Can RBI’s Restructuring Schemes Reduce the Impact of Bad MSME Business Loan?

April 3, 2023
Updated on

The MSME sector in India plays an important role in the growth of the Indian economy. Approximately there are 6 crore MSMEs which are present in India and contribute almost 30% to the GDP. The MSME sector also plays a significant role in increasing the export output, creating new jobs, uplifting the semi-urban and rural areas and growth of the country. 

However, despite these positive numbers the COVID-19 pandemic impacted this sector and the prolonged periods of lockdown through the country led to decrease in production output, impacted the growth of the sector and in some cases small business owners had to shut down their operations for an extended period of time. According to estimates, almost 67% of the MSMEs in India were temporarily shut for 3 months or more during the lockdown in FY21 and more than 50% of the MSMEs lost 25% of the revenues. As a relief measure and to revive economic activities for small businesses, the Reserve Bank of India (RBI) introduced the loan restructuring scheme.

What is the RBI Restructuring Scheme?

RBI restructuring scheme is a one-time restructuring of MSME loans for small businesses who are struggling to revive operations post the COVID-19 pandemic.  RBI has capped the restructuring limit for non-performing assets (NPA) at INR 50 crores. This scheme is valid for Individuals who took out a loan for business premises and small entities operating in retail and wholesale before 31 March 2021. MSMEs who want to benefit from this scheme must be registered under Udyam Registration before applying for the restructuring scheme. It is implied that this scheme is valid for those credit seekers who have a standard loan account at the end of FY21. A standard loan account stands for a loan that is classified as bad debt or NPA which refers to a loan that is overdue for more than 90 days.

Impact of the RBI Restructuring Scheme on the Growth of MSMEs

MSMEs can leverage a second loan through this restructuring scheme and pay off the loans which were taken earlier, which they were not able to pay because of the pandemic and have been written-off as bad debt. This additional access to funds can help MSME businesses increase their production capacity, expand to newer markets, hire more employees and add products to their portfolios.  Additionally, there is a moratorium period of 90 days, where small businesses can use the funds to revive their enterprise and are not required to pay any EMI in that time frame which makes it easier to sustain and grow.

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Role of Financial Institutions, Private Lenders and NBFCs

Extended credit schemes can be a win-win situation for private lenders, NBFCs, financial institutions and MSMEs. Extension or increased line of credit enables MSMEs to clear bad debts and improve business operations to boost profitability.  With the restructuring scheme, lenders know the borrows they are extending credit to and have the opportunity to recover the written-off bad debts and get returns on the funds an MSME invested in their business. Borrowers on the other hand can leverage this restructuring scheme to improve their credit score and improve and rebuild their businesses, and return the loans resulting in increased credit scores.

This RBI loan restructuring scheme was introduced to help MSME entrepreneurs to grow their business and boost profitability that was affected by the pandemic.  Revival of the MSME sector post the COVID-19 pandemic will be beneficial for both the MSME business entrepreneurs and the NBFCs, by creating opportunities of profitability and ROI. Furthermore, this will boost the Indian economy and increase the scope of MSME lending in India.  

NBFCs such as Kinara Capital have been on the path to create financial inclusion for MSMEs in India. Kinara offers collateral-free business loans for small entrepreneurs operating in the manufacturing, trading, and service sectors. As a socially responsible fintech, Kinara Capital enabled small manufacturers to bring economic prosperity to their communities with job creation and income generation. The company’s portfolio of business loans has enabled small manufacturers to exhibit significant income growth, curate job opportunities, and fortify local economies.

So, expand your MSME enterprise with a small-scale business loan and make an impact while uplifting the community.

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