Our detailed write-ups on these frameworks may be referred here:
Our detailed write-ups on these frameworks may be referred here:
-Kanakprabha Jethani and Anita Baid (email@example.com)
On June 26, 2020, the Ministry of Micro, Small and Medium Enterprises (MoM) released a notification changing the definition of MSMEs and introducing a new process for MSME registration. The notification also stated that the existing MSME registrations (i.e. Udyog Aadhaar Number (UAN) or Enterprise Memorandum (EM)) shall be invalid after March 31, 2021. While the enterprises have to obtain Udyam Registration, the RBI has also made it mandatory for the lenders to ensure that their MSME borrowers have obtained the registration. The RBI through its notification dated August 21, 2020, has provided certain clarifications on its existing guidelines and stated clearly the things to be taken care of by the lenders. The following write-up intends to provide an understanding of the said clarifications and analyze them at the same time.
Under the existing framework for MSME registration, MSME borrowers had an option to provide either their Udyog Aadhaar Number (UAN), Entrepreneurs Memorandum (EM) or a proof of investment in plant and machinery or equipment being within the limits provided in the erstwhile definition along with a self-declaration of being eligible to be classified as an MSME. However, since the MoM notification stated that the UAN or EM shall be valid only till March 31, 2021, the MSMEs will have to compulsorily get registered under the Udyam portal, as per the revised definition. Hence, the lenders shall before March 31, 2021, obtain Udyam Registration proof from their existing as well as new borrowers.
In case of loans whose tenure shall end before March 31, 2021, the above requirement may not be relevant i.e. to obtain Udyam Registration since the existing registration submitted earlier by the borrowers shall be valid till the expiry of the loan tenure.
Pursuant aforesaid notifications, it seems that from March 31, 2021, Udyam Registration shall be the only valid proof for an entity to be recognized as an MSME. In such a case, it is pertinent to note that a notification issued by Ministry of MSMEs on July 17, 2020, which provides a list of activities that are not covered under Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) for Udyam Registration. The list of activities is as follows:
A major section of Indian business in small or micro businesses involved in trading activities. Will keeping them outside the coverage of registration mean they don’t get benefits as that of registered MSMEs?
Let us understand the same by analysing the provisions of various schemes introduced by the Government.
The notification of Ministry of MSME dated January 10, 2017 provides that every micro, small and medium engaged in the manufacturing of goods or rendering of services with total investment in plant and machinery below the limit specified in section 7 of the said Act, shall file the memorandum. This makes it evident that the requirement for registration is mandatory for all MSMEs defined under section 7 of the MSMED Act.
However, various schemes introduced for MSMEs either refer to the definition of MSMEs provided in the MSMED Act or make reference to the limits specified under the MSMED Act or specifically include certain categories of entities under its scope. Let us look at some of these schemes that are extending benefits to MSMEs and their eligibility criteria.
Bank loans to MSMEs, for both manufacturing and service sectors, are eligible to be classified under the priority sector as per the norms provided by the RBI.
Till 2009, there was a separate category for retail trade which included retail traders/private retail traders dealing in essential commodities (fair price shops), and consumer co-operative stores. The same was included in the category of MSEs later through a notification issued by the RBI.
However, from 2013 onward, for MSE lending, the reference was made to the MSMED Act for the investment limits in case of manufacturing and service sector.
However, the PSL Directions refer to the investment limits for determining the MSME classification and there was no explicit requirement to have UAN/URN. For the purpose of classification under PSL, it is implicit that the definition of MSME should come from the MSMED Act.
Post the amended definition of MSME and the procedure for filing the memorandum under the Udyam Registration, it seems that registration as an MSME shall be a necessity and accordingly be considered as a pre-requisite by lenders.
The ‘Interest Subvention Scheme for Incremental Credit to MSMEs, 2018’ was notified to Scheduled Commercial Banks and NBFCs which specifically required the MSMEs to be registered for being eligible under the scheme. The guidelines were further modified by SIDBI in December 2019 and notified by RBI in February 2020, wherein the requirement of Udyog Aadhaar Number (UAN) was dispensed with for units registered for Goods and Service Tax (GST).
Further, enterprises that are not registered under GSTN were allowed to either submit Income Tax Permanent Account Number (PAN) or their loan account should be categorised as MSME by the concerned bank. Trading activities without UAN were also allowed to avail the benefit under this scheme. Therefore, for the purpose of this scheme, the registration under the MSMED Act is not mandatory.
Consequently, enterprises engaged in trading activities can also avail the benefit of this scheme.
RBI vide its notification dated February 07, 2018, provided relief for MSME borrowers registered under Goods and Services Tax (GST), to support these entities in their transition to a formalised business environment.
In furtherance to the aforesaid notification, the notification dated June 6, 2018 extended the scope to all MSMEs, including those not registered under GST, as a standard asset.
By virtue of another notification dated January 1, 2019, RBI permitted a one-time restructuring of existing loans to MSMEs classified as ‘standard’ without a downgrade in the asset classification. This was further extended vide notification dated February 11, 2020 and August 6, 2020. The extension notifications make reference to the initial January 2019 notification for the detailed instructions wherein it refers to MSME as defined under the MSMED Act. Further, the notifications require the MSME to be GST registered unless otherwise exempted from GST registration. Hence, GST registration is not mandatory to avail the one-time restructuring benefit. However, MSME registration seems to be compulsory given the reference to the MSMED Act.
The scheme defines eligible borrower as-New or existing Micro and Small Enterprises, as defined in the Act, to which credit facility has been provided by the lending institution without any collateral security and/or third-party guarantees.
Subsequently, MSE Retail Trade was added vide a circular issued by Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) under its ambit for fresh credit facilities eligible for guarantee coverage. Explicit inclusion of retail trade clarifies that benefits of this scheme shall be available to retail traders as well, subject to conditions provided in the scheme.
