Context: The Reserve Bank of India’s (RBI’s) restructuring package for small businesses announced last month will help recast Rs 1 lakh crore of loans for 7 lakh eligible micro, small and medium enterprises (MSMEs).

The scheme:

The scheme announced by RBI is a one-time scheme wherein a loan tenor and interest rate can be revised without classifying the asset as a NPA.

• The facility is available for standard advances of up to Rs 25 crore only.
• The scheme will help free up additional resources which will fuel demand and create further opportunities in the industry.
• The restructuring must be implemented by March 31, 2020. Banks will need to make a provision of 5% towards these restructured loans. Each bank/NBFC should formulate a policy for this scheme with board approval. Those MSMEs that are not exempt from GST will need to be registered on the GSTN on the date on restructuring.

What was the issue with MSMEs?

SMEs were the worst hit among various industry segments following demonetisation and implementation of the Goods and Services Tax. Availability of credit to MSMEs declined further after the IL&FS default crisis which led to bank credit to non-banking finance companies drying up. This in turn reduced the ability of NBFCs to lend to MSMEs.

The sector was facing a liquidity problem because of lack of confidence of banks who had turned risk-averse in the wake of rising bad loans.

Significance of MSMEs and the need for creating an enabling environment:

MSMEs form an important component of the Indian economy and contribute significantly to the country’s gross domestic product, exports, industrial output and employment generation. Considering the importance of MSMEs in the Indian economy, it is considered necessary at this juncture to take certain measures for creating an enabling environment for the sector.