Distressed Assets Funding: A Subordinate Debt Program for Struggling MSMEs

Distressed Assets Funding: A Subordinate Debt Program for Struggling MSMEs

November 15, 2022 Admin
distressed assets funding distressed asset fund distressed asset credit guarantee fund subordinate debt scheme

The Ministry of Micro, Small, and Medium Enterprises (MSMEs) has developed a mechanism to give guarantees for loan facilities provided by qualified and registered scheduled commercial banks to borrowers in Micro, Small, and Medium Enterprises. The instrument through which the guarantee will be given is called the “Credit Guarantee Scheme for Subordinate Debt” (CGSSD). The initiative is called "Distressed Assets Funding - Subordinate Debt for Stressed MSMEs." As part of the economic package, the government declared a subordinated debt fund of Rs 20,000 crore which includes the distressed assets fund. The government would provide Rs 4,000 crore to the Credit Guarantee Fund Trust for Micro and Small Enterprises, which will provide partial credit guarantee support to banks so they may lend to MSMEs.


Purpose of the scheme:

Purpose of the Scheme: To offer guarantee coverage so that the CGSSD may support MSMEs' restructuring with sub-debt. The scheme/Trust would provide 90% of the guaranteed coverage, and the concerned promoter would provide the remaining 10%. According to RBI rules for restructuring troubled MSME advances, the scheme's goal is to give personal loans through banks to the owners of stressed MSMEs so they may inject them as equity or quasi-equity into the company that is found suitable for restructuring.

Distressed Assets Funding: A Subordinate Debt Program for Struggling MSMEs

Eligibility Criteria of the scheme:

As already stated, the Rs. 20,000 crore subordinate debt plan is intended for struggling MSMEs, including those classified as non-performing assets or under financial stress.


The following are eligible under the scheme:

  • Functioning MSMEs which are non-performing assets (NPA)
  • Financially Stressed MSME is also eligible
  • MSME units such as individuals/proprietorships, LLP, Partnerships, Private Limited Companies, or registered companies are eligible to be covered under the scheme.

Benefits of the Scheme

The COVID-19 lockdown has severely impacted small firms, hence the government has taken steps to offer these companies a lifeline in the shape of the” Distressed Assets Funding: A Subordinate Debt Scheme for MSMEs”. Banks have limited options available to help stressed MSME units.


This government aid would help MSMEs get their businesses back on track since they have been unable to obtain credit because they are classified as NPAs and have stressed finances throughout the pandemic.


Features of the Scheme

The features of the Subordinate Debt Scheme are explained in detail below:

  • The quasi-equity funded with the guarantee provided under the program would create a balance between the advantages and risks for both the financial institutions and MSMEs.
  • The Subordinate Debt Scheme for distressed assets would offer the necessary finance to the MSME unit when an outright loan would be too risky.
  • Subordinate debt would significantly aid in maintaining and reviving MSMEs that have either turned into non-performing assets (NPA) or are on the verge of becoming so.

The tenor of credit facility under this scheme.

  • From the guarantee availment date or March 31, 2023, whichever comes first, the maximum tenor would be 10 years.
  • The payment of the principal may be suspended for a maximum of seven years. Only interest will be paid up to the seventh year in such cases.
  • After the end of the moratorium period, the facility's principal must be returned within the permitted tenor for the facility, and the interest on the facility would need to be routinely serviced (as and when applicable).
  • The borrower is free to prepay the loan without incurring any further fees or penalties.

Quantum of Finance:

  • The Promoter of the MSME Unit would be given a credit facility up to 50% of his/her ownership in the MSME unit (equity plus debt), or Rs. 75 lakhs, whichever is lesser, under the program, based on the most recent audited balance sheet.
  • To determine the equity/debt participation of the promoter for firms that are not required to have their balance sheets audited, the bank may request a CA's certificate or the most recent ITR return.
  • In addition, the equity will be determined using the most recently available audited balance sheet for a given financial year.

Note on Subordinate Debt

Subordinate debt is unsecured debt with a secondary priority for repayment in the event of bankruptcy or liquidation of the company. A corporation must always pay off the senior debt first if it has both senior and subordinated debt. For a lender (bank), there is no assurance that a subordinate loan will be paid back by the borrower. The borrower is only required to make payments in the event of a liquidation or bankruptcy of the company if there is excess cash left over after paying the senior loan.


Quasi Equity – Subordinate Debt

The Credit Guarantee Trust for Medium and Small Entrepreneurs will fully guarantee this subordinate debt for distressed assets provided by the commercial banks, which will be regarded as quasi-equity. The Subordinate Debit Scheme's guaranteed coverage can be used by the promoters as equity in the MSME unit, boosting liquidity and maintaining the debt-to-equity ratio.


Guarantee Fee

On an outstanding basis, the guaranteed amount will earn 1.50% annually.

The borrowers are responsible for paying the guarantee cost.

Until the first claim is settled, a guarantee fee is due on NPA cases and cases where claims have been filed.

Once paid by the lending institution to the Trust, the guarantee service charge is not recoverable.


The extent of the Guarantee coverage

90% of the guarantee coverage for the loan that the Bank would give would come from CGTMSE, and the remaining 10% would come from the relevant promoters under the "Distressed Assets Funding - Subordinate Debt for Stressed MSMEs."

The guarantee will begin on the guarantee start date and continue until the facility's agreed-upon lifespan as long as the yearly guarantee fee is paid.

The guarantee cover would be an uncapped, unconditional, and irrevocable credit guarantee.

Featured blogs

Any Query ?
Any Query Call Now