Distressed Assets Fund - Subordinate Debt Scheme for MSMEs

To provide relief to Micro, Small, and Medium Enterprises (MSMEs) reeling under the impact of the Covid-19 pandemic, Ministry of Finance, Government of India has announced few schemes as part of the economic package. Accordingly, the Distressed Assets Fund - Subordinate Debt Scheme has launched to provide equity support for financially stressed MSMEs. Under this scheme, promoters of the MSME will be provided debt by banks, which will then be infused by promoters as equity in the MSME Unit. The primary objective of the Subordinate Debt Scheme is to help MSMEs to meet operational expenses, and resume the businesses that have been badly affected by the COVID 19 pandemic.

Distressed Assets Fund

The distressed Asset Fund is part of the Rs 20,000 crore subordinate debt announced by Honourable Finance Minister – Smt. Nirmala Sitharaman as part of the economic package. The government will provide Rs 4,000 crore support to the Credit Guarantee Fund Trust For Micro and Small Enterprises., which will give partial credit guarantee support to banks, to lend to MSMEs.

Financial Assistance under the Subordinate Debt Scheme

Working capital credit remains a major issue for MSMEs, as part of the Subordinate Debt Scheme; Government provides a debt facility of Rs.75 lakh to promoters of MSME or up to 15 % of the promoter contribution. Accordingly, the government will provide guarantee coverage for loans obtained by MSME from the bank.

Sl.No	Guarantee Coverage	Loan Amount
1	85%	Loans an Rs.5 lakhs
2	75%	Loans beyond Rs.5 lakhs

Eligibility Criteria for Subordinate Debt Scheme

As mentioned above, Rs. 20,000 crore subordinate debt scheme is meant for stressed MSMEs; even those that are tagged as non-performing assets or financially stressed.

Functioning MSMEs which are non-performing assets (NPA)
Financially Stressed MSME also eligible

Benefits of the Scheme

As small businesses have taken a massive hit due to the COVID 19 lockdown, the government needed to release a lifeline to these businesses in the form of Subordinate Debit Scheme for MSMEs. If a stressed MSME unit goes bankrupt then the bank has few options to make the MSME repay a subordinate loan. As MSMEs that are categorized as NPAs and with stressed financials have been facing difficulty in procuring credit during the pandemic, this assistance by the government will help them bring their business on track.

Features of Subordinate Debt Scheme

The feature of the Subordinate Debt Scheme is explained in detail below:

The quasi-equity provision with the guarantee provided under the scheme will balance the risks and rewards between the financial institution and MSME.
In a situation where an outright loan is too risky, the Subordinate Debt Scheme will provide the requisite financing to the MSME unit
Subordinate debt will be of substantial help in sustaining and reviving the MSMEs which have either become non-performing assets (NPA) or are on the brink of becoming NPA

Note on Subordinate Debt

Subordinate debt is a debt that is a collateral-free debt that has secondary priority in repayment if a firm files for bankruptcy or liquidation. If a company has taken subordinate debt and senior debt, then the senior debt is always the one it must pay first. There is no guarantee for a lender (bank) that a subordinate debt will be repaid by the borrower. In case the firm liquidates or goes bankrupt, the borrower is only obliged to pay if there is surplus liquidity after repaying the senior debt.

Quasi Equity – Subordinate Debt

This subordinate debt provided by the commercial banks will be considered as quasi-equity and it will be fully guaranteed through the Credit Guarantee Trust for the Medium and Small Entrepreneurs. The promoters can use the guarantee coverage provided under the Subordinate Debit Scheme into the MSME unit as equity, therewith enhancing the liquidity and maintain the debt-equity ratio.

Subordinate Debt Scheme Application Procedure

Promoters of MSMEs meeting the eligibility criteria as mentioned above can approach scheduled commercial banks to avail benefit under the scheme. The bank will disburse loans to promoters within 2 working days after complying with all sanction terms.