Making the best of the situation - Ten Point Plan for MSMEs in Pandemic

MSMEs – Think Anew and Act Afresh

A Ten Point Plan

MSME Surveys done by various organizations revealed that the packages released by the FM under Atma Nirbhar Abhiyan are not going to benefit them much. Now is the time to think afresh and move fast to be back on rails without expecting much from the Government over and above the guarantees announced. There is full realization among the MSMEs that they should live in debt, survive and if God helps, grow.

If there were perverse incentives earlier that only made them perpetuate small in size and not grow, now they will have to contend with no incentives but to grow with their own ingenuity. In a debt syndrome, this can happen only when there is a strong environment of mutual trust between the lender and borrower. Some State Governments are trying to create a better ecosystem and help the MSMEs.

What you should do as a MSME in this emerging scenario?

Covid-19 in a way opens a chapter in their enterprises. You are an important link in the supply chain and it is time that you make the government come to you and not you stand before them with a begging bowl. You should be able to dictate your supply terms instead of bemoaning that you are after all a cog in the wheel.

There have been surfeit of ideas and strategies but the question that stands in front of you, is: how to respond to their work force who were forced on holiday under lockdown and incentivize them to work for the Company?

All that the Bank wisemen would do is to give a moratorium for principal and interest if their credit record held you good – a standard asset in bank language – by January 2019, a la March 2020, the beginning of lockdown.

1.    

Make a reasonable assessment of receivables by discussing with the debtors. This will measure up the duration risk of receivables.

2.    Take full count of the stock available and see if there is any redundancy. Clear up all the useless stock.

3.    Assess the demand for the product in the context of sluggishness around in Consumption and the steep fall in Consumption index. It is very likely that the product required either a makeover or change in complexion.

4.    Set up a digitization environment – have a desktop or laptop and buy a ERP solution if you are beyond Rs.1.5cr turnover. Up to 1.5cr turnover, you have Zoho ERP solution offered by the MSME Ministry free of cost. Avail it. Incorporate every aspect of your data – from buyers to sellers, buy to sale, cash to credit, stocks to receivables and enable GST compliance. This will save you the bother of compliance. Any regulatory requirement either from the Bank or the Government, you can pull out.

5.    Take work force into confidence: Discuss with them how they would like to be paid their arrears given the firm’s predicament. Place before them your increased obligation to the Bank and tell them what would it mean to pay wages and salaries from the Credit window of the Bank and how much dip would be there for the firm. Disclose your own financial position.

6.    Present the future market scenario before them and the prospects it holds both within and outside the country. You may also discuss with them whether they would like to partner with you in the future of the enterprise taking into account the new dynamics of the market. Give them an undertaking that their wages and salaries will be packaged as mutually agreed after paying at least one month’s arrears.

7.    Strategize for attaining a brand value for your product within a set timeframe.

8.    Discuss with all the other units engaged in producing similar products to gain advantage of (a) a co-working space; (b) co-branding; (c) rational pricing of the product; (d) clusterizing for purchase of raw material in bulk on a shared e-commerce platform; (e) rediscovering the price of the final product taking the logistics into consideration.

9.    Rework your Business Continuity Plan and arrive at viability of your enterprise in the emerging post-Covid environment.

10. Place your cash flow position for the next 3, 6, 9, and 12 weeks and seek your Bank’s support.

In States like Telangana you have Industrial Health Clinic to help you out. In other States you have some responsible outfits of Associations like FISME in New Delhi, TANSTIA-FNF centre, KASSIA in Karnataka, etc., that would be happy to suggest right strategies. There would be little purpose in wasting your time any longer waiting for things to happen since the economy is opening up.

*The writer is Adviser, Government of Telangana, Telangana Industrial Health Clinic ltd and author of the Story of Indian MSMEs.

https://knnindia.co.in/news/newsdetails/msme/msmes-think-anew-and-act-afresh-a-ten-point-plan

The Sweet and Sour Package for MSMEs

Following the PM’s thunderous announcement of Rs.20trn constituting 10% of GDP, the highest by any government post-pandemic, the Finance Minister came up with a six-point package sounding big relief for the MSMEs. When the final figures came for counting the five-day pack whittled down to bare 2% of GDP. Will the relief be long lasting or comfort, lasting for short time?

MSME sector is soar over the package as it did not provide virtually any relief for either payment of wages or immediate payment of bills pending with the government itself ( approximately Rs.5trillion – both the GoI, PSUs and State Governments) and even forbearance of the loans for at least 180 days.

