U.K. Sinha-led RBI panel suggests ₹5,000 crore stressed asset fund for MSMEs

U.K. Sinha-led RBI committee proposes relief for MSMEs

Mumbai: A Reserve Bank of India (RBI) committee has suggested a ₹5,000 crore stressed asset fund for domestic micro, small and medium enterprises (MSMEs) in a relief to small businesses hurt by demonetization, the goods and services tax and an ongoing liquidity crunch.

The committee to study the problems faced by MSMEs was chaired by U.K. Sinha, former chairman of the Securities and Exchange Board of India.

“The committee recommends for the creation of a distressed asset fund, with a corpus of ₹5,000 crore, structured to assist units in clusters where a change in the external environment, e.g. a ban on plastics or ‘dumping’ has led to a large number of MSMEs becoming non-performing asset (NPA),” its report published on Tuesday said.

The committee said such a fund could work in tandem with RBI-mandated restructuring schemes or bank-led NPA revival solutions for MSMEs. “The onus of creating this fund would lie with the government,” it said.

The committee also suggested forming a government-sponsored Fund of Funds of ₹10,000 crore to support venture capital and private equity firms investing in MSMEs.

India’s 63.38 million MSMEs contribute significantly to the country’s economic growth. The sector accounts for about 45% of manufacturing output, more than 40% of exports, over 28% of gross domestic product and employs about 111 million people.

Worldwide, small businesses account for more than 50% of employment and are key engines of job creation and economic growth in developing countries.

Small businesses have been facing a spate of disruptions since the government decided to demonetize high-value currency notes in November 2016. This abrupt move was followed by a hasty implementation of the goods and services tax in 2017, and the final nail was the liquidity crunch triggered by a series of debt defaults by group companies of Infrastructure Leasing and Financial Services Ltd in 2018.

Chandrakant Salunkhe, founder and president of the SME Chamber of India, said the corpus was too small and would fall short of aiding the large target market. “A corpus of at least ₹20,000 crore is required to revive small businesses that are stressed for various reasons and therefore unable to repay loans,” said Salunkhe.

The central bank’s board on 19 November had advised RBI to consider a scheme to recast MSME loans.

In January, RBI allowed lenders to recast loans of stressed MSMEs with loans up to ₹25 crore.

In January 2019, RBI constituted the expert committee on MSMEs to undertake a comprehensive review of the sector and to identify causes and propose long-term solutions. The committee held 15 meetings as well as consultations with industry associations and state governments across the country, and submitted its report on 18 June.

The report said that small industries face problems of delayed payments and hesitate to enforce legal provisions available to them under the MSME Development Act due to their weak bargaining power. It recommended an amendment to the Act, requiring all MSMEs to mandatorily upload from time to time all their invoices above an amount to be specified by the government to an information utility. This mechanism will entail automatic display of the names of defaulting buyers and also act as moral suasion on them to release payment to these suppliers, said the report.

The committee has also recommended expanding the role of the Small Industries Development Bank of India (SIDBI). “SIDBI should deepen credit markets for MSMEs in underserved districts and regions by handholding private lenders, such as non-banking financial companies and micro finance institutions. Further, they must develop additional instruments for debt and equity which would help crystallize new sources of funding for MSMEs and MSME lenders,” it said.

Besides, the committee suggested that the PSBLoansIn59Minutes.com portal also cater to new entrepreneurs, who may not necessarily have information like GSTIN, income-tax returns and bank statement. “A timeline of 7-10 days needs to be fixed for disposal of applications, which have received in-principle approval; the threshold of loan should be enhanced up to ₹5 crore,” it said.

PSBLoansIn59Minutes.com is an online marketplace that enables in-principle approval of MSME loans up to ₹1 crore in 59 minutes from public sector banks. The report said the committee has learnt from entrepreneurs that obtaining regular sanctions from the banks post in-principle approval had not been smooth. As on 7 June, banks had sanctioned ₹40,156 crore to 127,000 units through this portal.

Other suggestions include introduction of adjusted priority sector lending guidelines for banks to specialize in lending to a specific sector, doubling the collateral-free loan limit to ₹20 lakh and providing insurance coverage to MSME employees by the government.

The committee said group policies for death and accident cover for MSME entrepreneurs need to be developed with insurance cover significantly higher than the cover currently offered by the Pradhan Mantri Suraksha Bima Yojana and the Pradhan Mantri Jeevan Jyoti Bima Yojana, two government-backed insurance schemes.

“As group policies, these would involve significant reduction in premium payable,” it said.