Covid-19 –Relief measures for Indian MSME sector

Covid-19 –Relief measures for Indian MSME sector

On May 12, 2020, PM Narendra Modi announced a ₹20-lakh Crores (about US$ 266 Billion) economic relief package called the Atmanirbhar Bharat Abhiyan. The relief package was unveiled in tranches over the next five days by the Finance Minister of India. The relief was aimed at focussing on Land, Labour, Liquidity and Law.  It addressed concerns for micro, small and medium enterprises (MSMEs), non-banking financial companies (NBFCs), middle class individuals, poor, and labourers including migrant workers.  Proclaimed the Atmanirbhar Bharat Abhiyan, the relief package is slated to attempt making India Self-reliant under this crisis or any other crisis that may emerge in the future.  In this article, we shall be focussing alone on the relief measures declared for MSMEs, Power Discoms, Employed Middle class as these are all inter related and overall impact the MSME sector which is India’s dominant job creator.

Proposals for Micro, small and medium enterprises (MSMEs)

The government has proposed to offer Collateral-free loans to MSMEs which will be fully guaranteed by the Centre. There will be a principal repayment moratorium for 12 months and the interest rate will be capped and there will be no guarantee fee.

All MSMEs with a turnover of up to ₹100 Crores and with outstanding credit of up to ₹25 Crores will be eligible to borrow up to 20% of their total outstanding credit as on February 29, 2020. These loans will have a four-year tenure and the scheme will be open until October 31, 2020. A total of ₹3-lakh Crores has been allocated for this.

The Government claims this will act as initial seed money for these small enterprises hit by zero cash flow due to the national lockdown. This loan will help them buy raw materials, pay initial bills and daily wages to employees. In short, this will be like working capital for kick starting their businesses again.  Banks, though flush with funds, have been unwilling to lend comfortably to this category of borrowers as they fear that the money will not be repaid. The small businesses are mostly believed to have also pledged all their assets already for other loans and do not have any more assets to pledge.  It is to break this logjam that the government has said that it will insure banks up to ₹3-lakh Crores and said that these loans do not need any form of collaterals. Thereby, banks are now expected to be more comfortable in assisting this category of borrowers because the risk is zero.

This is the single biggest proposal out of all the announcements under the Atmanirbhar Bharat Abhiyan and small businesses are expected to benefit from this in a big way. Government estimates about 45 lakh MSMEs are expected to gain.

Other relief proposals for MSMEs:

A partial credit guarantee scheme has been extended to enable promoters of these MSME units to increase their equity. A total of ₹20,000 Crores will be infused through the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) whereby banks will lend money to promoters which can be infused as equity in their businesses. About two lakh stressed MSMEs with non-performing assets (NPAs) are projected to benefit from this. The CGTMSE will offer a partial credit guarantee to the banks.

There is also a proposal to infuse equity into MSMEs through a Fund of funds system where the government will provide ₹10,000 Crores as initial corpus of the Fund. This will be leveraged to raise ₹50,000 Crores which will be used to support MSMEs in desperate need of equity through ‘daughter funds’ of the main Fund of funds. The aim is to expand size and capacity of the MSMEs with equity and help them get listed on the stock exchanges too.

Revised definition of MSME:

Henceforth, MSMEs will be defined not based on their investment alone but also on their turnover. The definition has been tweaked and the existing distinction between manufacturing and services units has been eliminated.

Henceforth, a unit with up to ₹1 Crores investment and ₹5 Crores turnover will qualify as a micro unit, investment up to ₹10 Crores and turnover up to ₹50 Crores will qualify as a small unit, and investment up to ₹20 Crores and turnover up to ₹100 Crores will qualify as a medium enterprise.  Apply for your MSME registration

It has been a long-standing demand from industry to hike the investment limits, as there are units that leverage a small capital to post large revenues.

Other proposals to aid NBFCs etc. which support lending to MSMEs:

NBFCs, housing finance companies and micro finance institutions are finding it difficult to raise debt capital due to a confidence crisis in the debt markets. The government has, therefore, announced a special liquidity scheme of ₹30,000 Crores to pick up investment grade debt paper from both primary and secondary markets. Such paper will be fully guaranteed by the government. This is expected to break the low confidence cycle in the market for lending to the above category of borrowers.

In addition, to help low rated finance companies to raise debt, the existing partial credit guarantee scheme has been extended to cover primary market debt paper wherein the first 20% loss will be borne by the government.

A total of ₹45,000 Crores has been set aside for this Partial Credit Guarantee Scheme 2.0 that will offer liquidity to paper rated AA and below and even unrated paper.

Benefits for Power/electricity distribution companies:

Popularly known as discoms, electricity distribution companies are in a huge liquidity crisis and unable to pay their dues to electricity generation companies. Their cash flow and revenues have been hit due to low demand from industrial consumers for power during the lockdown. The various State discoms together owe about ₹94,000 Crores to their suppliers, the generation and transmission companies. The government, through Power Finance Corporation-Rural Electrification Corporation, will infuse liquidity of ₹90,000 Crores to discoms which will be securitised against their receivables from consumers. The loans given for the purpose of discharging their dues to generation companies will be against a guarantee from the respective State related to the discom. This emergency liquidity infusion will avert a crisis where generation and transmission companies stop supplies to discoms that are in default.

