In its recent circular, the Reserve Bank of India (FID.MSME & NFS.BC.No.4/06.2.31/2020-21 dated August 21, 2020) issued an exclusive criterion for the commercial banks including Small Finance Banks, Regional Rural Banks, Local Area Banks, Co-operative Banks, all India Financial Institutions and Non-Banking Financial Companies.
The criterion provided MSME the ease of doing business, classification of asset or provision in interim financing or credit options for certain eligible borrowers or provision for extension of new finances distressed accounts, can help achieve honor and respect towards governmental strategies in these tough times.
RBI Framework 2.0 for MSME
Due to the uncertainties that were created by the COVID-19 pandemic across the country, the RBI (Reserve Bank of India) issued a notification dated 5 May 2021, which stated the framework of the new resolution for MSMEs known as, Resolution of COVID-19 Related Stress of Ministry of Micro, Small and Medium Enterprises (MSME).
Through this notification circular, RBI stated the extension of the facility to restructure existing loans without downgrading the current asset classification. Restructuring to be carried out under the proposed framework can be invoked up to the end of September 2021 and implemented within 90 days post invocation.
Resolution Framework 2.0 – Extension of Restructuring
As per the latest guidelines notified by the RBI circulars for MSMEs, an extension to one time-restructuring of the existing loans will be permitted to the standard MSMEs without lowering the classified assets.
Initially, when the Resolution Framework 2.0 was launched, MSMEs with aggregated loans less than Rs 25 crore as of 31 March 2021 were eligible to apply under the said framework. Further, the coverage of business loans aggregate availed was enhanced to Rs 50 crore from Rs 25 crore, under the Resolution Framework 2.0 for restructuring debt of stressed individuals to tackle the pandemic. Those borrowers who could not apply for the earlier RABI’s resolution framework for MSMEs announced in August last year (FID.MSME & NFS.BC.No.4/06.2.31/2020-21 dated August 21, 2020), can opt into framework 2.0 before September 30, 2021.
Procedure for Invoking Restructuring of Loans
- The restructuring of MSMEs borrowers account is supposed to be invoked by 30 Sep 2021. The restructuring will be considered as invoked when the borrower MSME and the loan lending institution agree to proceed with the efforts for finalizing the restructuring plan implementation.
- The applicant or borrower has to make a written application to the lending institution as per the new RBI framework for MSMEs, for invoking restructuring of the debt.
- In return, the financing institutions will also have to communicate in writing to the debtor about the decisions taken on their applications for invoking restructuring under this facility.
- The lending institutions independently will make decisions in invoking the restructuring of the debts by having exposure to the MSME borrowers, irrespective of the other lending institutions having exposure to the same borrower.
Conditions stated as per the new RBI framework for MSMEs
For availing the benefits of the new RBI Framework 2.0 for MSMEs, the conditions needed to be fulfilled areas –
- As per the Gazette Notification S.O. 2119 (E) June 26, 2020, the borrower must be classified into a Micro, Small, or Medium Enterprise as of March 31, 2021.
- The debtor MSME should have its GST registered when applying for implementation of restructuring. This condition excludes those MSMEs that are exempted from registration of GST. This shall be ascertained as per the exemption limit as of 31 March 2021.
- The loan aggregate, including the facilities that are non-fund based from all the financing institutions, should not be more than Rs 50 crore, which was decided to be Rs 25 crore earlier as of 31 March 2021.
- The borrowers’ accounts should not have to be restructured in MSME terms of restructuring.
- As of March 31, 2021, the debtor account was a standard asset.
- The account restructuring is executed within 90 days from the invocation date.
- The registration of the borrower must be completed under the portal of Udyam Registration before the date on which restructuring is implemented for the plan to be treated as implemented.
- The lending institutions shall keep a provision of 10% of the balance loan amount after the implementation of the restructuring plan.
RBI Frameworks for MSMEs – Credit Access
As per a survey by the Economic Times, the Small, Medium Enterprises in locations outside India that have the inclusion of other financing mediums develop quicker comparatively than the time-consuming methods in India for availing credit for MSMEs.
There have been provisions defined in the new RBI framework for MSME to provide easy access to credit.
The Account Aggregator RBI Framework
Account aggregator was a process launched to provide higher entry to the financial knowledge of any particular person and enterprise. This quickly gained eight main banks as members of the AA community, such as ICICI Financial Institution, State Financial Institution of India, Axis Financial Institution, Kotak Mahindra Financial Institution, IDFC First Financial Institution, Federal Financial Institution, HDFC Financial Institution, and IndusInd Financial Institution.
How does Account Aggregator or AA Framework work?
In simple explanation – Account Aggregator shares the information among the monetary establishments, collected with the consents and permissions of the people.
This helps the establishments to thoroughly understand the prospects in terms of their potential and design their companies accordingly. It also allows easy circulation of financial knowledge between banks and financial service suppliers.
- In the first step, open an account with the bank which has joined the account aggregator community; further, a funnel of all the monetary knowledge is created by linking with lending institutions accounts, insurance coverage and policies, and so forth.
- Now, in the next step, the borrower offers consent to the lending institutions for providing their monetary knowledge via an NBFC-AA if you are searching for a mortgage on your promoting assets.
- In the third step, after the consent is provided, the Account Aggregator seeks permission from the financial lending experts to match the borrower’s knowledge.
- Finally, the information is delivered to the Account Aggregator, which enables the lending institutions to understand the promotions of the MSMEs along with their monetary profile and the possibility of dangers in offering the mortgage.
Benefits of AA framework
With the improved entry of monetary knowledge, the urgent financial requirements of small-size loans for MSMEs may be met very well by implementing the framework.
The MSMEs, which often face credit score issues, with an improved entry to monetary knowledge will improve the visibility in the direction of their creditworthiness.
RBI’s new AA framework platform will turn the monetary knowledge into digital, regulative, and simplify the scope of formal credit score with clear and accessible financial information for the MSMEs, as major of these are outdoors. Thus, allowing financial institutions to meet the monetary requirements efficiently.
Aadhaar e-KYC License – Increase Credit Score
The traditional KYC is a paper-based process and validation job. In contrast, e-KYC is an OTP-based authentication procedure, thus easily making the verification process faster and more efficient, enabling authentication for immediate lending.
The e-KYC authentication will smoothen the borrowing process and shorten the time required during the disbursal of loans. Also, it will enhance the procedure by assisting the MSMEs to onboard the borrowers and disburse their credit scores much faster.
With certain important frameworks and efforts made in line with the current situation by introducing reliefs for MSMEs, RBI frameworks will surely enhance and strengthen the Indian economy. MSMEs being the second largest sector in the country after agriculture, hold a significant role in GDP and contribute to the economy’s building. These reliefs and provisions will encourage other small businesses to scale without fearing financial indigence due to pandemic-like situations.