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

Making a Departure in Lock Down

Telangana makes a departure on Lockdown Strategy:

There are no two opinions on saving the humans should be of utmost importance when compared to saving the economy, although the economy lives longer than the human being. Therefore, strategically, saving the economy and saving the human life should run parallel as far as possible.

In the case of COVID-19, governments initially had no choice but to save lives by locking down to strictly enforcing people staying at home setting aside the economy’s interests very rightly. As things unfolded, there is broad realization that rescuing the economy from the recession and moving to V curve should also not brook any delay. In fact, compared to several States, Telangana has singular advantage moving on consistently high growth trajectory till April 2019.

The breather given by PM Modi on lockdown relaxation while extending the final date to May 3, 2020 allowed relaxations to keep several working populations in a new normal – barring the barbers who have the largest potential to spread the Covid. Welders, mechanics, electricians and even construction workers were all allowed to go back to work on the strict compliance of wearing the mask at work and maintaining social distance apart from frequent washing of hands with soap.

Those who open the workshops were asked to strictly follow the full sanitization of the area frequently and keeping the rest of the work-space tidy. It is expected that the discipline of 25-day lockdown will hold them in good stead. Telangana State differed on the agenda.

The State has a distinct place in the economic space in the country. Telangana's Gross State Domestic Product (GSDP) expanded at a Compound Annual Growth Rate (CAGR) of 13.40 per cent (in Rupee terms) to Rs 8.67 trillion (US$ 126.81 billion) between 2011-12 and 2018-19. At a CAGR of 16.00 per cent (in Rupee terms), tertiary sector has been the fastest growing sector from 2011-12 to 2018-19 and accounted for 63.68 per cent share in the overall GSDP. As of November 2019, the total installed power capacity of Telangana state was 15,855.87 MW. Out of this, 8,103.65 MW was contributed by state utilities, 5,637.37 MW by private utilities and 2,114.85 MW by central utilities. The second reason for a possible smoother stand is the very confident way in which the State has been tackling the pandemic. A dedicated war room to monitor the cases mandal-wise has been set up right under the glare of the CM.

Agriculture and allied activities have merited the required relaxation on lockdown norms ahead of every other State and the Union Government. Even procurement of paddy and other major crops of the State are receiving active attention. The State also merited appreciation of the Union Government in handling Covid-19 in exemplary manner.

As revealed by the Chief Minister, four districts are free from Covid patients. The intensity of the attack is more localized in Hyderabad Municipal Area and the Greater Hyderabad has already been divided into red and hot zones with intense policing and strict adherence to discipline.

Districts are gradually turning to near normal , which according to his press review, are having a better doubling rate (10days), death rate (2.44% compared to 3.22% for the whole country) and recovery rate of 22% and a larger 354 test rate per million. The State, after seeing the sudden upsurge in Suryapet district, doubled the quarantine period to 28 days, again the only and the first State to take such decision.

In and around Hyderabad, pharma, medical equipment and relating packing and packaging are any way allowed to function even before the relaxations. They are all working to around 50 percent capacity.

MSMEs are the lifeline of the economy. The State has nearly 70000 of them and the most in micro and small sector with nearly 4 lakh employees. Therefore, allowing them to work in two stages - normal districts, near normal, which may commence after a week (27^th May), the State would have many micro and small enterprises from near extinction post- Covid.

Some events have no history; but they create one like the Covid-19 attack that has levelled 210 nations in one stroke. Globe turned upside down during the last two months. In the whole crisis, India of 31 States with several of them having specific strengths in different manufacturing and production spaces has a great opportunity having already become a savior of 55 Covid- 19 affected nations.

Efforts to re-invent our Health sector are already on way with the decision of converting Gachiboli Stadium Temporary Covid-19 hospital into an advanced Health Institute. It is the Hospitals, doctors, nurses, health workers, scavengers, Defense Hospitals, army doctors and nurses – all in the Union and State governments that quickly rose remarkably to the task and rescued millions of lives, where the America failed. With no offence meant, private sector was nowhere near the task.

