Credit and Finance for MSMEs: The Modi government’s Rs 20,000-crore Credit Guarantee Scheme for Subordinate Debt (CGSSD), which was launched on June 24, last year for restructuring of Covid-hit MSMEs as part of the government’s Atmanirbhar package, has been further extended by the government. The Ministry of MSME in a statement on Monday announced another six-month extension to the scheme from September 30, 2021, till March 31, 2022. The scheme was supposed to be operational till March-end this year, however, “On the basis of the requests received from the stakeholders of the scheme,” the government said it has given another extension.
For the uninitiated, the scheme’s purpose was to provide guarantee coverage for CGSSD to offer subordinate debt support with respect to the restructuring of stressed MSMEs viz. Special Mention Account (SMA)-2 and non-performing asset (NPA) accounts as of April 30, 2020. While 90 per cent guarantee coverage cover comes from the scheme, the remaining 10 per cent is contributed by the promoter.
SMAs signal incipient stress in the business that leads to defaults in debt servicing. While SMA-0 are accounts with payments partially or wholly overdue for 1-30 days, SMA-1 and SMA-2 accounts have payments overdue for 31-60 days and 61-90 days respectively.
The latest data on the number of guarantees and the amount involved is undisclosed by the government, but former MSME Minister Nitin Gadkari had informed Parliament in March this year that only 343 guarantees amounting to Rs 40.56 crore were issued as of March 10, 2021, since the scheme’s launch. The scheme had targeted to support 2 lakh Covid-hit MSMEs that are stressed and NPA accounts as of April 30, 2020.
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Even as the government reasoned stakeholder interest for extending the scheme, experts had explained why there was a poor uptake of the scheme among MSMEs.
“As the government had simultaneously come up with ECLGS, instead of going for restructuring in order to apply for the subordinate debt scheme, people (MSMEs) opted for ECLGS as that was giving ready credit to remain afloat for the next two to three years and also an option for those who availed ECLGS to go for restructuring too. In banking parlance, once you go for restructuring, you are treated as a stressed account. You are tagged that you are restructured whereas ECLGS doesn’t give you that tag for taking additional funding to cater to Covid-related stress,” Sunil Mehta, Chief Executive Officer, Indian Banks’ Association had told Financial Express Online.
Noida-based Vishwa Nath who runs Nath Bros Exim International for garment manufacturing and supplying of textile goods told Financial Express Online that, “Particularly micro units are not interested in restructuring as most of them are run by nuclear families or a group few people and they want to ensure the succession of the business ahead. Restructuring is not easy for small businesses even though they are giving you money. There are not many who seems interested in this and would rather want to borrow credit from other sources instead of undergoing restructuring if they want to benefit from this scheme.”
According to the scheme’s guidelines, the subordinate debt scheme enables personal loans through banks for stressed MSMEs for infusion as equity or quasi equity in the business eligible for restructuring, as per the guidelines of the Reserve Bank of India (RBI) for restructuring of stressed MSMEs. Subordinate debt is also known as subordinated debenture or junior securities, a type of unsecured loan or bond that ranks below other senior loans or securities in terms of claims on assets or earnings.
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The contribution of 10 per cent subordinate debt as collateral required to be brought by the promoter was also one of the reasons for the extent to which MSMEs had taken interest in the scheme till March this year.
“There was, in fact, not much need for this scheme. If an MSME is already in financial distress, how will the promoter manage even that 10 per cent. Why would an MSME go for restructuring to take a loan under this scheme? If you don’t want an additional loan and there is no need to increase equity, there is no strong reason for MSMEs to consider the scheme. Also, banks are not very forthcoming to give loans to stressed accounts,” Anil Bhardwaj, Secretary General, Federation of Indian Micro and Small & Medium Enterprises (FISME) had told Financial Express Online.