Ten days after the Centre's Rs 3 lakh crore revival package, MSMEs continue to live in a finance-friendless world.
Until last week, it was only a matter of time before rescue arrived. When it finally did come, the wait got longer, both due to departmental delays and bankers' reluctance.
Unlike big businesses that hit headlines arm-twisting governments for handouts citing job losses and systemic failures, this is a segment that strives to pay the piper.
For them, the fear of a default cuts like a knife as it snaps whatever negligible institutional credit line they have for good.
This story is about our capital-starved MSMEs, who sometimes are loved by the government, but mostly unloved by the banking system. Or so it appears.
Often, successive governments are seen as cherishing MSMEs, perhaps because they make for a fantastic metric. They are humongous in size (6.3 crore and counting), are among the biggest employers engaging 11 crore, add 30 per cent to nominal GDP, 45 per cent to manufacturing output and 48 per cent to merchandise exports.
Yet, MSMEs are currently living on the breadline with banks literally folding the tent on borrowers, whose payments are behind schedule as unpaid dues pile up and economic activity ran aground due to the lockdown.
Finance Minister Nirmala Sitharaman may have announced relief measures amid drumbeats, but her package apparently hasn't reached bank branches yet.
So existing borrowers are being turned at the door, with some getting ridiculed for making enquiries about non-existing schemes (read the Rs 3 lakh crore credit guarantee plan), while requests for working capital loans to cover rentals and employee salaries aren't being evenly entertained.
Meet Jayarammu Mayanna, who runs a physical vapour disposition coatings business in Peenya, North Bangalore. Mayanna's humble enterprise employs 12 and his loan request drew a blank as the bank manager was blissfully unaware of the COVID-relief package.
Similarly, Hyderabad-based Satish (name changed), who makes and supplies equipment for mining and manufacturing companies, was left dumbfounded when his banker broke the bad news that there were no fresh guidelines to offer collateral-free credit.
“I am currently making rounds at various banks and have not achieved anything so far,” explained Mayanna, who also is a member of Peenya Industries Association and Karnataka Small Scale Industries Association.
Did MSMEs hear it all wrong? Definitely not.
The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme, a government-Sidbi joint effort offering collateral-free loans made its debut in early 2000 and since then several versions have been in operation.
Last week's announcement simply involved an additional funding of up to Rs 3 lakh crore at a concessional interest rate of 9.25 per cent. While the Cabinet has duly approved the proposal, it needs to reach Sidbi first, which then notifies the scheme and intimates banks.
As on Saturday, no such circular was put out in the public domain, which partly explains the bankers' dismissals.
This isn't the only problem troubling MSMEs. Existing borrowers are finding it difficult to raise credit to cover operational expenses.
Dibyendu Roy, CEO, Pristine Plants (India) Pvt Ltd is one such worried man. His attempts to meet overhead costs, wages for 80-odd workers and raw materials costs to service urgent export orders from his factory in Faridabad industrial area, Haryana ran into a brick wall.
“My bankers include ICICI Bank and State Bank of India. The first says they haven’t received any notifications as yet, but will give me the credit when they get. SBI is so bureaucratic that I have no expectations of getting any urgent lines of credit from them during the lockdown,” Roy said with a wry smile.
Making matters worse for him, a letter of credit for export of machinery to Ethiopia issued on March, 11 to ICICI Bank wasn't communicated till May 19, just a day after it expired! For now, he's scraping through with help from friends and long-term credit from suppliers.
For others like S Selvam trouble began a year ago. Selvam owns an auto component manufacturing unit in Chennai, which took a severe knock as the auto industry transitioned from BS-IV engines to BS-VI. All it needed was a spark to light the fire, which COVID-19 did, blowing even little chances of survival.
He shut the business, but vowed to pay staff wages. There were sundry bills like electricity and other expenses to pick up, so he sought a Rs 50 lakh bank loan. "Getting a loan isn't easy for smaller units like us. After heaps of paperwork, the bank concluded my account as stressed, and refused the loan. For the last two months, we had no business depleting the entire repayment capacity," he rued.
Similarly, Arpan Goenka, a Kolkata-based jeweller has been scouting for capital for two years on a trot. "Despite a GST-registered MSME, banks aren't lending. We've reached out to the Ministry of MSME (via CII) and even Sidbi, but there's no response. Schemes are available, but banks don't want to deliver," he concluded, anguish audible in his voice.
All MSMEs need is working capital right now, and term loans, later.
Term loans are investments taken for expansion or purchasing new machinery. Typically, they are higher sums and are paid off during a longer period say one to ten years.
Working capital loans cover immediate cash needs for daily expenses, monthly rents, staff salaries and utility bills. Taken out as an overdraft or cash credit (both have different interest rates, end-use and collateral requirements), these are short-term liquid loans with less than 12 months' tenure. They are relatively easy to get without much paperwork, but at steep interest rates.
These are small-ticket loans, but worryingly, they have become a sacred cow and inaccessible to the needy.
The total addressable credit demand of MSMEs is estimated at Rs 37 lakh crore, of which formal sources of finance stood at Rs 17.4 lakh crore as on March, 2019. About 90 per cent of this was from scheduled commercial banks, while NBFCs accounted for the rest.
