Whither MSME Resolution Framework 2.0?
As the second wave of Covid-19 pandemic continues to impact the country, businesses both big and small are experiencing disruptions but are faring better due to the learning from the previous lockdowns. Also talk of third wave has gained strength over last few weeks. RBI issued directives to Banks on 5 th May 2021 to permit restructuring in eligible MSME units which have not availed restructuring benefit earlier to tide over COVID 19 induced stress. Corporates are excluded rightly so at this time.
Credit Rating Agencies are uniform in their view that corporates especially the large ones other than in retail, entertainment, hospitality, travel and associated services have improved their balance sheets over last 12 months, thanks to cost restructuring post pandemic, saving in SGA expenses (which may now never to return to old level), soft commodity prices, sharp dip in interest rate due reduction in policy rates & abundant liquidity in the system, deferment of Capex, reduction in working capital, better receivable management, all resulting in healthy free cash flows and debt reduction. Both operating and financial leverages have considerably improved. The amount of strengthening depends on sector and size of operations. Large one in less impacted sector obviously benefitted more.
The information for MSME come from several sources. There are an estimated 63 million small businesses in India. 12 million of those file GST returns. However only about 2.6 million (less than 4.5%) units are registered under new ‘UDYAM’ portal which is mandatory for being eligible under the current dispensation of RBI. UAM, an earlier registration portal had over 10 million registration. Further, there are an estimated 14–16 million consumers with commercial-vehicle and business loans which are MSMEs. According to MFIN, there are 58.3 million unique micro-finance borrowers. Industry experts suggest that at least 25% of them that is 14 million units are Micro Enterprises. The Micro Enterprise appear the weakest but most of them are adaptive and have lived through several storms in the past and will survive this too. The rapid improvement in recovery % tage of MFI loans post first wave of COVID 19 is a pointer to this. The focus of current RBI circular is thus on small business and lower end of medium business in 2.6 million units registered in UDYAM portal and with total borrowing facilities up to Rs 250 million. By rule of thumb, it means units with turnover up to Rs 1500 million are target beneficiaries under this scheme. Sharp focus always helps in ensuring the benefits reach the intended and remains measurable too. Recasts under this new window must be invoked by 30 September 2021, and banks and will get an additional 90 days to implement the plan.
These target units are vulnerable due to –
● Very often single person show & wary of taking help of right experts to tide over issues as it emerges.
● Too much of productive time is spent in functions not core to business — managing various inspectors, permissions, chasing the banks for limits.
● Limited financial resources and flexibility.
● Are not able to showcase their strength in a limited mind share allotted to by lenders & poor financial information flow to lenders.
● Often terms of purchases and sales are beyond their control, the cash conversion cycle fluctuates rapidly affecting their working.
● The balance sheet carries full load of all borrowings, even when the market offers good off balance sheet products.
● More SMEs in this target category go down when they are expanding with large debt, unable to absorb even a small market shock. They manage downturns much better as is evidenced in the current pandemic when MSMEs with reasonable financial standing have survived.
● Securing financing more particularly working capital financing in time is rarely a core strength of any small business.
The target units therefore need to use this window strategically for long term survival plan. For banks, the overall objective must be to preserve economic value of the entity rather than ever greening. This entail a joint exercise in a transparent and conducive environment of mutual trust. Many a times the focus by banks is on security rather than cash flows which derails the whole process. So also, the reluctance of promoters to bring in adequate equity over a period to support cash flows in weak times also derails the restructuring process. True restructuring entails immediate sacrifice from both the main stake holders, banks albeit with recompense option at times and promoters. Diagnosis of reasons which may be beyond financials is also important for addressing the resolution of stress in a holistic manner. The implementation plan must be realistic with clearly defined milestone events for trigging actions like additional equity infusion etc.
The package offered by each banks are decided by their board but broad contour are same — Funding of unpaid and future interest, Funding of shortfall in drawing power in respect of working capital facilities, up to 2 year moratorium on repayment of principal, door to door loan tenor up to 7 years, immediate moderation in margin with buildup in later years for working capital, need based additional working capital and necessary minimum term loan for essential long term expenses like balancing equipment, replacement of critical machinery, digitilisation of process, SAP implementation etc. The financial parameters to judge viability being overall DSCR of at least 1.25 over repayment period/ current ratio of 1.10/ FACR of at least 1.0
A professional restructuring exercise would cover –
● Assessment of pre-covid financial standing
● Diagnosis of issues — Financial, Operational, technological
● Assessment of resiliency exhibited by business/ management in wave 1 of COVID 19 in terms of rationalization of fixed cost , monetisation of assets, availment of ELS liquidity, repayment behavior with various credit institutions, creditors & receivable management, write offs etc. Resilient organizations maintain business models that can adapt to significant shifts in customer demand, the competitive landscape, technological changes, and the regulatory terrain.
● Assessment of progress of Digital intensity of business during pandemic times and Capex/opex needs in future to increase digital intensity as a part of Term Loan assessment.
● Assessment of immediate cash outflows on account of statutory payments, urgent creditors, devolved liabilities, reduction in drawing power, salary arrears to staff etc.
● Assessment of cash conversion cycle
● Realistic cash flow projections covering repayment period after recognizing bad debts and with fresh equity augmentation plan, retained accruals and monetisation of surplus assets if any.
● Assessment of cash buffer required to tide over future shocks & uncertainties. General trend in the business is to have at least 2 to 3 months expenses as reserves even though this is ROE decretive.
● Devising judicious financing mix which apart from cash credit and term loans also uses cheaper short term financing products like WHR, off balance sheet reverse factoring for receivable financing, Supply chain financing, Non funded facilities etc.
Units Interested in availing expert one stop financial consultation /professional service for all their growth needs may contact us.
Contact Us :-
Building No. A-9, Office №30
Prakruti Palms CHS Ltd.
Brahmand Phase VI,
Off. Ghodbunder Road,
Thane (West)– 400607
The Author S.K.V. Srinivasan is a veteran commercial banker, former board member of SIDBI & Ex Executive Director of IDBI bank.