With the Insolvency and Bankruptcy Code (IBC) catering for bigger companies rather than micro enterprises the ministry of corporate affairs (MCA) is doing well to focus on finding solutions for very small businessmen.
With the Insolvency and Bankruptcy Code (IBC) catering for bigger companies rather than micro enterprises the ministry of corporate affairs (MCA) is doing well to focus on finding solutions for very small businessmen. Media reports say the government is working on a relief package for very small borrowers, essentially small farmers, businesspeople, traders or artisans. These would be individuals with an annual income of less than `60,000 and who owe lenders up to `35,000 each. Essentially, the government is understood to be planning a loan waiver package for these borrowers.
There is no doubt that this community has suffered badly over the past few years with the economy turning distinctly sluggish; the distress in the farm sector, for example, is well documented. At a time when a very large number of promoters of big corporate houses have each defaulted on loans of `30,000-40,000 crore or much more, a sum of `20,000 crore being spent on ten million underprivileged people—assuming an average loan size of `20,000—would appear insignificant. Indeed, viewed from the perspective of the government’s annual expenditure of over `20 lakh crore, `20,000 crore is a tiny fraction. Also, in the current context, where promoters of large companies appear to have no qualms in defaulting, it would seem churlish or even callous not to come to the rescue of an individual whose monthly earnings are `5,000 or less. From that perspective, the MCA is right in attempting to find a solution for them. MCA secretary Srinivas Injeti’s point that the IBC does not provide any special dispensation for small borrowers and that the personal involvency chapter may need some amendments is well taken. These underprivileged cannot be subjected to the same rigours as corporate borrowers, apart from the fact that they cannot afford the long-drawn procedures involved in the IBC process; indeed, hiring lawyers and Resoultion Professionals may not even be worth it for the banks given the small size of loans.
However, waiving their loans altogether might not be the best way to help these borrowers because it vitiates the environment and ruins the credit culture. While the government will compensate the banks for loans taken by these small borrowers, given they borrow so much from NBFCs, if this loan waiver encourages them to default on the NBFC loans, this will end up choking off future loans. Instead, the government should, through various agencies, work with the small enterprises/individuals to help boost demand, which is their biggest problem area. Under a scheme planned some years ago, between the central government ministries and PSUs, a fifth of all purchases had to be made from MSMEs; that alone implies annual purchases of around `120,000-130,000 crore, but what is being achieved is a small fraction of that. Similarly, popularising trading of receivables will boost credit flows; and, despite all these years of industrial estates, both land and other infrastructure costs like electricity remain prohibitively expensive, as are labour costs. Given the size of the loans being considered for waivers, what is being discussed is a small one-time benefit; what is needed is a longer-term solution.