The RBI has given a temporary loan-repayment breather to GST-registered micro, small and medium (MSMEs), whose cash flows were affected due to implementation of the Goods and Services Tax regime.

GST-registered MSMEs, whose aggregate exposure to banks and NBFCs did not exceed ?25 crore as on January 31, 2018, with amounts overdue as on September 1, 2017, and payments due between September 1, 2017 and January 31, 2018, will be allowed by banks and NBFCs to pay not later than 180 days from their original due date, without a downgrade in asset classification.

At present, banks and NBFCs in India generally classify a loan account as non-performing asset (NPA) based on 90-day and 120-day delinquency norms, respectively.

This relief comes as MSMEs had represented to to the RBI 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.

The RBI said a provision of 5 per cent has to be made by the lenders (providing relief to GST-registered MSME borrowers) against the exposures not classified as NPA. The provision in respect of the account may be reversed as and when no amount is overdue beyond the 90- and 120-day norm, as the case may be. The RBI emphasised that the additional time is being provided for asset classification only and not for income recognition — if the interest from the borrower is overdue for more than 90/120 days, the same cannot be recognised on accrual basis.

GST, which came into effect from July 1, 2017, is a destination based tax. It follows a multi-stage collection mechanism. In this, tax is collected at every stage and the credit of tax paid at the previous stage is available as a set off at the next stage of transaction. This shifts the tax incidence near to the consumer and benefits the industry through better cash flows and better working capital management.