Banks have started disbursing funds to Micro, Small and Medium Enterprises under the 100% Emergency Credit Line Guarantee Scheme announced by Finance Minister Nirmala Sitharaman last month but for many firms, hit hard by the pandemic lockdown, credit is still a huge challenge.
Viable companies, with good credit history, are able to raise funds, but the most needy among the MSMEs are facing a double whammy: slump in demand and lack of finance.
Official data shows that as of June 18, state-owned banks sanctioned loans worth Rs 40,416 crore under the scheme of which Rs 21,028.55 crore has been disbursed.
This scheme categorically excludes first-time borrowers and those whose accounts have turned bad. A separate scheme for stressed MSMEs is yet to be operationalised.
Why their hands are tied
RBI may have cut repo rate to 4% but credit to MSMEs is still going out at 8-14%. First-time borrowers are out and high rates deter stressed firms. Lack of demand has shrunk their space.
Banks are not asking for fresh collateral on these loans under the scheme, but since it is extended only to existing borrowers running credit facilities with banks, their factory land, plant and machinery is mostly pledged with the banks.
One significant deterrent, sources said, is that the rate of interest charged by banks under the scheme is almost at par with market rates and does not offer any substantial concession.
Last month, the RBI had cut repo rate 40 basis points bringing it to a record all-time low of 4 per cent. This hasn’t translated to any relief for borrowers.
For, under the scheme, interest rate of banks and financial institutions have been capped at 9.25 per cent per annum, while Non-Banking Financial Companies can lend at maximum of 14 per cent per annum. State-owned banks are lending at around 8 per cent, depending upon the credit worthiness of the borrower.
Industry sources say such high rates make credit unviable for stressed companies that need a working capital loan for a period that their units were shut.
Sources said that along with cheaper credit, MSMEs need government support in lowering fixed costs and short-term benefits like waiver of electricity charges. “Otherwise, not many will survive this onslaught and they will have to wind up,” said Animesh Saxena, President of Federation of Indian Micro and Small & Medium Enterprises.
“These are issues we are talking to the government about… that this loan availability should not be only for existing borrowers. There is a lot of paperwork requirement in borrowing from banks…and most MSMEs fail on a lot of these parameters,” he said.
Apart from exorbitant interest costs, raising loans under the scheme is not easy even for non-NPA companies.
“Borrowers are asked to provide utilisation document for the loan and banks directly disburse the loan amount for outstandings of government statutory payments (such PF and TDS dues), salary payments and settlement of suppliers – which practically leaves nothing with the borrower,” said K E Raghunathan, Former National President, All India Manufacturers Organisation.
The government should make loans available even for stressed MSMEs (those which are Special Mention Account-2), and waive interest burden for loans up to Rs 2 crore which are largely for micro enterprises, he said.
K K Balli, President of East Delhi-based Association of Wholesale Readymade Garments Dealers said banks are calling up MSMEs with land, plant and machinery to extend loans. “Why would banks give loans to small players and garment traders if they do not have adequate collateral? These players can get overdraft and cash credit against hypothecation,” he said.
In a report released last week, CRISIL Rating said it expected MSME revenues and profitability to fall steeply, hitting micro enterprises the hardest.
Micro enterprises account for 32 per cent of the overall MSME debt. Consumer discretionary, construction, export-linked MSMEs and textile and ceramics players are being seen as the most affected.
“For MSMEs, the fall in revenue will be steeper at 17-21 per cent, while EBITDA margin will shrink 200-300 basis points to 4-5 per cent as weak demand gnaws away gains from lower commodity prices. A sharp decline at the operating level will also impact creditworthiness, aggravating the liquidity stretch these units have been grappling with, particularly on the working capital front,” the report said.
Need for fresh loans among small and medium enterprises may also be low because there is no pick-up in demand. “We do not need additional working capital loans since there is not enough demand in market and interest keeps piling up on additional facilities,” said a Ludhiana-based MSME player manufacturing auto parts.
📣 The Indian Express is now on Telegram. Click here to join our channel (@indianexpress) and stay updated with the latest headlines