The definition of eligible borrowers under this scheme is the same as that of CGS-I. Initially, the eligibility criteria specifically excluded retail trade and registration was a mandatory requirement under the scheme. Later on, the scheme was amended to do away with the registration requirement and specifically include MSE retail trade in its ambit.
Given the August notification issued by RBI, it is clear that the intention of the RBI is to ensure that lending institutions, such as banks and NBFCs, obtain Udyam Registration Certificate from the borrowers to pass on the benefits provided by the RBI.
Hence, unless a scheme specifically provides the inclusion of activities that are not eligible for registration or does not mandate the requirement of registration as an MSMC, one shall refer to the definition provided under the MSMED Act. Further, in case of reference it made of the MSMED Act, it can be implied that registration is a mandatory requirement.
Based on MoM notification, Udyam Registration can also be obtained on a self-declaration basis. The notification states-
“The turnover related figures of such enterprise which do not have PAN will be considered on self-declaration basis for a period up to 31st March, 2021 and thereafter, PAN and GSTIN shall be mandatory”
Further, RBI notification states-
“Udyam Registration Certificate’ issued on self-declaration basis for enterprises exempted from filing GSTR and / or ITR returns will be valid for the time being, up to March 31, 2021.”
A plain reading of these provisions would bring one to a conclusion that in order to obtain registration as an MSME, one would be required to mandatorily obtain PAN and GSTIN. However, going by the principle, the law itself exempts certain classes of persons to obtain PAN and/or GSTIN. It would be counter-intuitive to draw upon a compulsion on such persons to obtain PAN and GSTIN for the purpose of getting registered as an MSME.
As discussed above, the one-time restructuring benefit introduced by RBI requires the MSME to be GST registered unless otherwise exempted from GST registration. However, for the purpose of the registration as an MSME without GST registration ( in case exempted), there is still a lack of clarity.
The lenders would obviously expect clarification from the MoF or the MoM on the applicability of this clause on persons not required to obtain PAN or GSTIN. In the absence of any clarification or leeway specified for such persons, the lenders would be bound to ensure that their borrowers obtain Udyam Registration using PAN and GSTIN.
In 2017, the RBI issued a notification providing a list of documents to be relied upon and method for calculation of the value of plant and machinery or equipment. As per the notification, the purchase value of the plant and machinery or equipment shall be considered and not the book value (purchase value minus depreciation).
However, the Udyam registration process considers the value of plant and machinery or equipment based on the ITR filed by the enterprise. The ITR contains the value of machinery left after deducting depreciation i.e. Written Down Value (WDV).
This created a disconnect between the earlier RBI guidelines and the process of registration. Considering this disconnect, the RBI on July 2, 2020, released a notification with the updated definition and directives for calculation of investment in plant and machinery or equipment, which is in line with the MoM notification. Further, the RBI has clarified that the existing guidelines provided in the 2017 notification shall be superseded by the July 2, 2020 notification.
While the RBI has made an effort to clarify the stand of lenders and things to be done by them owing to the change in the definition of MSMEs, a few operational difficulties still persist, specifically relating to obtaining the PAN and GSTIN. It is clear that the motive of the government behind introducing consistent developments for MSMEs is to uplift the small businesses in the country. The lending market awaits clarifications/ reliefs from the government on these operational difficulties. A relief from the government will be a step in the direction of better financial inclusion.
 Details of various schemes for MSMEs can be referred here- http://vinodkothari.com/2020/05/primer-on-msme-financing/
 The conditions may be referred to from the Master Circular for PSL- https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10497&Mode=0
 Refer notification- https://www.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=8191
 https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11803&Mode=0– the notification was however addressed to banks and not NBFCs
 Read the detailed process here- http://vinodkothari.com/2020/07/udyam-portal-the-pristine-msme-registration-process/
-Financial Services Division (firstname.lastname@example.org)
The Finance Minister had announced several measures to provide stimulus to economy for providing a momentum after impact caused by Covid-19 and also to take further the mission of self-reliant India. Among various schemes introduced in the package, one was the Emergency Credit Line Guarantee Scheme (‘Scheme’), which intends to enable the flow of funds to MSMEs by providing additional loans to MSME’s covered by 100% government guarantee.
Under this Scheme, the Government of India, through a National Credit Guarantee Trust (NCGTC), will provide 100% guarantee on loans provided by banks and Financial Institutions (FIs) to MSMEs and MUDRA borrowers under the said scheme. The Scheme aims to extend additional funding of Rs. 3 lakh crores to eligible borrowers in order to help them through the liquidity crunch faced by them due to the Covid-19 crisis.
In order to ensure the full utilisation of the 100% government guarantee loans in times of such financial downturns, the scheme has been updated on July 4, 2020 to widen the scope and significant changes in the limits has been notified. It is evident form the amendments under revised operational guidelines that it is aimed at providing deeper benefit to the society, by expanding the borrower base to include individuals who have availed loan for business purposes under the scheme.
National Credit Guarantee Trust by a Notification date 31st October 2020 has extended the scheme up to 30th November 2020 or till the utilisation of 3 lakh crores, whichever is earlier.
This article discusses the changes and its impacts in detail.
The erstwhile operational guidelines only allowed Business Enterprises/MSME to borrow under the scheme which were having already existing loan facility with the member lending institution (MLI). The major change under the revised guideline is the extension of the scheme to the individuals who have existing loan facility with MLI. Such application of credit facility by an individual under the scheme shall be supported by Management Certificate to the effect that they have availed such loan facility for their own business purposes.
We had earlier also held the view that a loan taken by a business, even though owned by an individual and not having a distinctive name than the individual himself, cannot be regarded as a “loan provided in individual capacity”. And hence, must be covered under the ambit of the scheme.
For instance, many SRTOs, local area retail shops etc are run in the name of the proprietor. There is no reason to disregard or disqualify such businesses. It is purpose and usage of the loan for business purposes that matters.
The scheme now specifically includes individuals who have availed loans for business purpose, this would help business who are not incorporated or the owner had availed facility in its own name. This would also benefit professionals like Doctors, CA/CS/CMA, who have availed loans for scaling up their service businesses.