Telangana’s ability to leverage its strength and create a huge health infrastructure in government that would create new supply chains and new value chains deserves aplomb. It has unique place again in producing vaccines very successfully and CCMB is actively working on a new vaccine along with quite a few others. The other investments that attracted the globe are aerospace, defense, ITeS and Biosciences. Disaster management could be the new strength of the State.

It would be appropriate if the State would review its decision and release the lockdown in stages in districts next week and in GHMC areas during the first week of May 2020.

Drive out Covid-19

                Hell is Hell in COVID-19;
                Wearing mask is your devoted task; 

               Staying at home is your comfort;
               Social distance is your most wanted proximity;
               Driving out Carona is road to Heaven;
               Live like a king and help the popper. 
               Think rational and act national.
                     Author: B. Yerram Raju

Lock down to Continue

The Lock-down to Continue or Not?

B. Yerram Raju*

Lockdown declared on 25^th March 2020 has proved reasonably effective in India due to the two important initiatives: social distance and staying at home apart from wearing masks while going out for any emergency. The lifeline was kept alive – all emergency services, food supplies and medicines are kept available at the hands of the citizens. Police, Doctors, paramedical and sanitization staff have been rendering round the clock. Still, a few violations are seeing here and there and they are being tacked as they should. Even new ‘Normal’ has to wait for a long time. Precaution continues as philosophy of life.

Hon’ble PM Modi asked for suggestions for staggered lifting of lock out and your team should be working on it. CM KCR in a very detailed press conference clearly voted against opening the Lock-out now. In Telangana, people will obey the CM direction without demur.

There could be several other States wanting a partial lock-down till June end to fight the Covid-19 effectively. In such case, it is imperative that we should ensure that the spread is prevented effectively even during the lock-down. Even if lockdown is opened with the precaution given below, it should be re-imposed after five days for a period of one month. During this period, those in home quarantine and several hospitals should be supplied the masks and aprons. All Small enterprises should be permitted to refurbish their machines for production or may be permitted to go in for production of covid-combat materials where they can.

My suggestions for meeting the eventuality of lifting lockdown are:

1.             All schools, colleges and technical education and management education institutions shall remain under lock out till further notice.

2.             Lockout should be lifted every day between 5am and 10am and 4pm to 7p.m.

3.             All religious centres, temples, public offices should be kept open between 5am and 7pm.

4.             Only 10 percent of liquor shops with special approval from the concerned authority may alone be opened.

5.             All Malls should be opened between 11am and 5pm who shall ensure social distance for purchase. Any mall found crowded shall be ordered closure instantaneously.

6.             All public transport duly sanitized may be allowed occupation only to 35% extent to maintain social distance among commuters. The buses should stop only at the specified bus stops and not everywhere on the route.

7.             All Senior citizens, citizens with deformities and women should have separate transport facility. The mini school buses should be used for the purpose.

8.             Metro to colonies connectivity should be arranged through commissioning all the school and college operated private fleet with tariffs well displayed.

9.             Inter-district movement should be restricted between 6am and 6pm either side meaning thereby that the terminal time to reach is 6pm

10.          .All Rythu Bazars should function as now – with 2 hours a day in the morning.

11.          All goods transport across districts shall be given entry up to 8a.m into the city and all goods transport may be permitted to start at 7pm in the night. At each checkpost (may have been abandoned, tea stall may be allowed for the truck drivers to make use of. They should be provided special facility.

12.          All sick persons or patients of any disease other than Carona should be allowed free access and they should show their ID and mobile communication from the Doctor to consult or take medication.

Supplementary list:

1.    No restrictions on movement of dead bodies during any time of lockout for purposes of funeral rights.

2.    The already opened windows for vegetables, fruits and essential commodities and medicines should continue.

3.    Transportation:                 

4.    Any auto should not carry more than two; no motorcycle should carry more than the driver;

5.    All cars whether government or private or taxis shall not Carry more than two persons with masks in the rear.

6.    All sanitized buses public or private should carry one third of the capacity with everyone wearing masks.

All these vehicles shall be sanitized for every trip before boarding new passengers.

