By Prateek Kumar Singh Research support Arushi Jain
The Covid-19 Pandemic has been redefining moment in the history of economy and business changing the broad government policies, approach and priorities. It has the multi-sectoral impact and especially from Indian perspective the most crucial ones are that on the MSMEs. It is perhaps a watershed moment in the MSME’s policy reformation in India and the government has attempted to sustain their business and infuse liquidity.
Following are some major reforms & schemes announced by the government:
1. Re-classification of MSME’s (See Table below)
2. Emergency Credit Line Guarantee Scheme: A Rs. 3 lakh crore comprehensive package wherein the loans granted to MSMEs will be 100% guaranteed by the GOI.
3. Restructuring scheme: All MSMEs loans classified as ‘standard’ as on March 1, 2020 shall be eligible for loan restructuring.
Apart from the above mentioned, government has announced additional reforms for eg. Labour Laws changes which will have an impact of on functioning of MSMEs. However, even after all this the persisting issue of solvency will remain due to subdued demand and lack of digital adoption. Read our earlier note on the subject, here.
Net impact of the MSME COVID rescue stimulus
In May 2020, the Union Finance Minister announced liquidity measures for businesses, especially Micro, Small and Medium Enterprises (MSMEs) as part of the first tranche of Atmanirbhar Bharat Abhiyan.
This economic stimulus has both, liquidity financing measures and credit guarantees.
In our opinion, the government’s offer to bailout MSMEs implies a collateral free liquidity stimulus through 100% Government backed debt vehicles, with repayment embargo for 1 year from date of disbursement (coincide with ruling government’s 2nd year) + repayment over 4 years (coincides with General Elections).
It is a bold step, considering the fiscal gap Government is facing currently.
Revised Definition of MSME
MSMEs in India for the last five decades have sustained expansion visions of the GoI; created mid-segment employment, advanced sectors at lower capital-intensive options, supplemented domestic demand, managed exports. MSMEs contribute 6.11% to the manufacturing GDP & 33.4% to India’s total manufacturing output with 24.63% of the GDP from services & around 45% of India’s total export. In turn, they are benefitted from loan facilities, priority lending, and mandatory sourcing of 25% procurement by government, etc.
The Government, during these uncertain times of a pandemic re-defined Micro, Small and Medium enterprises based on investments and turnover:
| Classification | Investment limit* | Turnover limit* |
| Micro* | Up to INR 1 Cr. increased from INR 1- 2.5 lac | Under INR 5 Cr. |
| Small | Up to INR 10 Cr. increased from INR 2-5 Cr. | Under INR 50 Cr. |
| Medium | Up to INR 20 Cr. increased from INR 5-10 Cr. | Under INR 100 Cr. |
*India’s MSME market is dominated by the Micro Units (99.4%).
The definition has been expanded to allow for higher investment limits and introduction of turnover-based criteria. Earlier MSMEs were defined based on the limit of investment in machinery or equipment. The ‘turnover’ is the more efficient way to identify an MSME as it allows a lot of firms, especially in the services sector like mid-sized hospitals, hotels and diagnostic centres to be eligible for benefits as an MSME. There will be no difference between a manufacturing MSME and services MSMEs which is likely to create a bias impacting the manufacturing units registered under the Factories Act.
Expanding the composite thresholds for Micro enterprises has now opened the gateway for larger units to be clubbed under Micro, causing dilution in the segment, also will expose it to false data capture issues. The previous threshold was INR 25 Lakhs. These would have been units will special unique requirements which will go unmet under this rescue aid.
Additionally, the revised threshold linked classification for investment and turnover will trivialize the crisis experienced by enterprises employing a larger number of people. While holding a measure based on employees is not too stable for the nation given the labour and employee culture being transient, in the current situation, it would have secured multiple areas.
GoI offering
- In a concentrated focus on providing liquidity to MSMEs, GoI has offered-
- Collateral free additional loan 20% of their loan outstanding for MSMEs with a 25 Cr. outstanding of total borrowing.
- 1 year repayment discount and to be repaid over 4 years.
- a 100% guaranteed by GoI, to be availed up to Oct 31, 2020, of this INR 3 lakh crore. under Emergency Credit Line Guarantee Scheme. The scheme was extended by the government until November 30, 2020 or such time that an amount of Rs 3 lakh crore is sanctioned under the scheme, whichever is earlier. This was done in view of the opening of various sectors in the economy and the expected increase in demand during the ongoing festive season.
- Equity infusion worth INR 500 bn through special fund.
However, details of who would make these equity investments, what diligence will be conducted to assess and ascertain viability and within what time frame these must be completed, have not been clarified.
