India File

One step forward, two steps back

Radhika Merwin | Updated on June 30, 2020

The Centre’s moves to step up loan delivery to MSMEs and relax repayment terms may not be enough. Reverse migration and logistics are challenges, says Radhika Merwin

After nearly three months of lockdown, the economy is limping back. But restarting activity for many sectors is no mean task. During the lockdown period, there has been a massive disruption in the movement of people and materials across the country that has brought production to a grinding halt across industry.

Aside from operational issues, businesses, in particular MSMEs, have been saddled with huge losses and cash-flow problems, owing to a sharp hit in revenues and high overhead costs. While the RBI and the Centre have announced several measures to ensure flow of credit to cash-hit businesses, there appears many a slip between the cup and the lip.

BusinessLine reached out to various companies across sectors. What are the operational challenges in restarting activity? Has the working capital pressure eased with the steps taken by the Centre and the RBI?

Construction grounded

An industry that gives employment to over 5.7 million people, the construction sector, along with related segments such as tile, paint, cement, etc., has been hit hard, says Devarajan, Managing Director, URC Constructions (headquartered in Erode, Tamil Nadu), who has about 35 years of experience in construction and infrastructure development. With the Covid situation still evolving, activity is expected to be impacted over the next one year.

“Till about a month back, we were confident of revival because 40-45 per cent of workers staying on the site had started working. But the ongoing crisis is having a psychological impact and people want to go back to their villages and homes. This has brought construction to a complete stop. Bihar, Odisha, Uttar Pradesh, Jharkhand and West Bengal are the key States from where workers come for construction activity across the country. Hence, barring those States, activity in the rest of the country has come to a grinding halt,” Devarajan explains.



The challenges faced by migrant labourers could have been avoided to some extent had adequate facilities been provided to them at their place of work.

“Many of these workers come to the cities alone and leave their family behind in villages whom they visit once or twice a year. But that model has now been completely shattered. So, even if, after the lockdown, materials are allowed to move between States, there are no people to do the work. This is a critical issue that needs to be addressed urgently,” says Devarajan.

For manufacturing units, the lockdown had caused total stoppage of production and stagnation of finished goods in factories. Migrant labour issues and rise in raw material costs only accentuated the pain.

Export orders hit

Exporters operating in Tirupur or Karur say the lockdown woes have been compounded by customers in Europe and other countries putting orders on hold. According to J Natarajan, President and COO, Karur Vysya Bank, many of the bank’s customers have been affected by export and migrant labour issues. The bank mainly caters to the business community in the South and has been engaging with customers to assess the impact of the ongoing pandemic .

For MGS Govindaraajulu Chettiar & Sons, manufacturer and exporter of textile garments, even as the lockdown is getting lifted, since very little public transport is available and there are difficulties in getting e-passes, bringing workers to the factory is an issue. “Moreover, we have to maintain social distancing in our factory and utilise only 50 per cent of the work force, which results in lower productivity and higher cost of operations” rues M V Srinivasamoorthi of MGS.

Poultry in shock

The poultry industry has been having its own problems. B Soundararajan, CMD, Suguna Holdings Private Ltd, says that even before Covid, the industry was facing hurdles. Material costs for FY20 had gone up by 20 per cent (maize and soyabean in comparison to international prices).

“Earlier, the increase could be passed on to customers. But in late January and early February, owing to the virus outbreak, there was a misguided fear over consumption of poultry, which impacted demand and prices. While the Centre and States came out with clarifications subsequently, the industry was already hit.”

While lockdown is being lifted now, poultry can at best come back to about 50 per cent of earlier capacity, and eggs to 70 per cent by June. While market prices that fell sharply have recovered and consumer confidence restored, purchasing power is down and restaurants that form 40 per cent of consumption may not open in a hurry. “On the labour front, even local people (aside from migrant labourers) are not too comfortable returning to work. This increases the labour cost,” says Soundararajan.

