Moratorium, Interest during Lockdown, Compounded Interest during Moratorium, Emergency Credit Line
The moratorium announced initially was for 3 months March-May
- This moratorium was critical because borrowers could not have paid EMIs and interest due to almost NIL economic activity due to complete lockdown
- However, the Government did not give waiver of interest for the lockdown period. In fact, compounded interest is being charged on deferred EMIs & interest.
This matter was raised by IamSMEofIndia also and we are of the firm opinion that interest must be waived for the lockdown period and compounded interest not be charged
- The moratorium was extended for 3 more months till 31.08.2020 as Unlockdown was announced in phases and businesses needed time to prepare and revive
- To support revival, the Government announced 20% Emergency Line of Credit at slightly lower rate of interest.
This is additional debt for which interest has to be paid regularly and principal to be paid in 36 EMIs after one year moratorium. Additional debt means additional burden
The Emergency Credit Line has some major Challenges:
- a) Available only to those MSMEs who already have access to Formal Credit and maintained Regular accounts. 20% of the Loan Outstanding as on 29th February 2020 is available to MSMEs with Turnover upto Rs.250 Cr and Loan outstanding upto Rs.50 Cr as on 29th Feb 2020
- b) In reality, even this 20% is difficult to avail.
Many banks are not easily disbursing. Some Banks are trying to add their own conditions.
- c) It’s also difficult to avail full 20% in case the loan outstanding is from multiple banking.
Take the case of a typical MSME which has CC limit from one Bank, Term Loan from SIDBI, Home loan from HDFC, couple of Cars & Commercial Vehicle Loans from different NBFCs and some Unsecured loan from another Institution. Each Institution can offer 20% of the outstanding with them as on 20.02.2020.
Now just imagine, how many institutions shall entrepreneur run to, apply for, do the documentation, buy stamp papers etc. to get the Emergency Credit Line?
Practically, Entrepreneurs have chosen just one or maximum two Institutions with larger exposures (Term & CC).
So it actually means that Entrepreneur could get only 8 to 12% of the eligible Emergency Credit Line.
How I wish there was a system to consolidate the entire outstanding of business entity as on 29th Feb and apply and avail from any one Institution of their choice.
- c) The 20% Emergency Credit line (In reality only 8-12% as explained above) hardly meets with the accrued EMIs, Interest and Statutory payments during the Lockdown period.
So practically, MSMEs got the Emergency Credit line only to pay off the Govt and the Bank dues leaving virtually nothing to restart, resurrect and revive business
Let’s look at today’s scenario
- This month, September, is very critical for all MSMEs:
- A) MSMEs that haven’t revived within last 2 months and which are unlikely to revive to pre-Covid times at least for 6 to 18 more months, find it impossible to start paying regular EMIs/ interest alongwith due interest of moratorium period plus additional interest of Emergency loan.
These businesses include restaurants, hotels, construction, travel, tourism, retail, non-essential manufacturing, large part of service Sector, marriages, conventions, exhibitions etc.
- B) Businesses that have revived fast (Bicycle, 2-W, small cars, essential goods & services, exports, Pharma, Agro, Food processing), many doing even better than before, face challenges of working capital.
On one hand, old creditors are asking for payments, on the other hand these businesses need money to buy raw materials and inputs to produce. They also have to pay interest accrued during moratorium period plus interest on Emergency loans. Due to almost Nil sales in April-June, payments coming from customers are much much less than the order book for September-October, which is real BIG.
So even for these fast revivers, the September-October are very critical as the liquidity is NIL.
If these MSMEs cannot manage additional liquidity in September, whether by convincing operational creditors to supply on longer credit periods or raising additional working capital limits from their banks or by selling some assets and bringing in own equity (all these are almost impossible to do in the present scenario), they shall either lose the orders or miss on bank re-payments or find difficult to pay statutory dues like GST.
- Some petitions were filed in Hon’ble Supreme Court to waive off the interest during the lockdown period. Hon’ble Supreme Court has taken a serious view of the compounded interest on moratorium dues.
Therefore, Hon’ble SC has granted interim relief for borrowers, directing banks not to declare any loan accounts as Non-Performing Assets (NPAs) until further orders.
The three Judge Bench of Justices Ashok Bhushan, R Subhash Reddy and MR Shah today said that the accounts that were not declared as NPAs till August 31 must be protected and should not declared as NPAs till further orders.
“the accounts which were not declared NPA till 31.08.2020 shall not be declared NPA till further orders.”
While the question for consideration before the Court was limited to interest on interest being charged, the Court was also considering the aspect of role of the National Disaster Management Authority under the Disaster Management Act to provide relief as regards loan repayment in disaster situations.
Government is trying to convince the Hon’ble Court that waiver should not be given. The Government’s attorney mentioned that the Government can extend the moratorium period for some sectors that are taking time to revive. No final decision on extension has yet been taken or announced.
Suggestions from IamSMEofIndia:
- Waiver of interest should be granted for the lockdown period considering the force majeure pandemic situation. From a Cab driver, to rickshaw puller to daily wage earner to an industry, all were under lockdown and lost their earnings during the period. Many property owners too waived off due rent from tenants during the period. Banks and NBFCs should also be stopped from levying/ charging interest during the lockdown period. Maybe, the interest cycle itself could be halted just for the lockdown period.
- As special support in this force majeure pandemic situation, Compounded interest (Interest on Interest) should not be charged for the announced moratorium period
- Emergency Credit line be enhanced from 20 to 40% to provide more liquidity and working capital to businesses that have revived faster (June-August Sales/GST returns can be the measure)
- Moratorium must be extended for MSMEs in the Sectors that are reviving slower. Restructuring Scheme should be made open to all regular to stressed MSMEs and this should include Moratorium, Interest waiver period, longer repayment terms and timely repayment incentives.
- Banks be advised to offer additional Working Capital limits, Bills Discounting, Factoring Limits to existing borrowers beyond the usual conservative LTV (Loan-to-Value) ratios of 50-70%.
- Liberal Loan programs for existing MSMEs outside the Institutional Credit domain as on 29.02.2020, be immediately planned and announced.
- In the first half of this FY, hardly any new loans have been disbursed to new MSMEs. New Entrepreneurs with fresh loan requirements too are looking at fast sanction and disbursal of loans with 2% Interest subvention. I hope and pray the Banks announce some special Loan Schemes for the second half of this FY.
Do share your valuable feedback, suggestions and comments.
Chairman, IamSMEofIndia
chairman@iamsmeofindia.com
