MSMEs may see another round of restructuring as RBI moratorium eases

Small businesses remain under stress as India ends lockdown to contain coronavirus outbreak

Micro small and medium enterprises (MSMEs) might need large-scale restructuring in August, when the moratorium on loan repayments will be lifted.

As the country opens up after a lockdown to contain the coronavirus, small businesses remain under stress.

“One-time restructuring might be needed after the moratorium is lifted. About 40-50 per cent of borrowers are availing 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, Ujjivan Financial Services. 

“We will have to wait and watch the situation. If the cash flows of the MSMEs improve, they will be self-sustainable. However, if it doesn’t improve, we will have to be open-minded towards further restructuring and forbearance,” said S Harisankar, Managing Director and Chief Executive Officer of Punjab & Sind Bank.

The Reserve Bank of India (RBI) granted in March a three-month moratorium on loans and later extended it for another three months. Hence, customers can avail moratorium till the month of August, albeit at a higher cost on account of accrued interests.

“We have already proposed to extend the moratorium till 31st March, 2021. For most MSMEs, the supply chain is largely disrupted, there is acute labour shortage, the export market is very weak and 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 Sidbi (Small Industries Development Bank of India), for most non-banking finance companies (NBFCs), including microfinance operators, recoveries have been between 40-65 per cent in the month of June.

Microfinance lenders, who typically lend to small businesses, have been witnessing better recoveries as their lending have been mostly concentrated in rural areas.

Most of the loans sanctioned by Sidbi to MSMEs have been for emergency purposes, like paying staff salaries, according to sources. Sidbi had received Rs15,000 crore from Reserve Bank of India (RBI) in order 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 that 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.

Finance minister Nirmala Sitharaman recently said that banks have sanctioned working capital loans of Rs 75,426 crore under the Rs 3-lakh-crore Emergency Credit Line Guarantee Scheme (ECLGS) for MSMEs. Of the sanctioned amount, Rs 32,895 crore has already been disbursed. Under the scheme, the government offers full guarantee on up to 20 per cent additional and collateral-free working capital loans.