Loan Restructuring support for MSMEs –Extension is positive
The extended restructuring window to assist the MSMEs in distress is a welcome step. However, its utility depends on how we draw the restructuring proposal.
Finance Minister Mrs Nirmala Seetharaman in her budget speech announced that the scheme of one-time restructuring of existing MSME loans that have defaulted but are not non-performing as on January 1, 2020, will be extended for one more year. Consequently, RBI also took steps to issue the notification in this regard.
The key points as below:
1. The aggregate exposure, including non-fund based facilities, of banks and NBFCs to the borrower does not exceed ₹25 crores as on January 1, 2020.
2. The borrower’s account was in default but was a ‘standard asset’ as on January 1, 2020, and continues to be classified as a ‘standard asset’ till the date of implementation of the restructuring.
3. The restructuring of the borrower account is implemented on or before December 31, 2020.
4. The borrowing entity is GST-registered on the date of implementation of the restructuring. However, this condition will not apply to MSMEs that are exempt from GST-registration. This shall be determined on the basis of exemption limit obtaining as on January 1, 2020.
5. It is clarified that accounts which have already been restructured in terms of the RBI’s previous circular dated January 1, 2019 shall be ineligible for restructuring under this circular.
Extending the support by another nine months is a good step to assist the MSMEs to restructure their business and work out a turnaround path for themselves.
In the ongoing economic slowdown and growing incidences of Covid-19 outbreak, many MSMEs may suffer liquidity stress and require some breathing space to realign the financial model. If any entity experiences symptoms of distress, it is better to approach the bank to restructure the loans than seeking short term high-cost borrowing to keep the account regular.
However, we observed that due attention is not given to draw the proposal to avail its benefit.
The key factor of failure of restructuring – Not synchronizing with cash flow:
Recently I met an entrepreneur who has availed this facility in the month of September 2019. Despite restructuring, he is still grappling with the same level of distress as it was prevailing before. Upon reviewing the revised repayment schedule, I found that it was drawn arbitrarily and there was no linkage to the business characteristics and cash flow from the operations. I found that the restructuring is undertaken without drawing financial projections and solely with the focus of avoiding to classify it as NPA.
It is not the right approach. The scheme is a one-time opportunity for both borrower and banker to undertake a course correction so that precious public money will be returned in an orderly manner. It is an appropriate context to review the business holistically and draw a realistic financial projection for the few years and draw the repayment schedule based on that.
Arbitrariness in fixing the revised schedule will not serve any purpose and likely to render the project unviable leading to perennial distress. A situation can be easily avoided provided we give little attention to make a detailed and realistic financial plan.
We suggest a simple process to make restructuring successful:
1. Review the business holistically and understand the challenges and opportunities in a very unbiased manner
2. Draw a realistic financial projection based on step 1
3. Identify the needs – Rescheduling the existing loan/s, carving the deficit, seeking additional funding, stretching the repayment holiday etc
4. Make a comprehensive formal proposal and don’t accept the changes if it does not support the planned turnaround.
5. Highly desirable to seek expert support while drawing a revival and restructuring plan
A sustainable and enduring turnaround from financial distress requires a very meticulous approach. Restructuring of bank loan is an important step in this regard. The exercise needs to be approached with the utmost care and due concern to cash flow. As emphasized by the RBI circular, it is a one-time benefit for stressed MSMEs to undertake course correction. Don’t ignore the basics.
SMEs in Distress- Beware of ‘Soldiers of Fortune’
When in distress, many SMEs chase new money and normally end in traps of mischievous elements who make tall promises and swindle money.
I recently met one entrepreneur after a gap of two years. Once he had a flourishing business in excess of Rs 50 crores. He had built the business by himself brick by brick. Having come from a middle-class family, despite the success, he stuck himself to the higher values-Extremely affable, god-fearing, and committed to meet promises.
The back to back the introduction of policy measures – Demonetisation and GST-pushed him to the slippery position. Before he could make the required changes in the business process and financial management, the situation went out of control. The liquidity stress started appearing and he started defaulting on the payments resulting in personal insinuations from the providers of loan and suppliers which he never experienced in his life. On the other hand, the trade cycle got disrupted and order flow dried up as his principals started realigning their business to adjust to the new reality.