Measures for the employed Middle class:

In March, when the first relief package called the Pradhan Mantri Garib Kalyan Yojana was announced, the government offered to pay the 24% provident fund contribution (employer + employee) for those earning up to ₹15,000 a month as salary and working in units that employ less than 100 workers for three months. This has now been extended for another three months up to August 2020. The statutory PF contribution for those employed in the private sector (and not in the category of establishments above) has been reduced to 10% (from 12% now) for the next three months in order to increase liquidity in their hands. This is expected to benefit employees and employers to some extent in terms of liquidity on hand.

Income tax measures:
In addition to the above, the rate of tax deducted at source (TDS) and tax collected at source (TCS) has been reduced by 25% for a whole range of receipts. Thus, in payments to contractors, professional fees, rent, interest, commission, brokerage, etc. the TDS will be 25% lower. The TCS paid while buying a car of over ₹10 lakh in value and TCS collected in property transactions will also be lower.

The lower TDS is not applicable on monthly salaries that employees receive.

Beware that where TDS/TCS has been reduced, the tax liability itself is not reduced. It will be payable while filing return or while paying advance tax. The idea is only to offer immediate cash relief to people. The lower TDS/TCS kicks in right away and will stay until March 31, 2021.

Also, the deadline for filing of income tax returns for Companies and persons who are required to be tax audited, can file their returns by October 31, 2020.  For others not requiring tax audit, the due date deadline is extended to November 30, 2020.

Opinion on the Relief measures for the MSME sector

These relief measures for the sector were much awaited and anticipated with the growing aftermath as a result of the Covid-19 pandemic.  It remains to be seen how infusion of cheap and free liquidity into the financial system by the RBI & Government will revive the MSME sector.  As expected, the RBI’s aggressive stance on monetary policy has barely made a dent so far in MSME lending. Parking surplus liquidity in financial institutions and expecting them to absorb the full credit risk from lending these funds to cash-strapped MSMEs, at a time when capital is scarce, has turned out to be a non-starter. Instead, financial institutions have deflected the excess liquidity away from much riskier MSME asset pools and parked it in safer, more profitable, higher-rated corporate securities.

With the RBI monetary impetus turning out to be a damp squib and public anger mounting over the anguish of poor migrant workers fleeing, unemployment caused by an extended lockdown, the government unveiled a the collateral free automatic loans scheme specifically meant to revive MSMEs and stem job losses. At the core, it is by far the largest chunk of this relief package, is the collateral free automatic loans for MSMEs.  This scheme, a zero risk for the banks, will only nudge them to refinance—at full cost to the exchequer—the past loan losses of these small borrowers, and use the remaining portion of this scheme to casually, without examining any credit implications, build an asset portfolio of sub-standard companies. With full recourse to the sovereign and no collateral, the bill for payment defaults of most of these poor-quality borrowers will almost certainly have to be borne by the government.  It is not believed that all MSME borrowings could turn bad, but it could certainly be huge as kick starting the activities will not be expected to be that easy.

The remaining of the MSME rescue package focuses primarily on liquidity support initiatives to help troubled non-bank financial companies (NBFCs), who typically have large MSME portfolios. A partial credit guarantee scheme has been created to encourage banks to buy investment-grade debt paper of NBFCs, with the government taking a first loss of 20 percent. For this type of capital market solution to work, however, there would have to be an active secondary market for banks to trade this paper in order to manage their liquidity risk, which is currently absent. Another special liquidity scheme is also being launched to help NBFCs, housing companies, and mutual funds, but details on how this will be intermediated are yet to be revealed.

Other spending initiatives include capital funding for financially stressed companies. Equity funding is also planned to be made available to viable companies via an MSME fund of funds. The need for this equity line is unclear since tenable companies are generally able to lure private sources of equity on their own.

To conclude the loan guarantee program, which transfers the full liability of loan losses of eligible borrowers to the exchequer, however, appears ill-conceived at a time when the government is scrambling to contain the fiscal deficit. Structuring the program to cover the credit and performance risks of MSME loan portfolios of financial institutions through risk participation or risk sharing would have been a wiser choice for the government. With lenders having skin in the game, expected credit losses would be lower with funds being deployed more sensibly to save viable, restructured companies. The government could further optimize its risk-adjusted return and expand the target market of borrowers under this program by leveraging highly rated, third party sponsors, such as multilateral institutions, to share the credit risk.

For beleaguered lenders, the last mile challenge of any government-sponsored scheme lies in its implementation. Very clear and detailed rules on loan loss collections have to be worked out upfront, in the event borrowers default, and lenders want to exercise their right of recourse. If there are delays or denials because of red-tape, financial institutions will steer clear of any government credit enhancement scheme, and troubled MSME borrowers will have to look elsewhere for a solution.

Troubled times need desperate measures and the size of the relief package is justified, but with the unorganized environment Indian MSME businesses operate in, the roll out of the package would need a cautious approach to save from fiscal imbalances.

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Thanks & Best regards,

Knowledge Base team

GJM & Co.

Chartered Accountants

www.gjmco.in

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