CIA Seeks Clarification 'Distressed Assets Funds-Subordinate Debt for MSMEs' Scheme

The Indian government is currently taking major steps to uphold the MSME sector. It has lately launched various credit schemes to safeguard the MSME sector. The Consortium of Indian Associations (CIA), a forum comprising 30 associations across India, have come together for the Save MSME campaign over the government's recent launch of 'Distressed Assets Funds-Subordinate Debt for MSMEs', reported The Economic Times. 

Under this scheme, credit guarantee is rendered for sub-ordinate debts to 2 lakh MSMEs. As per the government, the scheme will uphold promoters for the operational MSME that are financially hit owing to the banking rules. 

Availing the Scheme 

Promoters of the MSMEs will be offered guarantee cover worth INR 20,000 crores. Through this cover, the promoters can take debt from the banks to further infuse money in their MSME as equity, thus, managing liquidity as well as debt-equity ratio. As per the scheme, 90 per cent guarantee coverage for this sub-debt will be given under the scheme while 10 per cent would come from concerned promoters, according to the cited media report.  

"If the Government's intention is to help stressed companies to become healthy, then it is important not to pump in further money into companies that are beyond recovery, even if they are stressed now," KE Raghunathan, the Convenor and Spokesperson of CIA, said in the official statement 

"The better format would be to segregate the stressed firms to declare voluntarily into a company that wants to end and a company that wants to continue," Raghunathan told. 

Raghunathan further added that if a company wants to end, it is better to give them a one-time settlement (OTS) and give them clean chit to restart and that OTS can be repayment of principal outstanding as on March 1, 2020, waiving all interest, penal interest and litigation costs. By this way, the government will collect more inflow of funds and that can be used to nurture companies that need support.

"For those companies which are sick, stressed and NPA as on March 1, 2020, but having hope to revive, the bank can ask for a proposal for revival and clear them in full – which might include – restructuring of existing loans, support to increase additional equity and borrowing power, waiver of penal interests. So, what we nurture is helpful. An ICU patient can be recovered only when we address all organs which need treatment and just one partial solution alone. We might end up spending on unrecoverable infusion and that might not derive any help to anyone," Raghunathan said in its official statement.

In the official statement, CIA has asked for a series of clarifications from the government in relation to the scheme that included eligibility and selection process. While also underlining that the biggest concern was whether the additional capital invested into the company would be utilised by banks towards regularisation of their stressed account.

"The scheme says it is eligible for all applicable NPAs as on April, 30, 2020. However, as per RBI statement, 90-day NPA norm will not include the 90-day period of moratorium granted in the monetary policy of March 27 (i.e from March 1, 2020 to May 31, 2020). So if there is no likelihood of any company falling as NPA after 1st March why not then keep cut off as 1st March 2020 itself?" the statement questioned.

The central government has to clarify these questions yet and also, streamline the credit guarantee scheme launched in the last few months.