Transitory liberalisation of asset classification norms for MSMEs

by Yutika Lohia and Anita Baid (finserv@vinodkothari.com)

With the advent of GST in the Indian economy, all three sectors i.e. Agriculture, Industry and Service, have been facing several challenges. Majority of small entities in the country have been impacted in some way or the other, irrespective of whether they required registration under GST or not. MSMEs requiring registration faced difficulties due to disruption of their business for ensuring compliance with the new regime. Even unregistered MSMEs faced complications as they were dealing with businesses which were directly disrupted due to GST implementation eventually effecting their cash flows to honour financial obligations. In response to the worries of small enterprise, the government has introduced several relaxation so as to enable them to adopt themselves with the revolutionary change of indirect taxation scheme being implemented in the country. Certainly the cash flows of the micro, small, medium enterprises (MSMEs) sector has been adversely affected with this new GST regime and such entities whether registered or not under GST, who have taken financial assistance are definitely facing problems to pay off their debts.

MSMEs are regarded as one of the major contributors for the development of the Indian economy. Several small sector entities are concerns supplementary to GST and to cater this there are measures taken by the authority to help the entity to sustain the changing tax pattern. There have been several attempts by the government to promote the MSMEs. Earlier, the Reserve Bank of India (RBI), on February 7, 2018[1], came out with a notification to grant relaxation to banks and NBFCs with respect to asset classification in case of MSME accounts.[2]

Another respite has been given by the RBI on  June 6, 2018[3], by allowing banks and NBFCs to classify their exposure on all MSMEs, whether registered or not under GST, as per the 180 days past due (DPD) criterion. By extending the benefit for unregistered MSMEs as well, the government aims to encourage their registration under GST by December 31, 2018.

Scope of the notification

• This notification focusses on all the banks and NBFCs, irrespective of the financier classification and also brings in MSMEs whether registered or not under GST.
• All MSMEs whether registered under MSMED Act or not are covered under this notification.
• The benefit is extended to those MSME borrowers, whose aggregate fund based and non-fund based exposures of all banks and NBFCs does not exceed Rs. 250 million or Rs 25 crores as on May 31, 2018.

Asset classification benefit under the notification

The notification extends the asset classification benefit to the banks and NBFCs with respect to stressed MSMEs account, not registered under GST.

The February notification provided that MSME accounts, registered under GST, that would become 90 days/ 120 days delinquent due to non-payment of amount overdue on September 01, 2017 and any amount falling due between September 01, 2017 and January 31, 2018, shall continue to be classified as a ‘standard asset’ in the books of banks and NBFCs, provided:

• the account was classified as standard in the books of the lender as on August 31, 2017; and
• the overdue amount is paid within a period of 180 days from the original due date.

The extant notification extends the scope till December 31, 2018 as well as covers MSME account not registered under GST within its purview. Accordingly, all MSME accounts shall be classified as ‘standard asset’ if the payments due from the borrower as on September 1, 2017 and falling due thereafter up to December 31, 2018 were/are paid not later than 180 days from their original due date. Provided they were classified as standard in the books as on August 31, 2018.

The notification further provides the alignment of NPA classification, for GST registered MSMEs, with the extant IRAC norms in a phased manner. However, for non-registered GST entity, NPA classification shall regress to 90 days from January 01, 2019 itself.

Accordingly, dues payable on borrowings by MSMEs who are registered under GST or registers themselves by December 31, 2018 shall align their NPA classification from January 01, 2019 as per the table mentioned below:

The illustrations below would help us to understand the position better:

From the language and intent of the notification it seems that for accounts which have been already reported as NPA in the September or December quarter, the banks and financial institutions will be free to roll back the asset to standard category.

Provisioning and income recognition norms

The notification states that the other terms and conditions of the February notification shall remain unchanged. Accordingly, the additional provisioning requirements for these accounts shall be as follows:

• 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.

With respect to the income recognition, for accounts with more than 90/120 DPDs, the income will be recognized on cash basis only.

Conclusion

Greater number of NPAs will amount to scarcity of funds in the economy also at the same time it will result in meager generation of revenues to banks/NBFCs. In order to cure the repayment cycle of borrowers post demonetization and GST, RBI has intended to restructure the NPA classification for MSMEs. This restructuring of NPAs will bring a relief to the whole economy as a whole.

The aforesaid relief granted by the government will help the MSMEs to recover from the adverse impact from GST implementation on their cash flows and allied business activities. RBI has been taking such measures to alleviate the distress caused to the MSMEs and assist them to come out of the vicious circle of NPAs.

[1] https://rbi.org.in/scripts/NotificationUser.aspx?Id=11216&Mode=0

[2] Our article on the same can be read here- http://vinodkothari.com/blog/relaxation-in-the-asset-classification-norms-for-msme-accounts/

[3] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11289&Mode=0