Covid-19 Package: Rs 3 Lakh Crores Collateral- Free Loans to MSME's
The Union Finance Minister on 13th May 2020 came out with an economic package for Micro, Small and Medium Enterprises (MSME’s) earmarking Rs 3 lakh Crores of Collateral free- loans to those MSME’s having an outstanding loan of Rs 25 Crores and with a turnover of up to Rs 100 Crores who would be eligible in getting the loans. The credit lines that can be availed by the MSME would be up to 20% of their outstanding credit as on February 29, 2020. These loans would be given under a 100% credit guarantee scheme with a tenure of 4 years and with a moratorium of 12 months on payback.
Some of the areas where more clarity and remedial measures are expected from the government are:
1) Start-ups in the Technology space in India rely on Equity Funding from promoters/VC’s for meeting their working capital requirements since obtaining credit from Banks is difficult and hence many of them may miss the bus under this scheme. The MSME funding scheme should have been made more- broad based to extend the coverage to all the units based on a lower turnover threshold and some employment-based threshold criteria instead of the Rs 25 Crores Outstanding loans criteria. Since the quantum of VC funding in the Start-up ecosystem may drop going forward along with a huge number of layoffs and closures taking place, there is an immediate need to provide relief to them.
2) How would the end usage of the funds sanctioned by the Banks to MSME’s under the credit guarantee scheme be monitored? A blanket sanction of the loans without adequate safeguards may turn out to be counter-productive unless there are some conditions attached to it like a prescribed threshold of employment and jobs should stay protected during this crisis period since one of the objectives of liquidity infusion also focuses on this aspect.Would the credit guarantee scheme lead to reckless lending which in the past had contributed to the NPA mess of the Banks? Would the Bank’s lending practices be questioned if in the future, the MSME’s loans were to turn out to be bad and the government holds back some portion of the Credit guarantee? Unless these questions are answered and detailed guidelines are issued quickly, the liquidity infusion into MSME’s may be slow and banks may adopt a conservative and cautious approach. It is a case of once bitten twice shy.
3) MSME receivables from Government and CPSE’s would be released in 45 days. Can this duration be brought down to 15 to 20 days since it has been almost 50 days since the lock-down started with no business activity for the MSME’s?
What are some of the additional measures that can be undertaken to ensure immediate liquidity infusion into MSME’s?
1)The UK Sinha led expert Committee Report on the MSME Sector had come to a conclusion that 41% of all the stressed loans in the MSME sector is due to delayed payments from larger firms, tight liquidity and greater difficulty in repaying the loans. In order to track the delayed payments from larger firms (Beyond 45 days of acceptance of goods/services rendered) and which is one of the reasons for cash flow challenges of micro and small enterprises. Ministry of Corporate Affairs(MCA) had introduced Form MSME-1 to be filed by the Companies by 31st October and 30th April of every financial year for the period April to September and October to March respectively. It is yet to be seen as to how much of this measure to ensure compliance has been successful.
However, as a short term measure, MSME Act,2006 should be amended to reduce the 45 days period to about 15 days for a limited period of say the next 6 months, since micro and small enterprises have severely constrained cash inflows due to the pandemic and this measure would at least ensure that they are able to realize their receivables faster and protect themselves from extinction. Since this early payment would also have a negative impact on the Cash flows of the larger firms, the government would need to incentivize the larger firms for supporting the MSME’s like lowering the interest rates on their borrowings from the Banks, GST rate reductions, etc subject to necessary safeguards. The government would then need to provide a sovereign guarantee to the Banks who would be footing the bill for this arrangement of interest subsidization to large corporate's. Since the Banks have a greater comfort in dealing with larger corporate's having a stronger Balance Sheet, this measure should be explored. The broader interest of the economy would need to be kept in mind while addressing this issue since both larger as well as smaller entities are suffering from liquidity crisis during this pandemic.
2)The existing framework of Delayed payment monitoring Scheme of MSME Samadhaan needs to be further strengthened to ensure closure of cases at a faster pace. For example – There are almost 40,800 applications filed by the MSME’s as of now with the MSME Ministry and the amount involved in pending applications at different stages is almost Rs 10,900 Crores which may go up due to the current pandemic.
3)Under the MSME Samadhaan Scheme, with regard to the disputed claims, Micro and Small Enterprises Facilitation Council (MSEFC) has 90 days to settle the outstanding disputes. As it stands currently, the amount payable by MSEFC is Rs 6,261 Crores. This period of 90 days needs to be brought down and disposal of cases should be fast tracked to ensure liquidity support to the MSME’s.
Though the Credit Guarantee Scheme has been framed with good intentions by the government, the question that remains unanswered is whether the measures announced would be sufficient enough to tide over the rough patch that the MSME sector is facing.