MSME lending – Alternate funding option
Rejuvenation of MSME segment is an essential requirement for accelerating demand, employment generation and effective utilization of resources. A series of measures taken by the regulator in recent past , for improvement in lending to MSME segment is yet to be reciprocated. The position prompted government to consider extension guarantee for sanction of credit by banks. This is in addition to the permitted second restructuring as well as 3 months moratorium on dues without attracting impairment norms. Growing NPA, present uncertainty, implicating credit decision makers previously and related consequences turned lenders risk averse. Even prior to the lockdown , the segment was vulnerable and policy makers expressed their concern for growth and development of the MSME segment. The requirement for injecting funds to MSME segment is imminent , but the process of bringing back the confidence of lenders may not yield result expeditiously. The issue requires an urgent solution to come out of the present slow down in the economy.
The status of the MSME segment , prior to the lock down, is comparable to the crisis faced by Japan during 2003-04. The Japanese experience in revitalizing the economy through a series of measures could be an example for us to develop a policy for the segment. It would be worthwhile to refer to a study on the Japanese experiment “ Problems and Prescriptions for the Japanese Economy:An Overview by Takatoshi Ito Graduate School of Economics, University of Tokyo and Hugh Patrick,Graduate School of Business, Columbia University,April 2005”. As mentioned in the report “
“… despite huge write-offs of non-performing loans and improvements in the last few years, the capital position of almost all Japanese banksremains extraordinarily weak. Through mergers and failures the reduction from 20 big banks in 1990 to 8 in 2004 has created even larger but not stronger banks. Mergers have not yet resulted in substantial cost cutting or in the development of new, more effective business models. Moreover, bank lending policies have worsened asset quality. While total bank loans have decreased significantly, loans to very weak, large borrowers (called “zombie firms”) have been maintained and in some cases even increased. Hoshi and Kashyap emphasize that under Minister Heizo Takenaka supervisory and regulatory reforms by the Financial Services Agency (FSA) to restructure bank balance sheets and identify and deal with non-performing loans have been a substantial improvement over the past, but should be further strengthened and pursued even more vigorously. Nonetheless, these are only the first steps to restoring competitiveness and strength to Japanese banks. Hoshi and Kashyap stress the reality that many banks remain undercapitalized and need to be recapitalized. Several ways to capitalize banks have been proposed and implemented. The government can inject capital into weak but solvent banks that are essential to the financial system’s stability or in regional banks to support the local economy, as has been done in the past. If injected as shares, the government can sell these in the market, rather than having the bank pay the capital back to the government, in order to maintain capital.”
A special reference was made to the SME segment in the report , which inter alia states that,
Most Japanese corporate finance has continued to be provided by banks and,especially for small- and medium-sized enterprises, government financial institutions. The government’s Big Bang policies of the late 1990s have accelerated the development of capital markets. Nonetheless, the Tokyo capital market is still relatively costly, and the legal frame work does not adhere to international best practices. Its rules and regulations are not foreigner-friendly; prospectuses and balance sheets have to be written in Japanese. Stock transactions and registrations are now electronically based, registration of ownership can be done with the stock depository, and changes in ownership are much easier than before.Further development of the Tokyo capital market is necessary.
The report mentions about alternate funding options …Fujii analyzes the development of Japan’s corporate bond market since the late 1990s, which is important because bond issuance will become a significant source of business finance, as it is in other advanced countries. She uses her own survey of participants in the Tokyo capital market, and analyzes market effectiveness through bond pricing models.Respondents identified taxation issues and lack of human capital (professional expertise) as major problems.” Further, ……Now government restrictions on corporate bond issuance are minimal, and previously high issuance costs have been reduced substantially. However, a market has not yet developed for high yield, below investment-grade, bonds. Nor has an appropriately priced middle-market evolved for more risky bank loans. Fujii concludes that corporate bond market pricing is working reasonably well because prices and their credit-default swaps are consistent based on monthly data. Estimates of changes in the implied ratings by credit rating agencies and their actual bond ratings move together quite closely.” The recommendations include “Better-functioning capital markets, especially the further development of the corporate bond market, will contribute to the more effective allocation of resources, as Fujii argues.”
It is well known that Japan came out of the crisis and subsequently consolidated its position in the world economy. The present debate over issuance of government guarantee for lending in India raises the question about sustainability of the government initiative to improve lending to MSME borrowers , even if a significant amount is covered by government guarantee. The Japanese crisis was at a time when the bond market was not significantly digitalized. In India the stock exchanges are digitalized. National Stock exchange was created to make security transactions easy and approachable. It is time that instead of driving the MSME units to banks, some structured instrument is created , which can be traded in the market. Based on proper evaluation MSME units, above a cut off amount, can be identified to be brought under a equity/ bond scheme. While a body comprising of Nabard, Sidbi , SBI etc can be constituted to oversee the corporate governance, NSE can be instrumental in the operational aspect , by engaging competent professionals to ascertain viability of each issues. The bonds / equity thus issued can be acquired by the banks as well as other FIIs based on their risk appetite.
It is essential that the banks /FII purchase the bonds / equity enjoy the following privileges :
1. The bonds/equity so purchased will come under the head lending in exposure and will not be treated as investment, so that there is no ceiling on their purchase.
2. The exposure (or part thereof) will attract zero capital adequacy since the exposure is guaranteed by the government .
3. Those units coming under agriculture / ssi etc will be treated as exposure to priority sector etc and accordingly the reporting in balance sheet will be done.
4. The securities thus purchased can be treated as investment “available for sale” catgory.
The aforesaid measure would alleviate the risk averse attitude since the individual judgment of the decision makers will not be questioned. The entrepreneurs will be responsible for monitoring and reporting in order to maintain their rating. Investors will identify good scripts and thus viable MSME units will continue to receive funding .
MSME units with very low exposure may not come under the purview of the individual bonds in the name of their unit. In such cases , for exposure below , say annual turnover of Rs 100 lacs , a separate instrument may be created , comprising of such units , which will be traded as group instrument. Since the entire process involve surveillance by SEBI as well as NSE etc, banks will be willing to take the risk and improve their business as well.
