Budget 2022: MSMEs may get credit guarantee, better deal in IBC cases

Banks and MSME industry representatives have sought support for the sector in the line of ECLGS, a measure introduced early in the pandemic

With a large number of micro, small, and medium enterprises (MSMEs) continuing to reel from the impact of the ongoing Covid-19 pandemic, banks and companies have represented to the finance ministry for another relief package for the sector.
 
According to bankers, the third wave of the Covid-19 pandemic, mainly driven by the Omicron variant, has impacted the MSME sector adversely. Banks and MSME industry representatives have sought support for the sector in the line of Emergency Credit Line Guarantee Scheme (ECLGS), a measure introduced early in the pandemic.
 
The ECLGS scheme entails 100 per cent credit guarantee by the NCGTC (National Credit Guarantee Trustee Company Ltd) for loans extended by banks and non-banking finance companies.

 

In addition, a large number of MSME accounts that have turned non-performing (NPA) even with an extended classification of 180 days’ overdue, the security collateral usually remains fully utilised in MSMEs. As a result, promoters are unable to bring in additional security demanded by lenders to accept a restructuring package.
 
“For units impacted during the Covid pandemic, a guarantee cover of 100 per cent of additional security needed for restructuring may be extended through the existing CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises) scheme or through a new instrument under NCGTC,” said the pre-budget memorandum of the Federation of India MSMEs (FISME).

 
There is also a demand to amend the Insolvency and Bankruptcy Code (IBC) for better recovery of the dues from MSMEs.
 
A large number of MSMEs are suppliers to companies. During the Corporate Insolvency Resolution Process (CIRP) and liquidation process under the IBC, MSME suppliers are treated only as operational creditors.
 
“For distribution of assets as per waterfall mechanism’ under both these processes the dues of MSME operational creditors are mostly written off with little to no recoveries, as by the time the dues of the secured creditors are addressed there is very little left to distribute,” FISME said in its pre-budget memorandum to the government.

 
“The procedure is such that hapless MSME suppliers get nothing if their large buyers go through CIRP/ liquidation. The process has pushed many MSME suppliers to the brink of closure for no fault of theirs. As one large corporate entity would have many MSME suppliers, a large debtor becoming insolvent also has a snowball effect. All of this is despite the MSME Act providing for timely payment of MSME dues which stand overruled by the IBC,” FISME said.
 
As a remedy, it has been suggested that MSMEs should be classified as a separate sub-category under the existing operational creditors category and accorded priority for payment of their dues over other operational creditors’ and other debts / debtors’ by introducing a relevant amendment under the waterfall mechanism as under Section 53.

 
“Further, section 53 be so amended as to put dues of MSMEs on a par with the dues of workmen to a minimum extent of 5% of the total CIRP or liquidation amount, as the case may be, for payment,” the pre-budget memorandum said.