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Pankaj Tyagi
| Updated: 05 Nov, 2020 | Category: MSME

An Overview of New Debt Facilities for Distressed MSME

New Debt Facilities for Distressed MSME

COVID 19 is nothing short of a catastrophe for the global economy. Nearly every organization across the globe has affected by this pandemic and MSMEs are not different here.  The Indian government had taken some proactive steps in this direction to help the small and medium-class enterprises in terms of financial backing by announcing New Debt Facilities for Distressed MSME.

On May 5, the honorable finance minister unveiled a string of initiatives for MSMEs under the Aatmanirbhar Bharat stimulus package that worth around a Rs 20,000 crore. The scheme named as “Distressed Assets Fund–Sub-ordinate Debt for MSMEs”. The said scheme aims to benefits more than 2 lakh MSMEs across the country. In this article, we will look into the new debt facilities for MSME.

Distressed MSME

Role of MSMEs during COVID-19 Pandemic

Micro and small scale companies are the backbone of the Indian economy. They address the demands of surging consumption by able to optimize production accordingly. It was MSMEs that responded to the downturn created due to COVID 19 and braced themselves after addressing themselves as an institution after MSME Registration to escalate the production of PPE kit and ventilators. 

Many MSMEs acts as intermediary manufacturing hubs for other industries that were under relentless pressure to meet the production demand.  

They often render logistic services to bigger organizations. But in the absence of required backing, most of the MSMEs are facing financial turbulence and seeking new debt facilities for MSME.

Role of Subordinated Debt

What is Subordinated Debt?

It comes under the category of the unsecured loans and it becomes payable only after when other loans are repaid. A company’s promoters may invest in the debt of the company. Therefore, his claim would be deemed as subordinate to banks’ claim. 

Escalating Non-Performing Assets in MSMEs

The government, in the past 2 months has revealed multiple incentives such as Atma Nirbhar Bharat[1] and easier credit stipulates for MSMEs, etc. However, it has been witnessed that many MSMEs were grappling to safeguard their existence under the poor economic conditions prevailing even before COVID 19 pandemic. 

Subordinated Debt for Promoters

It was realized by the Indian government the MSME’s promoters were struggling to meet the fiscal obligations. Loans availed by the company’s promoters, credit instruments, and interest payouts add to the hardship.

Read our article:Can Startups Benefit From MSME Registration For Better Govt Support?

What details does Distressed Assets Fund–Subordinated Debt for MSMEs involve? 

Following are the details appended by the Government into the scheme:-

Eligibility for the Scheme

The small and medium scale companies that were operational and come under the “stressed” category on or before 30/04/2020 are eligible to avail the benefit of the said scheme. 

Credit Guarantee Cover

The scheme envisions a total pool of twenty thousand crore rupees available for the disbursement to MSME’s promoters. The promoters of MSMEs are expected to obtain credit from banks intending to renders aid to the frazzled MSMEs. The scheme shall further render an assurance to the promoter for the loan availed. 

Credit limit related to the promoters

The MSME’s promoter under the scheme can obtain credit equivalent to fifteen percent of the total stake in the company. This limit will have a computation on equity as well as total debt held by the promoter. However, this is capped at a max limit of seventy lakhs. 

Accountability of the Promoters

The promoter’s role under this scheme is to inculcate the amount availed as a credit guarantee into the equity share in the company. This would help the company to improve its liquidity as well as the debt to equity ratio. 

Moratorium on the Debt

The scheme will offer a moratorium of 7 years applicable to the payment of the principal amount. Moreover, ten years of timeline would be given to the MSME for the repayment of the debt.

Other Beneficial Schemes Announced amid a Pandemic

Here are some additional schemes unveiled during the pandemic, those are as follows:-

Collateral Free Loan 

Under the purview of the COVID 19 pandemic, the Indian Government has announced the relief credit package for existing MSMEs for worth three lakh crore.  The main highlight of the scheme is that it provides collateral-free loans to credit seekers. The scheme prevails under the assurance of National Credit Guarantee Trustee Company Ltd through Emergency Line of Credit. The interest rate for MSMEs for availing a loan from bank and NBFCs has been capped at 9.25 and 14 percent respectively. 

The Moratorium for the Interest Payments 

For already obtained loans, the government has provided relief in interest payment applicable to all term loans availed by MSMEs. The businesses must deliberately evaluate their financial options as the interest component shall keep on compounding.  

Credit Scheme Benefits for Subordinated Debt for Promoters

  • It seems that the interest moratorium & credit guarantee may not impact the stress MSMEs as per the expectation. The banks are not keen to roll out further credit to the distress MSMEs. That is why Credit Guarantee for the Promoters’ Subordinated debt comes in handy. 
  • If promoters can plead commercial banks to avail of personal loans where the government can act as a guarantor. This will aid consolidates crucial capital to the company. 
  • The Liquidity further can use to address the back credit and obtain working capital for arranging logistics and meet existing orders. 

Conclusion

The new debt facilities for MSME renders financial aid without imposing any stringent obligations and the banks are acting as guarantor to avert repayment related issues. MSMEs are the backbone of the Indian economy and they need adequate financial backing from the government to safeguard their existence. The well established and bigger organization have ample fund to encounter tough times. But that’s not the case with MSMEs. They tend to eclipse very quickly under tremendous economic pressure. 

Read our article:What are the Key Benefits of an MSME/SSI Registration?

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Pankaj Tyagi

Pankaj has a diverse experience of writing research papers, blog, and articles during his college time. Earlier, he was working as a tax consultant in a financial firm, but his interest in writing drives him to pursue a career in the writing field.

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