Under the previous operational guideline the total outstanding loan limit of an eligible borrower from all the MLI was caped at INR 25 crores which has now been increased up to INR 50 crores as on February 29, 2020. As the ceiling for maximum amount of loan is increased the maximum amount of guaranteed loan that can be issued under the guideline have increased from INR 5 crores to INR 10 crores.
The turnover limit of eligible borrowers has been increased from INR 100 Crores to INR 250 crores. This means eligible borrowers which were earlier having annual turnover inclusive of all taxes/GST more than INR 100 crores are now eligible under the new operational guidelines. Provided there annual turnover is less than INR 250 crores for financial year 2019-20.
Smaller companies were already covered under the scheme and so the aforesaid amendment would include larger companies as well.
The erstwhile operational guideline provided for a borrower who wishes to take from any lender more than 20% of outstanding credit that the borrower had with specific lender, a NOC would be required from all the other lenders.
Revised operational guidelines has served as a clarification that NOC to be required in such cases only from the lender whose share of ECLGS loan is proposed to be extended by a specific lender. However, it would be necessary for the specific lender to agree to provide ECLGS facility on behalf of such of the lenders.
As per the news report, more than half of the amount of guarantee approved under the scheme remains unrealised till date. Hence, the increase in ambit of scheme would be beneficial to reach out to the businesses in the name of individuals as well. Further, it would help the larger businesses to avail funding, in these times when all businesses are facing liquidity issues.
Our FAQs on ECLGS:
Watch our Youtube video explaining the entire Udyam Registration process here: https://youtu.be/dqm64_oTbnQ
Read our other resources on related topics here –
-Qasim Saif (email@example.com)
The Indian government has been taking a number of measures to tackle the disruptions caused by the pandemic, giving special focus on small businesses. The small and medium size businesses form the backbone of any economy, specially developing economies like India, hence, the Micro, Small and Medium Enterprises (MSME) are seen as a key player in promoting momentum in economy once movement restrictions and social distancing norms are lifted. In order to stimulate the post-Covid economic scenarios, it is crucial to focus on the growth and development of the MSME sector.
The definition of MSME comes from section 7 of the Micro, Small and Medium Enterprises Development Act, 2006 (‘Act’) . Based on the proposal of the Finance Minister, he Ministry of Micro, Small and Medium Enterprises on 1st June 2020 via notification, amended the definition of MSME in order to increase the scope and hence bringing larger number of firms within the ambit of MSME. As per the revised definition, the classification is based on the investment and turnover of the entity.
The latest definition of MSME as per the notification is as follows-
|Revised Classification applicable w.e.f 1st July 2020|
|Composite Criteria: Investment in Plant & Machinery/equipment and Annual Turnover|
|Manufacturing Enterprises and Enterprises rendering Services||Investment in Plant and Machinery or Equipment:
Not more than Rs.1 crore and Annual Turnover; not more than Rs. 5 crores
|Investment in Plant and Machinery or Equipment:
Not more than Rs.10 crore and Annual Turnover; not more than Rs. 50 crores
|Investment in Plant and Machinery or Equipment:
Not more than Rs.50 crore and Annual Turnover; not more than Rs. 250 crores
The aforesaid definition removes the bifurcation of investment limits for Manufacturing and Service industry which were previously existent. Hence, it is expected that large number of service providers would be covered as they tend to have lesser investment in plant and machinery or equipment and turnover as compared to Manufacturing entity with similar profits.
As the changes in classification are to be applicable from 1st July 2020, the Ministry of Micro, Small and Medium Enterprises have come up with a Notification dated 26-06-2020 which provide for a novel method of registration for MSME (‘Udyam Registration’).
The said notification provides for process for registration of MSME which shall become applicable from 1st July 2020, the requirement of Udyam Registration shall also be applicable on existing MSME’s.
Pursuant to the amendment in the definition of MSME and the introduction of procedure for filing the memorandum under the Udyam Registration, it seems that registration as an MSME shall be a necessity and accordingly be considered as a pre-requisite for availing benefit under the various schemes introduced by the Ministry.
As per the Udyam Registration requirement it is evident that Udyam Registration can be done on the basis of filing a self-declaration. The relevant extract of the notification states as follows-
“Any person who intends to establish a micro, small or medium enterprise may file Udyam Registration online in the Udyam Registration portal, based on self-declaration with no requirement to upload documents, papers, certificates or proof.”
On review of the registration process on the Udyam Registration portal, it is been observed that the list of major activities contains a specific head for trading activities, land transport as well as an option for selecting ‘Others’. Thus, it may be concluded that trading, transportation and such other activities are included under activities of a service enterprise and shall be required to be registered as an MSME on the Udyam Registration portal.
The Aadhaar of following persons shall be required for registration as an MSME.
|Type of Entity||Aadhar of|
|Partnership Firm||Managing Partner|
|Company / LLP / Co-operatives / Trust / Organisations*||Authorised Signatory|
*PAN and GSTIN of enterprise shall also be required
In case the person does not have Aadhar, he/she can approach MSME-Development Institutes or District Industries Centres (Single Window Systems) with his Aadhaar enrolment identity slip or copy of Aadhaar enrolment request or bank photo pass book or voter identity card or passport or driving licence and the Single Window Systems will facilitate the process including getting an Aadhaar number and thereafter in the further process of Udyam Registration
In order to determine whether the enterprise falls within the limits of MSME and under which category Calculation of amount for Investment in Plant, Machinery and Equipment, and Annual Turnover is required to be calculated.
The Plant, Machinery and Equipment shall have same meaning as under Income Tax Rules, 1962 hence not include land, building and furniture and fittings. Further it shall not include items mentioned in Explanation 1 to Section 7(1) of MSME Act 2006 shall be excluded.
All units with Goods and Services Tax Identification Number (GSTIN) listed against the same Permanent Account Number (PAN) shall be collectively treated as one enterprise and investment figures for all of such entities shall be seen together and only the aggregate values will be considered for deciding the category as micro, small or medium enterprise.
