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Forbearance over Default
In a move ostensibly aimed at helping micro, small and medium enterprises hurt by demonetisation and the goods and services tax regime, and burdened with distressed debt, the Reserve Bank of India acceded to the demands that a lenient regime of debt restructuring should be put in place. However, the evidence suggests that this would not go very far in helping the units in this large sector. This gives rise to the suspicion that the real intent of the move is to open the door to a return to a regime wherein bad debt, resulting from default on debt service by large corporate borrowers, is restructured at the cost of the taxpayer.
In response to pressures from the government and its nominees on the board, the Reserve Bank of India (RBI), under the leadership of a new governor, has decided to step back. Departing from its insistence that restructured loans should not be treated as standard assets, the RBI has issued new guidelines that allow for the restructuring of loans subject to default, provided to micro, small and medium enterprises (MSMEs) with total (fund and non-fund) exposure of up to ₹ 25 crore. As part of what is being termed as a one-time concession, stressed loans that have not been declared non-performing as of 1 January 2019, can be, subjected to restructuring before March-end 2020, without them being downgraded in status to non-standard assets. As part of this diluted restructuring process, banks and non-banking financial companies (NBFCs) are required to make a provision for 5% of the value of the assets so restructured.
There is much that can be said in support of such a measure. The MSMEs, which are in any case more vulnerable than large firms, had been badly hit by both demonetisation and the hasty implementation of the badly designed goods and services tax (GST). One consequence of such damage is the difficulty in repaying loans, and the pressure from the government to ease the terms of restructuring of MSME debt is a recognition of the effect its own policies have had on units in the sector. Easier restructuring, it is hoped, would keep credit flowing to these enterprises.
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