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
- Redefine
MSMEs by way of turnover
- Allocate
specific portfolio for manufacturing sector to make ‘Made in India’ a
reality
- Enterprise
should digitise operations and have a consent-based ERP architecture
- 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
- Evaluate
working capital requirements on cash flow basis
- 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.
- 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
- Declare
NPA threshold at 180 days overdue and redefine the Special Mention
Accounts — 0,1,2 at 60, 90, 180 days
- Review
all existing limits, legal proceedings, auctions etc, and ensure that no
viable enterprise will exit
- 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’)
