It has been slightly over 100 days since the lockdown was announced in India. The pandemic shows no signs of receding or flattening yet. As the fight continues, we are constantly reminded that we battle on two fronts – health and economics. I am no expert on health, but can share my two cents on economics, and especially, small businesses.
The pandemic has hit Small & Medium Enterprises (SMEs) particularly hard. While we focus on headline numbers, such as the material contraction in industrial output (down 17% in Q4 2019-20) or the revision in the GDP growth numbers (4.2% for 2019-20), we find it hard to quantify how badly the SME segment has been hit. While statisticians may debate on how accurate their estimates are, there is little doubt in anyone’s mind that the prospects of a quick economic rebound look bleak.
The government, recognizing the contribution of the SME segment to the economy, announced a slew of measures to support the ailing sector. Of the announcements, none garnered as much interest as the ‘MSME Automatic Loan’ scheme (formally called Emergency Credit Line Guarantee Scheme or ECLGS). Rightfully so. SMEs are in need of liquidity. A bruised business generates far less cash; however, there is no reduction in the fixed costs that the business incurs. SMEs, like any other business, could not let go of employees due to contractual & government directives. Like salaries, rent, interest, and other fixed costs cause great strain on the SMEs depleting cash reserves. Thus, a credit line automatically extended by banks would be of immense help.
The broad contours of the scheme are as follows
- Any business whose (a) outstanding loan balance from banks on 29 Feb 2020 was up to Rs. 25 Crores and (b) annual turnover in 2019-20 was up to Rs. 100 Crores, would be eligible for the scheme,
- Any Scheduled Commercial Banks (SCBs) & NBFC (operational for at least 2 years as on 29 Feb 2020) can lend,
- The maximum amount the business can borrow is 20% of the loan balance on 29 Feb 2020. If the business has borrowed from multiple banks, it can apply to anyone for the entire sum, and
- Interest rate would be capped to 9.25% (SCBs) / 14% (NBFCs). The business would enjoy a moratorium of 1 year and will have to repay the loan in the next 3 years.
There is a clear directive by the policymakers that the SME should not go through any hassle to obtain this loan. As the name goes, it is an ‘automatic facility’ for those who have borrowed earlier. Thus, credit assessment and KYC should not be necessary. Further, the application process should be digital and fast.
It is heartening to see that banks have lent their full support and have risen to the occasion. As on 26 Jun 2020, nearly Rs. 100,000 Crore had been sanctioned. However, out of this, only Rs. 45,860 Crore had been disbursed. Banks will need to improve this ratio quickly.
The scheme is open till 31 October 2020 or till Rs. 300,000 Crore has been sanctioned.
Is the policy without flaws? Of course not; no policy is. Some of us believe that the loan sanctioned should be linked to the employment guarantee. This would have protected jobs. Further, SMEs with no borrowings on 29 Feb 2020 (or those who would have closed their loans before that date) would not be eligible for the scheme. Given the abysmal record of SME lending (by CGTMSE’s own admission, only 50% of the debt demanded by SMEs is currently met), this would leave out a large population of businesses who badly need credit. The government also expanded the definition of SMEs; of course with good intention. But that also meant that more businesses, those that were hitherto not classified as SMEs, would vie for a share of the Rs. 3 Trillion packages.
Finally, there is little reason to view a credit line extended by banks, as a ‘relief package’. There has traditionally been a clear difference between a country’s fiscal policy and its monetary policy. Credit lines fall in the latter category. On the other hand, the relief package usually means a reduction in taxes or additional money put directly in the hands of those impacted. A relief package is financed through borrowings. Thus, the government would borrow more money to help those in need. Further, banks had begun advertising the emergency credit line much before the government’s announcement. Several banks offered loans up to 10% of current borrowings – the ECLGS has now extended this limit to 20%.
There is no doubt that the facility will help some SMEs. But we have to protect more businesses and more jobs. That will need more, much more, than just the magic of mathematics.
Stay safe! Stay healthy!
*The opinions expressed in this article are those of the author. They do not purport to reflect the opinions or views of Intuit QuickBooks.*