What changed
RBI introduced a debt restructuring mechanism for SMEs, as announced by the Finance Minister, applicable to urban co-operative banks. It defined SMEs based on investment limits (SSI up to Rs 1 crore, medium up to Rs 10 crore) and set eligibility criteria excluding wilful defaulters and loss assets. Prudential norms were specified for standard, sub-standard, and doubtful accounts undergoing restructuring.
What it means for you
Urban co-operative banks can now restructure SME debt without automatic asset downgrade if certain conditions are met, such as full tangible security cover for principal rescheduling. This encourages banks to support viable SMEs facing temporary stress, but requires careful provisioning for any interest sacrifice. Banks must assess viability within 7 years and ensure repayment within 10 years.
What you must do
- Review SME loan portfolios to identify eligible accounts for restructuring under these guidelines.
- Ensure viability assessment confirms the unit can become viable within 7 years and repayment within 10 years.
- Apply prudential norms correctly: for standard accounts, principal rescheduling with full security cover avoids downgrade; for sub-standard/doubtful, maintain classification if conditions met.
- Create a distinct provision account for any interest sacrifice, computed using BPLR and risk-adjusted discount rates.
- Exclude wilful defaulters, fraud cases, and loss assets from restructuring eligibility.
Who it affects
Primary (Urban) Co-operative Banks, Small and Medium Enterprises (SMEs) with non-corporate or corporate status, SMEs under single or multiple/consortium banking arrangements with dues up to Rs 10 crore
What is the definition of SME under these guidelines?
A small scale industrial unit has investment in plant and machinery up to Rs 1 crore (Rs 5 crore for specified items). Medium enterprises have investment between the SSI limit and Rs 10 crore.
Can a standard account be restructured without being downgraded?
Yes, if only principal instalments are rescheduled and the outstanding is fully covered by tangible security, the account remains standard. Interest rescheduling requires provisioning for any sacrifice.
Are BIFR cases eligible for restructuring?
Yes, but banks must complete all formalities to seek BIFR approval before implementing the restructuring package.