Will MSMEs get the Desired Package ? – Dr. Manoj S. Kamat



The Micro Small and Medium Enterprises (MSME) sector employing total 40 percent of the country’s workforce, with almost 50 percent of exports and contributing close to 30 percent of India’s GDP is struggling to survive. This sector had suffered three blows earlier with the demonetisation, the GST, the burden of the economic slowdown and feels entirely derailed in the post lockdown scene.

The MSME sector has run out of money to pay staff salaries, rents and other expenses. The trade credit has almost dried and the NPAs piling up has left them gasping for breath with production stopped and lost their trained workers. The MSMEs badly needed help and thankfully, the reliefs have been announced.

The 3 proactive States
Without awaiting the help from the Centre, the three proactive State governments, Kerala, UP, and Haryana came to prompt rescue of their respective MSME sector. Kerala has announced Rs 3,434-crore package offering one-time settlement on loan defaults from their two industrial promotion agencies, KSIDC and KINFRA. This package promises margin money assistance and concession on interest on additional loans, along with six-month extension for payment of interest on investment loans.

The Haryana government notified its revival scheme with 100 percent interest benefit on loan availed for payment of employees’ wages, and other expenses up to a maximum of Rs 20,000 per employee to be provided by the government, while the UP government has organised a week-long online loan fair from 14 to 20 May for MSMEs that has been particularly badly hit by the lockdown.

Central Government Package
As a part of a central economic relief package, the Hon FM announced six measures for the MSMEs to revive a Covid-19 hit economy. The first one is collateral or guarantee- free automatic loan up to 3 lakh crore with 4 years tenure. With this it is expected that the lending bank will not worry about potential NPAs as it is transferred to the government. The second relief is about Rs 20,000 crore subordinated debt for MSME’s that are either NPA or economically stressed. The government will provide Rs 4,000 crore partial credit guarantees and around 2 lakh MSMEs qualify under this category.

The fund of fund for the infusion of Rs 50,000 crore as equity into MSMEs is the third measure. In the other three measures, the definition of MSME is being changed to encourage MSMEs to grow bigger without losing on the benefits availed by MSMEs. The investment limit that defined an MSME is being revised upwards along with the addition of turnover as criteria. In addition the differentiation between manufacturing and service MSMEs is removed. Put simply, the government will now subsidise a lot more smaller companies than they used to.

The government has assured that procurement of tenders up to Rs 200 crore will no longer be open to global tenders/players, allowing MSMEs the chance and to clear all receivables due to MSMEs in the next 45 days.

The reality of the package
The above six measure look attractive but may not be so in reality. With regards to the first measure it must be understood that government will not directly give Rs 3 lakh crore to India’s MSMEs, the banks will have to do it. If at all banks lend to the MSME’s, and if the units fail to repay the same the government will step in and make it good. The assumption being that the banks will be happy to lend.

With regards to the second measure subordinated debt, the government will only provide partial credit guarantee support to banks. But for the banks enforcing these guarantees may not be as easy as it sounds. According to bankers, in the event of default, banks will have a tedious process to get their money from a fiscally constrained government. Also, the government will have to verify the cases that turned bad, and compensate banks which will take time. Till that time the lenders will have a long wait. In case of the Fund of Fund measure, here again the centre will put in only Rs 10,000 crore and the remainder is expected from other PSU institutions like SBI or LIC.

Thus with regards to the first three measures the government intends solving liquidity concerns faced by MSMEs and the NBFC sector, assuming that banks will continue to lend them. However this may not happen immediately as the lenders also have a liquidity problem. None of these announcements actually involve the government pumping its money in the system but only nudges the financial system to lend more money.

MSMEs desires in having immediate liquidity and not mere extension of loans. Most of the MSME’s by today have already exhausted their collaterals. There was also a demand to reduce the interest rates. The measures propose no interest waiver for term loans, nor has the EMI moratorium been extended. Further no reduction in GST rates concerning the MSMEs has been proposed.

Will the banks actually lend?
The lending Banks already have a total loan outstanding of Rs 29 lakh crore to MSMEs with around 10 percent of them being NPAs. Thus the banks have significantly cut down their exposure to MSMEs due to high stress. PSU banks struggling for capital, are wary of the additional stress by lending to these firms unless demand situation improves, and MSMEs likely to make enough revenue to pay back.

With regards to the other three measures there are problems in addition. The new definition of MSME leads to confusion as both the investment and turnover conditions will have to be satisfied to keep the status and will not help the existing units that have been suffering for the past five years. The new definition will also help big companies enter the MSME sector, to bid the under Rs. 200 crore tenders and also enjoy all benefits deserved by the struggling MSME units. Finally the announcement by the Centre to clear all MSME dues from the government will only make sense if the Centre releases their pending payments attributable to the States, and impress upon them to pay the MSME dues immediately.

To summarise, though the MSME relief measures made good headlines none of them will provide these sector the immediate relief it deserves. Let us at least hope that the system doesn’t create a bunch of stressed MSMEs and huge bad loan problem for the forced lenders in next couple of years.


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