Why the MSME subordinate debt scheme got a lukewarm response

According to Mukesh Mohan Gupta, chairman of the Chamber of Indian Micro Small and Medium Enterprises, until changes are introduced, the scheme is unlikely to take off.

“We have suggested changes in the scheme to the ministry but so far it looks like the government has only extended it,” he said.

The CGSSD was introduced in June last year for restructuring pandemic-hit MSMEs as part of the government’s Aatmanirbhar Bharat package. The scheme was initially operational until March this year.

Under CGSSD, a guarantee is given to eligible borrowers for credit. Financial assistance is provided through a sub-debt facility extended by a lending institution to the promoter of an MSME unit up to 15 percent of the promoter’s stake or Rs 75 lakh, whichever is lower.

The personal loans provided to promoters of stressed MSMEs would be infused as equity/quasi equity in the business as per the central bank’s guidelines for restructuring of stressed MSME advances. The promoter is required to bring in 10 percent of the subordinate debt amount as collateral while 90 percent was to come from the scheme.

“As per the scheme, for Rs 5 crore capital, the promoter will be given 15 percent of credit. But there will be very few MSMEs which will have a net worth of Rs 5 crore despite being stressed,” Gupta told Moneycontrol. “Plus, banks and lenders are reluctant to give additional loans to an entity which is already an NPA account. So there are many issues.”

“Lenders are not keen on extending loans to an already stressed entity,” a senior official from a New Delhi-based MSME association said on condition of anonymity. “Moreover, how will an MSME which is already under distress bring even 10 percent? There is no way an MSME will be able to fulfil this condition. Instead of extending its validity, the government should have just axed it.”

In addition, restructuring is a very lengthy process, so it did not attract many MSMEs, the official added.

“Only bankers and auditors are aware how many entities are stressed, so it should be their responsibility to raise awareness among MSMEs about the scheme so that many can avail of it,” said Ramamurthy, a member of the All India Council of Associations of MSMEs, which represents 170 MSME associations across the country. 

"The extension of CGSSD, a scheme for restructuring of both standard & provided-for NPA loan accounts is unlikely to benefit MSMEs unless the limitation on the amount that lends itself to restructuring is modified. The maximum amount that may be restructured is the lower of 15% of the equity plus debt per loan account or Rs. 75 lacs, which is quite miniscule and unlikely to benefit struggling MSMEs for whom the scheme is intended," said YS Chakravarti, MD & CEO, Shriram City Union Finance. 

Despite the guarantee built in, banks continue to be risk-averse, especially with regard to unviable MSME businesses. Further, the transaction costs, of 1.5% as guarantee fee throws a spanner in the works. If some of these impediments get ironed out and the scheme marketed better, CGSSD may provide the much needed respite to small businesses, he added. 

Sundeep Mohindru, CEO & Founder M1Xchange noted that the scheme failed to find many takers as there is a lack of awareness about scheme amongst MSMEs and the MSMEs are dependent upon banks for the execution process.