The calculation of investment in plant and machinery or equipment will be linked to the Income Tax Return (ITR) of the previous years. In case of a new enterprise, where no prior ITR is available, the investment will be based on self-declaration of the promoter of the enterprise and such relaxation shall end after the 31st March of the financial year in which it files its first ITR.
However, it shall be noted that in case of new enterprise without any ITR, where calculation is made on self-declaration basis, the purchase (invoice) value of a plant and machinery or equipment, whether purchased first hand or second hand, shall be taken into account excluding Goods and Services Tax (GST).
On the similar grounds as investment the turnover shall also be calculated on collective basis for all units with Goods and Services Tax Identification Number (GSTIN) listed against the same Permanent Account Number (PAN) and all such units shall be treated as one enterprise and turnover figures for all of such entities shall be seen together and only the aggregate values will be considered for deciding the category as micro, small or medium enterprise.
Further it shall be noted that the Exports of goods or services or both, shall be excluded while calculating the turnover of any enterprise.
Information as regards turnover and exports turnover for an enterprise shall be linked to the Income Tax Act or the Central Goods and Services Act and the GSTIN. The figures of enterprise which do not have PAN will be considered on self-declaration basis for a period up to 31st March, 2021 and thereafter, PAN and GSTIN shall be mandatory.
In case of existing MSMEs, the registration shall be valid till March 2021. They are required to register themselves under the Udyam Registration portal before the expiry of their registration under Udyog Aadhaar or EM-II.
The registration as an MSME may be obtained based on a self-declaration by the applicant, without submitting any other documents, certificates or proofs of investment in plant and machinery or equipment or turnover. However, once the URM is granted, the MSME is required to update details on the portal, including details of the ITR and the GST Return for the previous financial year and such other additional information as may be required, on self-declaration basis.
Failure to update the relevant information within the period specified [to be specified] in the online Udyam Registration portal will render the enterprise liable for suspension of its status.
On the basis of information furnished and updated from time to time as well as information from Government sources including ITR/GSTR the classification of enterprise may be changed to a lower to higher category (graduation) or from higher to lower category (reverse-graduation).
In case of graduation an enterprise will maintain its prevailing status till expiry of one year from the close of the year of registration. In case of reverse-graduation of an enterprise, the enterprise will continue in its present category till the closure of the financial year and it will be given the benefit of the changed status only with effect from 1st April of the financial year following the year in which change happened.
Accordingly, it can be inferred that the limits of investment and turnover shall be reckoned on the basis of the ITR and GST returns filed for the previous financial year.
The Champions Control Rooms functioning in various institutions and offices of the MSME-Development Institutes along with District Industries Centres in their respective districts shall act as Single Window Systems for facilitating the registration process and further handholding the micro, small and medium enterprises in all possible manner.
In case of any discrepancy or complaint, the General Manager of the District Industries Centre shall undertake an enquiry for verification of the details of Udyam Registration and thereafter forward the matter to the Director or Commissioner or Industry Secretary concerned of the State Government who after giving an opportunity to present its case and based on the findings, may amend the details or recommend to the Ministry of MSME’s, Government of India, for cancellation of the Udyam Registration Certificate.
Further it shall be noted that, if provision for registration under MSME Act, 2006, is violated Section 27 of the Act, provides for a fine which may extend upto one thousand rupees for first conviction and a fine ranging from one thousand to ten thousand rupees for second and subsequent conviction.
The new process provides an easy, quick and simple method for registration that will be linked to information submitted under Income Tax and GST, hence being user friendly as well as keeping a check on reliability of information. The move is intending to promote ease of doing business in lieu of the introduction of Atmanirbhar Bharat scheme.
This process and amended definition would help more MSME to take benefit of government schemes for MSME hence providing them an elevated pedestal to provide a push to kick-start economy after the covid restrictions are lifted.
Our other relevant articles may be referred here:
-Kanakprabha Jethani (firstname.lastname@example.org)
On June 24, 2020, Ministry of Finance (MoF) issued two press releases with respect to further measures to support the MSME sector during the current situation of crisis. One of these launched the Credit Guarantee Scheme for Subordinate Debt (CGSSD) (‘Debt Scheme’) and the other one announced an interest subvention of 2% for a period of 12 months, to all Shishu loan accounts under Pradhan Mantri Mudra Yojana (PMMY) to eligible borrowers (‘Subvention Scheme’).
The COVID-19 disruption and subsequent downfall of the economy has impacted the MSME sector drastically. MSMEs are a crucial component of the Indian economy and hence, it is necessary to uplift them, so as to bring the economy back on track. In this backdrop, the Government of India (GoI) has been taking various measures and introducing schemes to provide the much needed liquidity to MSME sector. The recently introduced schemes are yet another step in that direction. The following write-up provides runs through the basics of these schemes focusing on the practical issues that may arise while implication.
The MSME industry, colloquially referred to as the power engine of the economy has been a focal point of several reforms over the years. The recent reforms w.r.t. MSMEs and the Insolvency and Bankruptcy Code, 2016 (“Code’) has altered the stance of MSMEs, both as creditors and debtors. In this article, we shall discuss some significant reforms/ amendments w.r.t. MSMEs (due to COVID, or otherwise), and those under the Code and analyse the cumulative impact of these reforms on the sector in the prevailing scenario
Kanakprabha Jethani & Timothy Lopes
Micro, Small and Medium Enterprises (MSMEs) have received a lot of attention from the government in recent times in terms of regulatory measures, reliefs and benefits. Consequently, the eligibility criteria and incentives offered to the MSME sector in terms of financing has been attracting the attention of businesses across the country. Additionally, with various schemes being introduced for revival and upliftment of MSMEs, banks and financial institutions have also started focusing on the MSME segment of borrowers.
This usually-overlooked segment of borrowers is now becoming the most targeted customer base, however, there are many uncertainties around the concept of MSME and the benefits associated with MSME financing.
