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Updated: Mar 9, 2023

The following extracts from SBI research paper dated 23.01.2023 in its Executive Summery in section IV under “An Update on ECLG Scheme” states, “How the ECLGS scheme acted as an enabler in guiding the MSME sector through the pandemic.

Ø As per our analysis, at least 14.6 lakh MSMEs accounts were saved due to ECLG scheme

Ø In absolute terms, MSME loan accounts worth Rs 2.2 lakh crore improved since inception of ECLGS for entire banking industry. This means that around 12% of the outstanding MSME credit has been saved from slipping into NPA because of the ECLG scheme

Ø Of 14.6 lakh MSMEs accounts that are saved due to ECLG scheme, almost 93.8% were in Micro and Small category

Ø As per our analysis, if such units slipped into NPA, then 1.65 crore workers would have become unemployed. Thus, the ECLG scheme has saved the livelihood for 6.6 crores (assuming four family members per worker including herself/himself)

It was indeed a very good timely action initiated by the government during pandemic to tide over the deteriorating situation faced by enterprises coming under the purview of MSME sector and saved many MSMEs from classifying them as NPA. But the under mentioned questions need answers.

(a) Are the steps taken during pandemic period be considered as a permanent solution?

(b) What could be post pandemic scenario of the MSME sector after the financial year end as on 31st March 2023?

(c) Did the reassessed and restructured Scheme sanctioned to the borrower after negotiating with the borrower ensure realistic cash flow to meet the futuristic financial commitments to the banks and financial institutions and other creditors by the borrowers after the moratorium period fulfilling the terms and conditions of the restructured sanction and guarantee stipulations? (Many banks and financial institutions do not furnish the certified copies of their appraisal and assessment report in spite of requesting them in writing which is against RBI direction.)

The entire restructuring programme was initiated under government guidance as per RBI circular Resolution Framework 2.0 – Resolution of Covid-19 related stress of Micro, Small and Medium Enterprises (MSMEs) dated 5th May 2021 which stated, as referred to in their circular DOR. No. BP.BC/4/21.04.048/2020-21 dated August 6, 2020 on restructuring of advances to the MSME borrowers:

“2. In view of the uncertainties created by the resurgence of the Covid-19 pandemic in India in the recent weeks, it has been decided to extend the above facility for restructuring existing loans without a downgrade in the asset classification subject to the following conditions:

(i) The borrower should be classified as a micro, small or medium enterprise as on March 31, 2021 in terms of the Gazette Notification S.O. 2119 (E) dated June 26, 2020.

(ii) The borrowing entity is GST-registered on the date of implementation of the restructuring. However, this condition will not apply to MSMEs that are exempt from GST-registration. This shall be determined on the basis of exemption limit obtaining as on March 31, 2021.

(iii) The aggregate exposure, including non-fund based facilities, of all lending institutions to the borrower does not exceed ₹25 crore as on March 31, 2021.

(iv) The borrower’s account was a ‘standard asset’ as on March 31, 2021.

(v) The borrower’s account was not restructured in terms of the circulars DOR. No. BP. BC /4 /21.04.048/2020-21 dated August 6, 2020; DOR.No.BP.BC.34/21.04.048/2019-20 dated February 11, 2020; or DBR.No.BP.BC.18/21.04.048/2018-19 dated January 1, 2019 (collectively referred to as MSME restructuring circulars).

(vi) The restructuring of the borrower account is invoked by September 30, 2021. For this purpose, the restructuring shall be treated as invoked when the lending institution and the borrower agree to proceed with the efforts towards finalising a restructuring plan to be implemented in respect of such borrower. The decisions on applications received by the lending 2 institutions from their customers for invoking restructuring under this facility shall be communicated in writing to the applicant by the lending institutions within 30 days of receipt of such applications. The decision to invoke the restructuring under this facility shall be taken by each lending institution having exposure to a borrower independent of invocation decisions taken by other lending institutions, if any, having exposure to the same borrower.

(vii) The restructuring of the borrower account is implemented within 90 days from the date of invocation.

(viii) If the borrower is not registered in the Udyam Registration portal, such registration shall be required to be completed before the date of implementation of the restructuring plan for the plan to be treated as implemented.

(ix) Upon implementation of the restructuring plan, the lending institutions shall keep provision of 10 percent of the residual debt of the borrower.

(x) It is reiterated that lending institutions shall put in place a Board approved policy on restructuring of MSME advances under these instructions at the earliest, and in any case not later than a month from the date of this circular.

(xi) All other instructions specified in the circular DOR. No. BP.BC/4/21.04.048/2020-21 dated August 6, 2020 shall remain applicable.

3. In respect of restructuring plans implemented as per Clause 2 above, asset classification of borrowers classified as standard may be retained as such, whereas the accounts which may have slipped into NPA category between April 1, 2021 and date of implementation may be upgraded as ‘standard asset’, as on the date of implementation of the restructuring plan.

4. In respect of accounts of borrowers which were restructured in terms of the MSME restructuring circulars, lending institutions are permitted, as a one-time measure, to review the working capital sanctioned limits and / or drawing power based on a reassessment of the working capital cycle, reduction of margins, etc. without the same being treated as restructuring. The decision with regard to above shall be taken by lending institutions by September 30, 2021. The reassessed sanctioned limit / drawing power shall be subject to review by the lending institution at least on a half yearly basis and the renewal / reassessment at least on an annual basis. The annual renewal/reassessment shall be expected to suitably modulate the limits as per the then-prevailing business conditions.

5. The above measures shall be contingent on the lending institutions satisfying themselves that the same is necessitated on account of the economic fallout from Covid-19. Further, accounts provided relief under these instructions shall be subject to subsequent supervisory review with regard to their justifiability on account of the economic fallout from Covid-19.”

