Credit and Finance for MSMEs: The six-month (March-August 2020) moratorium on term loans announced by the Reserve Bank of India helped MSMEs briefly survive Covid amid disruption in income but the reprieve fell short in addressing their recovery concern amid the demand slump. Now battling the second Covid wave, MSMEs are hoping for stronger working capital handholding and for a longer period to stay afloat. However, banks and credit rating agencies had last year suggested the RBI that extending the moratorium period would risk more non-performing assets in the ecosystem.
“At least 30 per cent MSMEs had availed moratorium benefit. However, businesses still don’t have money to repay the debt. The moratorium was the oxygen mask for survival not the betterment of MSMEs. It only postponed the suffering as MSMEs still have to pay the amount with interest burden. The mask was removed in August by RBI without being sure about the Covid situation,” KE Raghunathan, Convenor and Spokesperson, Consortium of Indian Associations (CIA) told Financial Express Online. The MSME body CIA represents over 30 trade associations in India.
Bengaluru-based former president of Federation of Karnataka Chambers of Commerce and Industry and chairman of diesel genset and pumpset maker DPK Engineers S Sampathraman seeks another moratorium amid fall in demand. “We availed moratorium as cash flow was affected. The loans we took helped us treat our fixed overhead costs and not towards improving the business. Demand-side is the problem. Until demand improves, businesses cannot improve in the current situation. For repayment of the loan, I don’t have enough money as there are no buyers as of now. There has to be an additional flow of loans from the government without any conditions unlike in ECLGS. Another round of moratorium is needed since there is no money to repay. It is a dire necessity,” Sampathraman told Financial Express Online.
Raghunathan urged the government and RBI for an immediate rollout of MSME-focused stimulus to arrest the decline in their current situation amid the second wave. While the impact of existing lockdown restrictions would be ascertained in near future, the impact of Covid and following lockdown last year on MSMEs in terms of the number of units that shutdown was also not certain. According to MSME Minister Nitin Gadkari, while the MSME sector suffered Covid impact, “however, as MSMEs are there in both formal and informal sector, data regarding temporary or permanent closure of the units are not maintained by the Government of India in Ministry of Micro, Small and Medium Enterprises (MSME).” The minister had said in a written reply to a question in the Rajya Sabha earlier this year. However, according to a study undertaken by Khadi and Village Industries Commission (KVIC) to assess the impact of the pandemic on the micro-units set up under the Prime Minister’s Employment Generation Programme (PMEGP), 88 per cent of the PMEGP beneficiaries reported that they were negatively affected.
“If the current Covid situation extends for the next 30 days, minimum 45 per cent MSMEs will be dead. Already 30 per cent MSMEs are shut due to the first wave in the country. Last year, the government performed surgery on MSMEs without any sedation. This time before the lockdown, there should be sedation of moratorium, capital support to MSMEs who have lost revenue, postponing all payment collection like GST, PF, ESI, etc., by six months so that whatever money MSMEs have can be used for this emergency situation,” said Raghunathan.
Lenders too are keeping an eye on the impact of Covid 2.0 on MSMEs to ascertain the subsequent stress they are likely to witness in the segment. “Actual stress would be gauge through the payment behaviour only. The current behaviour is not truly reflective of what actually MSMEs are going through. The second wave is bringing completely unexpected disruption to MSMEs. While MSMEs were yet to fully recover post moratorium through the storm of the first wave, they are now met with a tornado,” Arup Kumar, General Manager, SIDBI told Financial Express Online.
The RBI had last year allowed a debt restructuring scheme for stressed MSMEs, which were in default but ‘standard’ as on January 1, 2020, till March 31, 2021. According to a PTI report, the representative body for NBFCs in India Finance Industry Development Council has requested RBI to extend the one-time restructuring scheme for MSMEs till March 31, 2022, as these enterprises haven’t been able to revive their businesses.
“When the moratorium was offered, there was no MSME activity happening. For MSMEs to repay, their operations were necessary which wasn’t there. The government had offered ECLGS and the restructuring scheme that had taken care of whatever stress was there. However, now with the second wave, it is difficult to ascertain the level of impact on banks and other lenders. But moratorium destroyed the credit culture as it affects the discipline of payment. It gives license for non-payments,” said Kumar.
In July last year, Financial Express had reported that HDFC Chairman Deepak Parekh had urged RBI to avoid moratorium extension on loan repayments beyond August 2020 as borrowers who could service their loans were deferring payments. “Please do not extend the moratorium because we see that even people who have the ability to pay – whether it is individuals or corporates – are taking advantage under this moratorium and deferring payment…There is some talk that there will be another extension of three months. It’s going to hurt us, and hurt the smaller NBFCs particularly,” Parekh said at industry body CII’s council meeting.