Coronavirus-induced lockdown: SMEs staring at a bleak future

As the lockdown continues, small and medium enterprises have been adversely affected as manufacturing has come to a grinding halt.

"Without business activity for three months, it is highly unlikely that MSMEs will be able to repay the debt," said Mukesh Mohan Gupta, Chairman, CISME.

Further, there is no clarity on the interest payments of term loans. Banks have been given discretion over the implementation of moratorium. According to Gupta, several SMEs have complained that installments have been debited from their accounts.

"Estimating the business level and its impact on working capital and hence availability of cash flows for debt servicing and repayment post the moratorium period will be a challenge. Borrowers will need to run various scenario analysis assuming level of COVID-19 impact on their business and cash flow over the next 3 to 12 months period to ascertain their ability to service debt," said Sanjay Doshi, Partner, Deal Advisory - Financial Services, KPMG India.

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Accordingly, some borrowers may need to reschedule their cash flows and seek increase in credit limit, which will not be an easy task due to lack of of regulatory support.

SMEs need an interest waiver of at least six months to get businesses running again, according to Gupta. Payment of labour, electricity bills, salary etc. will make payment of term loans difficult.

Most of the transactions are cash-based and SMEs usually have a smaller working capital cycle of 90 to 120 days. Thus, there are no reserves to service these loans.

At an aggregate level, the banking sector has credit outstanding to MSMEs of approximately Rs. 17.4 trillion as on March, 2019. Scheduled Commercial Banks comprise 90 percent of these loans.

However, given the impact on global economy, Doshi said that the overall level of business may shrink in the next 9-12 months, which will result in volume decline on working capital requirement. However, the working capital cycle in itself will increase as the overall credit from financial institutions will be adversely affected.