Below we have listed some of the generally raised concerns in this regard and our response to the same.
-Financial Services Division (email@example.com)
The Finance Minister has, in the month of May, 2020, announced a slew of measures as a part of the economic stimulus package for self-reliant India. Among various schemes introduced in the package, one was the Emergency Credit Line Guarantee Scheme (ECLGS, ‘Scheme’), which intends to enable the flow of funds to MSMEs. This is the so-called Rs 300000 crore scheme. The scheme was further amended on 4th August 2020 for widening the scope of the said scheme
Under this Scheme the GoI, through a trust, will guarantee loans provided by banks and Financial Institutions (FIs) to Individuals MSMEs and MUDRA borrowers. The Scheme aims to extend additional funding of Rs. 3 lakh crores to eligible borrowers in order to help them through the liquidity crunch faced by them due to the crisis.
Based on the information provided by the Finance Minister about this Scheme, the press release issued in this regard and the operating guidelines scheme documents issued subsequently, we have prepared the below set of FAQs. There is also a set of FAQs prepared by NCGTC – we have relied upon these as well.
In brief, the Guaranteed Emergency Line of Credit [GECL] is a scheme whereby a lender [referred to as Member Lending Institution or MLI in the Scheme] gives a top-up loan of 20% of the outstanding facility as on 29th February, 2020. This top up facility is entirely guaranteed by NCGTC. NCGTC is a special purpose vehicle formed in 2014 for the purpose of acting as a common trustee company to manage and operate various credit guarantee trust funds.
[Vinod Kothari had earlier recommended a “wrap loan” for restarting economic activity – http://vinodkothari.com/2020/04/loan-products-for-tough-times/. The GECL is very close to the idea of the wrap loan.]
Essentially, the GECL will allow lenders to provide additional funding to business entities and individual businessman. The additional funding will run as a separate parallel facility, along with the main facility. The GECL loan will have its own term, moratorium, EMIs, and may be rate of interest as well. Of course, the GECL will share the security interest with the original facility, and will rank pari passu, with the main facility, both in terms of cashflows as in terms of security interest.
The major questions pertaining to the GECL are going to be about the eligible borrowers to whom GECL may be extended, and the allocation of cashflows and collateral with the main facility. Operationally, issues may also centre round the turnaround time, after disbursement, for getting the guarantee cover, and whether the guarantee cover shall be in batch-processed, or processed loan-by-loan. Similarly, there may be lots of questions about how to encash claims on NCGTC.
Eligible Lenders and eligible borrowers
The GECL shall be an additional working capital term loan (in case of banks and FIs), and additional term loan (in case of NBFCs) provided by the MLIs to Eligible Borrowers. The GECL facility may run upto 20% of the loan outstanding on 29th February, 2020.
The meaning of “working capital term loan” is that the amount borrowed may be used for general business purposes by the borrower.
For the purpose of the Scheme MLIs/eligible lenders include:
III. Non-Banking Financial Companies (NBFCs), registered with the RBI and which have been in operation for a period of 2 years as on 29th February, 2020.
The language of the scheme indicates that the NBFC must be in operation for 2 years (and not financial years) as on 29th February, 2020. Thus, the period of 2 years shall be counted from the starting of operations after getting registration as an NBFC.
Usually, the RBI while granting registration requires the NBFC to start operations within a period of six months of getting registration. It also requires the NBFC to intimate to RBI that it has commenced operations. Logically, the 2 years’ time for starting of operations should be read from the date of commencement of operations
The asset size of the NBFC would not matter. The NBFC must only hold a valid certificate of registration issued by RBI in order to be eligible under the scheme (and in operation for 2 years). Thus, whether SI or not, any NBFC will qualify.
Yes, the eligibility criteria specifically requires the NBFC to be registered.
In our view, that should certainly be possible. However, in our view, in that case, the rate of interest charged to the borrower should be the blended rate considering the interest rate caps for the bank [9.25%] and the NBFC [14%].
The Eligible Borrowers shall be entities/individuals fulfilling each of the following features :
Mudra borrowers are micro-finance units who have availed of loans from Banks/NBFCs/MFIs under the Pradhan Mantri Mudra Yojna (PMMY) scheme.
No. There is no particular organisational form for the Eligible Borrower. It may be a company, firm, LLP, proprietorship, etc.
Note that the Scheme initially used the expression: “all Business Enterprises / MSME institution borrower accounts”. From the use of the words “business enterprises” or “institution borrower account”, it was contended that individuals are excluded. In Para 7 of the Operational Guidelines on the website of NCGTC, it mentioned that “Loans provided in individual capacity are not covered under the Scheme”. However, the very same para also permitted a business run as a proprietorship as an eligible case of business enterprise.
Hence, there was a confusion between a business owned/run by an individual, and a loan taken in individual capacity. The latter will presumably mean a loan for personal purposes, such as a home loan, loan against consumer durables, car loan or personal loan. As opposed to that, a loan taken by a business, even though owned by an individual and not having a distinctive name than the individual himself, cannot be regarded as a “loan provided in individual capacity”.
For instance, many SRTOs, local area retail shops etc are run in the name of the proprietor. There is no reason to disregard or disqualify such businesses. It is purpose and usage of the loan for business purposes that matters.
To ensure clarity, the revised operational guidelines include business loans taken by individuals for their own businesses in the ambit of scheme, Further, individual would be required to fulfil eligibility criteria for the borrower.
The term “ business enterprise” has been used repetitively in the Scheme, and is undefined. In our view, its meaning should be the plain business meaning– enterprises which are engaged in any business activity. The word “business activity” should be taken broadly, so as to give an extensive and purposive interpretation to fulfil the intent of the Scheme. Clearly, the Scheme is intended to encourage small businesses which are the backbone of the economy and which may help create “self reliant” India.