It means, the overall credit gap shortfall for the MSME sector stood at roughly Rs 20 lakh crore.
Precisely to fix this, the government intervened with some sincere attempts.
Last August, banks were incentivised to lend to MSMEs through NBFCs. All bank loans (up to Rs 20 lakh per borrower lent via NBFCs) qualify for Priority Sector Lending, where loans come with an all-inclusive interest not exceeding the bank's base rate plus 8 per cent per annum for banks and 12 per cent for NBFCs.
There were Mudra loans, PSB loans in 59 minutes and several others. Walking an extra mile last October, the RBI allowed external benchmark rates to micro and small entrepreneurs to ensure faster monetary policy transmission. This was further extended to medium enterprises in April.
Most recently, the government even launched a Champions website with three objectives, one of which includes helping MSMEs with finance. Moments after its launch, interested customers ran into technical glitches. Companies claim most government attempts remain effective only in theory.
"Even though the central government announced 20 per cent extra working capital for MSMes to be disbursed immediately, banks aren't playing ball. Especially those that are on the verge of being classified as NPAs are being driven away. Our members believe, banks introduced a grading system of their own and are preferring those with good financial health over others, which just defeats the purpose of saving the sector,” said Srinivas Asranna, President Peenya Industries Association that speaks for 10,000 MSMEs in Karnataka.
According to Satish in Hyderabad, MSMEs expected direct cash transfer as business came to a standstill in the last two months. "Still, we paid PF contribution as local authorities didn't receive any guidelines and non-payment would make us a defaulter. There were no electricity bills, but we were asked to pay last year's amount even though the unit was shut," he explained.
The company employs around 30 and to honor staff salaries besides other payments, he sought additional capital on top of the Rs 1.5 crore fully secured loan, but was denied a collateral-free fund last week.
Why are banks reluctant to lend?
Banks believe, the risk is high due to MSMEs' inability and unwillingness to pay. The former is due to delayed buyer payments embedded in supply chains or government utilities and also other business risks like changes in consumer demand or extraneous events like an economic slowdown.
MSMEs often have little to no equity buffers, risk mitigation mechanisms and expected losses on loans aren't rationally priced. This explains why only 25 per cent of MSME priority sector lending targets are met by banks.
Banks unwillingness to lend is also to avoid ever-greening of loans, a practice widely seen until recently, where existing borrowers are given additional credit to avoid a loan from going sour.
Managers are also averse as it could trigger an internal staff accountability exercise followed by a concomitant fear of investigative agencies later. Above all, there's no visibility of future viability with cash flows remaining uncertain due to demand slump and an ensuing recession.
Credit rating alleviates the information asymmetry and allows risk-based pricing, but previous such attempts were unsuccessful. In the past, the Ministry of MSME subsidised the cost of ratings for MSMEs, but the scheme has since been discontinued. Getting a rating of their own is expensive for MSMEs and because most of them have weak capital structures, it results in poor ratings. Lastly, due to their small-scale operations, they cannot raise risk capital and go big.
So what's the way out?
Ironic, but many MSMEs can potentially get by if pending dues are cleared.
Take Pridhvi Reddy, whose company completed 80 per cent of the work on MSME Park in Bhogapuram, Andhra Pradesh two years ago, but the sanctioned amount of nearly Rs 30 lakh is pending for a year. Simply releasing these funds will help Reddy resume the rest of the work without knocking on the banks' doors.
Incidentally, an RBI survey in December 2019 showed that 44 per cent of MSMEs engaged in manufacturing involving basic metal and metal products, engineering, construction and infrastructure-related industries faced payment delays.
Services sector was slightly better off with only 27 per cent companies staring at unpaid dues. These delays increase operating cycle expenses and reduce their ability to procure new orders or fulfill existing ones.
A whopping Rs 5 lakh crore is pending with central and state governments, public and private enterprises. Needless to say, if the amount is released with urgency, the Rs 3 lakh crore additional credit guarantee might as be dead on arrival.
In any case, the scheme doesn't seem to be a crowd-favourite. In FY19, approved guarantees stood at a mere Rs 30,168 crore, which -- hold your breath -- was the highest-ever recorded since its inception in 2000.
It's no denying that payment delays cause irreparable harm to both MSMEs and banks. A recent central bank study on 100 NPA cases revealed that stress due to delayed receivables, inventory and liquidity accounted for a staggering 41 per cent.
Sensing the underlying trouble, RBI announced a one-time restructuring scheme without an asset classification downgrade (first permitted to GST-registered MSMEs in 2019) and extended to all standard accounts but in default as on January 1, 2020. The restructuring has to be implemented latest by December 31, 2020.
As on March, six lakh accounts were restructured involving Rs 22,650 crore and MSME Minister Nitin Gadkari expects 25 lakh MSME loan accounts to undergo restructuring by December -- a staggering 300 per cent increase over March.
That said, RBI remained mum on the 180-day NPA recognition norms so far. Such a regulatory relaxation will help deal with stressed building up in the banking system after the government announced a suspension of insolvency proceedings for a year.
(Additional reporting by Binita Jaiswal in Chennai)