The initial moratorium on the term loan instalments and working capital and the deferment of working capital were just a breather in pandemic. Since the units were under lockdown, most of those availed, have no output to support the additional working capital. They are now offered relief in the margin. This would mean that the Banks would give more working capital loan against deficient stocks, wages to the labour for the lockdown period etc.,- knowing it as an unsustainable debt because there is a National Credit Guarantee Trust and there is pressure to deliver by September 2020. Against this, Cabinet provided Rs.41,600cr over a three year period. Banks are not happy with this type of guarantee dispensation since they still have to provide for likely capital erosion.

MSMEs that received the incremental credit during the quarter Mar-June 2020 post-Covid at 7.4% p.a., are now told that they have to pay 9.25% for Emergency Credit Relief Package extending over four years with a moratorium of one year!

The other measure is a follow-up of Budget 2020-21. The FM announced sub-ordinated debt  (SOD) at the hands of the same banks that have all along been winking at the revival of micro and small enterprises and on easy and timely credit access as part of Covid relief package.  

Banks that do not have a subordinated debt in their balance sheets thus far, should now look for providing it under investment category and that too upfront labeling it as NPA!! They should develop standard operating procedures and help the clientele know of the nuances of availing it. To embrace innovation for a sector that is always viewed with suspicion, will they fall in line with the thinking of the FM?

Subordinated debt in simple terms is defined as a debt subject to subordination when there is creditor’s default. If ‘A’ Bank has offered a subordinated debt to a micro, small or medium enterprise, and this enterprise goes bankrupt after a certain period, and therefore becomes a defaulter. Bank cannot claim the money it has given as a loan from the enterprise’s earnings or assets.

After the senior debts are paid off in full, the left over will accrue to the clearance of the subordinated debt. Singular advantage however is that in case of Companies (this category is just 2 to 2.5% of the total MSME borrowers) bank will receive its SOD claim ahead of preferred and equity shareholders. Banks will be able to recover their usual unsubordinated debt in the shape of term loans and working capital ahead of sub-ordinated debt.

This simply means that SOD is riskier than the normal term loan and working capital loan offered either as cash credit or overdraft. Banks that have been lurking to grant loans against CGTMSE guarantee to the extent of Rs.2 crores cannot be expected to grant SOD again at the same guarantee window!

Sub-ordinate debt, by definition, stands higher in risk and lower than the principal loan in terms of claims by the Bank. For Rs.20000cr infusion, CGTMSE is being given Rs.4000cr. It would have been a fairer had she extended the Rs.3lakh sovereign guarantee cover to these set of borrowers too. Offering this high-risk product to already declared NPAs could trigger lot of problems in operationalising this product.

It will be now for the Banks to roll out the product. Standard operating procedures for releasing this SOD will be very tough if not tricky for the Banks. On top, the CGTMSE guarantee with which the banks are already unhappy is supposed to provide guarantee. Quite likely, several of the 2lakh MSMEs pitted out this benefit may have already been covered by the CGTMSE and the claims must be hanging at one end or the other for consideration in order that the banks concerned will close the NPA accounts!!

It is advisable instead to offer equity to micro and small manufacturing firms – proprietary or partnerships, most of them – up to 50% of their total financial requirements and the balance as debt. This equity should be left untouched by the Banks for a period of five years. The purpose for which such equity is rolled out shall be for buying a leasehold right/outright sale in the site where the manufacturing unit is set up and or purchase of machinery/technology or acquiring of intellectual property rights. Once it is given as equity, Banks will be forced to become the development partners that may provide route for scaling up the enterprises from the micro to small and small to medium.

Assessment of revenue stream and monitoring it continuously is extremely important to culture the enterprise in apportioning some percentage towards the equity contributed by the Bank. There are two ways of ensuring this: 1. Banks physically monitor the functioning of the enterprise as its partners to its committed capacity; 2. Set up a consent-based ERP architecture to monitor their debtors, creditors, sales and cash flows on the system. The purpose is to ensure that any aberrations are remedied timely.

Such equity can flow across the enterprises but shall be on sound credit risk assessment and effective follow up and supervision.

Banks with their limited manpower can hardly be expected to do the former. Handholding, mentoring and counseling continuously and ensuring that the enterprise makes seamless transition from unorganized to organized, Banks may have to outsource these services to competent and State Government accredited professional institutions. Even regarding the second step, Banks should be able to re-engineer their work- spaces and train their executives to catch up with the task.

Relief package is at best a pack of intentions. The relief is additional loan burden. MSMEs’ cost of production will go up at a time when they are totally uncertain about the demand. They also become uncompetitive compared to any other SME across the globe that has received cash relief and interest-free loan to rebuild their manufacturing business.

