On January 1, 2019, the Reserve Bank of India (“RBI”) issued a circular (“Circular”) in connection with the restructuring of advances availed by Micro, Small and Medium Enterprises (“MSMEs”). With a view to facilitate meaningful restructuring of MSME accounts that have become stressed, the Circular allows a one-time restructuring of existing loans to MSMEs classified as ‘standard’ without a downgrade in the asset classification.

The aforesaid restructuring can be undertaken, subject to the following conditions:

• The aggregate exposure, including non-fund based facilities, of banks and NBFCs to the borrower should not be more than Rs. 25 crore as on January 1, 2019.
• The borrower’s account may be in default but should be a ‘standard asset’ as on January 1, 2019 and should continue to be classified as a ‘standard asset’ till the date of implementation of the restructuring.
• The borrowing entity should be GST-registered on the date of implementation of the restructuring (not applicable to MSMEs that are exempt from GST-registration).
• The restructuring of the borrower account should be implemented on or before March 31, 2020. A restructuring would be treated as implemented under the Circular if the following conditions are met:

1. all related documentation, including execution of necessary agreements between lenders and borrower, creation and perfection of security are completed by all lenders; and
2. the new capital structure and/ or changes in the terms and conditions of the existing loans get duly reflected in the books of all the lenders and the borrower.

• A provision of 5% in addition to the provisions already held, shall be made in respect of accounts restructured pursuant to the Circular. 
• Post-restructuring, NPA classification of such accounts shall be as per the extant Income Recognition and Asset Classification (“IRAC”) norms.
• Banks and NBFCs shall make appropriate disclosures in their financial statements, under ‘Notes on Accounts’, relating to the MSME accounts restructured under the Circular as per the following format:

Banks and NBFCs desirous of undertaking such restructuring shall have to put in place a Board approved policy on restructuring of MSME advances under this Circular within a period of 1 month from the date of this Circular. Such policy shall, inter alia, include framework for viability assessment of the stressed accounts and regular monitoring of the restructured accounts.

The RBI has clarified that while accounts classified as NPA can be restructured, the extant asset classification norms governing restructuring of NPAs will continue to apply. As a general rule, barring the above one-time exception, any MSME account which is restructured must be downgraded to NPA upon restructuring and will slip into a progressively lower asset classification and higher provisioning requirements as per extant IRAC norms. Such an account may be considered for upgradation to ‘standard’ only if it demonstrates satisfactory performance during the specified period.

The term ‘specified period’ under this Notification means a period of one year from the commencement of the first payment of interest or principal, whichever is later, on the credit facility with longest period of moratorium under the terms of restructuring package. The term ‘satisfactory performance’ means there shall be no payment (interest and/or principal) which shall remain overdue for a period of more than 30 days. In case of cash credit / overdraft account, satisfactory performance means that the outstanding in the account shall not be more than the sanctioned limit or drawing power, whichever is lower, for a period of more than 30 days.