Temporary working capital

RBI loan moratorium does little to help MSMEs as recovery in repayment activity remains weak, experts say

The RBI last year cleared a debt restructuring program for stressed MSMEs, which were in default but “ standard ” from January 1, 2020 to March 31, 2021.

Credit and financing for MSMEs: The six-month moratorium (March-August 2020) on term loans announced by the Reserve Bank of India helped MSMEs briefly survive Covid amidst income disruption, but the reprieve did not responded to their concerns about a recovery in a context of falling demand. Struggling with the second wave of Covid, MSMEs are hoping for better management of working capital and a longer period to stay afloat. However, banks and credit rating agencies had suggested to the RBI last year that extending the moratorium period would risk increasing non-performing assets in the ecosystem.

“At least 30 percent of MSMEs had taken advantage of the moratorium. However, companies still do not have the money to pay off the debt. The moratorium was the oxygen mask for survival, not the improvement of MSMEs. This only delayed the suffering, as MSMEs still have to pay the amount with the interest charge. The mask was removed in August by RBI without being sure of the situation at Covid, ”KE Raghunathan, head and spokesperson for the Consortium of Indian Associations (CIA) told Financial Express Online. The MSME body, the CIA, represents over 30 trade associations in India.

The former chairman of the Bengaluru-based Federation of Karnataka Chambers of Commerce and Industry and chairman of diesel generator and pump maker DPK Engineers S Sampathraman is calling for another moratorium amid falling demand. “We took advantage of the moratorium because cash flow was affected. The loans we took have helped us address our fixed overhead costs, not improve the business. The problem is on the demand side. Until demand improves, businesses will not be able to improve in the current situation. For the loan repayment, I don’t have enough money because there are no buyers at the moment. There must be an additional flow of government loans without any conditions unlike ECLGS. Another cycle of moratorium is needed because there is no money to repay. It’s an absolute necessity, ”Sampathraman told Financial Express Online.

Raghunathan urged the government and the RBI to immediately roll out MSME-focused stimulus measures to stop their current situation from declining in the middle of wave two. While the impact of existing lockdown restrictions would be determined in the near future, the impact of Covid and the lockdown following last year on MSMEs in terms of the number of units closed was also not certain. According to the Minister of MSME, Nitin Gadkari, while the MSME sector has suffered from the impact of Covid, “however, as MSMEs are present in the formal and informal sector, the data regarding the temporary or permanent closure of the units does not are not kept by the Indian government at the Ministry of Micro, Small and Medium Enterprises (MSME). The minister said in a written response to a question in the Rajya Sabha earlier this year. However, according to a study conducted by the Khadi and Village Industries Commission (KVIC) to assess the impact of the pandemic on micro-units set up under the Prime Minister’s Job Creation Program (PMEGP), 88% of PMEGP beneficiaries indicated that they were negatively affected.

Also Read: Textile MSMEs See Uncertainty In Future Production Capacity After Return To Close To Pre-Covid Levels

“If the current Covid situation continues for the next 30 days, at least 45% of MSMEs will be dead. Already 30% of MSMEs are closed due to the first wave in the country. Last year, the government operated on MSMEs without any sedation. This time before the lockdown, there should be a sedation of the moratorium, capital support to MSMEs that have lost income, postponement of all payments such as GST, PF, ESI, etc., by six months so that all the money available to MSMEs can be used for this purpose. emergency, ”said Raghunathan.

Lenders are also monitoring the impact of Covid 2.0 on MSMEs to determine the subsequent stress they are likely to witness in the segment. “Real stress would only be measured by payment behavior. The current behavior does not really reflect what MSMEs are actually going through. The second wave brings totally unexpected disruption to MSMEs. While MSMEs were not yet fully recovered after the moratorium during the first wave storm, they are now facing a tornado, ”said Arup Kumar, Managing Director of SIDBI at Financial Express Online.

Last year, the RBI authorized a debt restructuring program for stressed MSMEs, which were in default but “standard” from January 1, 2020 to March 31, 2021. According to a report by PTI, the representative body of the NBFCs in Indian Financial Industry The Development Board has asked RBI to extend the one-time restructuring program for MSMEs until March 31, 2022, as these companies have not been able to restart their activities.

“When the moratorium was proposed, there was no MSME activity. For MSMEs to reimburse, their operations were necessary, which was not there. The government had proposed the ECLGS and the restructuring program which had taken care of the stress that existed. However, now with the second wave, it is difficult to determine the level of impact on banks and other lenders. But the moratorium has destroyed the credit culture because it affects the discipline of payment. It allows non-payments, ”Kumar said.

In July last year, Financial Express reported that HDFC chairman Deepak Parekh urged the RBI to avoid extending the moratorium on loan repayments beyond August 2020 because borrowers who could repay their loans deferred payments. “Please do not extend the moratorium because we see that even people who have the capacity to pay – whether individuals or businesses – are taking advantage of this moratorium and postponing payment … They say there will be another extension. three months. It will hurt us, and especially the small NBFCs, ”Parekh said at the CII industry body board meeting.

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