A Reserve Bank of India (RBI) committee has suggested a Rs 5,000 crore (about $720 million at current exchange rate) stressed asset fund for micro, small and medium enterprises (MSMEs).
The committee is chaired by UK Sinha, former chairman, Securities and Exchange Board of India (Sebi), and joined by eight other members from the MSME ministry and banking fraternity.
“The committee recommends for the creation of a distressed asset fund, with a corpus of Rs 5,000 crore, structured to assist units in clusters where a change in the external environment, for example, a ban on plastics or ‘dumping’ has led to a large number of MSMEs becoming non-performing assets (NPAs)," said the panel’s report.
This fund could operate on the lines of the Textile Upgradation Fund Scheme (TUFS), which, according to a report by The Financial Express in June, has attracted over Rs 3.75 trillion of investments during the last two decades.
The distressed fund would be of a significant size so as to make equity investments that help unlock debt or revive sick units, observed the committee.
The fund is a variation of venture capital fund, meant for equity investment of Rs 1 lakh to Rs 10 lakh in proprietary or partnership MSMEs which will not or cannot list on stock exchanges.
The committee recommended that covenants such as formalisation and digitisation of cash flows can be built in.
The structure would recognise that exits will not be big bang but through a percentage of revenues or profits over a period of, say, three to five years.
Such a fund could work in tandem with RBI-mandated restructuring schemes or bank-led NPA revival solutions for MSMEs. The onus of creating this fund would lie with the government.
The committee also highlighted the important role played by Small Industries Development Bank of India (SIDBI) as a nodal agency to create platforms wherein various venture capital funds can participate and, in turn, create a multiplier effect for providing equity support to MSMEs.