By Abhirup Ghosh(firstname.lastname@example.org)
The Reserve Bank of India (RBI), on 7th February, 2018, has come out with a notification to grant relaxation to banks and NBFCs with respect to asset classification in case of MSME accounts. The notification has been released on the pretext that the due to the implementation of Goods and Services Tax, the cashflows of small enterprises have been impacted severely, thereby hampering their ability to honour their financial obligations.
In this write up we have tried to cover the impact of the notification.
Scope of this notification
This notification is addressed to all banks and NBFCs, irrespective of what business the financier is engaged in. The notification attempts to capture only such MSMEs which are registered under GST regime as on January 31, 2018.
Before we delve into further details, let us first take a note of the meaning of MSME.
Here it is important to note that the notification covers MSMEs which are classified as such under the MSMED Act, registration under the said Act however is not necessary. Therefore, the MSMEs, irrespective of whether they are registered under the Act, shall be covered under this notification.
The implementation of GST regime has caused adverse impact on majority of small entities in the country in some way or the other, irrespective of whether they required registration under GST or not. While the ones requiring registration faced difficulties as their businesses were disrupted for ensuring compliance with the new regime, the ones not requiring registration also faced difficulties as they had to deal with persons whose business were directly disrupted due to GST implementation.
However, this notification seems to address the concerns of only such MSMEs who have been directly affected due to the implementation, as only those enterprises who are registered under GST regime are eligible cases under this notification.
Further, the benefit under this notification shall be available only in respect of such borrowers, where the aggregate fund based and non-fund based exposure of all the banks and NBFCs does not exceed Rs. 250 million or Rs. 25 crores.
Asset classification benefits under this notification
The crux of this notification lies in the asset classification benefit that it passes to the banks and NBFCs with respect to the stressed MSME accounts. The notification states the accounts that would become 90 days/ 120 days delinquent due to non-payment of amount overdue on 1st September, 2017 and any amount falling due between 1st September, 2017 and 31st January, 2018, provided:
- the account was classified as standard in the books of the lender as on 31st August, 2017; and
- the overdue amount is paid within a period of 180 days from the original due date
The illustrations below would help us to understand the position better:
|Original Due Date||DPDs as on 31-08-2017||Benefit available||Payment to be made within|
|01 June 2017||91||No||NA|
|01 July 2017||61||Yes||28 December 2017|
|01 August 2017||30||Yes||28 January 2018|
|01 September 2017||NA||Yes||28 February 2018|
|01 October 2017||NA||Yes||30 March 2018|
|01 November 2017||NA||Yes||30 April 2018|
|01 December 2017||NA||Yes||30 May 2018|
|01 January 2018||NA||Yes||30 June 2018|
|01 February 2018||NA||No||NA|
|Assuming the entity follows 90 days NPA convention|
One interesting question that arises here is what will happen to the cases which have been already reported as NPA in the September or December quarter. Looking at the language and intent of the notification, it is safe to conclude that the banks and financial institutions will be free to roll back the asset to standard category.
The notification also lays down additional provisioning requirements for these accounts. The accounts retained as standard will be subject to provisioning at the rate of 5% instead of 0.40%. However, this provisioning requirement shall apply only in case of accounts having delinquency of more than 90 days/ 120 days but less than 180 days.
The excess provision created under this notification can be reversed only when the amount due from the borrower falls below 90 days/ 120 days past due.
If the account moves beyond 180 DPDs, then the same shall attract provisioning as per the normal IRAC norms.
This notification shall have no impact on the income recognition norms. Therefore, for accounts with more than 90/120 DPDs, the income will be recognised on cash basis only.
While the notification has been projected as a relief for the MSMEs, however, the most intriguing question is whether the actual intention of the notification is such. The timing of the notification is perfect, as majority of the banks and financial institutions are yet to finalise their quarterly commercials. This will undoubtedly be a great way to improve the state of financials statements of major banks and financial institutions, which are otherwise in a sorry state now.