How RBI’s Resolution Framework 2.0 can help MSMEs tide over Covid mess; is Udyam registration required?

For MSMEs and small businesses restructured earlier, RBI had allowed lenders to review the working capital sanctioned limits, based on a reassessment of the working capital cycle, margins, etc. as a one-time measure.

The Reserve Bank of India (RBI) in August last year during its second bi-monthly monetary meet had extended provisions of restructuring MSME loans classified as standard as of March 1, 2020. The move was intended to support Covid-hit MSMEs and to align the restructuring guidelines with the Resolution Framework for Covid-related stress announced for other loans. However, the resurgence of the pandemic post-mid-February and following lockdowns across the country had further necessitated support to the most vulnerable borrower class – MSMEs.

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Consequently, the RBI had in early May announced Resolution Framework 2.0 to allow individuals, small businesses, and MSMEs — with loans up to Rs 25 crore and who have not availed restructuring under Resolution Framework 1.0 and others and were classified as ‘Standard’ as on March 31, 2021 — avail one-time restructuring under the proposed framework till September 30, 2021. The “restructuring has to be implemented within 90 days after the invocation,” RBI Governor Shaktikanta Das had said in a statement. However, for borrowers who had availed restructuring under Resolution Framework 1.0, Das had allowed lenders to modify their plans to increase the period of the moratorium and/or extend the residual tenor up to a total of two years. Borrowers were permitted a moratorium of less than two years under the first framework.

“The industry has welcomed RBI’s framework 2.0 as it provides the much-needed relief to select borrowers who have been impacted in the second wave. It aims to provide liquidity to the borrowers, at reasonable costs, in these tough market conditions. It can benefit them in the long run by restructuring the account without classifying it as an NPA. Further, there is also an option for small businesses who had availed benefits under framework 1.0 to avail additional borrowings which could provide them another chance,” Maulik Sanghavi, Partner – Resolution Advisory, BDO India told Financial Express Online.

For MSMEs and small businesses restructured earlier, RBI had allowed lenders to review the working capital sanctioned limits, based on a reassessment of the working capital cycle, margins, etc. as a one-time measure. Meanwhile, there were other conditions laid down by the Central bank for MSME borrowers to get their loans restructured under the 2.0 framework. For instance, while the borrower has to be GST-registered on the date of implementation of the restructuring, the same doesn’t apply for MSMEs that are exempted from GST registration. “It must be ensured that only credible businesses as provided the benefit under this framework to ensure long term benefits of the framework to the economy. Further, the RBI also may need to consider providing an extended period for other companies as well since the previous one-time restructuring windows may need more time for coming to a combined resolution,” Karan Mitroo, Partner, L&L Partners told Financial Express Online

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Another key ask by RBI was that if the borrower is not registered on the new Udyam Registration portal, they would have to obtain the registration before the date of implementation of the restructuring plan. Financial Express Online had reported last month that as of May 16, 2021, 30,00,822 MSMEs were registered on the Udyam Registration portal, which had replaced the erstwhile process of filing for Udyog Aadhaar Memorandum (UAM), as per the online data available with the MSME Ministry. Before the Udyam portal, India had 1.02 crore registered MSMEs under UAM between September 2015 and June 2020 apart from nearly 22 lakh units registered under EM II between 2007 and 2015, as per the FY21 annual report of the MSME Ministry.

This indicates that only among these 30 lakh borrowers registered with the Udyam portal would be eligible for restructuring if at all they want to opt for it. For others, new registration is a must. On the other hand, the number of SMEs seeking restructuring might not be as much as assumed. For instance, according to the credit rating agency Crisil, the number of SMEs rated by Crisil opting for the restructuring window could be much lower than those who are eligible. “Crisil believes that the impact of the pandemic could be contained over the next 2-3 months. Therefore, the actual number of companies opting for restructuring could be much lower than that are eligible,” it said in a statement last month. Around 3,500 companies rated by Crisil are SMEs with bank loan exposure of up to Rs 25 crore while around 3,400 of them are standard accounts, which makes them eligible for the restructuring scheme.

“As future is full of uncertainty, it is highly recommendatory to opt for the available restructuring scheme under resolution framework 2.0 as the revival of the market shall take its own time and till then in order to ensure the ease of the entity cash-flow, the alignment of the existing debt ought to be as per the available entity cash-flow. An availment of restructuring scheme shall not only ensure to curb the future uncertainty of entity cash-flow but also ensure the minimum reduction in credit score of the promoter and entity as compared to the classification of the account as non-performing asset,” Jyoti Prakash Gadia, Managing Director, Resurgent India told Financial Express Online.