Special Package to aid stressed MSMEs

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In response to the biggest crisis triggered by COVID19 pandemic and extensive lockdown period wherein all economic activities have come to an abrupt halt the Central government’s fiscal relief packages have been announced in tranches by the Finance minister, citing some bold reforms as need of the hour. Around ₹20 lakh crores have been set aside which is essentially 10% of India’s GDP in 2019-2020.

Holding the backbone strong

The first tranche of Athmanirbhar package aimed at Micro Small and Medium Enterprises (MSMEs), Non-banking Financial Corporations (NBFCs), liquidity infusion, and so on. For a developing country like India, MSME industries are its backbone. The government has offered collateral-free loans to MSMEs which is guaranteed by the Centre, for which a total of ₹3 lakh crores have been set aside.

There will be a principal repayment moratorium for 12 months and the interest rate will be capped. All MSMEs with an outstanding credit of up to 25% and a turnover of up to ₹100 crores will be eligible to borrow up to 20% of their total outstanding credit from banks and NBFCs and these loans will have a 4-year tenure. This new scheme happens to be a lifeline for all those stressed/special mention accounts (SMA) and those which are on the verge of being declared non-performing. The bankers shall offer them loans irrespective of their repayment history and financial soundness, as the government will provide a 100% credit guarantee to banks and NBFCs on principal and interest.

Symptoms of stress

RBI has identified accounts that have the potential to become an NPA or stressed asset depending on non-repayment or overdue position, these are called as Special Mention Accounts (SMA). They are further classified based on duration as – SMA 0, SMA1 and SMA2. Repayment exceeding 90 days is called as NPAs. The Centre has also devised plans for NPAs wherein support of ₹4000 crores is extended to SIDBI-managed Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). This shall be considered as a subordinate debt to provide equity support to stressed MSMEs. As they have operational units but require funds to run them. This can be considered as a second chance to kickstart their units back into the business.

Way forward

The Centre has been deploying various fiscal policies to withstand the nation-wide crisis by supporting business units with credit facilities. However, there is an underlying concern regarding the credit culture as the banks are currently brushing off the possibilities of risk – as it can potentially disrupt debt financing, due to government guarantees. The response to this situation calls for greater coordination among a joint forum of regulators and decision-making bodies.  

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