Press release put out by Ministry of Finance, Government of India on ECONOMIC SURVEY 2022-2023 highlights that “Indian economy staging a broad based recovery across sectors, positioning to ascend to pre-pandemic growth path in FY23” and that “State of the Economy 2022-23: Recovery Complete” Further, while industry is showing steady credit recovery, “Credit to Micro, Small and Medium Enterprises (MSMEs) has grown by an average of around 30% since January 2022 and credit to large industry has been showing double-digit growth since October 2022.”

It is very clear that all the aforesaid restructurings were initiated for MSME sector with many riders and terms and conditions to be over by 31st March 2023 when the repayment of instalments and interest will start based on the purported assumption that the devastating effect of the pandemic corona would have been over by then and stability would have been restored among the MSME sector creating enough cash flow to fulfil their financial and other business commitments. Were these assumptions based on envisaged realities or a mere wishful thinking as per the prevailing global situation?

“Banks could see an increase in bad loans in the retail and small business segments from its recent low levels, an official with country’s largest lender said recently”. “For the small businesses, the bad loans were higher at 7.7%, the RBI's financial stability report added”.

In a report released by the Associated Chambers of Commerce and Industry of India and CRISIL Ratings said “the gross NPA ratio for the small and medium enterprises may rise to 10-11% by March next year. These businesses often have weaker cash flows or little equity, which erode quickly in times of stress and eventually leads to defaults, SBI's Tiwari said. “But clearly, MSME (Micro, Small and Medium Enterprises) stress is something which might be coming."

World Bank in their recent January 2023 press release predicted ‘Sharp, Long-lasting Slowdown to Hit Developing Countries Hard” and “2023 global growth to slow to 1.7% from 3% expected six months ago” Global growth is slowing sharply in the face of elevated inflation, higher interest rates, reduced investment, and disruptions caused by Russia’s invasion of Ukraine, according to the World Bank’s latest Global Economic Prospects report.

“The global economy is projected to grow by 1.7% in 2023 and 2.7% in 2024. The sharp downturn in growth is expected to be widespread, with forecasts in 2023 revised down for 95% of advanced economies and nearly 70% of emerging market and developing economies.” Over the next two years, per-capita income growth in emerging market and developing economies is projected to average 2.8%- a full percentage point lower than 2010-2019 average.

“Emerging and developing countries are facing a multi-year period of slow growth driven by heavy debt burdens and weak investment as global capital is absorbed by advanced economies faced with extremely high government debt levels and rising interest rates. Weakness in growth and business investment will compound the already-devastating reversals in education, health, poverty, and infrastructure and the increasing demands from climate change.”

The World Bank predicts “emerging market and developing economies is expected to decelerate from 3.8% in 2022 to 2.7% in 2023, and “By the end of 2024, GDP levels in emerging and developing economies will roughly 6% below levels expected before pandemic”

India growth is illustrated as per the chart here below.

(Source: National Statistics Office and World Bank Forecast FY: 22-23 and FY: 23-24)

Unpredictability of future and its gory effects have been exposed. Besides, the devastating effect of climate change creating natural calamities of great magnitude, worsening geo political situation especially ranging hostilities between Russia and Ukraine and the ongoing global power crisis, spreading terrorisms in many parts of the world and deteriorating economic situations in many countries aggravate the already worsening global financial and business environment.

Yet another reality factor is the threatening re-emergence of the corona variant and the impending global recession predicted by World Bank and the effect of these on global economy. Apart from the aforesaid threat, “Microfinance NPAs surge to a record despite cleansing” and as per statistics third quarter stress up by 16% at Rs.3200 crores as of end of December 2022and recovery of Covid-hit bad assets showing poor recovery result as per recent Sa Dhan report.

“It’s hard to predict the demand and growth numbers for FY24 as last two years have been “Zig Zag years” as stated by Debjani Ghosh, President of Nasscom recently. Besides, “We also live in the midst of much more volatility and uncertainty than they ever have in the past” said Krishnan Ramanujam Chief Technology Officer, TCS.

‘Global rating agency Moody’s Investors Service raised India’s economic growth forecast for 2023 to 5.5% from November projection of 4.8% on the back of a sharp increase in the capital budget and resilient economic momentum” Further they also expect the global growth to continue to slow in 2023, with increasing drag from cumulative monetary policy tightening on economic activity and employment in most major economies.”

While the optimism and hope with which the Government has taken the positive budgetary steps are praiseworthy, neither the economic survey nor the annual budget touched upon the World Bank report on Global Economic Forecast and its warning which states, “Given fragile economic conditions, any new adverse development—such as higher-than-expected inflation, abrupt rises in interest rates to contain it, a resurgence of the COVID-19 pandemic, or escalating geopolitical tensions—could push the global economy into recession. This would mark the first time in more than 80 years that two global recessions have occurred within the same decade.” The economic survey or the budget envisages any counter action to be undertaken if the World Bank predictions come true. The probability and the possibility of any untoward calamity taking place at any time beyond anybody’s control cannot be overlooked and people cannot be caught unaware. It is time for the industry and business to undertake a review of their current financial status and performance analysis to understand their capacity to meet their financial commitments and the future shocks, if it strikes. Therefore, it is advisable that the borrowers should approach their banks and financial institutions in case they feel any stress factor to seek their help and guidance from their banks and financial institutions at the earliest much before their loan repayment commitment starts. Complacency and indifferent attitude should be avoided to prevent greater catastrophe.

In my opinion if we think of waiting for tomorrow, then it may not even come. Hence, the best solution is to bring tomorrow today and succeed. Remember “An ounce of prevention is worth a pound of cure.” (Benjamin Franklin)

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