Having said this, it should be clear that the idea of the Scheme is not to give loans for consumer durables, personal use vehicles, consumer loans, personal loans, etc. While taking the benefit of the Scheme, the MLI should bear in mind that the intent of the lending is to spur economic activity. There must be a direct nexus between the granting of the facility and economic/business activity to be carried by the Eligible Borrower.
The eligibility criteria for borrowers does not specifically require the MSMEs to be registered under the MSMED Act. Thus, an unregistered MSME may also be an Eligible Borrower under the scheme.
There is no particular form. However, we suggest something as simple as this:
To whomsoever it may concern
Sub: Declaration of Turnover
I/ We………………………………….. (Name of Authorized Signatory), being ……………………..(Designation) of …………………………………………………. (Legal Name as per PAN) do hereby state that while the financial statements for the FY 2019-20 have not still been prepared or finalised, based on our records, the turnover of the abovementioned entity/unit during the FY 2019-2 will be within the value of Rs 250 crores.
Signed …………. Date:…………………
The manner of counting DPD is – we need to see the oldest of the instalments/ principal/interest due on the reckoning date. Here, the reckoning date is 29th Feb. On that date, the oldest overdue instalment is that of 10th Jan. This is less than 59 DPD. Hence, the borrower is eligible.
On the reckoning date, the oldest instalment is that of 1st Jan. 2020. Since the reckoning date is 29th Feb., we will be counting only one two dates – 1st Jan and 29th Feb. The time lag between the two adds to exactly 59 days. The borrower becomes ineligible if the DPD status is more than 59 days. Hence, the borrower is eligible.
It does not seem relevant that the GECL should be of the same nature/type or purpose as the primary facility. We have earlier mentioned that the purpose of the GECL is to support the business/economic activity of the borrower.
However, there may be issues where the existing facility itself would not have been eligible for the Scheme. For instance, if the existing facility was a car loan to a business entity (say, an MSME), can the GECL be eligible if the same is granted for working capital purposes? Intuitively, this does not seem to be covered by the Scheme. Once again, the intent of the Scheme is to provide “further” or additional funding to a business. Usually, the so-called further or additional funding for a business may come from a lender who had facilitated business activity by the primary facility.
Hence, in our view, the primary as well as the GECL facility should be for business purposes.
There does not seem to be a correlation between the residual term of the primary facility and the tenure of the GECL facility. The GECL seems to be having a term of 4 years, irrespective of the original or residual term of the primary facility.
Of course, the above should be read with our comments above about the primary facility as well as the GECL to be for business purposes.
Here, the purpose of the loan, and the nature of collateral supporting the loan, are different, but what matters is the end-use or purpose of the loan. The collateral is a self-occupied house. But that does not change the purpose of the loan, which is admittedly working capital for the retail trade activity.
Hence, in our view, the facility will be eligible for GECL, subject to other conditions being satisfied.
It seems that even loans extended to co-obligors or co-applicants also qualify.
We may envisage the following situations:
The Scheme shall remain in operation till 30th November, 2020, or till such time as the maximum amount of loans covered by NCGTC reaches Rs 300000 crores. Accordingly, it can be inferred that the GECL must be sanctioned during the period of the operation of Scheme, that is during the period from May 23, 2020 to 30th November, 2020, or till an amount of Rs. 3 lakh crore is sanctioned under GECL, whichever is earlier.
Understandably, there may be mechanisms of either dissemination of the information by NCGTC, or some sort of a pre-approval of a limit by NCGTC.
The Scheme specifically mentions that the limit of Rs. 50 crores shall be ascertained considering the borrower accounts of the business enterprises/MSMEs with combined outstanding loans across all MLIs. For the purpose of determining whether the combined exposure of all MLIs is Rs 50 crores or not, the willing MLI may seek information about other loans obtained by the borrower.
Logically, all business loans, that is, loans/working capital facilities or other funded facilities availed for business purposes should be aggregated. For instance:
The Scheme uses the term MSME, but nowhere has the Scheme made reference to the definition of MSME under the MSMED Act, 2006. Therefore, it does not seem necessary for the Eligible Borrower to have registration under the MSMED Act. Further, even if the entity in question is not meeting the criteria of MSME under the Act, it may still be satisfying the criteria of “business enterprise” with reference to turnover and borrowing facilities. Hence, the reference to the MSMED Act seems unimportant.
However, for the purpose of ease of reference, we are giving below the meaning of MSME as per the definition of MSMEs provided in the MSMED Act, 2006 (‘Act’):
|Enterprise||Manufacturing sector [Investment in plant and machinery (Rs.)]||Service sector [Investment in equipment (Rs.)]|
|Small||Not exceeding 25 lakhs||Not exceeding 10 lakhs|
|Micro||Exceeding 25 lakhs but does not exceed 5 crores||Exceeding 10 lakhs but does not exceed 2 crores|
|Medium||Exceeding 5 crores but not exceeding 10 crores||Exceeding 2 crores but does not exceed 5 crores|
The above definition has been amended by issue of a notification dated June 1, 2020. As per the amendment such revised definition shall be applicable with effect from July 01, 2020. Accordingly, w.e.f. such date, following shall be the definition of MSMEs:
|Enterprise||Investment in plant and machinery or equipment (in Rs.)||Turnover (in Rs.)|
|Micro||Upto 1 crore||Upto 5 crores|
|Small||Upto 10 crores||Upto 50 crores|
|Medium||Upto 50 crores||Upto 250 crores|
The Scheme states that a borrower is eligible if the borrower has –
(i) total credit outstanding of Rs. 50 Crore or less as on 29th Feb 2020;
(ii) turnover for 2019-20 was upto Rs. 250 Cr;
(iii) The borrower has a GST registration where mandatory.
Udyog Aadhar Number (UAN) or recognition as MSME is not required under this Scheme.
Hence, even retail traders fulfilling the eligibility criteria above would be eligible under the scheme.
Looking at the clear language of the Scheme, it seems that existence of an outstanding facility is a prerequisite to avail credit facility under the Scheme. The intent of the Scheme is to provide additional credit facility to existing borrowers.