7.    All trains should allow only one third of the capacity in all three tier coaches. All coaches should be sanitized every eight hours and washrooms kept clean with hot water cleaning of the commodes.

8.    Offices can operate between 10 & 4.

9.    Factories can work 2 shifts following due precautions. The shop floor supervisor of the shift shall make sure that the toilets and wash rooms are clean, loaded with the required sanitary materials, with clean up every two hours. All employees, labour, executives shall wash their feet before entry and  sanitize their hands both while entering and exiting.

All enterprises should display Cleanliness is Godliness and saves their lives.

Exceptions: -

Companies' staff with ID's and vehicles should be permitted to travel.

Postal service/couriers and electricity and telephone maintenance staff should also be permitted from 6am to 9pm.

Extraordinary times require extraordinary solutions and require tolerance and forbearance. The country so far, has handled the situation exceedingly well and it is our duty to keep the protecting staff in good health. Stop spitting in public; wear mask when outside; maintain social distance and keep clean.

*The Views are personal and the author is economist and risk management specialist.

https://www.thehindubusinessline.com/opinion/should-the-lockdown-be-lifted/article31287496.ece

Coping with post-COVID-19 Disruption

Coping with post Covid-19 Disruption

Post pandemic prediction can’t be a soothsayer’s job. Preparing the economy from a tremendous shock and staying inside home for nearly a month in some States and could be longer as we see the accelerated rate of spread of Covid-19 hit persons, is the biggest challenge. India is not a city state like Singapore or Finance hub like Hong Kong. The optimists expect the lockdown to be lifted by the 14^th April while the less optimistic put it to the end of April. We need to think of the strategies and actions phased over short, medium and long term with matching resources right now. This should be both sectoral and geographical specifics.

While we are the leading global pharmaceutical suppliers, the low and inefficient health sector management with historically low outlays suddenly got the awakening call with the CVD spread and the need for public health systems to step up their capabilities. Yet, the call of the nation has been very ably responded to the greatest consternation of the rest of the world.

The country, with diversity nowhere else existing, is the biggest challenge and opportunity to the governments. Diversity has capacity to cross hold risks across segments and has innate resilience when calamity befalls. It also provides scope for innovation as people think more actively under pressure than leisure. When none can be in laid back comfort that existed before, people keep working out differently different things. For example, there have been more webinars during the last one month than during the last six months. There have also been more video conferences and skype calls as people started working from home. This may gradually turn out as new order of functioning.

One of my nieces from Bengaluru tells me that as Director of a Union Government organization working from home became a true challenge as deliverables rest with her than with other members of her team. Even the forgotten kitchen started demanding her time with children demanding newer tastes and new dishes. This is making her work for 14 hours instead of 7 hours in office. There is a whole paradigm shift in the work environment., not for one but many like her – with no gender discrimination.

What would be the future like? Very many organizations could find new economies of scale in a combination of work from home and work at office. More factories will have to think of reworking their supply chains that thoroughly disrupted due to the CVD, New leadership paradigms emerge. The 10 percent manufacturing small enterprises manufacturing gloves, sanitizers, masks, medical emergency kits to combat CVD will find near extinction of such market. They should expect this to happen and therefore prepare from now on the way to re-engineer their process to newer products and new markets. They will notice that institutions and persons that were after them during their need will turn their faces and likely to hold up their bills in their search for finding cash margins for fresh initiatives.

Our country will have to reinvent itself in workspaces and relationships like never before. In this process, at the micro level, enterprises will re-engineer their production and processes and search for new markets. Many will find the exit to be a problem.

Amidst a supply driven crisis, the unrest and plummeted resources of all kinds, as also eroded markets, MSMEs will require sustainable process consultants to rescue them at affordable costs. Here, the governments in looking at the sovereign dues and the banks looking at the stuck balance sheets of MSMEs should learn the art of turn around management or seek recourse to experts in turn around management.

