Distressed MSMEs Will Now Benefit From New Debt Facilities

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Distressed MSMEs Will Now Benefit From New Debt Facilities

What seemed like a mild annoying breeze of disease back in January became a tsunami by March. The Coronavirus pandemic, which is now in full-throttle has uprooted several businesses and financially damaged many others. The losses are behemoth and the economies and enterprises suffering are many. The biggest victims of this pandemic are the MSMEs – small enterprises that were just starting to rise up in the business crowd.

Thankfully, the government is not without heart, for it has announced a New Debt Scheme. It’s known as “Distressed Assets Fund- sub-ordinate Debt for MSMEs” and it’s expected to provide benefit to more than 2 lac MSMEs. In this article, we analyze the scheme and its impact on MSMEs and employment.

Why MSMEs should be protected during the pandemic?

MSMEs or Micro, Small and Medium Enterprises are the backbone of Indian economy. They are the living proof that through innovation, tenacity and some help, anyone can establish a successful business. That is the main reason why MSMEs should be protected during the pandemic, but it’s not the only one.

1. MSMEs are providing the protective gear during this crisis: COVID-19 pandemic era – it is an era, believe us – has witnessed an explosive rise of protective gear industries. Several MSMEs has cropped out of the woodwork to fulfil the sudden high demand of PPE kits masks, sanitizers face shields and more. Indirectly, those enterprises are now acting as smiths, protecting our front-line workers from the wrath of COVID-19.
2. MSMEs are the providers of intermediate goods: Most major goods manufacturers require tools and articles that can only be affordably produced by MSMEs. As intermediate good providers, MSMEs push industrialization which in turn, pushed development.
3. MSMEs provide tertiary services: You can’t imagine a business running without good logistics, delivery and supply services, can you? All those tertiary services you can’t imagine your business running without are provided by MSMEs.

Why do MSMEs need subordinated debt?

Subordinated debt is a class of unsecured loans – becoming payable only after the claims of other secured creditors have been met. The devastative impact that COVID-19 has had on the MSMEs has left many of them without any assets, but a lot of liabilities. Thus the MSMEs need subordinated loans which will help them repay their secured creditors while moving the MSME forward. Other reasons are:

1. It will suppress the quantum of Nonperforming Assets that the MSMEs are left with due to COVID-19.
2. It will help promoters to gain traction in business that they lost during COVID-19 pandemic.

What is present in the Distressed Asset Funds scheme?

The government has furnished several details regarding this scheme and all of them are difficult to understand. Thus, we have made it simple for you to comprehend and implement:

1. Eligibility: MSMEs who were operational but became”stressed” before or on 30th April 2020 are the only one available for this scheme.
2. Credit Guarantee Cover: Government has put INR 20000 Crore in this scheme which will be disbursed to MSMEs to improve their financial condition.
3. Responsibility of the promoters: The promoters have to integrate the amount taken from this scheme as equity share in the company.
4. Repayment moratorium: Those who avail this scheme are exempted from repaying the principle amount for 7 years.

Advantages of Credit Scheme

Following are the advantages of subordinated debt for promoters:

1. Limited impact on stressed MSMEs
2. The government becomes the guarantor on personal loans.
3. The loan will make MSMEs liquid enough to pay back their outstanding credits.

Conclusion

In this blog, we have given you our analysis of how subordinated loans can help your MSMEs. We will keep on updating as stimulus package becomes more understandable.

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