Credit Guarantee Scheme for Sub-debt may Benefit MSMEs...

...but much will depend on banks which need to monitor revival of smaller units

The newly-framed Credit Guarantee Scheme for Subordinate Debt (CGSSD) can be a workable scheme for small MSMEs provided both bankers and the promoters of such stressed enterprises fulfil their side of the bargain.

Though the government has clearly gone out of the way and sweetened the deal for promoters of such stressed MSMEs, many MSME promoters see the stipulation requiring promoters to bring in 10 per cent of the sub-debt as margin money as daunting in the current trying Covid-19 times.

Bankers take larger exposure

The bankers, on the other hand, say that it is they who are going to take a larger exposure, when they take up “restructuring” of the MSME.

Giving an example, a former chief executive of a public sector bank said that if total package for restructuring an MSME is say ₹100, then the bank is asking the promoter to bring ₹10 (while the bank itself will bring ₹90).

The main objective of this scheme is to facilitate loans (personal loan) through banks to the promoters of stressed MSMEs for infusion as equity/ quasi equity in the business eligible for restructuring as per RBI guidelines.

The maximum sub-debt eligible under the scheme is equivalent to 15 per cent of his/ her existing stake (equity plus debt) or ₹75 lakh, whichever is lower as per the last balance sheet. To support the promoter, who may find it difficult to give this ₹10 in current Covid-19 times, the government has now through the CGSSD told the banks to fund another ₹9 (give as loan to the promoter) and ask the promoter to fork out just ₹1 towards sub-debt. In effect, the bank will give ₹99, while the promoter puts in ₹1. If the promoter can’t pitch in this ₹1 also, then the restructuring itself should not be done as the business itself will not be viable, the former banker said.

Beneficial for MSMEs

Anil Bhardwaj, Secretary General, Federation of Indian MSMEs (FISME), said that the scheme will be beneficial for those MSMEs that are planning restructuring and need to infuse more capital. “Generally, when a unit is stressed, it is difficult for banks to provide additional funds without a corresponding equity increase. Under this scheme, the promoter of an MSME can access funds (from banks) to be used as equity guaranteed under the scheme,” he said.

KV Srinivasan, Director and CEO, Profectus Capital, said that though it is a well thought out scheme, a lot would also depend on the assessment of bankers and their readiness to monitor and provide advisory to the small units.

Ashok Saigal, Co-Chairperson, CII MSME committee, said, “The scheme might not be very helpful as there’s a lot of paperwork involved. On the other hand, medium scale industries who have a large outstanding from long-term projects might get some relief.” S Rajagopal, Executive Director, Cotton Textiles Exports Promotion Council, said the scheme is being operated through Scheduled Commercial Banks and most of the MSMEs are having their accounts with co-operative banks, which are outside the purview of the scheme. If co-operative banks are included under the scheme, then it will benefit a large number of MSMEs, he said.

Darshan Upadhyay, Managing Partner of Stratage Law Partners, said that it is too early to say whether this has benefited either party. “In current circumstances and in the absence of economic revival, the promoters may still find it difficult to take on the additional burden,” he said.