Page 44 - Banking Finance September 2022

ARTICLE

promoter's stake or Rs. 75 lakh whichever is lower. Only one more tax-effective instrument, as interest paid is tax-
personal loan account shall be opened in the name of deductible whereas dividends paid do not get such tax
promoters, subject to maximum quantum of finance of Rs. benefit. However, in view of bigger risk associated with
75.00 Lakh for MSME beneficiary unit. subordinated debt, it is important for lenders of subordinate
debt to consider a loan applicant's solvency as well as other
This personal loan shall not exceed the original debt of the loan obligations in order to evaluate the risk should the entity
beneficiary. Further, the Equity shall be calculated on the be forced to liquidate.
basis of the last available audited balance sheet of a
Financial Year. There is moratorium period of 7 years on Senior secured debt (covered bonds)
payment of principal whereas maximum repayment period
will be 10 years.
Term deposits

About Subordinate Debt:
Senior debt
Subordinated debt refers to the debt owed to an unsecured
creditor. It is an unsecured loan or security that ranks below
Subordinated debt
other loans or securities with regards to claims on assets or
earnings of the issuer.

Hybrids
In the event of the bankruptcy or liquidation of the debtor,
Debt like
the court will prioritize the outstanding loans which the
Equity like
liquidated assets shall repay. Therefore, subordinated debt
can only be paid if any assets left after the claims of secured
Highest
creditors have been met. Hence, these types of debt with Equity
risk
lesser priority make the grade as subordinated debt. In
financial parlance, subordinated debt is also known as Source: FIIG Securities Limited
subordinated loan, subordinated bond, subordinated
Should a company go bankrupt, for example, creditors with
debenture or junior debt.
subordinated debt would not get paid until after other
senior debt holders are paid in full. This is indeed the primary
The main reason a company going for subordinated debt is
difference between subordinated debt and senior debt.
that it allows the company a way to raise additional capital
Because senior debt has the priority of repayment, it carries
after all lines of credit and other resources have been
lower risk and therefore has lower interest rates.
exhausted. Further, issuance of subordinate debts like
subordinated loan, subordinated bond, and subordinated On the other hand, subordinated debts have a higher risk
debenture has advantage over acquiring money through and therefore come with higher interest rates and
issuance of equity shares as subordinate debt does not dilute consequently a higher expected rate of return for the
the stake of promoter's shareholding. In addition, it is a creditor or lender.

Features of scheme "Subordinated Debt for Stressed MSMEs"

Eligible Borrowers For availing the sub-debt, the unit must be in running condition and operational. MSMEs should
have the potential of becoming commercially viable as per the assessment of the lending
institutions. Fraud/ Willful defaulter accounts will not be considered under the proposed scheme.
Personal loan will be provided to the promoters of the MSME units. The MSME itself may be
Proprietorship, Partnership, Private Limited Company or registered company etc. (in case of
partnership, private limited company etc., only one personal loan account shall be opened in the
name of promoters, subject to maximum quantum of finance of Rs. 75.00 Lakh for MSME
beneficiary unit).

44 | 2022 | SEPTEMBER | BANKING FINANCE