MSMEs may need massive restructuring post moratorium, says industry

Source: Business Standard, Jun 26, 2020

Kolkata: Micro, small, and medium enterprises (MSMEs) might need large-scale restructuring in August once the moratorium on loan repayment is lifted, people in the industry have said.

Most small businesses have started opening up with Unlock 1.0 but they continue to remain under stress due to lack of demand.

In March, the Reserve Bank of India (RBI) had launched three-month moratorium on loans, which was extended by another three months. Customers can now avail of moratorium till August, albeit at a higher cost on account of accrued interests.

“About 40-50 per cent of borrowers are availing of the moratorium and the stress is likely to continue. Across the banking sector, small businesses have been seriously impacted and banks might have to make high provisions for them if restructuring is not done. This will seriously impact balance sheets of all banks,” said Samit Ghosh, founder of Ujjivan Financial Services, adding that MSMEs might need further restructuring after the moratorium period is over.

S Harisankar, managing director and chief executive officer of Punjab & Sind Bank, said they were adopting a wait and watch approach. “If cash flow improves, MSMEs will be self-sustainable. If it doesn’t, we will have to be open for further restructuring and forbearance,” he said.

Small industries have proposed to extend the moratorium till March 31, 2021. “For most MSMEs, the supply chain is largely disrupted, there is an acute labour shortage, and the export market is very weak. Most importantly, there is not much demand in the market,” said Chandrakant Salunkhe, founder and president of SME Chamber of India and SME Importers Association of India.

According to estimates by Small Industries Development Bank of India (Sidbi), recoveries have been around 40-65 per cent in June for most non-banking financial companies, including microfinance operators.


Microfinance lenders that lend to small businesses have been witnessing better recoveries as their lending has been mostly concentrated in rural areas. Most of the loans sanctioned by Sidbi have been for emergency purposes, such as paying staff salaries, according to sources. Sidbi had received Rs 15,000 crore from the RBI to provide financial help to MSMEs.

“Although 75 per cent of our customers are in rural areas, if we look at pure urban customers, we find small businesses have been very badly affected. It is quite possible that they might need some restructuring once the moratorium is lifted,” said H P Singh, chairman and managing director, Satin Creditcare Network.

In rural areas, income from harvesting season, along with the essential nature of rural occupations, helped rural borrowers to be more resilient to the economic slowdown due to Covid. Recently, Finance Minister Nirmala Sitharaman had said that banks had sanctioned working capital loans of Rs 75,426 crore under the Rs 3-trillion Emergency Credit Line Guarantee Scheme for MSMEs. Of the sanctioned amount, Rs 32,895 crore has been disbursed. Under the scheme, the government offers full guarantee on up to 20 per cent additional and collateral-free working capital loans.

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