While he was battling in multiple fronts he started getting offers for a comprehensive bailout. Obviously these offers attract him as he was already exhausted to deal with demand from various people.
They offered to arrange a very large sum and consolidate the borrowings into a single source along with a very attractive rate of interest much below the RoI applicable to well-rated borrowers despite being highly stressed.
The waiting is still on…
Unfortunately, he is still hoping for the new money ever after two years. In the meantime bank and NBFCs have initiated recovery action against his properties and have been establishing their rights. The business is closed and the family is living with agonising pain and praying for better days.
It is commonly observed among the entrepreneurs in distress:
Most of the entrepreneurs in financial difficulty look for quick solution fearing that continued distress may affect the business and their reputation. Having pledged every asset to lenders they fear the impact of distress much more than what it really is. That in turn, prompts them to seek an instant solution. They tend to react to any proposal with much more intensity and avoid confronting those mercenaries to understand their credentials.
Fortune soldiers- Mercenaries who boast about exclusive access to money:
These agents claim that they have an exclusive arrangement to secure money at very soft terms. They show a lot of empathy and promise to work for clients with all the sincerity. If we analyse the experience of interaction with these fortune soldiers there are commonalities in their approach. Some of them are :
- They present as if they enjoy a high degree of confidence of the financiers.
- They seek very small fraction as advisory fee and a still smaller fraction as advance
- Terms are so compelling to justify taking risk of giving advance
- The advance will be packaged as a commitment fee or insurance premium to bring the money from abroad etc
- They do not reveal much about the financier.
- They prop up the names of people in higher offices
- They set the meeting in very premium places
Eventually, their target is to extract advance as much as possible, keep giving excuses to frustrate and eventually make one go away.
Entrepreneurs are more vulnerable in India for financial distress than in any other country:
The options for turnaround are limited in India. The general perception of the stressed enterprise is highly prejudiced. Many see them with suspicion of laundering money from the firm. Being in stressed and struggling lonely, entrepreneurs are obviously vulnerable.
Many take risk of giving the advance in the hope of getting a large sum. Unfortunately, many entrepreneurs have lost a huge sum of money in their hunt for fortune.
The greater damage will be when an entrepreneur diverts his attention to chase this route and keep away from immediate tasks. Lack of credible proposal may prompt recovery action leading to the collapse of the business and destruction of enterprise value.
How to deal with this situation?
If anyone offers a deal which is cheaper than a bank loan, it is to be examined thoroughly before committing. We have not still come across a charity extending helping hand to distressed businesses.
Entrepreneurs should desist from the temptation to seek quick money and allow them to be drifted away from reality. It is nothing but a distraction to find a viable solution within their reach and exacerbating the distress.
Keep your attention to immediate tasks such as talking to creditors and suppliers.
Many a time we falsely blame the absence of money for our distress. However, the fact is that most of the reasons for distress lie elsewhere and pumping more money won’t solve the problem.
Review the business strategy with the support of professional advisors. With professional assistance, you can build a new roadmap and lower the risk to sustainability. When an outsider is roped in, fresh scrutiny will open the mind to explore alternatives.
Distressed entities require better policy support:
MSMEs need better implementation of the law to assist entrepreneurs to undertake course correction. Unfortunately, half-hearted implementation of regulations to support distressed entities in India is preventing entrepreneurs from taking an orderly path to turnaround. This will naturally make them fall prey to unscrupulous elements.
The Insolvency and Bankruptcy code needs to be made universal. The option of restructuring of loans should be enforced upon all the banks(public/private) and NBFCs.
In the present era of globalization, the vulnerability for risks is unlikely to recede rather likely to go up. Thus a stable policy environment is needed to support the turnaround of distressed entities. Also tagging prejudice of criminality with distress situation must end.
Entrepreneurs in distress should appreciate that there are no short cuts to come out of it. Recovery from distress is an orderly process and time consuming requiring one to review in entirety and draw a new strategy.
Anil Kumar Shetty, Founder, SME Advisors
Bank merger: Re-entry to the pre-1969 era for small businesses?
