Swaminathan Gurumurthy, member of the Board of the Reserve Bank of India, is an original thinker who follows the ‘Third Way’ propounded by the likes of Deendayal Upadhyaya and the labour movement leader Dattopant Thengdi when it comes to questions of finance and economics.
Recently, he wrote about how lenders should prevent illiquidity from leading to insolvency for enterprises, particularly in the MSME sector.
From a banker’s perspective, there is no better way to encapsulate what lenders should do under the current conditions for borrowers.
The primary focus
Even though fresh investments and new units ought to be supported, the primary focus now should be on protecting the units already working because the negative demonstration effect of MSMEs collapsing will be disastrous.
Gurmurthy’s construct assumes relevance here. If bankers can internalise this spirit and implement the government’s and RBI’s schemes for MSMEs – tailoring /customising them appropriately – MSMEs can weather the Covid impact.
As one of the world’s few full-service regulators, RBI Governor Shaktikanta has been admirably proactive right from January 2019 in supporting all MSME units facing financial stress through a restructuring scheme (without it resulting in downgradation of the asset as is the norm).
After board-level discussions on November 18, 2018, the first of these instructions were issue on January 1, 2019, valid up to March, 2020.
Restructuring
The special provision encouraging banks to offer restructuring to all eligible unitswas extended soon after the Covid-induced lockdown in April 2020, and now in the wake of the second wave impact, again up to September 30, under the Covid2.0 resolution framework.
Coupled with the Modi government’s Emergency Credit Line Guarantee Scheme, increased from ₹3- lakh crore to ₹4.5-lakh crore last week, the attempt is to ensure that money is available to all eligible units.
The RBI has also been supporting the liquidity requirements of banks by giving three-year money under its Long Term Repo Operations. Consequently, the average daily liquidity in the system is of ₹4 lakh crore.
Enough cheap money to go around, the government stepping in to guarantee loans, the regulator permitting a liberal restructuring of debt – 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 up by banks? The following could be a 12-point template for this process. 1) Considering that the only condition stipulated by RBI is that the maximum moratorium as part of the restructuring should not exceed 2 years, a liberal restructuring scheme should be implemented forthwith.
2) The primary skill needed will be the ability to take a call on the intrinsic viability of the business and whether with support, the business will survive.
3) While all efforts are worth taking to keep the business afloat, in the very rare cases where the borrower is seen as unable to carry on activities even with additional support, it is better to take a decision early not to support. One of the fundamental principles of credit is that a ‘no’ today is often better than a ‘yes’ five/six months later.
4) The RBI has advised that the process of restructuring should be implemented and completed within 90 days of application by the borrower.
5) The usual tool kit of restructuring like conversion of erosion of working capital loan into a Working Capital Term Loan, conversion of unpaid interest into a Funded Interest Term Loan, rephasement of unpaid Term Loan instalment, additional need-based working capital loans, a term loan for meeting further cash losses for one year, and reduction in interest rates, along with moratorium on all repayments, should be extended to all requiring this assistance.
4) There may be need to conduct crash courses for loan officers as the average ticket size of the loans requiring recasting will be low and there will be knowledge/skill gaps at those levels. Terms like WCTL/FITL/Dimunition in Fair Value (a key factor in restructuring) and the Right of Recompense may be alien to many officials.
5) There is need to advertise and publicise this restructuring facility. Many borrowers and, sometimes branch officials, may not be aware of the scheme, its import and intent.
6) There will be requirement for hand holding by Chartered Accountants in preparing reasonable projections so that these units do not end up in another cul de sac again. Most often, banks do not receive the detailed workings required to put up restructuring proposals.
7) Often, it is found that date-keeping of the process is not proper. Borrowers need to be aware of their rights too as per RBI directions.
8) The RBI has instructed that “a register/ electronic record should be maintained by the bank wherein the date of receipt, sanction/rejection/disbursement with reasons thereof, etc. should be recorded. Banks should provide acknowledgement for loan applications received under priority sector loans”. This will apply to all restructuring requests, too.
9) It may be a good idea to build in the provision for sanction of a ‘Standby Cashflow Mismatch Credit Facility’ (with suitable margin stipulations) as part of all fresh loans both for working capital and term loans initially itself – akin to a proxy Debt Service Reserve – as most often, after a loan account has started exhibiting signs of stress, no officer wants to recommend/sanction additional finance for fear of being pulled up in accountability studies later on.
10) Declining of any credit facility, whether fresh or for rephasement, should be only with the approval of the next higher authority in banks.
These 12 points could form the basis for a genuine and whole-hearted approach to support MSMEs.
MSMEs represent entrepreneurship at its best and are our Swadeshi Start-ups. Indeed, the Union government has done well in now including retail and wholesale trade as part of MSMEs for priority sector lending. An executive order of the government of India in 2017 had excluded trade from MSMEs.
Clearly, a liquidity problem is bugging most MSME units now. We owe it to our next generation to tune our collective approach to value-preservation and not value-negation of these entrepreneurs. It is worth remembering that today’s MRF started as a toy-balloon manufacturing unit in 1946. That is the promise and the prospect MSMEs hold.
(The author is a Chief General Manager with a leading Public Sector Bank)
