Why most businesses, startups trying to register as MSMEs may not get loans

As small businesses and start-ups line up to register as micro, small and medium enterprises (MSMEs), most do not stand to benefit from the government’s relief package, say officials.

The government had last month announced loans worth Rs 3 trillion for an estimated 4.5 million MSMEs that are facing a liquidity crunch since last year.

While the term loans — that are collateral-free and automatic — have been made available till October 31, only businesses that have outstanding loans of up to Rs 25 crore would be eligible.

This saw a surge in start-ups and small businesses across the country logging in to the MSME Ministry’s registration portal — Udyog Aadhaar — hoping to get a shot of liquidity through the loans, as well as other benefits.

Experts, however, say the loan scenario looks bleak. 

“These new loans are categorised as ‘additional working capital finance’ for firms which have already been granted loans and those with a turnover up to Rs 100 crore. These will amount to a maximum of 20 per cent of the firm’s outstanding credit as of February-end. Also, the outstanding credit needs to be at least 60 days past due as of that date,” a senior government official pointed out.

The loans have elicited massive response since the units will not have to provide any guarantee or collateral of their own, the official added. The amount will be 100 per cent guaranteed by the government.

“The ability to access this fund has nothing to do with whether an entity is registered through the government’s MSME website or not. Only entities with an outstanding loan are eligible,” said Anil Bhardwaj, secretary general of Federation of Indian MSMEs.

Tough luck

Earlier this week, the Cabinet approved a Rs 20,000-crore subordinated debt for 200,000 MSMEs which have been tagged a non-performing asset or are stressed. Under this, the government will disburse Rs 4,000 crore to the Credit Guarantee Fund Trust for Micro and Small Enterprises which allows MSMEs to secure bank credit without the hassles of collaterals or third-party guarantees. The government will, however, guarantee the entire Rs 20,000 crore.

Current NPA norms don’t allow restructuring of MSMEs which are categorised as stressed, MSME Minister Nitin Gadkari had earlier said. Banks are expected to provide the subordinated debt to promoters of such MSMEs equal to 15 per cent of their existing stake in the unit. The loan amount will be limited to a maximum of Rs 75 lakh and interest will be kept to a minimum, Gadkari had said.

This move, too, is only for registered MSMEs which have already been categorised as stressed and are prone to defaulting on their business obligations, a senior MSME ministry official clarified.

While more details will soon be made clear, this particular clause is unlikely to change, he added.

 

Silver lining

Start-ups and new MSMEs may, however, get one benefit. The Centre had announced the creation of a mega ‘fund of funds’ with a corpus of Rs 50,000 crore to help MSMEs expand capacity and eventually get listed in the markets of their choosing.

Gadkari had clarified the government will now buy equity stakes worth up to 15 per cent in MSMEs that choose to get listed. Once the listed price of the firm’s stock gathers strength to a certain degree, the government will divest its investment, allowing the money to be given to another MSME, he had said.

A senior policy expert working on start-ups with the NITI Aayog said: “While the prevailing volatile nature of the stock markets may not imbue entrepreneurs with a lot of hope, those entities which are ambitious enough, and want to get formalised soon can benefit from this move.”

Over the past few days, industry organisations such as The Indus Entrepreneurs, a Silicon Valley-based non-profit group supporting start-ups, have also advised getting an MSME registration, arguing easier recovery of payments pending from the government and easier access to government tenders.