In a relief to small and medium enterprises, the Reserve Bank of India has decided to link pricing of loans by scheduled commercial banks for the medium enterprises to an external benchmark.

It has also decided to extend the benefit of one-time restructuring without an asset classification downgrade to standard accounts of GST registered MSMEs that were in default as on January 1, 2020.

The twin move is expected to give a fillip to small and medium sector that has been identified as cornerstone of growth and development of the economy. The high employment potential of these sectors has also attracted government's attention with a flurry of policies aimed at its strengthening.

In its statement of development and regulatory policies, the central bank said that subsequent to the introduction of an external benchmark system, the monetary transmission has improved to the sectors where new floating rate loans have been linked to the external benchmark.

"With a view to further strengthening monetary transmission, it has been decided to link pricing of loans by scheduled commercial banks for the medium enterprises also to an external benchmark effective April 1, 2020," the RBI said. Detailed guideline over this is expected to be issued separately.

In pursuance of the recommendations of an internal study group an all new floating rate personal or retail loans and floating rate loans to micro and small enterprises (MSEs) extended by banks were linked to external benchmarks, viz. the policy repo rate; any benchmark market interest rate produced by the Financial Benchmarks India Private Ltd. (FBIL), including Treasury bill rates effective October 1, 2019.

This was, however, not available to the medium sector. RBI has now decided to expand the scope of external benchmarking to rates for the entire MSME segment.

With regard to extension of one-time restructuring scheme for MSME advances, the Central Bank has decided to allow such process for GST registered MSMEs that were in default as on January 1, 2020 to implement restructuring plan latest by December 31, 2020.

"This will benefit the eligible MSME entities which could not be restructured under the provisions of the circular dated January 1, 2019 as also the MSME entities which have become stressed thereafter. It is re-emphasised that this is a one-time regulatory dispensation. Detailed guidelines, in this regard, will be issued shortly," RBI said in its statement.

The Micro, Small and Medium Enterprises (MSMEs) sector plays an important role in the growth of the Indian economy, contributing over 28 per cent of the GDP, more than 40 per cent of exports, while creating employment for about 11 crore people.

Considering the importance of MSMEs in the Indian economy and for creating an enabling environment for the sector in its efforts towards formalisation, a one-time restructuring of loans to MSMEs that were in default but "standard" as on January 1, 2019, was permitted without an asset classification downgrade. The restructuring of the borrower account was to be implemented by March 31, 2020. The scheme provided relief to a large number of MSMEs.

As the process of formalisation of the MSME sector has a positive impact on financial stability and this process is still underway, the RBI has now decided to extend the benefit further.