Sunday, June 13

RBI loan moratorium of little help for MSMEs as business recovery to repay remained low

The Reserve Bank of India’s six-month moratorium on term loans, including business loans helped MSMEs temporarily survive financial devastation due to the lockdowns. However, it was a short term solution that could offer nothing to help them recover, especially with demand in such a slup. MSMEs are hoping for more working capital support and a longer time to remain afloat, as they fight the economic implications of this massive, deadly surge. Last year, however, banks and credit rating agencies warned the RBI that extending the moratorium duration would put the economy at risk of more non-performing assets. 

MSME loans

Most MSMEs avail a business loan for their enterprises, for financial assistance in order to meet their needs. The are several types of business loans, but perhaps the two most common business loans among MSME are-

  1. MSME Business Loan

An MSME loan can be used for a variety of things, including improving the company’s facilities, purchasing and repairing factory equipment, and purchasing raw materials.

  1. Working Capital Loan

Working capital refers to the funds that power a company’s day-to-day operations, be it a MNC with large scale operations or a MSME. Working capital loans are a good way to pay off debt without giving up any equity.

There are four types of working capital loan-

  • Short term: This type of working capital loan is typically availed to fund short-term cash flow deficits. Tenures are usually one year or slightly longer in length, and they can be used to cover operating and overhead expenses during that time.
  • Long term: These loans have a slightly longer term, up to 5 years or more, and can be used to cover operating expenses when a company is expanding. They can also be used to cover operating expenses for a longer period of time in difficult situations before an organisation regains its footing.
  • Secured Loans: In order to securitize the loan, the lender would need an asset from the customer. Since it is seen as a high-risk investment, a higher rate of interest will be paid. If there are any late payments, this form of business loan can become burdensome and cause more harm to the company’s credit score.
  • Unsecured Loans: These can be a useful way for a small business to keep running without having to give up all of its properties as leverage. 

Why does it have little impact?

  • A means to survival: A good proportion of MSMEs availed the moratorium benefit. In spite of that, many are in no position to start repaying their debt. The moratorium was a means of survival, not a means to an end. There was no MSME operation when the moratorium was proposed. In order for MSMEs to repay, they needed to have operations, which they didn’t have. The government had provided ECLGS and the restructuring programme, which had alleviated some tension.
  • The long term solution : The long term, sustainable way for business owners to work their way out of this travesty is having a rise in demand. However, the prospects of this seem weak, since the second wave of the Covid 19 pandemic is proving more fatal than its predecessor. Until then, they are resting their hopes on another moratorium.

How can the MSMEs be helped

Although the effect of current lockdown constraints will be determined in the near future, the impact of Covid and the subsequent lockdown last year on MSMEs in terms of the number of units that closed was unknown. Leading economists and financial experts suggest that MSMEs could be better helped by-

  • providing capital support to those businesses that have lost all revenue
  • postponing other tax payments such as GST until they have reestablished a steady line of revenue.
  • This also enables MSMEs to save their emergency refunds to keep their business afloat, should there be another series of harsh lockdowns.

The lenders point of view

  • The expected stress in the sector: Lenders are also keeping an eye on the effect of Covid 2.0 on MSMEs to see what kind of stress they might see in the sector. Only payment behaviour can be used to determine actual stress. The current behaviour does not accurately reflect the challenges that MSMEs face. The second wave is causing MSMEs to experience entirely unexpected disruption. MSMEs have yet to completely recover from the first wave’s storm, they are now confronted with a typhoon.
  • The additional burden: Some lenders are also wary of having to bear the grunt of the moral hazards with such moratoriums- individuals and corporations with the financial means to pay are taking advantage of the moratorium and deferring payment. This could hurt the financial positions of lenders. 

How the efforts to support MSMEs pan out with this new wave of infections remains to be seen. It must be kept in mind that keeping the MSME sector afloat is crucial, for it forms an integral part of India’s economy.

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