Every nation will be on the uncertainty horizon. Risk mapping will be difficult. Everyone has been a looser. Non-performing loans will surge unless the thresholds change. Indian regulators need not wait for the world to guide them. They can guide the world. BCBS has already provided for applying the thresholds for SME sector as per the needs of the country. The time for action is now. The threshold should move to a 180day horizon till December 2020 subject to a review after six months. This will automatically provide for higher leverage in lending for the MSME sector, the nerve wire of production that has been contributing 35% of GDP, 45% of exports and employing 112mn persons.

The poor and daily wage earners, the hawkers, the wayside eateries, many disabled, contract workers – both skilled and unskilled, need government subsidies, even salary buffers, supplies and cash to meet their daily needs for at least three more months until the industries and enterprises re-look for employing them.

Fiscal responsibility under these circumstances of both the State and Union governments already hit by the lowest ever tax returns requires out-of-the-box thinking to meet the situation. Several relief funds of the CMs and PM, private donors and even CSR funding even amidst the near 10 percent hit on most corporate balance sheets would be inadequate for revival of the economy. It may take at least nine months to one year to cone to a new normal which would be far less than that we had in the slowing economy.

Even if people have cash in their hands, which itself is doubtful, they will not get the goods and services as the lockdown succeeding the slowdown of the economy, there will be supply driven inflation. Scarcity stares in all areas.

Courage is the watch word. In times of distress people display amazing unity while immediately after normalcy is restored the same set of people will most likely diverge. While the demand to lift the lockdown in toto will surface with more vigor than now, it would be prudent to release in parcels to rework on the efficiency of the health sector infrastructure, doctors, nurses, para medical staff on one side and on to ensure that the wheels of production get back to normalcy gradually, on the other. Second, the discipline enforced should be redirected to finance, transport and manufacturing sectors.

The focus of trade will suddenly think of new protectionism, new direction of investments, newer regional allies in trade and new relationships. The denuded investor firms and the huge number of corporates off-loading the bonds in the markets for liquidity are bound to put pressure on the financial sector. This recession is very unlike the 2008 or even 1930 and it will be a prolonged and widely spread across 200 nations in the globe.

Banks are systems driven and not enterprise driven, Unless the instructions are fed to the system, the concessions do not take effect. In several Banks, even the usual half-yearly reviews of several accounts on a regular basis did not take place. The disaster today is extraordinary and requires extraordinary speed of action post new normal.

At a time when the demand for credit is at the lowest level due to several manufacturing and trading enterprises shut their shops due to lockdown and are seeing future as more uncertain than now, liquidity doors have been kept open by the RBI as though that was the problem area that required urgent attention. Even during the last six months RBI has been extremely accommodative to Banks both in capital buffer and liquidity commitments. But the credit did not move to a higher zone in non-food segments.

“These capital and liquidity buffers are designed to support the economy in adverse situations,” as the Fed said in a statement. Fed’s other hope is exactly what the India incorporated is looking for: less rigidity from the banks in extending the required debt, post pandemic. COVID-19 has caused serious disruption to global supply chains and has a huge impact on financial markets and trade ecosystem. It is important to retain the customers and governments post pandemic and rebuild their lost supply chains to operate sustainably.

India’s biggest advantage is its demographics and therefore, the future needs to be addressed with alacrity so that entrepreneurship will not be governed by the hoary past but a bright future.

The Author is an economist and risk management specialist. The views are personal.

Published in Money Life 2^nd April 2020; www.moneylife.in

Impact of Covid -19; Review of Measures taken

RBI in its Monetary Policy statement on the 27^th March 2020 front-ended the effort of banks through pumping liquidity, 3-month moratorium on term loan instalments, working capital while interest will continue to accrue during the moratorium period with a further clarification that instalments will include the payments falling due from March 1, 2020 to May 31, 2020: (i) principal and/or interest components; (ii) bullet repayments; (iii) Equated Monthly instalments; (iv) credit card dues; review of working capital limits of all enterprises. 3% CRR recommended by Narasimhan Committee, Tarapore and Ashok Lahri at different points of time has been announced.

