MSME relief package to provide limited respite: Report

The first round of economic relief package announced by the government for micro small and medium enterprises (MSMEs) will provide a limited respite to the sector and partially ease near-term liquidity stress of lower-rated such companies, says a report.

In May, the government had announced a slew of measures to support MSME sector including collateral-free loans up to Rs 3 lakh crore backed by government guarantee, Rs 20,000 crore subordinate debt provision for stressed MSMEs, among others.

The government also revised the definition of MSMEs to include entities with revenue up to Rs 250 crore and investment in fixed assets up to Rs 50 crore.

Talking about its rated companies, India Ratings and Research in a report said, "The first round of economic relief package announced for MSMEs will partially abate the near-term liquidity headwinds faced by some of the lower rated (below investment grade) mid and emerging corporates (MECs).”

The rating agency defines MEC as companies having revenue up to Rs 750 crore. Under the revised definition, a large portion of these companies will qualify as MSMEs, its senior analyst Arindam Som said.

The benefit of these schemes will be restricted to 30 per cent of the overall rated portfolio with limited respite for high rated, large entities by revenue, the rating agency said.

It analysed around 200 investment-grade rated MECs and 226 speculative grade MECs.

Of this, 131 issuers are eligible for the Rs 3 lakh crore collateral-free loan – of which 91 per cent are rated in the speculative grade.

The report said in scenarios where the impairment in the business profiles and balance sheets of MSMEs is not expected to reverse in the near term, the risk of a negative rating action could be high.

“Notwithstanding access to funding under the schemes, entities may find it difficult to revert to their pre-COVID profile,” it said.

The extent of benefit on account of the government's schemes will depend on their timely implementation – especially with regard to putting in place proper systems and processes to ensure smooth functioning of these schemes over the near to medium term, it said.

Between April 2020 and 15 June 2020, the agency downgraded 25 rated MECs while upgrading six issuers.

For 44 per cent of the issuers, the rating downgrade was primarily reflective of the COVID-19 related business disruption while for the remaining issuers the pandemic has aggravated the existing cash flows pressures.

The report said the decision to provide funds to the promoters to infuse capital in stressed MSMEs could help reinvigorate some of these stressed units – especially those which have been facing a funding gap for a long time.

“However, a long-term absence of deep meaningful, structural reforms could intensify liquidity challenges for MSMEs,” it said.

The revision in the definition of MSMEs will enhance the freshly included MECs' ability to access fresh funding from the financial system – on account of the inclusion of the banking sector's exposure to these issuers in the priority sector exposure bucket, it said.

MSME sector is the backbone of the country's economy, contributing over 28 per cent of the GDP and more than 40 per cent of exports. The sector employs about 11 crore people, the second-highest after agriculture.