Neither RBI nor GoI has issued operational guidelines for the treatment of existing NPAs. Without revival of the viable micro and small manufacturing enterprise and carving out a definitive future, Banks taking part in equity of such firms through sub-ordinated debt route will be a wild goose chase.

But for the risky NPAs, sub-ordinate debt to roll out is a future, worthy to watch. Banks may innovate, who knows? In essence, the package is sweet in words and soar in delivery.

https://telanganatoday.com/sweet-on-words-sour-in-delivery

MSME Releif package, Some good moves

MSME Relief Package: Some good first moves

Collateral Free Automatic Loan for MSME. Those MSME having Loan upto Rs.25cr and turnover up to Rs.100cr will be covered in this scheme. 100% Central Govt Guaranteed. Will help 40 Lac Units. This loan will be for 4 Yrs with a Moratorium of 12 Months. 45 Lakh MSME Units will get benefit from It. Total 3 Lakh Cr Loan will be Given under this scheme. This covers only the Emergency Credit Line. 

And this FM clarified is only for the standard assets. This means that those who became eligible under the earlier restructuring scheme of January 7, 2019 will get covered. If these units stopped functioning due to Covid-19 and were put on moratorium of 3 months and additional credit support under Covid will alone be eligible. This means that existing collaterals will continue and existing CGTMSE wherever extended might also continue. But the additional credit facility post Covid operations will get covered by this new guarantee mechanism and this is in itself unique. Nowhere it was mentioned that entire outstanding up to the thresholds will be covered under the new guarantee scheme. Hence this should be taken for whatever is worth. This will however kick up appetite for lending to MSMEs by banks.

Rs. 20000Cr will be infused as Subordinate Debt for stressed MSME. 2 Lakh SME will get benefit from this. Govt will provide Rs.4000 cr to CGTSME Trust. Sub-ordinate debt, by definition, stands higher in risk and lower than the principal loan in terms of claims by the Bank. For Rs.20000cr infusion CGTMSE is being given Rs.4000cr. It would have been a fairer had she extended the 

Rs.3lakh guarantee cover to these set of borrowers too. Offering this high risk product to already declared NPAs could trigger lot of problems in operationalising this product.

Fund of Fund to be created. Rs 50000cr will be infused as equity to standard MSME that will help them to expand their capacities. This is not going to be immediate because the Fund giver will evaluate the IRR as usual before extending such equity.

Definition of MSME changed. But for this definition change can take effect only when the MSME Development Act 2006 changes. It is hoped that Government will bring about suitable ordinance to give effect to this change.

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Government has earlier mooted change to replace investment criterion with turnover and amendment was mooted in the Parliament. Parliamentary Committee was also appointed. Again, a separate Committee was also set up to examine this aspect. While the Report of the Committee is yet to be out, the FM has announced this change. But this change is good for future as several economies in the globe adopted dual criteria – either investment and turnover or employment and turnover under various thresholds. This is a big correction that will benefit the sector grow vertically as investment criterion has only spawned the numbers horizontally and distorted the incentives and global competitiveness.

Tenders up to Rs.200Cr relating to Govt procurement will not be Global Tenders any more. MSMEs will get benefit out of this direction. E-Market Linkage will be provided to all MSMEs due to less possibility of trade fairs and industrial exhibitions in different countries post pandemic. Another advantage is that all outstanding bills of Union Govt and Central PSUs will be cleared by them within 45 Days.

The views expressed are personal. He is the author of the Story of Indian MSMEs.

Ten point Policy for MSMEs

Sweet nothings for MSMEs

Risk aversion can’t be turned into risk appetite with excess liquidity in the hands of hesitant lenders

MSMEs, the lifeline of the economy and the main job-provider, has no oxygen left. The Micro, Small and Medium Enterprises (MSMEs) have been the worst affected by the pandemic but only sweet nothings have been coming as announcements for the sector. The RBI offered a deceptive comfort: standard assets as on March 1, 2020, would get a relief of three-month moratorium with no interest relief; review of the working capital requirements and pumping in liquidity of the order of 3.37% of GDP combined with the GoI relief for the weaker sections by way of cash remittances into the Jan Dhan accounts.

There was further relief by way of refinance from Sidbi: Rs 50,000 crore; Nabard: Rs 25,000 crore among others. The net result of previous liquidity injection as per the RBI April 2020 Bulletin is 0.7% year-on-year credit growth for the industry. Sectorwise: manufacturing micro and small enterprises was -0.4%; food processing: -3.1%; textiles: -6.6%; leather and leather products: -2.3%, all engineering: -0.4, state-sponsored SC/ST credit: -70.4%; export credit: -13.2%. Will all these negatives turn positive with the new liquidity? Risk aversion cannot be turned into risk appetite with excess liquidity in the hands of a hesitant lender.

