On May 13, 2020, Nirmala Sitharaman, the Finance Minister of India, announced a Rs. 20,000 crore subordinate debt scheme for stressed micro, small and medium enterprises (MSMEs). The scheme is touted to benefit close to 2 lakh MSMEs across the country.
According to the Finance Minister, this subordinate debt scheme will help MSMEs to meet operational expenses, buy raw material and resume their businesses that have been badly affected by the coronavirus pandemic.
Many people must be hearing about subordinate debt for the first time. What about senior debt; do you know what it is? Here’s an explanation on both these terminologies here because both subordinate debt and senior debt are co-related in this context.
What is subordinate debt and senior debt?
A subordinate debt is a debt which is a collateral-free debt that has secondary priority in repayment if the company files for bankruptcy or liquidation. If a company has taken subordinate debt and senior debt, then the senior debt is always the one it must pay first.
While a senior debt is secured with collaterals; there is no guarantee for a lender that a subordinate debt will be repaid by the borrower. In case the firm liquidates or goes bankrupt, the borrower is only obliged to pay if there is surplus liquidity after repaying the senior debt.
Why is subordinate debt being released for stressed MSMEs?
As previously mentioned, the Rs. 20,000 crore subordinate debt scheme is meant for stressed MSMEs; even those that are tagged as non-performing assets or financially stressed. As small businesses have taken a massive hit due to the COVID-19 lockdown, it was imperative that the government released a lifeline to these businesses.
Since these are subordinate debts, if a stressed MSME goes bankrupt then the bank has few options to make the MSME repay a subordinate loan. As MSMEs that are categorized as NPAs and with stressed financials have been facing difficulty in procuring credit during the pandemic, this assistance by the government will help them bring their business on track.
Lowdown on Rs. 20,000 crore subordinate debt scheme for MSMEs
- It will provide equity support to MSMEs that are badly affected by the pandemic.
- Around 2 lakh MSMEs will benefit from the subordinate debt scheme.
- MSMEs that are still functional in spite of NPA or are in financial trouble will gain from this subordinate debt.
- Additionally, the government will provide a support of Rs. 4,000 crore for Credit Guarantee Funds Trust for Micro and Small Enterprises (CGTMSE), which will provide some guarantee to banks.
Other relief packages announced for MSME businesses
Apart from the subordinate debt scheme, the central government has decided that MSME promoters will be provided with loans by banks, which the promoters can infuse as equity in the business. The FM has also announced automatic and collateral-free loans worth Rs. 3 lakh crores for other MSMEs and businesses.
The 3 lakh crore relief package includes Rs. 2.8 lakh crore in automatic loans. The central government has also announced emergency credit lines to businesses and MSMEs from banks and NBFCs. However, only companies with up to Rs. 25 crore outstanding and Rs. 100 crore turnover will be eligible for the emergency credit line.
The Finance Minister has also announced that the government will infuse equity amounting to Rs. 50,000 crore into potential MSMEs through MSME Fund of Funds.
MSMEs had been reeling with a relentless onslaught of challenges since demonetization and COVID-19 has made matters even worse for this sector. Once the backbone of the economy with 30% of the nominal GDP share in 2016-17 and contributing 45% to the country’s manufacturing output, around 6.3 crore MSMEs in the country today are on the verge of collapse.
Hopefully, these schemes announced during the pandemic will breathe a new lease of life to this sector. Changing the definition of MSME and prohibition of global tenders for up to Rs. 200 crore will also encourage this sector, as many local MSMEs face unfair competition from foreign players.
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