Experts bat for separate debt resolution framework, more borrowing avenues for MSMEs

Finance Minister Nirmala Sitharaman in her Budget speech announced that the outlay for the Ministry of Micro, Small and Medium Enterprises has been doubled to Rs 15,700 crore.

"To ensure faster resolution of cases, NCLT framework will be strengthened, e-Courts system shall be implemented and alternate methods of debt resolution and special framework for MSMEs shall be introduced," Sitharaman further said.

These announcements come as the MSME sector is touted to be the worst hit by the COVID-19 pandemic. The sector has been facing a massive liquidity and supply crunch, shortage of labour and non-payment of dues.

Commenting on the proposals announced for the sector in the Budget, Sunil Lotke, Chief – Legal, Compliance & Secretarial, U GRO Capital, said: " The economic impact of COVID 19 has been rather severe across most sectors worldwide, but the degree of severity notches up with regards to the Indian MSME sector. Owing to limited cash flows and inadequate reserves, MSMEs are the most vulnerable sector that entreat relaxations and leniency especially towards their debt repayment obligations."

The present resolution framework including the Insolvency and Bankruptcy Code, though effective in resolving large delinquent borrowers, does have a tendency to create some adverse pressure in the case of MSMEs and their business continuity, he noted.

"With the mention in the Union Budget to address the same and given a specific room in the Code for the same (refer sec 240A(2)), we feel there should be implementation of a separate insolvency resolution framework for MSMEs with appropriate modifications to the provisions mentioned in the Code or redesigning of the fast-track resolution procedure for small debtors which inter alia could include debtor-friendly procedures, cost-effective resolutions, retention of promoter’s involvement in the business to ensure business continuity etc. A judicial-like authority may be constituted or designated to address the recovery or debt-related matters pertaining to MSMEs and consolidate all the related proceedings," Lotke noted.

Speaking on condition of anonymity, an analyst at Emkay Global Financial Services called for creating a specialised ARC (Asset Resolution Company) structure for stressed MSME loans in order to have a clear focus on resolution.

The analyst further stated that MSMEs must be allowed to have more avenues of borrowings like borrowing from capital market in order to diversify their funding profile and reduce overall stress for banking/NBFCs and that a separate framework similar to NCLT (National Company Law Tribunal) must be instituted for MSMEs.

The government had announced a Rs 3 lakh crore Emergency Credit Line Guarantee Scheme (ECLGS) for MSMEs under the Aatmanirbhar Bharat Abhiyan package in order to mitigate the stress caused by the lockdown. The scheme was valid till October. Sitharaman had later extended the ECLGS till November 2020 and had further extended it till March 21, 2021.