Tirupur, in India’s southern state of Tamil Nadu, is an export hub for textiles. Each year, the town’s medium, small, and micro enterprises (MSMEs) export products worth $3.5 billion, servicing international brands such as Zara, Disney, Nike, and Puma. This year is different. Even as factories continue to churn out clothing, the town is waiting anxiously for demand from exporters to return.

Thirty-two-year-old Gomatha International, which employs nearly 400 people, is among the companies watching the clock tick away. The company, which exports baby and kids wear to countries like Australia, Finland, and Sweden, saw business grind to a halt in March, when India went into lockdown to stave off the threat of Covid-19. CMN Muruganandan, the company’s owner, says he is only just seeing a gradual uptick. But even as business as usual slowly resumes, the terms of doing business have changed.

For Muruganandan, borrowing has always been integral to operations. While he needs to make payments on a weekly or fortnightly basis, actual sales now only happen every three months. This situation has worsened for Muruganandan, who is a member of the Tirupur Exporters Association (TEA). Payments from clients, which once took between 60-90 days, now take up to four months, increasing his reliance on borrowing. Muruganandan already has borrowings worth Rs 8 crore ($1 million)—a debt he can settle only when business is back to pre-Covid levels, but for which he needs to continue repayments.

Gomatha’s fellow MSMEs—over 60 million of them—are in the same boat. These businesses earn anywhere between a few crore to Rs 250 crore ($33.7 million) annually. For many of them, their fate will be determined by a case that’s set to go before India’s Supreme Court (SC) on 28 September.

The SC is in the middle of hearing a public interest litigation by aggrieved individual borrowers and various company associations, including TEA, all of whom opted for the government’s six-month loan repayment moratorium moratorium moratorium Temporary suspension in repayment of loan . Their primary appeal to the court is to suspend the compounding of interest—interest charged on interest—for the moratorium period.

Strength in numbers

While the PIL originally represented individual borrowers, companies soon flocked to join in. The PIL has nearly 30 petitioners, said Kumar Dushyant Singh, the SC lawyer who filed the case

“The SC is inclined to do away with the interest on interest. Otherwise they would have dismissed it by now,” said a lawyer who is looking to add another petition to the PIL.

For many of the aggrieved businesses, the PIL is a chance to not just seek suspension of interest, but to stop their credit ratings from getting downgraded.

Any company that has over Rs 5 crore ($675,683) in borrowings is mandated by the Reserve Bank of India (RBI) to get its loans rated by regulated external Credit Ratings Agencies (CRAs) like Crisil, Care, and ICRA.

AUTHOR

Arundhati Ramanathan

Arundhati is Bengaluru-based. She is interested in how people use money in the digital age and how new economies will take shape based on that interaction. She has spent over 10 years reporting and writing on various subjects. Previous stints were at Mint, Outlook Business and Reuters.

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