In a pandemic, history tells us that massive credit and large fiscal expansion should go in sync to pump-prime the economy to a new normal.

Realistic View

When the manufacturing MSMEs open their shutters, they will find all the machinery waiting to be greased; sheds to be broomed; factory premises to be sanitised, and all tools readied. Several bills pending for payment require renegotiation. Labour will mainly demand their lost wages rather than renewing their work.

All supply chains are choked and each link in the chain needs to be looked at by the size of investment needed for re-functioning to the level of at least 60% capacity, Without this, interest commitments may not be honoured. The entrepreneur will, therefore, have to set his priorities right and decide which corners need to be cut and which widened.

The immediate trigger for enterprises in Telangana is deferment of fixed electricity charges for April and May without penalty and they will get 1% rebate on payment.

Several enterprises would first search for cash from banks and NBFCs. This would depend on the collateral securities they had and their previous track record. Banks are not poised as of now to lend on a cash flow basis. They may still try to work out estimates based on the pre-Covid-19 performance levels. This is the first tragedy. There may be a few understanding branch managers, who will take the risk and lend.

Next thing, the entrepreneur needs to negotiate with the existing labour. It will be a very hard negotiation and he will need to find money to pay the wages for the shutdown period first. Some understanding labour may oblige with deferred wages but they would be just a few. Most fair-weather friends would come up with suggestions like pledging gold; mortgaging excess property, etc but no cash. Private moneylenders too would be hard to come by.

The demands of all national associations like the CII, FCCI, PHDCCI have been kept waiting at the doors of the Finance Ministry. The UK Sinha Committee Report that recommended Rs 10,000 crore fund of funds and Rs 5,000 crore Distressed Asset Fund have not been set up. After set up, if they are kept in the conservative hands of Sidbi, it will be of no use. The Fund should address payment of wages of all the manufacturing MSMEs based on the muster roll and ESI evidence.

Assessing Demand

It is unlikely that products would be in demand at the same level. People have become austere. Every person, who faced a compensation cut, would continue to move the demand curve to essentials than FMCG. Sectors like pharmaceuticals, medical equipment, processed foods, packaging that were functioning on the fringe could move to higher capacities. All others will have to make rounds to the banks for their merciful looks!

Every enterprise will have to envision a new future – different scenarios have to be built and they should convince investors and lenders. They cannot look to the global markets immediately as the pandemic has levelled them all.

As far as India is concerned, a great opportunity is knocking. China has lost its sheen and credibility. Global markets hitherto linked to China would be looking at ways to pull off from them. Entrepreneurs should carefully set their trigger points. It is here that the policy vacuum can hurt hard.

Ten-Point Policy

1. Redefine MSMEs by way of turnover
2. Allocate specific portfolio for manufacturing sector to make ‘Made in India’ a reality
3. Enterprise should digitise operations and have a consent-based ERP architecture
4. Bundle up all existing credit (term loan plus working capital, inclusive of interest) for enterprises with a turnover of Rs 10 crore – extend a moratorium till December 31, 2020, after converting it into a Fixed Interest Term Loan carrying interest at 6% pa, for repayment thereafter in 48 annual instalments
5. Evaluate working capital requirements on cash flow basis
6. Discount all the bills drawn on government departments, PSUs and even large undertakings that carry credit rating of AAA and above at 75% and credit into the client account, provided the invoice clearly says that the purchase is within the approved annual budget.
7. Credit Guarantee Fund Trust for Micro and Small Enterprises should do portfolio guarantee up to Rs 5 crore and then second charge on the collateral security with the lender for the balance up to Rs 10 crore
8. Declare NPA threshold at 180 days overdue and redefine the Special Mention Accounts — 0,1,2 at 60, 90, 180 days
9. Review all existing limits, legal proceedings, auctions etc, and ensure that no viable enterprise will exit
10. For the rest of the enterprises, make exit comfortable: fair treatment of sovereign dues; priority to the creditors on first-in-first out; and transfer of assets to those who would like to acquire them. These accounts should be subject to a third party review by a State government accredited agency.

Thereafter, the industry should draw up their trigger points and rational action plan in consultation with the lender/investor. All Industry Associations should nominate one or two active Executive Committee Members to form a think-tank or negotiating team for regular interface with both State and Union governments.

(The writer has authored ‘The Story of Indian MSMEs’)

https://telanganatoday.com/sweet-nothings-for-msmes