but, keeping in view difficulties faced by
borrowers had the repayment period of extended by RBI up to
31 st March 2022 or up to 30 th September it would have been a
big relief for MSME.
In order to provide further relief to MSME borrowers
availing Working Capital facilities banks were permitted to
recalculate the Drawing Power by reducing margins till 31 st
August, 2020, RBI has now extended this period up to 31 st
march 2021. This will further smoothen the working cycle of
MSME. This relief will also not attract downgrading of asset
classification.
Exporters as well as Importers are also facing genuine
difficulties due to various restricts imposed in India and other
countries due to Covid 19 resulting in delay and postponement
of orders and delay in realization of bills, which are adversely
affecting production and realization cycles. RBI has now
permitted an increase the maximum permissible period of
realization of pre-shipment and post-shipment export credit
sanctioned by banks from existing one year to 15 months, for
disbursements made up to 31 st July 2010. In respect of
Importers, RBI has decided to extend the time period for
completion of remittances against normal imports to India from
6 to 12 months from the date of shipment for such imports
made on or before 31 st July 2020. These facilities will provide
greater flexibility to exporters in managing their production
Credit / Over Draft banks are permitted tom allow a deferment
of another three months up to 31 st August 2020 on recovery of
interest applied in respect of such facilities. Keeping in view the
hardships faced by borrowers in repaying the accumulated
interest for the deferment period on such facilities in one shot,
RBI now has permitted banks to convert the accumulated
interest on working capital facilities over the deferment period
up to August 31, 2020 into a Funded Interest Term Loan (FITL)
which shall be repayable not later than the end of the current
financial year (i.e., March 31, 2021). Though it is a major relief
for MSME sector but, keeping in view difficulties faced by
borrowers had the repayment period of extended by RBI up to
31 st March 2022 or up to 30 th September it would have been a
big relief for MSME.
In order to provide further relief to MSME borrowers
availing Working Capital facilities banks were permitted to
recalculate the Drawing Power by reducing margins till 31 st
August, 2020, RBI has now extended this period up to 31 st
march 2021. This will further smoothen the working cycle of
MSME. This relief will also not attract downgrading of asset
classification.
Exporters as well as Importers are also facing genuine
difficulties due to various restricts imposed in India and other
countries due to Covid 19 resulting in delay and postponement
of orders and delay in realization of bills, which are adversely
affecting production and realization cycles. RBI has now
permitted an increase the maximum permissible period of
realization of pre-shipment and post-shipment export credit
sanctioned by banks from existing one year to 15 months, for
disbursements made up to 31 st July 2010. In respect of
Importers, RBI has decided to extend the time period for
completion of remittances against normal imports to India from
6 to 12 months from the date of shipment for such imports
made on or before 31 st July 2020. These facilities will provide
greater flexibility to exporters in managing their production
realization cycle and importers in managing their operating
cycle in Covid 19 environment.
As these reliefs are provided to tide over the disruption in
business/working cycle due to Covid 19, availing these by
borrowers would not adversely affect his credit history and
accounts would not be downgraded in asset classification as
NPA, reported to CICs. However, on completion of deferred
period i.e. 31 st august normal ageing of 90 days for
classification of NPAs would apply.
MSME should make use of these relief measures after
due assessment of their working cycle and likely disruptions
due to uncertainty involved in control of virus and revival of the
economy.
cycle in Covid 19 environment.
As these reliefs are provided to tide over the disruption in
business/working cycle due to Covid 19, availing these by
borrowers would not adversely affect his credit history and
accounts would not be downgraded in asset classification as
NPA, reported to CICs. However, on completion of deferred
period i.e. 31 st august normal ageing of 90 days for
classification of NPAs would apply.
MSME should make use of these relief measures after
due assessment of their working cycle and likely disruptions
due to uncertainty involved in control of virus and revival of the
economy.
K B Singh
Former Deputy Zonal Manager,
Punjab National Bank
Kb.singh1601@gmail.com
Former Deputy Zonal Manager,
Punjab National Bank
Kb.singh1601@gmail.com