In the case of raw materials, soyabean comes from Maharashtra and Madhya Pradesh and inter-State restrictions are an issue. Maize has to come from Bihar. The disruption is impacting the quality of feed. But the Centre and the States are proactively taking measures. It could take one to two months for things to ease.

Many units in the industry have shut shop, unable to take the shock. How many of them reopen needs to be seen. Players with financial muscle and strong balance sheet can ride the storm better. Hence, the biggest need for industry is working capital, says Soundararajan.

Credit lines/loans

This brings us to the several measures taken by the RBI and the Centre over the past two months to ease the funds crunch faced by businesses. The RBI, on its part, slashed rates (repo rate by 115 bps) to ease borrowing costs for corporates, allowed lenders to provide six-month moratorium on term loans (on instalments falling due between March 1 and August 31), and allowed deferment of interest of six months on working capital facilities (lenders can convert the accumulated interest into a term loan to be repaid by March 31, 2021).

While some of these measures have eased the pain, they have not induced banks to lend. To address banks’ risk aversion, Finance Minister Nirmala Sitharaman announced ₹3 lakh crore of collateral free loans for MSMEs, with 100 per cent government guarantee.

In our interaction with businesses and banks, many expressed the view that the scheme has been a good measure. However, there several gaps too that need to be addressed. “The credit guarantee scheme is making an impact as also the 10 per cent additional working capital granted by various banks. These help cover salaries and rent in the near term,” says Devarajan of URC Constructions.

Karur Vysya Bank has been able to implement the scheme quickly, and has made it completely digital. “To ensure smooth execution of the scheme across branches, the bank has drawn up a list of eligible borrowers by doing a credit bureau check. The bank has short-listed about 23,000 eligible borrowers,” says Natarajan. He adds that the bank has disbursed ₹800 crore so far under the scheme.

Federal Bank too has centrally prepared the list of eligible borrowers in a similar way. “We have already disbursed loans to about 25 per cent (in number) and 35 per cent (in value) of eligible borrowers under the scheme,” says Rathish R, VP & Country Head – Business Banking, Federal Bank.

According to data tweeted by the Finance Ministry recently, a total of ₹75,400 crore has been sanctioned under the scheme so far, but the disbursement has been lower at ₹32,894 crore. One reason for this could be that companies are wary of availing more loans given the uncertainty in the business environment and their ability to repay the loans.

Many industry players say that easy access to loans under the scheme is a challenge.

The scheme only covers businesses that have already availed of loans from banks. “The package announced by the government is not stimulus — only directs companies to borrow from banks for which it will provide guarantee. It aims at MSMEs who have already borrowed money from banks. What about other small units who have also suffered during the lockdown?” poses Srinivasamoorthi of MGS. He also adds that the 20 per cent limit (of the borrowers’ total outstanding, which cannot exceed ₹25 crore) is mechanical. Rather it should be need-based as many companies are stuck with stocks that may not be useful now.

“The package restricts loan outstanding as on February 29, 2020, to ₹25 crore, whereas our company’s outstanding on that date was ₹29 crore. There is no stimulus for companies like us and many MSMEs fall in this category. The RBI should look into this very seriously failing which, after moratorium period, many companies will face enormous financial problems leading to stressed accounts,” says Srinivasamoorthi of MGS.

Soundararajan of Suguna says the funds may also not reach all sectors. The Centre should have done a sector-wise allocation.

On the RBI’s moratorium, while many players believe that it is welcome short-term relief, it may not be adequate. Devarajan of URC Constructions says the pain is likely to extend beyond next year and hence companies may not be able to repay the accumulated interest and working capital or other loans under moratorium. “The accumulated interest should be converted into term loan of two or three years”, he suggests.

“In case of government projects, they should ensure prompt payment of dues,” stresses Devarajan of URC Constructions. He also feels the cess collected under the BOCW (Building and Other Construction Workers) Cess Act, 1996, should be used by States to provide relief to construction workers.

Published on June 30, 2020

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