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
