Non-classifying stressed MSME Loan as  NPA-  It is not enough

Govt’s recent decision to direct banks not to classify stressed MSME loans as NPA is just a temporary relief and it is not enough to stabilize the segment reeling in distress.

Recently Union Finance Minister announced that banks will not classify stressed loans in MSME segment as NPA till March 31, 2020, thus restraining them from initiate recovery action anticipating that this will help the stressed entities to recover themselves.

Though her concern to assist MSMEs to come out of distress is appreciable, the measure in itself is not enough to stimulate the revival of the stressed entities.

MSME segment is reeling under massive slowdown beginning from 2018 due to steep decline in the demand for their products and services. Many of the MSMEs are part of the production and marketing value chain of the large companies in sectors like automobiles. The slowdown is witnessed in the sectors like the automobile has a cascading impact on the financial viability of many MSMEs countrywide.

The ongoing slowdown is unlikely to recede in the near future.  Though the experts are having divergent views on the course of likely time period the slowdown will persist, it appears that demand recovery will take a few more quarters to gain momentum and this is expected to cause disruptions to many MSMEs.

Secondly, the segment is also experiencing the negative impact of the structural changes happening in the many industries due to changes in the way the buyer-seller interact on account of technology-driven processes and solutions.

Thirdly the segment is still experiencing the challenges from the lingering impact of economic measures such as demonetization and other policy actions either industry-specific or broader economic.

MSME Segment requires more than the standstill from the recovery:

The promise of standstill in recovery action can be a good measure provided the economy is in recovery or growth mode. That would have created more breathing space for many temporarily stressed entities and would have helped them to set right their finances in the next two quarters. However, given the present circumstances of negative sentiment about the economy prevailing in the country, this measure is of no help either to banks or entrepreneurs.

What are the most feasible solution for reviving MSME segment?

There were few measures announced by the Govt in the last few years and more recently on January 1 2019. These measures coupled with few more amendments can become a strong anchor to promote the revival of MSMEs. We discuss them as below:

Enforce  rigorously the RBI guidelines issued on January 2019 to restructure  stressed entities:

RBI had issued guidelines to support the restructuring of stressed MSME loans on January 1, 2019, without classifying the restructured loans as NPA. The guideline incentivizes the banks by allowing them to not to treat such restructured accounts as NPA  The new guidelines will be available on up to March 2020.

Effective implementation of these provisions definitely of help to stressed MSMEs. They will get breathing space and can reset the growth strategy. However, the implementation so far is far from satisfactory.

Extend resolution support to revive the stressed entities to give rebirth to them that involves writeoff/waiver of a part of dues to banks:

Many of these MSMEs are victims of the inability to adjust to expected and unexpected changes in the external environment like Demonetisation and GST implementation.

These stressed MSMEs have the potential to turnaround and can contribute significantly to the national economy as well as local communities in terms of job and earnings. However, the accumulated debt burden during the last few years of distress makes them unviable to face the competition. The level of debt (from the bank and others put together) is beyond the sustainable level.

These units require broad-based resolution support. The resolution support must have enabling provision for reassessing the debt servicing capacity and identifying the level of sustainable debt.

Taking a cue from the performance of IBC (Insolvency & Bankruptcy Code), we feel that MSMEs may be extended support through write off/waiver of dues as a measure to revive the segment. The big loan accounts are resolved with substantial haircuts under IBC route. In some cases, it is more than 50%.  A similar provision for sacrifices needs to be extended the MSME to revive the potentially viable MSME units outside IBC purview. The lenders are aware that the market for the assets of stressed units is very poor. The recovery under the regulatory mechanism is unlikely to provide any substantial gain to the lenders. The contribution of revived MSME units to the economy is expected to be more than the amount of possible sacrifice made by the lenders.

MSMEs needs structured support to tide over financial support:

Many of the stressed MSMEs have the potential to turnaround. There are many regulatory and administrative guidelines from RBI and Govt to help these stressed MSMEs to overcome the challenge. However, these MSMEs require a very comprehensive framework that addresses their financial woes and helps to find a structured approach to cover the gamut of issues, something akin to Insolvency and Bankruptcy Code 2016 without the need to through the process of Insolvency.

“Framework for Revival and Rehabilitation of MSMEs” – A better alternative:

Govt of India & RBI had implemented the above framework in the year 2016 (RBI/2015-16/338 FIDD.MSME & NFS.BC.No.21/06.02.31/2015-16 Dated March 17, 2016). The framework addresses the financial issues holistically and is capable to assist stressed MSMEs to recover the lost ground.  The framework can help the stressed MSMEs to firmly anchor themselves to come out the challenges. The framework may be amended to make it versatile and become an anchorage to stressed MSMEs. Some of the amendment can be as below:

a)      Add the provision of waivers/write-offs:  If this framework is amended to discover the sustainable debt and thereafter setting a stage for resolution, this can be a quick and supportive avenue for stressed MSMEs to seek turnaround.  

b)      Extend a fresh round of finance especially working capital: Also these MSMEs are normally at the receiving end and unlikely to generate liquidity to support. Thus the working capital facility is paramount to make restructuring and turnaround support meaning full and constructive. To make it better it is desirable that the firms may be given another avenue of support in terms of extending an additional round of working capital finance to revive the business. Though the framework allows extending additional funding, it is not implemented and thus remains a bottleneck for revival.

