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Debt Restructuring Scheme for MSME

For Promotion & Development of Micro Small & Medium Enterprises (“MSMEs”) entities, the government is keeping wheels of the economy moving. The MSME sector is among the largest employment generation sector, which also accounts for 31 to 45% of the country’s total exports in GDP. Holding the largest space in the production sector, the sector requires a seamless flow of credit and policy aid from the government at regular intervals.

To meet the financial appetite of this sector, Reserve Bank of India (“RBI”) had announced a Debt restructuring scheme for MSMEs (“the scheme”). In the scheme, RBI instructed banks and fund institutions to restructure loan accounts of defaulting MSMEs back in their records. The reason behind was to provide support to MSMEs in their financial crunch, which these entities faced due to happening of demonetization and GST in a sequence. While these entities got no time to be compliant and work on their financial stress, an extension for repayment was given through the scheme.

Terms of Usage of Debt Restructuring Scheme for MSMEs

Under the scheme, only banks and financial institutions satisfying the following conditions shall be permitted to restore their MSME debts as active:

  • MSME accounts that hold a status of “standard asset” in the books as on 1st Jan 2019 or after, to be only restored.
  • If the total borrowings from all banks and NBFCs by the borrower does not exceed Rs 25 crores.
  • The borrower must be GST registered other than those who are exempted from GST.
  • A special provision of 5% on total outstanding loans in addition to existing has to be made by banks or NBFCs for such defaulting entity after restructuring their loan account.
  • Necessary disclosure for restructured accounts has to be made by banks and financial institutions after restructuring, in their financial statements.

The timeline under the scheme for the restoration of MSME accounts was up to 31st March 2020.

From Budget 2020

Proposal for Debt Restructuring for MSME

As the Government of India has taken many initiatives to push forward the MSME sector and provide relief to the financially stressed entities through RBI intervention.

Finance Minister highlighted the recoveries made and the sector growth observed from the issue of the Debt restructuring Scheme in 2019. FM announced to give a further extension to the scheme for MSMEs till 31st March 2021 ( earlier it was 31st March 2020).

Bringing additional reforms in the Budget 2020 for the MSME Sector, Finance Minister proposed the following changes:

  • To formulate a National Logistic Policy to promote and regularize logistic deals for MSME entities.
  • To enable easy credit to MSMEs through Invoice Finance Schemes through TReDS.
  • To provide more credit facilities to MSMEs through Credit Guarantee Trust for Medium and Small Entrepreneurs (CGTMSE).
  • To provide an app-based finance utility to MSMEs.
  • To safeguard small entities from audit compliances by providing an extension in their audit requirement from having turnover from Rs 1 crore to 5 crores provided that only 5% of their transactions are to be made through cash.

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