Since the amount of GECL is related to the POS as on 29th Feb., 2020, there is no question of such a borrower qualifying.
It is counter-intuitive to think that the MLI cannot put end-use restrictions. Ensuring that the funds lent by the MLI are used for the purpose for which the facility has been extended is an essential prudential safeguard for a lender. It should be clear that the additional facility has been granted for restarting business, following the disruption caused by the COVID crisis. There is no question of the lender permitting the borrower to use the facility for extraneous or irrelevant purposes.
Terms of the GECL Facility
The major terms are as follows:
Yes. This scheme may operate in conjunction with any interest rate subvention scheme as well.
It seems that the Scheme has a non-negotiable tenure of 4 years. Of course, the Scheme document does say the parties may agree to a prepayment option, without any prepayment penalty. However, in view of the purpose of the Scheme, that is, to restart business activity in the post-COVID scenario, it does not seem as if the purpose of the Scheme will be accomplished by a shorter loan tenure.
Minus the Scheme, nothing stopped a lender from giving a top-up lending facility on a loan. Therefore, the wrapped portion of the GECL facility is 20% of the loan, but if the lender so wishes to give further loan, there is nothing that should restrain the lender from doing so.
Para 11 of the Scheme document says: “…facility granted under GECL shall rank pari passu with the existing credit facilities in terms of cash flows and security”. The concept of pari passu sharing of the security, that is, the collateral, may create substantial difficulties in actual operation, since the terms of repayment of the primary facility and the GECL facility are quite divergent.
To understand the basic meaning of pari passu sharing, assume there is a loan of Rs 100 as on 29th Feb., 2020, and the MLI grants an additional loan of Rs 20 on 1st June, 2020. Assume that the value of the collateral backing the primary loan is Rs 125. As and when the GECL is granted, the value of this collateral will serve the benefit of the primary loan as well as the GECL facility. In that sense, there is a dilution in the value of the security for the primary loan. This, again, is illogical since the primary does not have a sovereign wrap, while the GECL facility has.
What makes the situation even worse is that due to amortizing nature of the primary loan, and the accreting nature of the GECL facility during the moratorium period, the POS of the primary facility will keep going down, while the POS of the GECL facility will keep going up. It may also be common that the primary facility will run down completely in a few months (say 2 years), while the GECL facility is not even half run-down. In such a situation, the benefit of the collateral will serve the GECL loan, in proportion to the amount outstanding of the respective facilities. Obviously, when the primary facility is fully paid down, the collateral serves the benefit of the GECL facility only.
The sharing of cashflows on pari passu basis should mean, if there are unappropriated payments made by the borrower, the payment made by the borrower should be split between the primary facility and the GECL facility on proportionate basis, proportional to the respective amounts falling/fallen due.
For instance, in our example taken in Q 15 above, assume the borrower makes a payment in the month of July 2020. The entire payment will be taken to the credit of the primary loan since the GECL loan is still in moratorium.
Say, in the month of July 2021, an aggregate payment is made by the borrower, but not sufficient to discharge the full obligation under the primary facility and the GECL facility. In this case, the payment made by the borrower will be appropriated, in proportion to the respective due amounts (that is, due for the month or past overdues) for the primary facility and the GECL facility.
Indeed there is. The difficulty arises because there are two facilities with the borrower, one is naked, and the other one wrapped. The pari passu sharing of cashflows will raise numerous challenges of appropriation. Since the claim is against the sovereign, there may be a CAG audit of the claims settled by the NCGTC.
If the existing loan has a charge securing the loan, and if the same security interest is now serving the benefit of the GECL facility as well, it will be necessary to modify the charge, such that charge now covers the GECL facility as well. As per Companies Act, the time for registration of a modification is thirty days, and there is an additional time of ninety days.
Not at all. The grant of the GECL facility is a grant of an additional facility, with the same collateral. Therefore, until the GECL loan is fully repaid, there is no question of the borrower getting a release of the collateral.
In our view, the collateral is shared by both the facilities on pari passu basis. Hence, there is no need for a cross default clause.
The fact that the GECL facility is 100% guaranteed by the sovereign may encourage MLIs to consider the GECL facility as risk free, and go aggressively pushing lending to their existing borrowers. However, as we have mentioned above, the pari passu sharing of the collateral results into a dilution of collateral for the primary facility. Hence, MLIs should use the same time-tested principles of lending in case of GECL as well – capacity, collateral, etc.
For the borrower as well, the borrower eventually has to pay back the loan. In case of NBFCs, the loan is not coming cheap – it is coming at a cost of 14%. While for the lender, the risk may be covered by the sovereign guarantee, the risk of credit history impairment for the borrower is still the same.
Hence, we suggest both the parties to take a considered call. For the lender, the consideration should still be the value of the collateral, considering the amount of the top up facility. In essence, the top up facility does not mechanically have to be 20% -the amount may be carefully worked out.
While the disbursal should appropriately be made by the MLI upfront, if the borrower uses the money to settle existing obligations with the MLI, that should be perfectly alright.
Further, In case the borrower wishes to take from any lender an amount more than the proportional 20% of the outstanding credit that the borrower has with that particular lender, a No Objection Certificate (NOC) would be required from the lender whose share of ECLGS loan is proposed to be extended by a specific lender. Further, it would be necessary for the specific lender to agree to provide ECLGS facility on behalf of such of the lenders.
In our understanding, the meaning is, except for those borrowers who opt out of the facility, the lender shall consider the remaining borrowers as opting for the facility. However, there cannot be a case of automatic lending, as a loan, after all, is a mutual obligation of the borrower towards the lender. Hence, there has to be explicit agreement on the part of the borrower with the lender.
Of course, a wise borrower may also want to negotiate a rate of interest with the lender.
At least the following:
Income recognition, NPA recognition, risk weighting and ECL computation
Of course, yes. In case of lenders following IndAS 109, the income will be recognised at the effective interest rate. In case of others too, there will be accrual of income.
