Synopsis–Can the one-time restructuring plan, supposed to be implemented by March 31, 2021, offer some breathing space for the Covid- battered MSME sector?
As the pandemic brought large-scale miseries to businesses, the already beleaguered Indian MSME sector went into an overdrive to seek help from every possible source.
The government through various means also tried to help this critical sector. Notably, in August last year, the Reserve Bank of India (RBI), as an interim relief measure, came out with a one-time restructuring (OTR) scheme for stressed firms. Under this, borrowers with loans that were classified as ‘standard’ as on March 1, 2020, could opt for loan restructuring. Notably, the announcement was an extension of a continuing scheme, in place till December 31, 2020.
“A restructuring framework for MSMEs that were in default but ‘were standard’ as on January 1, 2020, is already in place. The scheme has provided relief to a large number of MSMEs,” RBI governor Shaktikanta Das had said, adding, with Covid-19 continuing to disrupt normal functioning and cash flows, the stress in the MSME sector has got accentuated, warranting further support.
Under this fresh lifeline to corporate and MSME borrowers, eligible entrepreneurs with loans up to Rs 25 crore, are offered a new payment schedule, with a revised cost of interest payment and increased tenures of loans. The one-time restructuring plan, supposed to be implemented by March 31, 2021, offered some breathing space for the Covid- battered MSME sector.
On the face of it, the idea of loan restructuring offers a fresh lease of life to many firms that otherwise were on the verge of closing down. Additionally, opting for restructuring meant that there would be no downgrading in firms’ asset classifications. This meant that the scheme also addressed a major worry for MSMEs.
Revealing some clue to the progress made by the scheme, Union Finance Minister Nirmala Sitharaman in her last budget speech disclosed that over 5 lakh MSMEs have got their borrowings restructured under this scheme. There certainly are many clear upsides of this scheme, which offers a new payment schedule, besides a revised cost of interest payment and increased tenures of loans to borrowers.
Without discounting the positives of the idea, one pertinent question to probe is whether restructuring schemes really help businesses in their revival bids or for businesses, these remain more like a case of kicking the can further down the lane?
Jyoti Prakash Gadia, Managing Director of Resurgent India, is of the view that all businesses/projects/trades and economic enterprises go through business cycles of good times and stress. “Debt restructuring of the adversely impacted businesses is an essential aspect of handling such difficult situations, and cannot be termed as a mere process of kicking the can further down the lane,” Gadia says. He asserts that the principle behind any debt restructuring move is that the value of the existing assets created should be sustained rather than allowing it to go down the drain.
PTIShaktikanta Das, Governor, Reserve Bank of India.“It is always better to provide an opportunity and try to revive existing assets compared to allowing the business to die, from an overall cost of creation of assets point of view. This is however subject to a big provision regarding the overall long-term viability of the business,” stresses Gadia. He adds the exercise of restructuring should ensure the ability of the project in the medium to long term/ over the life span of the project to generate cash flows to repay the debt as per the revised terms of loans as per the resolution plan.
Debt restructuring, a helping hand in crisis times
No business likes to see itself slipping towards a debt restructuring scenario. But, despite best efforts, there are unavoidable scenarios in the life cycle of businesses when they reel under stressful factors beyond their control. The current pandemic induced crisis has been one such phase that left many businesses with no choice, but to go for debt restructuring schemes.
Highlighting the fragile tightrope that businesses tread each day, Chirag Nangia, Partner, Nangia & Co LLP, says that ill-managed capital and debt structures can prove fatal, especially in periods of crisis. “A thorough assessment and restructuring of debt is, therefore, imperative so that the debt service burden is closely aligned with the business’s inherent, underlying cash generation capacity. Also, for the revival of the businesses and for the safety of the money lent by the banks and Financial Institutions (FIs), timely support through restructuring in genuine cases is called for,” Nangia asserts.
Practically, a debt restructuring plan is aimed at yielding a win-win to both lenders and borrowers. Elaborating this, Nangia stresses that there is a need for lenders, regulators, and the government to accept that businesses can fail. And in those scenarios, debt restructuring can be a win-win for both the entities involved as the business avoids bankruptcy and the lenders typically receive more than what they would through a bankruptcy proceeding, he says. However, there are requirements of equity infusions and guarantees from the promoter backed by their adequate net worth to ensure the success of the debt restructuring scheme too. The many norms, introduced by RBI from time to time, and the Insolvency and Bankruptcy Code, have all aimed at a timely resolution of MSMEs’ and corporate distress.
Restructuring, a double-edged sword
If a firm is left with no option but to go for loan restructuring, it makes absolute sense to take into consideration all its cost-benefits. One should not opt for the scheme because others have. The overall cost of opting for debt restructuring also becomes significant in the long run which for firms could eventually be troublesome.
iStockA loan restructuring plan can be helpful only if there is no other way to arrange for repayment of dues.Milan Thakkar, CEO of Walplast says MSMEs should opt for the restructuring plan, only after careful evaluation of its impact on their finances. Walplast operates in the construction industry where, given the segment’s huge size and play in India’s informal economy, liquidity flow issues are rampant.
“Apart from the monetary costs, MSMEs availing the facility may also face a negative impact on their eligibility to borrow in the future. Hence, those who decide to apply for it should do so only if they are left with no other option. They should have the required repayment plan in place and exercise a high degree of financial discipline to stick to the plan. The restructuring would lead to an extension of the loan tenure which could snowball their interest dues at a later stage,” cautions Thakkar.
He further suggests that it’s in the good interest of the borrowers to repay the loan if one has adequate income to avoid the tag of “restructured”. This way, firms could also enhance credibility and eligibility for a future requirement of debt, if any. Businesses can also try repaying the existing loan with high interest and then raising a new loan with lower interest as and when required, he says.
Therefore, for businesses mulling over the restructuring of their borrowings, it’s important to keep in mind that loan restructuring is not the only solution available to solve the cash-flow issues. As the saying goes, ‘money saved is money earned‘, Industry observers also recommend exploring ways to offload assets no longer needed.
“Many businesses in an economic boom end up building various non-core assets. The sale of non-core business assets can help in achieving immediate liquidity and immediate capital. Companies can also look at mergers with other companies and optimise their costs of doing business operations. In case, companies are operating in multiple businesses, it may be possible for companies to explore hiving out one of their business divisions to a strategic investor. Every business needs to examine specific facts and circumstances before opting for a restructuring scheme,” suggests Nangia’s representative.
The common view among the industry circle is that if the firms’ revenue and cash flow stabilize earlier than expected, they should prefer loan repayments or pre-payments to reduce additional funding cost. It’s also suggested that the owner/promoter needs to contribute to bringing in whatever additional capital or funds they can to reduce the cost of restructuring. In sum, only in the case, where there is no way to arrange for repayment of dues and the borrower does not want to get into loan default, a restructuring plan can be helpful, experts opine.
“Any restructuring scheme’s success will depend upon how well the causes of the stress — both internal and external have been analysed and addressed,” says Resurgent India’s Gadia.
In conclusion, an encompassing, methodical structuring of the restructuring plan is imperative while formulating an ideal restructuring plan, one that remains an enabling force for borrowers.
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