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The Covid-19 pandemic induced lockdown led to businesses being shut down across India during 2020, leading to a huge economic downturn. Micro, Small and Medium Enterprises (MSMEs) which form the backbone of India’s economic development, both in the formal and informal sector, were hit due to temporary or permanent closure during the lockdown.

To aid the recovery of the MSME sector during the ongoing Covid-19 crisis, the Reserve Bank of India (RBI) had announced a 6-month moratorium on term loans from March to August 2020. This measure did not provide the benefit as expected from it and fell short in addressing the recovery due to the slump in demand for products and services.

Why did the RBI Loan Moratorium for MSME’s fail to achieve the desired results?

Low Business Recovery

The MSME sector, just like other industrial sectors in India was barely able to survive the Covid-19 onslaught due to a slump in demand causing a low business recovery and subsequent disruption in income. Though RBI has provided a loan moratorium in 2020 to counter the economic crisis, the measures were of little help for MSMEs as business recovery to repay remained low. At least 30% of MSMEs had availed of the RBI loan moratorium benefit but at that time when the moratorium benefit was announced, hardly any MSME activity was being undertaken.

Loans Utilised for Meeting Fixed Overheads

The loans undertaken by MSMEs were utilised mainly towards managing fixed overhead costs, which had to be taken care of irrespective of income being there or not. Such benefit could not be availed towards improving the business as there was no improvement in the slump in demand even after such a measure was announced by RBI. With demand problems persisting, MSMEs could not be expected to improve in the ongoing crisis. Loan repayment has been an issue with most MSMEs due to the paucity of buyers.

Slump in Demand

After the end of the six-month tenure, RBI lifted the moratorium benefit granted. However, many businesses still did not have the money to repay the debt and are now burdened with additional interest burden. With the demand side still not picking up as per the expected terms though the supply of goods and services had slowly restarted, businesses are still finding it difficult to stay afloat and are expecting RBI to provide them with additional measures.

How will RBI manage the way forward?

The slow business recovery and low loan repayment ratio has made banks and credit rating agencies cautious. Their suggestion to RBI that any further extension of the moratorium period or similar measures could be risky due to there already being an increase of non-performing assets over the past year due to non-recovery of loans.

However, now the second wave of Covid-19 pandemic has engulfed the nation. States are introducing restricted lockdown measures to counter the growing number of cases on a daily basis. The second wave is causing unprecedented disruption both on the physical health and economic infrastructure in more severe terms than the first wave. 

With most MSMEs still yet to fully recover post moratorium from the disruption caused by the first Covid wave, the second wave has already set in. This time, therefore, MSMEs are expecting stronger measures from RBI, for managing their working capital requirement and for a longer tenure to stay afloat amid the growing crisis.

RBI has therefore provided an extension of the one-time restructuring scheme for MSMEs till March 31, 2022, as these enterprises were not able to revive their businesses during the first Covid-19 wave. Lenders are also cautious of the impact of the Covid pandemic second wave to ascertain the related stress it would bring on to the MSME sector. They would be able to tell about the actual impact only through the payment pattern of this sector as the ongoing payment battery has not been very forthcoming and has increased the non-performing assets in the financial sector.

Summary

The current situation is very tricky for all. Lenders are already weary of the increasing amount of non-performing assets due to the low recovery of loans. MSME sector is witnessing low business recovery due to slow demand and is finding it difficult to repay their loans wherein the interest burden is mounting. So, RBI needs to bring in robust relief measures keeping both lenders and MSME difficulties in mind.

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