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Major Relief For MSME Borrowers Registered Under Goods & Services Tax (GST) (Circular dt. 7th Feb,2018)

Statutory  Auditor in Mumbai
Author: CA Hemant J Mehta
Posted On: Friday 23 February 2018

Tags: GST Registered MSME's loan repayment RBI NBFC

While maintaining a status quo, the Reserve Bank of India (RBI) today provided major relief to MSME borrowers, registered under the Goods and Services Tax (GST), by extending their repayment of debt deadline. 

RBI said, "It has been represented to us that formalisation of business through registration under GST had adversely impacted the cash flows of the smaller entities during the transition phase with consequent difficulties in meeting their repayment obligations to banks and NBFCs."

As per the new guidelines, RBI says GST-registered MSMEs - their overdue amount as on September 1, 2017 and payments due between September 1, 2017 and January 31, 2018, be allowed by banks and NBFCs to be paid not later than 180 days from their original due date, without a downgrade in asset classification.

Currently, banks and NBFCs in India generally classify a loan account as Non-Performing Asset (NPA) based on 90 days and 120 days delinquency norms, respectively.

As a measure of support to these entities in their transition to a formalised business environment, it has been decided that the exposure of banks and NBFCs to a borrower classified as micro, small and medium enterprise under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, shall continue to be classified as a standard asset in the books of banks and NBFCs subject to the following conditions :

  1. The borrower is registered under the GST regime as of January 31, 2018.
  1. The aggregate exposure, including non-fund based facilities, of banks and NBFCs, to the borrower does not exceed ₹ 250 million as of January 31, 2018. The aggregate exposure, including non-fund based facilities, of banks and NBFCs, to the borrower does not exceed 250 million as of January 31, 2018.
  1. The borrower’s account was standard as of August 31, 2017.
  1. The amount from the borrower overdue as of September 1, 2017 and payments from the borrower due between September 1, 2017 and January 31, 2018 are paid not later than 180 days from their respective original due dates.
  1. A provision of 5% shall be made by the banks/NBFCs against the exposures not classified as NPA in terms of this circular. The provision in respect of the account may be reversed as and when no amount is overdue beyond the 90/120 day norm, as the case may be.
  1. The additional time is being provided for the purpose of asset classification only and not for income recognition, i.e., if the interest from the borrower is overdue for more than 90/120 days, the same shall not be recognized on accrual basis.

Thus the decision follow the government’s announcement  that banks must improve credit flow  to the MSMEs. it will lead to improving  access to credit  for MSMEs.

  1. Consequent upon transition to 90 day delinquency norm with effect from March 31, 2018 for NBFCs, provision reversal will be with reference to the 90 day norm.
  1. Consequent upon transition to 90 day norm with effect from March 31, 2018 for NBFCs, restriction on income recognition on accrual basis will be with reference to interest overdue for more than 90 days.

To conclude, the relief provided by RBI through this circular shall smoothen the cash flow management which is required for working capital for the MSMEs. This is a great relief, especially for entities that are still awaiting GST refund from the government.  This is a positive move to address the practical challenges faced by the entities in the transitional GST phase.

Please feel free to write to us on hemant@apmh.in for any further queries on the above blog.

 

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