The GECL loan will have a moratorium of 12 months – hence, nothing is payable for the first 12 months. The primary facility may actually be having upto 59 DPD overdues at the very start of the scheme itself. Hence, it is quite possible that the primary facility slips into an NPA status.
As a rule, if a facility granted to a borrower has become an NPA, then all facilities granted to the same borrower will also be characterised as NPAs.
Therefore, despite the 100% sovereign guarantee, the facility may still be treated as an NPA, unless there is any separate dispensation from the RBI.
As regards the GECL facility, any provision is for meeting the anticipated losses/shortfalls on a delinquent loan. As the GECL is fully guaranteed, in our view, there will be no case for creating a provision.
In view of the 100% sovereign guarantee, this becomes a case of risk mitigation. In our view, this is not a case for providing for any ECL.
Here again, our view is that the facility is fully sovereign-guaranteed. Hence, there is no question of a prudential build up of a general loss provision as well. The RBI should come out with specific carve out for GECL loans.
The RBI issued a notification on June 22, 2020 stating that since the facilities provided under the Scheme are backed by guarantee from GoI, the same shall be assigned 0% risk weight, in the books of MLIs.
Guarantor and the guarantee
The Guaranteed Emergency Credit Line (GECL) or the guarantee under the Scheme shall be extended by National Credit Guarantee Trustee Company Limited (NCGTC, ‘Trust’).
NCGTC is a trust set up by the Department of Financial Services, Ministry of Finance to act as a common trustee company to manage and operate various credit guarantee trust funds. It is a company incorporated under the Companies Act, 1956.
The role of NCGTC is to serve as a single umbrella organization which handles multiple guarantee programmes of the GoI covering different cross-sections and segments of the economy like students, micro entrepreneurs, women entrepreneurs, SMEs, skill and vocational training needs, etc.
Presently, NCGTC manages 5 credit guarantee schemes that deal with educational loans, skill development, factoring, micro units etc.
The guarantee shall cover 100% of the eligible credit facility.
Yes, the Scheme shall cover both the interest as well as the principal amount of the loan.
The NCGTC shall charge no guarantee fee from the Member Lending Institutions (MLIs) in respect of guarantee extended against the loans extended under the Scheme.
Usually, eligible lenders under such schemes are required to enter into an agreement with the trust extending the guarantee, to become their members. In this scheme, the eligible lenders are required to provide an undertaking to the NCGTC, in the prescribed format, in order to become MLIs.
The MLI shall, within 90 days from a borrower account under the scheme turning NPA, inform the date on which such account turned NPA. On such intimation, NCGTC shall pay 75% of the guaranteed amount to the MLI i.e. 75% of the default amount.
The rest 25% shall be paid on conclusion of recovery proceedings or when the decree gets time barred, whichever is earlier.
Securitisation, direct assignment and co-lending
On the face of it, there is nothing that stops a lender from giving a further facility, in addition to the one that has been securitised. However, in the present case, there will be modification of the existing charge document, whereby the charge will be extended to the top up GECL loan as well. This amounts to a dilution of the security available for the primary loan. In our view, this will require specific consent of the PTC investors, through the trustee.
Note that FAQ 35 by NCGTC seems to be talking about off-balance sheet facility. Many securitisation transactions are actually on the balance sheet. Further, even if the original facility has gone off the balance sheet, the additional funding being given by the originator-servicer will be on-the-balance sheet.
Any interpretation of the guarantee scheme has to serve the purpose for which the scheme was envisaged – which is, clearly, to provide additional liquidity to borrowers affected by the disruption. There can be no suggestion that borrowers whose loans have been securitised will not need additional liquidity. Hence, the Scheme intends to wrap all additional lendings done by the lender, within the limits of 20%.
Same reasoning as above. Here again, FAQ 40 by NCGTC is talking about the entity on whose books the loan currently is. NCGTC’s view about the loan being on the books of a lender is seemingly overshadowed by accounting concepts which have drastically changed over time. For example, a loan which has been a matter of a DA transaction is actually partly on the books of the original lender, and partly on the books of the assignee. One cannot expect the assignee to be giving the additional line of credit, as the assignee is, practically speaking, a mere passive investor. The assignee does not have the franchise/relation with the borrower, which the originator has. To contend that the assignee bank should extend the additional facility is actually to deny the facility to the borrower completely, for no fault of the borrower and for no gain for the system. Since it is the original lender who maintains the relation with the borrower, it is original lender only who may extend the facility.
There is nothing in the Scheme for assignment of the benefit of guarantee. Typically, unless the guarantee agreement says to the contrary, the benefit of a security or guarantee is assignable along with the underlying loan. However, the guarantee agreement between NCGTC and the lender will be critical in determining this.
 The scheme earlier required the MSMEs to obtain UAN (i.e. get registered) in order to avail benefit under the same. However the same was recently done away with through a notification issued on February 5, 2020. Link to the notification- https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11803&Mode=0
Our related write-ups may be referred here:
–Megha Mittal & Shreya Jain
Frivolous initiation of insolvency process, merely for recovery of dues has been a persistent concern- catalyst being the seemingly low threshold of Rs.1,00,000/-.While murmurs about raising the threshold limit for initiating insolvency process have long been in the picture, the notification comes in the wake of recent outbreak of the novel COVID – 19 – the minimum default requirement now stands increased hundred times; from Rs. 1,00,000/- to Rs. 1,00,00,000.
Applicable from 24.03.2020, the Government, in exercise of its powers under section 4 of the Insolvency and Bankruptcy Code, 2016 (“Code”) has specified Rs. 1,00,00,000 (Rupees One Crore) as the minimum amount of default for the purposes of triggering insolvency. Note that Rs. 1 Crore is the maximum threshold which the Central Government can prescribe under section 4.
The step has been widely touted as a relief for MSMEs in this time of crisis, however, this might have multiple implications. The authors have made a humble attempt to analyse its implications from a broader perspective, and if at such increase would be welcomed in absence of the ongoing crisis.