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RBI's MSME restructuring scheme a lesser evil for banks than taking them to bankruptcy

Anand Adhikari     January 2, 2019

The Reserve Bank of India (RBI), which was under tremendous pressure from a few government-nominated directors for a relief to MSMEs, has introduced a one-time restructuring scheme for loans aggregating Rs 25 crore.

The scheme is like ever-greening of loans as the RBI had earlier scrapped the entire restructuring scheme. The insolvency and bankruptcy code (IBC), which called for restructuring or recover, was the ultimate solution for stressed companies in the system.

Also Read: RBI gives relief to MSME sector, provides for one-time restructuring of loans

By introducing a selective restructuring scheme for MSMEs, the RBI is now encouraging the postponement of a stressed problem. Without such a relief, these MSMEs would have landed at the bankruptcy court. Clearly, the RBI's restructuring scheme is a lesser evil for banks than taking them to bankruptcy. Look at how:

  • In the earlier regime, banks had no option but to take the defaulters of loan of over Rs 1 lakh to the bankruptcy code. There is now no pressure on them to invoke the IBC in the event of a default. Even invoking a forced bankruptcy was not the solution as the enabling ecosystem of buyers and funds etc was not in place.
  • These MSMEs are now protected from operational creditors taking them to NCLT for bankruptcy. The new restructuring scheme will provide a lifeline to thousands of MSMEs.
  • The banks are also saved from taking haircuts. In a possible bankruptcy, the chances of major haircuts are quite high. The new amendment in the bankruptcy code also allows MSME promoters (defaulters) to bid for their own assets. It's almost like giving the company back to the defaulter with a huge haircut. This will not happen now.
  • There was also a chance of liquidation under bankruptcy where the banks' realizable value was almost like selling assets at junk value.
  • There is some relief from higher provisioning norms under the new restructuring scheme. Under the bankruptcy, the provisioning requirement is almost 50 per cent for such assets. Under the new restructuring scheme, the provisioning requirement is just 5 per cent.

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