Another couple of stepladders for the MSMEs

-Kanakprabha Jethani (kanak@vinodkothari.com)

Background

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)[1] (‘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[2] (‘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.

About the Subordinated Debt Scheme

The Debt Scheme also known as “Distressed Assets Fund–Subordinate Debt for MSMEs[3]” intends to provide guarantee in respect of loans to promoters of MSMEs, to infuse equity into such MSMEs. The Scheme will be operated through the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). Some of the features of the scheme that intends will provide Rs. 20,000 crore of guarantee cover to two lakh MSMEs, has been discussed herein below:

Eligible Borrower

The Debt Scheme states that the loans shall be granted to promoters of operational but stressed MSMEs. The term operational but stressed indicates that the scheme is for those MSMEs, which in general have been standard and regular but owing to the liquidity crisis, followed by COVID-19 disruption, have been unable to pay their debts.

Hence, the promoter of an MSME, which is classified as SMA- 2 or NPA as on April 30, 2020 but was standard as on March 31, 2018, shall be eligible under the Scheme.

Further, the Scheme mentions that the loan shall be in the nature of personal loan to the promoter of MSMEs. Such MSMEs may be in the form of a company, proprietorship, partnership etc. hence, the proprietor or partner of the MSME, as the case may be shall also be eligible to avail loans under the Debt Scheme.

Eligible Lender

Under the Debt Scheme, only banks which are members of CGTMSE i.e. the banks which form part of the list of Member Lending Institutions (MLIs) of CGTMSE shall be eligible to avail such guarantee against the loans granted under the Debt Scheme.

Amount of Loan

The promoters of the eligible MSMEs may obtain credit equal to 15% of their total stake in the MSME or Rs. 75 lakhs, whichever is lower. For the purpose of calculation of promoter’s stake, the sum of equity participation and debt given by the promoter to the MSME, shall be considered.

End-Use Restriction

The loan amount received by the promoter shall be invested in the MSME as equity/quasi equity/subordinated debt. Considering the intent of the Scheme to cover MSMEs whether incorporated as a company or partnership or proprietorship, the investment by the partner in form of partner’s contribution and the use of the loan by the proprietor for the purposes of the business of the MSME shall also be eligible end-use of the proceeds.

On 1st July, 2020, RBI issued a notification stating that since the credit facilities extended under the scheme are backed by a guarantee from CGTMSE, as a special dispensation, banks have been permitted to reckon the funds infused by the promoters in their MSME units through loans availed under the captioned scheme as equity/quasi equity from the promoters for debt-equity computation.

Guarantee Coverage

The loans under this Debt Scheme shall be guaranteed by the CGTMSE to the extent of 90% of the loan amount. The remaining 10% guarantee coverage is required to be provided by the promoter itself.

The guarantee may be invoked by MLIs within 90 days of such account being classified as NPA in the books of MLI, subject to utilization of the limit of Rs. 20,000 crores.

Further, a fees of 1.50% per annum on the guaranteed amount on outstanding basis is to be paid.  The eligible lending institution may recover the guarantee fees, at its discretion, from the borrower.

Tenure of Loans

The tenure of such loans shall be as per the terms agreed between the lender and the borrower. However, the same shall be subject to 10 years from the date of availment of the guarantee or March 31, 2021, whichever is earlier.

There shall be a moratorium of 7 years on principal repayment i.e. till the 7^th year of the loan, only interest portion on such loan shall be paid by the promoter. The principal shall be repaid within a maximum of 3 years after completion of moratorium. However, in case the borrower intends to make a pre-payment of principal portion, the same may be done, without any pre-payment penalty or foreclosure charges.

Security

The security for loans under this Scheme shall be the assets financed under existing facilities to such MSME. The lender shall have a second charge on the assets in respect of the loan granted under the Scheme.

The Debt Scheme is silent about the case when existing facility is unsecured. However, the term ‘Senior Debt’, is defined to include unsecured debt as well. Hence, the MSMEs having existing unsecured exposures shall be eligible under the Debt Scheme. For the purpose of subordinated security, the security with other lenders may also be used. Further, in case the MSME has no secured existing facilities at all, the applicant may provide a fresh security to the MLI. In such case, the charge of MLI over the security shall be subordinated to the general charges over such security.

Multiple Lenders

In case of more than one existing facility with various lenders, the loan under this Scheme can be availed from any one of them only. For ensuring that the applicant does not have existing facility from any other lender under the Debt Scheme, the MLI may obtain a self-declaration from the applicant in this regard.

To Dos for the MLIs

The MLIs shall, for the purpose of getting their facilities covered by the said guarantee, shall ensure the following:

• Make an application to CGTMSE, in order to get the facility covered by the guarantee. For each such facility sanctioned by the MLI, it shall have to make an application to CGTMSE.
• The credit evaluation, as per the policy and regular practice of the MLI shall be carried out. Recovery efforts and credit monitoring shall also be the same as for the other accounts of the MLI.

Invocation of Guarantee

On an account becoming NPA, the MLI may apply to CGTMSE within 90 days, in order to invoke the guarantee. CGTMSE shall verify the eligibility of the MLI and the facility and upon being satisfied, shall grant 75% of the guaranteed amount within 30 days of such verification. Rest 25% shall not be granted immediately and shall be deferred until recovery proceedings are concluded on the account or the same becomes time barred, whichever is earlier.

Any recovery made post invocation shall be first adjusted against the legal costs of the MLI and the outstanding in the customer’s account. Any balance remaining thereafter shall be provided to CGTMSE.

About the Subvention Scheme

The Scheme intends to provide an interest subvention of 2% to the lenders who have granted eligible ‘Shishu Loans’ to MSMEs. Thus, MSMEs making repayments of their existing eligible loans shall get a relief of 2% on the interest amount payable. While the detailed guidelines about the Subvention Scheme are yet to be released, the press release by the Ministry of Finance provides the following details about the Scheme:

Eligibility

The subvention shall be granted with respect to existing Shishu loans to the existing borrowers of Shishu loans under PMMY Scheme, which were outstanding but not classified as NPA as on March 31, 2020. Under PMMY, loans given for income generating activities for an amount upto Rs. 50,000 are termed as ‘Shishu Loans’.

Exclusive benefit under the Subvention Scheme

Logically enough, the relief can be provided only for the payments being made. Thus, where the repayment is not being made by the MSMEs, there shall arise no question of subvention. Thus, MSMEs already availing the benefit of moratorium provided by their lenders, shall not be eligible to avail benefit of the interest subvention.

However, once the moratorium period expires, the MSME may avail the benefit of interest subvention as well. Hence, for MSMEs which have not availed moratorium, the tenure of the Scheme shall begin on June 01, 2020 and run till May 31, 2021.

For MSMEs, which have availed moratorium benefit, the period of interest subvention shall start w.e.f September 01, 2020 or the expiry of moratorium and shall be in force till August 31, 2021.

Conclusion

The GoI has been in consistent endeavor to provide the necessary support to MSMEs. On one hand, they are being motivated to make repayments regularly and on the other, a liquidity support to normalize the operations at the earliest. While the GoI is working in turbo mode to uplift the economy, its labor is yet to reap the fruits.

[1] https://pib.gov.in/PressReleasePage.aspx?PRID=1633907

[2] https://pib.gov.in/PressReleasePage.aspx?PRID=1633897

[3] https://www.cgtmse.in/files/Subdebt_Scheme_Guidilines.pdf

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