c)       New debt may be supported by CGTMSE: There is always an element of hesitation to extend fresh support for stressed firms. This requires explicit policy support to extend additional finance that may involve CGTSME.

d)      Simplify its administration: Present guidelines seek to involve people from outside including  Govt dept in the process of approving restructuring. Involving others may delay the process and resolution of stressed debts require timely intervention. Further having comprehensive framework backed by regulation and laws itself can create a conducive environment for enabling the arrival of a mutually understanding solution. Hence the participation may be limited to engagement between lender and borrower and/or their advisors without inviting outsiders can improve the speed of the process.

e)      Allow the advisors to assist: Bank loan restructuring alone is not sufficient. The turnaround of stressed business requires more than delaying loan repayment.  The turnaround of stressed business requires support from experts from fiancé, legal, and /or the subject matter.  It is better to involve the experts to structure a resolution plan and enable speedy implementation.  

Conclusion:

Distress in MSMEs requires a more holistic approach to assist the stressed units to come out successfully.  Instructions for standstill will not help. The present guidelines need to be reviewed and amended to support a speedy revival of the potential units and bring the buoyancy in the segment. Framework for Revival and Rehabilitation of MSMEs impended by the Govt with few amendments can be a robust platform to achieve that goal.

MUDRA loans can transform the lives of many micro-enterprises at the lower end of economic strata, however, the delivery process requires to be toned up.

I have been tracking a story of a woman entrepreneur who had been running a small grocery shop with a major focus on milk vending business in our area. We have been here in this locality for more than five years. Till recently we have been buying milk from her. Unfortunately, she closed her shop recently due to non-availability of adequate finance and the inability to raise the required capital to have her own license to vend milk from KMF.

Many MSMEs treat disclosure in the financial statements  merely a statutory compliance than an opportunity to know more deep onto their finances.

Recently I came across an instance of an entrepreneur hauled up by Income tax authorities and  issued  demand notice for an huge amount for the previous assessment year. He has been into construction business and the business had been subdued in the last two years. Obviously the profitability is very low and paid less tax compared to previous assessment year.

There is clamouring for making MSMEs accepting formal processes than remain informal. However, the choice of timing (to become formal) is a matter of dilemma for many entrepreneurs.

Recently one of the close confident secured a limit of Rs 30 lakhs in the online platform www.psbloansin59minutes.com and it was a matter of intense jubilation for him. On the one hand, it was a great endorsement of his entrepreneurial journey which has witnessed steep upheavals in the past few years and on the other hand he secured stable source of funding for expanding his business.

RBI’s recent move to permit banks to restructure loans of MSMEs without classifying as NPA is seen as positive for stressed MSMEs  

In a significant step, RBI has allowed a one-time restructuring of existing MSME loans that have defaulted but are not non-performing as on  January 1, 2019. Such a debt restructuring, the central bank said, would not lead to a downgrade in asset classification. To be eligible for the debt restructuring scheme, the aggregate exposure, including non-fund based facilities of banks and non-banking financial companies (NBFCs), to a borrower should not exceed ₹25 crore as on January 1. Also, the restructuring has to be implemented by 31 March 2020.

Many  SMEs in the post startup stage face a dilemma of exploring new areas or exploiting the existing one to sustain their entrepreneurial journey.

Recently I met my college friend after a long time who has been successfully running his herbal extraction business for the last four years. The business has been fairly stable in terms of control on operating metrics, market reach and supply chain. Over a period of four years, he set up a good team to run the business. The business has beenfinanciallyrewarding with a stable cash flow. 

Policy shocks like Demonetisation and GST bring to the fore a need for a mechanism to assist distressed MSMEs to secure a new lease of life.

On November 8, 2016 Mr Naredra Modi, Hon’ble Prime Minster announced a policy measure of demonetisation.

The entrepreneur was not prepared for the kind of action undertook by the Govt. The industry (real estate) had a huge shock. There was utter chaos in the market. The planned business did not accrue. However, the loans raised to set up the new unit started coming up for servicing. As there is no liquidity to service the loans due to lower sales, he started feeling the heat of distress.

Many entrepreneurs accept a complex financing model without dwelling deep into it and ended up in a messy situation to deal with if slips to distress.

A few years back I witnessed one distressed SME in my known circle. He had been a very successful entrepreneur having a record of 20 years of successfully running his business. He was into manufacturing of packaging materials and major FMCGs were his clients. As the existing unit peaked its performance and, he started contemplating setting up the second unit with most modern technology sourced from abroad. It was necessitated because the industry was becoming very competitive due to clients demand for better quality and superior visual presentation of packaging materials.

Universal access to Credit guarantee schemes for MSMEs can be an effective instrument for human capital development in India

Recently Karnataka State Finance Corporation(KSFC) came out with a scheme to extend loans at 4% interest rate up to 5 cores for the manufacturing sector and up to Rs 2 crores for the services sector.

Recently Govt announced setting up a digital platform to bring lenders closer to SMEs in India. It is a welcome initiative to improve the access to credit and make it timely.

The Union Minister of Finance and Corporate Affairs, Shri Arun Jaitley recently launched the web portal www.psbloansin59minutes.com  This will enable in principle approval for MSME loans up to Rs. 1 crore within 59 minutes from SIDBI and 5 Public Sector Banks (PSBs).