A call to preserve the “value” of MSMEs at all costs


Swaminathan Gurumurthy, Board Member of the Reserve Bank of India, is an original thinker who follows the ‘third way’ proposed by Deendayal Upadhyaya and trade union leader Dattopant Thengdi when it comes to financial and economic matters .

Recently he wrote on how lenders should prevent illiquidity from leading to business insolvency, especially in the MSME sector.

From a banker’s perspective, there is no better way to summarize what lenders should be doing under current conditions for borrowers.

The principal objective

Even though new investments and new units are to be supported, the main focus should now be on the protection of already functioning units, as the negative demonstration effect of MSME collapse will be disastrous.

Gurmurthy’s construction takes on all its relevance here. If bankers can internalize this spirit and implement government and RBI programs for MSMEs – tailoring / personalizing them appropriately – MSMEs can withstand the impact of Covid.

As one of the few full-service regulators in the world, RBI Governor Shaktikanta has been admirably proactive since January 2019 in supporting all MSME units facing financial difficulties through a restructuring plan ( without this leading to the degradation of the asset as is the norm).

After discussions at the board level on November 18, 2018, the first of these instructions was issued on January 1, 2019, valid until March 2020.


The special provision encouraging banks to offer restructuring to all eligible units was extended shortly after the Covid-induced foreclosure in April 2020, and now following the impact of the second wave, still until September 30, as part of the Covid2.0 resolution.

Coupled with the government’s Modi emergency line of credit guarantee program, which went from ₹ 3-lakh crore to ₹ 4.5-lakh crore last week, the attempt is to ensure that the money is available for everyone. eligible units.

The RBI has also supported banks’ liquidity needs by donating three-year money as part of its long-term repo operations. Therefore, the average daily liquidity in the system is ₹ 4 lakh crore.

Enough cheap money for everyone, with the government stepping in to guarantee loans, the regulator allowing liberal debt restructuring – banks cannot ask for more to support MSMEs and negotiate their cash flow problems.

What needs to be done?

So what are the practical steps to be taken by banks? The following could be a 10 point model for this process. 1) Considering that the only condition posed by RBI is that the maximum moratorium within the framework of the restructuring does not exceed 2 years, a liberal restructuring plan must be implemented without delay.

2) The main skill required will be the ability to answer the question of the intrinsic viability of the business and whether, with support, the business will survive.

3) While every effort is worth making to keep the business afloat, in the very rare cases where the borrower is considered unable to continue in business even with additional support, it is best to take the early decision not to support. One of the fundamentals of credit is that a ‘no’ today is often better than a ‘yes’ five / six months later.

4) The RBI has indicated that the restructuring process should be implemented and completed within 90 days of the borrower’s request.

5) The usual restructuring toolkit such as converting eroded working capital loan to working capital term loan, converting unpaid interest to funded interest term loan, rescheduling payment unpaid term loan, additional need-based working capital loans, a term loan to deal with further cash losses for one year and a reduction in interest rates, as well as a moratorium on all repayments, should be extended to all who need this help.

4) It may be necessary to organize crash courses for loan officers, as the average ticket size for loans requiring overhaul will be small and there will be knowledge / skills gaps at these levels. Terms like WCTL / FITL / Dimunition in Fair Value (a key factor in restructuring) and Remuneration Law may be foreign to many officials.

5) There is a need to advertise and publicize this restructuring facility. Many borrowers, and sometimes branch managers, may not be aware of the program, its scope and purpose.

6) Chartered accountants will need to hold hands to prepare reasonable projections so that these units do not end up in another dead end again. More often than not, banks do not receive the detailed work necessary to make restructuring proposals.

7) Often it is found that keeping the process date is not appropriate. Borrowers should also be aware of their rights in accordance with the instructions of the RBI.

8) The RBI directed that “an electronic ledger / record should be kept by the bank in which the date of receipt, sanction / rejection / disbursement with the reasons therefor, etc. should be recorded. Banks must acknowledge receipt of loan applications received for loans from priority sectors ”. This will also apply to all restructuring requests.

9) It may be appropriate to incorporate the penalty provision of a “cash flow mismatch stand-by credit facility” (with appropriate margin clauses) as part of all new loans to the home. both for working capital and term loans initially themselves – similar to a Debt Service Reserve proxy – as more often than not, after a loan account has started showing signs of stress, no agent does not want to recommend / sanction additional funding for fear of being held up in accountability studies later.

10) The reduction of any credit facility, whether new or for rephasing, should only be done with the approval of the next higher authority of the banks.

These 10 points could form the basis of a genuine and sincere approach to supporting MSMEs.

MSMEs represent the best of entrepreneurship and are our Swadeshi start-ups. Indeed, the Union government has been successful in now including retail and wholesale trade in MSMEs for priority sector loans. An Indian government decree in 2017 excluded MSME trade.

Clearly, a liquidity problem is currently disrupting most MSME units. We owe it to our next generation to adapt our collective approach to preserving the value and not negating the value of these entrepreneurs. It should be remembered that today’s MRF started as a toy balloon manufacturing unit in 1946. This is the promise and perspective of MSMEs.

(The author is the chief managing director of a large public sector bank)


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