Rs 20k cr Subordinate Debt: How stressed MSMEs can apply; collateral required, credit limit, other details

by Joseph K. Clark

Interest rates are per the RBI guidelines in September 2019 and February 2020 to benchmark all MSME loans to one of the external benchmark rates decided by banks, including repo rate, the government of India treasury bills, etc. The Rs 20,000-crore Subordinate Debt for Stressed MSMEs scheme, launched as part of the Rs 20-lakh-crore Atmanirbhar package last year and operationalized in August, is yet to find MSME takers. Around nine months after the scheme’s launch, which aimed at providing personal loans through banks to the promoters of stressed MSMEs for infusion as equity or quasi-equity, had only 332 beneficiaries involving guarantees worth Rs 38.5 crore as of March 4, 2021.

MSME Minister Nitin Gadkari shared the data in a written reply to a question in the Rajya Sabha. The scheme otherwise had targeted to support two lahks Covid-hit MSMEs that are NPAs or stressed. According to Icra Ratings, gross non-performing assets (GNPAs) are expected to rise to 9.6-9.7 percent by March 31, 2021, and 9.9- 10.2 percent by March 31, 2022, from 8.6 percent as of March 31, 2020.

MSME Sector BG

Who is eligible for the scheme?

All MSMEs with standard accounts as of March 31, 2018, and have been formal or NPA during FY19 and FY20 are eligible. The scheme is valid for MSMEs, Special Mention Accounts -2, and NPA accounts as of April 30, 2020, which qualify for restructuring per RBI guidelines. However, defaulting accounts are not considered under the proposed scheme.

How much amount can be raised?

Promoters of MSMEs can raise credit equal to 15 percent of their stake in the company or Rs 75 lakh, whichever is lower. For example, if the promoter has put Rs 6 crore in the company, 15 percent would be Rs 90 lakh. Hence, he would be eligible for an amount of Rs 75 lakh only. If MSMEs have existing limits with more than one bank, the scheme can be availed by the MSME through one lender only. MSME will have to submit a declaration to the lender regarding its other banking arrangements and that it has not availed funding under the scheme from other banks.

How much will be the guarantee fee and the extent of the guarantee coverage?

According to the scheme guidelines, a guarantee Fee of 1.50 percent per annum on the guaranteed amount on an outstanding basis may be borne by the MSME as per its arrangements with the bank. Also, the amount equivalent to the bank’s guarantee fee may be recovered from the MSME. While 90 percent of the guarantee coverage would be contributed by the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), the remaining 10 percent would be from the MSME promoter as collateral.

“There might be some flaw in the scheme if only nearly Rs 40 crore of guarantees were issued till March. Moreover, how would the struggling MSME promoter contribute even 10 percent of collateral? The government must do away with this, or NPAs may rise based on how long Covid would last. On the other hand, the credit limit should be graded. For instance, it could be 40 percent for Rs 1 crore credit going higher; the credit limit could be lower. MSMEs today are left with no money,” Rajiv Poddar, Managing Director, Poddar Enterprise and President of the Indian Merchants’ Chamber (IMC) Chamber of Commerce and Industry, told Financial Express Online.

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How much are the interest rate and tenor period?

Interest rates are as per the RBI guidelines in September 2019 and February 2020 to benchmark all MSME loans to one of the external benchmark rates decided by banks, including either repo rate, the government of India treasury bills, or any other benchmark market interest rate published by the Financial Benchmarks India. The tenor is defined as per the repayment schedule determined by the bank, subject to a maximum tenor of 10 years from the guarantee availment date or March 31, 2021, whichever is earlier. The leading tenor for repayment will be ten years, while the moratorium will be a maximum of seven years on the payment of the principal amount. While the interest must be paid monthly, the principal would be repaid within three years after the moratorium period. MSMEs can also pre-pay the loan without any additional charge.

What in case of default?

Banks might take over the assets of MSME, and the amount realized from the sale of the latter helps to settle the debt. According to the guidelines, any subsequent amount left post-settlement of senior debt would be appropriated between the trust (CGTMSE) and the bank to the extent of the guarantee coverage ratio.

“Government’s challenge of supporting industry is limited with its debt / GDP at 90 percent. RBI is quite supportive, but much is still required regarding industries and the entrepreneurs representing them. Fiscal and monetary policy should go hand in hand. Though constraints are well known, more support from the government to aid the economy is required. Rebates on income tax, like the 25 percent reduction on TDS (Covid version 1.0), are called for to overcome cash flow commitments. More leeway is required in GST compliance. Also, bankers have to look beyond the balance sheets and personal guarantees. There are other more challenges to be resolved to support MSMEs,” L Ravindran, MD and CEO of Wealthmax Enterprises Management, told Financial Express Online.

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