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Context:

• Public sector banks (PSBs) effected restructuring of 9.8 lakh accounts of micro, small and medium enterprises, due to the impact of the COVID-19 pandemic, amounting to ₹58,524 crore.
• About 8.5 lakh accounts of individual borrowers, accounting for ₹60,000 crore have also been restructured.

About Loan Restructuring:

• When a borrower is facing financial stress, the banks can modify the terms of the loan by a practice called restructuring/ recasting.
• This is done to prevent the borrower being declared a defaulter and the loan being classified as an NPA (non-performing asset).
• If the loan is classified as NPA, the banks stand to lose their profits as they have to make provisions towards it by setting aside money.

Loan Restructuring of MSME:

• The Reserve Bank of India’s (RBI’s) restructuring package for small businesses announced last month will help recast Rs 1 lakh crore of loans for 7 lakh eligible micro, small and medium enterprises (MSMEs).

The scheme:

• The scheme announced by RBI is a one-time scheme wherein a loan tenor and interest rate can be revised without classifying the asset as a NPA.
• The facility is available for standard advances of up to Rs 25 crore only.
• The scheme will help free up additional resources which will fuel demand and create further opportunities in the industry.
• The restructuring must be implemented by March 31, 2020. Banks will need to make a provision of 5% towards these restructured loans. Each bank/NBFC should formulate a policy for this scheme with board approval. Those MSMEs that are not exempt from GST will need to be registered on the GSTN on the date on restructuring.
• Later, RBI had extended the scheme in the wake of Covid Crisis.

Micro, Small and Medium Enterprises Classification 2020

Importance of MSMEs for Indian Economy

• Employment:It is the second largest employment generating sector after agriculture. It provides employment to around 120 million persons in India.
• Contribution to GDP:With around 36.1 million units throughout the geographical expanse of the country, MSMEs contribute around 6.11% of the manufacturing GDP and 24.63% of the GDP from service activities.
• MSME ministry has set a target to up its contribution to GDP to 50% by 2025 as India becomes a $5 trillion economy.
• Exports: It contributes around 45% of the overall exports from India.
• Inclusive growth:MSMEs promote inclusive growth by providing employment opportunities in rural areas especially to people belonging to weaker sections of the society.
• For example: Khadi and Village industries require low per capita investment and employs a large number of women in rural areas.
• Financial inclusion:Small industries and retail businesses in tier-II and tier-III cities create opportunities for people to use banking services and products.
• Promote innovation:It provides opportunity for budding entrepreneurs to build creative products boosting business competition and fuels growth.

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