Dear MSME friends, wish all of you a very successful and prosperous 2019. The last couple of years have been very stressful and challenging for all of you and I sincerely hope that this New Year brings with it better tidings. The new calendar year started with RBI announcing a restructuring dispensation for you, something which has been hailed as a welcome relief by all stakeholders. It sure is and well deserved, considering your contribution to the economy and the disruption caused to your businesses by the twin back-to-back events — demonetisation and GST.
In this context, I thought I would take the liberty of sharing my thoughts with you on what this dispensation would mean and what could be some of the risks you may need to build into your future plan as you take shelter under this. I extensively use the experience we have had with similar restructuring dispensations for corporates and I can assure you that a lot of the reactions and behaviour of various stakeholders will be the same in your case too.
Let us first understand what the twin disruptions have done to your business and what the current market context is. Demonetisation had an impact on volume of business and margins for a lot of you people and, more importantly, it increased the need for working capital from formal financing channels. On the other hand, GST has increased the working capital cycle as the system is still evolving and the friction of tax payments and refunds is still to work seamlessly for you. Both these would imply that your working capital requirement has gone up in a material way for the same volume of business. If that increased working capital is unavailable to you, you have to shrink your volume of business or be faced with a liquidity squeeze, both of which will have an impact on whether you would be able to service your current debt obligations.
Now, let’s look at the other material change in the current market context. This increased working capital need did not happen overnight? It has been continuously increasing over the last two years as you navigated the twin ‘jhatkas’. How have you been managing till now? Is that source available to you today?
All of you know the answer! It is NBFCs. They have been your ‘white knight’, providing the much required ‘swing’ working capital whenever you needed against property or on an unsecured basis. They lent such money on the back of huge liquidity that was awash in the market post demonetisation and being made available to them at cheap rates from mutual funds and banks. Now the situation has completely changed. The white knights themselves are in need of help with availability of money shrinking dramatically for them over the last few months. So, now you have to borrow from banks and repay the NBFC borrowings, as they address their liquidity and balance sheet issues.
The big issue you are grappling with is availability of money. Thus any decision of taking refuge under the new restructuring dispensation should ensure that availability of money does not shrink for your businesses in the coming few quarters. This is where the experience corporates have had with such dispensations is useful to understand.
Let us assume you opt for the restructuring of your debt obligations under the new RBI dispensation. The moment you sign the restructuring agreement, you would be branded a ‘restructured asset’! What does this mean for you? Irrespective of how good your track record has been for the last many years, the financing bank (which has been with you for years) is unlikely to lend any incremental money for your business needs. You may think: ‘That’s OK. Some other bank would give me money’. Let me temper your enthusiasm.
After seeing that you are a stressed account (since your debt has been restructured and would be tagged as such in the RBI CRILC database), all banks would balk at providing any finance to your business. In addition, your business would be subject to a much higher level of scrutiny from your bank and its sanctioning authorities and possibly from the regulator too. Approvals that used to happen in normal course of business (like NOCs, ceding charge, etc.) would take much longer as such approvals would need signoffs from more senior approving authorities/ committees. To sum this up, availability of money for an entity with restructured debt will shrink in a material manner and the time you spend with your banker for normal business needs will also increase disproportionately. In addition, you would need to live with the ‘ghosts of this branding’ much after you repay the current debt!
So, my earnest advice is that please take a hard look at your business and what is the current need of the hour. If the need for the business is higher availability of money, you get some liquidity relief from restructuring but the more lingering impact would be reduced availability of capital.
Unless you have the right liquidity antidote, resist the lure of the new RBI dispensation. Beware the poisoned chalice.
(The writer is a banker and a market expert)
Source : Times of India