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Reserve Bank panel proposes Rs 5,000-crore ‘distressed asset fund’ for MSMEs

The committee said the proposed distressed fund should be structured to assist units in clusters where a change — like a ban on plastics or dumping — in the external environment has led to a large number of MSMEs becoming non-performing assets (NPAs).

By: ENS Economic Bureau | Mumbai |
Updated: June 26, 2019 3:00:23 am
MSME, MSME crisis, U K Sinha committee, MSMEs, MSME sector, MSME sector crisis, loans under MUDRA, RBI, Indian express The panel, headed by former Sebi Chairman UK Sinha, submitted its report to the RBI Governor last week. (Express Photo by Pradip Das)

The UK Sinha Committee on micro, small and medium enterprises (MSME), constituted by the Reserve Bank of India, has proposed the creation of a Distressed Asset Fund with a corpus of Rs 5,000 crore and a Fund of Funds (FoF) of Rs 10,000 crore to support venture capital and private equity firms investing in the struggling MSME sector.

The committee said the proposed distressed fund should be structured to assist units in clusters where a change — like a ban on plastics or dumping — in the external environment has led to a large number of MSMEs becoming non-performing assets (NPAs). “This fund could then operate on the lines of the Textile Upgradation Fund Scheme (TUFS) which has been in existence over many years. This would be of significant size in order to make equity investments that help unlock debt or help revive sick units,” it said.

The formation of the committee was proposed in the December 5 policy of the RBI when Urjit Patel was the RBI Governor amid complaints that MSMEs were facing credit crunch and closures after the demonetisation. The panel, headed by former Sebi Chairman UK Sinha, submitted its report to the RBI Governor last week.

The structure of the distressed fund would recognise that exits will not be big bang but through a percentage of revenues or profits over a period of say 3-5 years. “Such a fund could work in tandem with the RBI mandated restructuring schemes or bank led NPA revival solutions for MSMEs. The onus of creating this fund would lie with the government,” he said. The committee said a government sponsored Fund of Funds (FoF) of Rs 10,000 crore to support VC/PE firms investing in the MSME sector that will support crowd funding from venture capital and private equity firms, which focus on investing in the MSME segment on modified term sheets developed by SIDBI. “This would encourage innovation in term-sheets and product structures,” it said.

The committee has recommended that the limit for collateral free lending to MSMEs and Self Help Groups (SHGs) should be increased to Rs 20 lakh from the current level of Rs 10 lakh.

Accordingly, the portfolio guarantee extended under the Credit Guarantee Fund for Micro Units (CGFMU) should be extended to Rs 20 lakh for borrowers under the Prime Minister’s Mudra Yojana (PMMY) and SHGs. The corpus of CGFMU should be augmented accordingly to Rs 10,000 crore by 2024. As on March 31, 2018, the corpus of CGFMU was Rs 3,200 crore.

The committee said an MSME account could be considered for upgrade to “standard” after six months of satisfactory operation, instead of one year at present. In order to provide loan portability in a seamless manner to MSMEs, the committee has recommended that the RBI should come out with measures on portability of MSME loans with a lock in period of one year, it said.

It has said as the Standup India Guarantee Scheme overlaps with the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) with similar cover, this scheme needs to be folded up with the corpus being redeployed either in CGTMSE or in the CGFMU. Guarantees for Standup India loans would continue to be extended through CGTMSE. According to the committee, the working group of SIDBI and the Indian Banks Association (IBA) may also consider ways to reduce turnaround time (TAT) especially in the pre loan origination system (LOS) or centralised sanction stage.

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