Mega MSME Outreach Programme

1. Resurgent India Knowledge Series- 15th May 2020 “Mega MSME Outreach Programme - Bank Initiatives towards MSME Sector” Speaker- Mr Rajkiran Rai G, MD & CEO- United Bank of India Key Takeaways General Overview MSME has historically played a pivotal role in building our economy. This crisis has not spared anyone and MSMEs have been crushed under its weight. Drying cash flows, labor migration are some of the many problems that they are facing as we speak. This is an interim period where we have to rebuild our economic practices. It’s a vicious circle of survival where companies and financial institutions are interdependent on each other. MSME makes ⅓ of GDP of the country and they are the second largest employer in our country after agriculture. It is estimated that more than 11 cr people are employed through MSMEs and allied activities. In addition, MSME generates substantial cash flow as compared to agriculture. Although, even with banks ⅕ of the credit is accounted by the MSMEs, they are yet not fully part of the formal lending mainly because MSMEs couldn’t provide information like balance sheets & turnover data that banks require to extend credit. And this where NBFCs stepped in. The credit issues can be relating to liquidity or solvency. Most of the MSMEs mask their solvency issue as liquidity issue which solves the problem temporarily. Solvency issues can be related to old receivables, supply chain & technology. RBI in recent times have come out in support of MSME to help them deal with credit issues. PSB 59 portal is also a great step by government for informal MSMEs based on their GST returns to get in-principle approval. The

2. tool has good escalation mechanism where the banks are required to make time-bound decision. Government has removed the difference between the manufacturing and services in MSME, increased the investment cap in plant & machinery and also introduced turnover criteria. We are hoping more relaxations will be given by bank so large number of companies are eligible for MSME benefits. The 3 lakh crore automatic loan to the MSMEs, as announced by the honorable finance ministry, is given with the view of making credit flow easier for the business owners so that they can focus on getting their business started. Government also is aware of the equity problem of the promoter which it has addressed via the scheme of subordinate debt. Regulators are also looking at deep restructuring of stressed MSMEs. All this put together, banks & governments are supporting the MSMEs that are required to to create the demand push of the economy and activate the chain. Most of the banks’ external rates are linked to repo rate, hence the transmission of the lower interest rates is immediate. The repo rates are at all time low, and we foresee further reduction because balancing act has to be maintained between the deposit rates and lending rates. The solution is to interest subvention or bring down credit cost. Rating downgrades by rating agencies are inevitable but a lot of suggestions can deliberations can be built like developing different rating system for MSME, Using of parallel ratings like internal ratings of banks or CMR ratings instead of external ratings for MSMEs up to 100 cr, or regulatory forbearances. These are only suggestions at this point that can be reviewed and recommended by different bodies of association like IBA, & ICC and push it to government & regulator. All the PSU banks uniformly came out with the 10% working capital emergency line of credit on fund based limit as an immediate response. Many banks (including UBI) further have taken their own independent decision of converting the non-fund based to fund based as & when LCs are invoked.

3. Earlier the deferment of installments and interest rate for NBFCs was not clarified, but now banks are sufficiently clear about it and they are providing to those who have made a request for it. There should be better resolution mechanism developed where the banks can differentiate between the MSMEs based on their collateralization in order to help the borrowers who are 100% collaterized and support them at this time. This idea can be floated in upcoming times. Pre-sanction physical documentation can now be done digitally. For disbursal, the immediate documentation is not very demanding and period of 60 days is given to complete full documentation. All the measures taken are to address the short term issues. As we come to the end of the cycle of this pandemic, every issue will have to be reassessed. Website: www.resurgentindia.com Webinar Link: https://bit.ly/2YOtmFR