Centre must do more to lift stress on MSMEs

Background:-

• As pandemic wreaks havoc across small businesses, representatives of the MSME sector have reached out to the government, seeking definite words of assurance on their key challenges.
• Due to the severe second wave of COVID-19, the micro, small and medium enterprises (MSMEs) have not been able to revive their economic activities and they are in urgent need of support from the lenders.
• The industry body urged the RBI to allow restructuring of certain MSMEs loans that already have got the similar relief under the same scheme during the first wave of COVID-19, but are now facing challenges.
• So In February last year, the Reserve Bank had permitted one-time restructuring of existing MSME advances, classified as ‘standard’ without downgrade in the asset classification subject to certain additional provisioning and other compliances.
• The restructuring under the proposed framework may be invoked up to September 30 and shall have to be implemented within 90 days after invocation. lending institutions are being permitted as a one time measure to review the working capital sanction limits of SMEs and MSMEs restructured earlier.

Linkages :-

To reduce the stress on small businesses and the MSME sector amid the unprecedented Covid surge gripping the nation, RBI Governor has announced a set of measures targeted at offering relief for such cash starved enterprises.

• For enhancing credit to MSME entrepreneurs, RBI mentioned that in Feb 2021, the scheduled commercial banks could deduct credit disbursed for new MSME borrowers from their Net Demand and Time Liabilities (NDTL) for calculation of CRR.
• To further incentivize inclusion of unbanked MSMEs into the banking system, this exemption which is currently available for exposures of up to Rs 25 lakh and for credit disbursed up to fortnight ending Oct 1, 2021 is being extended till Dec 31, 2021.
• Some other set of measures related to resolution of Covid related stressed assets of individuals, small businesses and MSMEs include the following: –
• Several policy steps to offset the economic impact of the second Covid-19 wave on MSMEs and small businesses.
• Small businesses and MSMEs having aggregate exposure of up to Rs 25 crore, and who have not availed restructuring under any of the earlier restructuring frameworks (including under the Resolution Framework 1.0 dated August 6, 2020), and who were classified as ‘standard’ as on March 31, 2021, will be eligible to be considered under Resolution Framework 2.0.

Current situation :-

• RBI Governor Shaktikanta Das said the measures proposed are part of the first round of calibrated and comprehensive strategy against the pandemic.
• As part of the measures, the RBI eased lending and restructuring norms for all stakeholders, especially those smaller businesses and MSMEs that have been impacted by the second wave.
• Priority lending facilities have also been announced for vaccine manufacturers and firms engaged in providing key medical supplies to hospitals during the pandemic.
• The RBI has also proposed an extension of a measure for incentivizing the flow of credit to MSMEs borrowers. The measure was first announced in February 2021 and it allowed Scheduled Commercial Banks (SCBs) to deduct credit disbursed to new MSME borrowers from their net demand and time liabilities (NDTL) for calculation of cash reserve ratio (CRR).
• In order to further incentivise the inclusion of unbanked MSMEs into the banking system, this exemption currently available for exposures up to Rs 25 lakh and for credit disbursed up to the fortnight ending October 1, 2021 is being extended till December 31, 2021.
• The RBI has also allowed lending institutions to extend the restructuring window for borrowers who have already availed modification of their loans under the Resolution 1.0 framework.
• In respect of individual borrowers and small businesses who have availed restructuring of their loans under Resolution Framework 1.0, where the resolution plan permitted moratorium of less than two years, lending institutions are being permitted to use this window to modify such plans to the extent of increasing the period of moratorium and/or extending the residual tenor up to a total of 2 years.

Impact:-

• The MSME sector is the backbone for high growth businesses, and with the initiative taken by RBI, has an effective impact in the area of indigenization.
• The MSMEs have a vast network of more than six crore enterprises contributing 30 per cent to the nominal GDP and around 48 per cent to exports, therefore the sector contributed 29% to overall GDP.
• Representing more than 70% of global employment and 30% of GDP, they cannot be ignored, Unfortunately, small businesses are being hit hardest by the fall-out of the pandemic. The Solutions are needed to give them the support they need to survive and continue to contribute to the global economy.
• MSMEs in India are in recovery mode as several initiatives by the Centre supported by Reserve Bank of India (RBI) are helping them weather the adverse impact caused by the Covid-19,
• To address the stress and open new opportunities in the MSME sector, the ECLGS and CGSSD introduced by the government were supported by various monetary and regulatory measures by the Reserve Bank of India in the form of interest rate cuts, higher structural and durable liquidity, moratorium on debt servicing, asset classification standstill, loan restructuring package and CRR exemptions on credit disbursed to new MSME borrowers.
• The measures will ensure that the liquidity for them will not stop as being PSL will incentivize banks to lend to them at lower rates; effectively cutting their cost of lending too,
• The possible impact on the MSME sector of the announcements is difficult to be assessed at the moment as the Covid-19 situation remains precarious.

Content contributed by – Vaishnavi Dahivalikar