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The IUP Journal of Bank Management

Pre-Pack Resolution of Stressed Corporate MSMEs by Banks in India

Article Details

Pub. Date	: Aug, 2022
Product Name	: The IUP Journal of Bank Management
Product Type	: Article
Product Code	: IJBM020822
Author Name	: V S Kaveri
Availability	: YES
Subject/Domain	: Finance
Download Format	: PDF Format
No. of Pages	: 09

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Abstract

Micro, Small and Medium Enterprises (MSMEs) in India experienced a steep decline in production, income and employment generation during the recent Covid-19 pandemic. Consequently, loan default on the part of stressed MSMEs has been on the rise. Appreciating the difficulties of such enterprises during the pandemic, the Government of India has recently initiated a major relief measure by amending the Insolvency Bankruptcy Code (IBC) to introduce a Pre-Pack Resolution Scheme, initially for corporate MSMEs. This is considered as an alternative route for faster and easy resolution of stressed corporate MSME debts if 66% of the financial creditors approve their plan to approach the adjudicating authority for insolvency, National Company Law Tribunal (NCLT). In the absence of such a scheme, they had to go through a long-drawn-out process under IBC. While there are several benefits of the scheme, stakeholders such as corporate MSMEs, lending institutions and NCLT have to face many challenges in implementing it successfully. This paper attempts to review the scheme by discussing its background, salient features, process, regulatory aspects and other issues.

Introduction

The Micro, Small and Medium Enterprises (MSME) sector contributes significantly to the economic and social development of India by fostering entrepreneurship and generating large employment opportunities at comparatively lower capital cost, next only to agriculture. MSMEs are complementary to large industries as ancillary units. The sector is also known for the inclusive industrial development of the country. In addition, the MSMEs produce a wide range of products and services to meet the demands of domestic as well as global markets. During the recent Covid-19 pandemic, this sector was under stress, experiencing loss of production, income and employment. According to a Money Outlook survey, almost 25% of these firms were about to face closure if the pandemic persisted for a longer period.1 Therefore, both the Government of India (GoI) and the Reserve Bank of India (RBI) came forward with muchneeded relief measures to the MSME sector during the pandemic to tide over liquidity and meet cash flow challenges. The major relief measures of the government include: (i) Package of