2. Listing aspirations
A fund of funds with a corpus of INR 100 bn has been allocated to aid expansion and potential listing in markets (Approved by the Union Cabinet).
This provision can help larger enterprises, who now due to expansion of the thresholds were treated as Medium sized enterprises and have grown close to venturing a listing exercise in term of business and compliance. This will marginalize the smaller enterprises.
Evaluating this against the SME platform on NSE and BSE have largest of SMEs is in the range of 190 to 300 confirms that to some degree, GoI is hitting the wrong end of the problem.
- Embargo on global tenders for government procurement of up to INR 2 Bn.
- Extended tax filing deadlines, EPFO relaxations, and immediate tax refunds.
- Loan repayment bar for 1 year from date of disbursement and repayment spread over 4 years.
Interestingly, there has not been any reflection on the monies the government and the private sectors owe the MSMEs. An immediate repayment of these dues would have been the meaningful help, the nation could do with. This amount is about 5 Lac Cr.
On the other hand, it seems that the GoI views employees only through PFs and EPFOs. Instead of displaying a reduction in PF contribution from 12% to 10%, a true support in spirit for MSMEs could have been-to offer a wage guarantee commitment.
Suspension of IBC
Initially, GoI suspended IBC for 6 months, moving thresholds, but those were abandoned in favour of a complete suspension of the code for 1 year. As of now, the IBC (filing of application under section 7, 9 and 10) stands suspended till December 25, 2020.
To compensate the absence of IBC and provide some breather to the MSMEs looking to restructure their bad debts, the RBI had, on August 6, 2020, announced the scheme as a relief measure for non-MSME corporate borrowers having an aggregate exposure of greater than Rs 25 crore and were under stress due to the Covid-19 pandemic.
MSME stimulus package held next to the suspension of IBC-
IBC is a recovery tool for Financial Creditors, in fact to be a part of CoC, the operational creditors would have to form 10% of the total debt exposure. So, while principally, IBC was not a recovery mechanism for operational creditors, its paved way for promising resolutions, efficient asset acquisition / restructuring / expansion opportunities. With 1 year suspension and 240A remaining un-announced, asset value erosion is a likely reality.
The Task
- Liquidity can help in de-clogging the last mile supply chain connectivity, but the liquidity model could keep the financial exposure staggered and postponed. A suspended debt scenario is likely to attract more of debt/ insolvencies and bankruptcies. For about a year, debtors have been low on cash and high on default. With no avenues supporting revenue generation, without constructive resolution for bad loans and liquidity stimulus embedded in debt, does not create an ideal situation for anyone.
- Liquidity management is a huge component of Liquidity itself. Even if we completely discount the outliers like the ones misusing/defaulting repayment for large number of MSMEs to feel confident and committed to infuse this liquidity back into the market, a few critical aspects require balancing:
- Sustenance, growth and expansion options in a bear market.
- Attractive debt resolution.
- Quick debt recovery.
- Discount in rents, electricity.
While GoI has advocated theAatmnirbhar Bharat as a main sentiment in announcing these aids, it has preferred to retain control over the growth and expansion and create dependency through debt. By suspending IBC, in absence of supplementary & supporting options, GoI has deflected MSME expansion avenues, remedial choices, legal recourse from a self -sufficient /confident model.
Concluding Remarks
MSME Non-Performing Assets have risen by 50 basis points to 12.2% as of September 2019, against 11.5% in September 2018. India’s Purchasing Manager’s Index, signifying the economic trend in manufacturing & services sector has dropped by 43.9 points to 5.4 in April 2019, the lowest in the world, making growth, a distant dream. There are a few fragmented and sporadic solutions like RBI’s one-time debt-restructuring scheme for MSME’s which has helped in improvement of the balance sheet for the purpose of raising new funds. But these achieve the significant desired results. The Indian economy is in bad shape, as witnessed by 23.9 % contraction in first quarter FY 20-2021. However, second quarter offers breather with contraction of 7.5 %. But this does not call for celebration yet as the revival was induced by festivals and road is still difficult ahead. The current crisis has all the elements of financial crisis, sectoral slump and demand and supply shock. The government’s response has been more focussed towards liquidity, but this may not be the solution for long term as the real issue is that of solvency. The businesses are not making revenues and lowering the cost of borrowing is not going to help either. The liquidity may help in keeping the short-term stress at bay, but long-term solvency repercussions are being ignored.
Disclaimer: This Note is for general information only and not intended for solicitation. Please do not treat this as a legal advice of any sort. Views contained in this, are personal with interpretive value of the author and teams assisting the author. We had written a piece on stimulus for MSME’s in the month of May-June 2020. As we are heading towards the end of the year, we are re-visiting the article along with the requisite updates.
Readers are encouraged not to rely solely on these contents before making any decision.