Interest will continue to be charged on the EMIs and they would to that extent enlarge the instalments that follow the moratorium. To expect the industry to recover immediately after the lockdown period is over will be an overestimation. McKinsey says:” Restarting production facilities can be more challenging than shutting them down. It requires a thoughtful approach to revive the supply chain, match volume to actual demand, and, most importantly, protect the workforce.” They require minimum six months to get back into the full supply chain. Banks’ sagacity to reassess working capital lies here. Banks should not cut down the limits because the size of the Balance sheets of all firms will be downside of the previous years including their own.

Future lending shall be cash flow based and not Balance sheet ratio based or even just turnover based (Banks are asked to extend minimum of 20% of projected turnover while most have adopted this as the maximum and this includes SIDBI).

RBI February data indicates that as of January 2020 credit growth to agriculture and allied activities decelerated to 6.5% from 7.6% in January 2019; to industry more than halved during the same period; to services sector decelerated to 8.9% from 23.9% whereas for personal loans it grew by 16.9%. This position prevails despite liquidity infusion measures during the last two monetary policy initiatives. Therefore, risk aversion and not liquidity is the problem with banks.

The already risk-averse banks can hardly lend during this period of lockdown seeing temporary shutdown of 90% enterprises. They can only provide online comfort following the policy announcement, al bait for three months! For a running industry to increase capacity is easier than a re-opened industry after lockdown. Further, investment required after re-starting is also going to be much more than now. Therefore, banks must prepare to lend more aggressively immediately after the current period. But can they move away from aversion to appetite in taking legitimate credit risk, without improving their lending infrastructure?

A few special efforts that still beg attention are:

·       Banks to stop all SARFAESI proceedings and developing forbearance for the manufacturing MSEs.

·       Extension of NPA threshold to 180 days, effective January 2020 quickly that will keep accounts standard for any further booster doses to flow to the industry.        

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Special Mention Accounts 1 & 2 categories will also need uniform forbearance.

·       Unfunded limits – LCs, Guarantees, ECGs falling due between January and May 2020 should not be revoked for non-compliance but their periods extended by another six months. RBI directive is imperative.

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A       All viability tests shall be done by State Government accredited agencies

·       GST should be reduced to 5% till the end of December 2020 for all the enterprises that would submit their quarterly returns as required under law, even if at exempted thresholds. Review of impact should be based on an evaluation study by all the Industry Chambers.

·       All MSMEs that maintain record of manpower employed verifiable with EPF and ESI registrations.

·       All MSMEs may be permitted to engage contract labour with the social security burden absorbed by the State Government on reduced commitments annually by 20% provided they all are digitized for all transactions.

·       Power Tariff should be cut by 50% for all the manufacturing enterprises provided they are all digitized and registered under Udyog Aadhar or TSiPASS.

·       All MSME Funds should be maintained and monitored by the DC-MSME through NSIC instead of SIDBI.

GoI may focus more on cleaning up the financial sector with a sense of urgency to render its services effectively in tackling this uncertainty effectively. At one end, cash relief from the exchequer should flow to all digitized Jan Dhan and Mudra loan accounts and at the other end, credit shall pump prime the economy with responsible and timely deployment post lockdown.

More digitized developed economies are redirecting their efforts to containing the spread and holding people in discipline using WhatsApp, digital alarms at the Carona Control Rooms etc.

South Korea has transferred cash to all the SMEs to pay for their labour for one month. US has announced a $2 trillion package to combat the new war. Several nations across the world – with 196 affected by this monster Carona - are seriously contemplating the relief packages. G-20 announced $5trn relief package. For once everyone stopped thinking of fiscal deficit. Extraordinary problems require extraordinary solutions.

No time for Hobson’s choice. Saving lives is more important than saving the economy, no doubt. But preparing the economy to respond to the post COVID-19 very effectively also brooks no let-up in efforts.

*This is part of the article published on the 30^th March in Telangana Today with some additions.  A Response write up to the CII.