There is an apprehension that merger among the PSBs may lead to deprivation of opportunities for small businesses and startups to obtain a bank loan.
Govt has been pursuing the policy of consolidation of public sector banks(PSBS) into 4 to 5. Already SBI subsidiaries are merged. Last year another round of merger was implemented under the Bank of Baroda. Now again we are witnessing one more round of mergers.
We are looking at how this plays out in supporting small businesses that were one of the reasons behind bank nationalization undertaken in 1969.
Contribution of PSBs in Lending to MSMEs
It is a fact that PSBs are shouldering the responsibility of delivering credit support to the needy section of the society- be it agriculture, MSME, etc. PSBs are always very magnanimous in supporting the MSME ventures, patronized innovations and have extended the long & short term loans. They have been wholeheartedly participating in Govt Schemes like PMEGP. The support for financially distressed entities is commendable and they are meticulously implementing guidelines from Govt and RBI.
How the scenario may change:
With the consolidation, it is likely that the business at the branch level will also be consolidated like it is done with other mergers in the past. This will lead to lesser attention span for the extra customer load the branch will have to deal with. The attention span is important for the reason that social sector banking activities require handholding of the customers that is the hallmark of public sector banking service since 1969.
With reduced branch presence of PSBs, the access points will dwindle and invariably small businesses will have to have banking business with private peers however what they likely to miss is credit support the way they get in PSBs.
Thirdly even for PSBs, more orientation will be towards profitability since capital efficiency was the reason for consolidation. That may drive them to reorient towards large value exposures.
Private Banks show no or less keen to lend in priority sector lending:
It is a fact that private sector banks show little or no interest in priority sector lending. They prefer other via media to engage with such clients resulting in higher cost of credit for end users. Also, they are happy to compensate for the gap through alternate options extended by RBI.
They are very particular about securing their loans by taking collateral of fixed assets. Even though Govt has implemented CGTMSE scheme to extend credit guarantee for small business loans and it has been here since nearly 20 years, private banks have not shown much inclination to extend loan under this window.
They are obsessed with securing their loan more than supporting the entrepreneurship. As a result, many budding entrepreneurs will not have access to bank credit and will be forced to seek support from predatory lenders.
If one looks at the profile of the product of many private banks, they are more keen to finance immediate needs than supporting capital investment. Support in distress is a far cry.
Role of RBI needs special mention:
Presently priority sector lending is handled by RBI. Most of the compliance with its directions are coming from only PSBs. With the reduction of their share and the increasing presence of private banks, we may see social sector lending will be reduced to islands everywhere.
Further, the RBI itself has created avenues for private banks to avoid direct participation in the priority sector lending that will further add to the declining credit flow.
Sadly RBI does not measure the flow of credit at the grassroots level rather relies on secondary data from Banks.
One can conclude that RBI action on this front is more of administrative and not accountable for the flow of credit to these needy segments.
How a merger may impact different sectors?
Mergers and consolidation of PSBs may create a huge vacuum of space of social sector lending. We believe that Micro and small enterprise will suffer more than agriculture because agriculture may get support from Coop Banks and Societies. Also, political activism may help agriculture, that privilege is not available to MSMEs.
The way forward: “Bring in a new law for creating sustainable financial architecture”:
Since consolidation exercise is underway, it seems there will not be any rethinking. However, Govt has to act to alleviate the apprehensions of a lack of access to credit from this process to small businesses.
In these circumstances, it is necessary to bring in legislation to create a sustainable financial architecture that binds regulator (RBI) and the banks to undertake lending to priority sector irrespective of ownership. They may be incentivized, extended liberal guarantees scheme coupled with provision for punitive action for not adhering to stipulations.
The notable benefits are :
a) It will make lending norms a legal mandate and ownership neutral.
b) It will universalise the access to credit in any region or activity
Bank merger without implementing an alternative model to support social sector lending will leave a huge vacuum and may affect the economically weaker section resulting in further widening of inequality. This may end up at creating a pre-1969 era of lack of access to credit for small businesses and others. Legislative action is necessary to preempt this scenario.
By: Anil Kumar Shetty, Founder SME Advisors (email: [email protected])
Loan restructuring support for MSMEs- A positive step.
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.Read more