Why FISME’s plea for distressed MSME funding is a double-edged sword

I’ve spent enough time in the trenches to know that the gap between a ‘viable business’ and a ‘zombie company’ is razor-thin. When FISME asks the government to open the spigots of the new 10,000-crore SME Growth Fund to firms already labeled as SMA-2 or NPA, it sounds like a lifeline. On paper, it’s a noble attempt to stop a cash-flow hiccup from turning into a corporate funeral. But let’s look under the hood. SMA-2 means a borrower has skipped payments for 61 to 90 days. NPAs are effectively non-performing. Pumping equity into these buckets isn't just risk-taking; it’s an admission that our banking system's current restructuring tools are hitting a wall.

The logic here is about saving jobs and maintaining industrial velocity. If a firm has a solid revival plan, why let it die for the want of working capital? It sounds like common sense. But here is the danger: moral hazard. If we start signaling that the government will provide equity for firms that have already breached their loan covenants, we might unintentionally incentivize bad credit discipline. Investors—and the taxpayers footing this bill—need to know exactly where the line is between a temporary market shock and fundamental business model failure.

From a founder’s perspective, getting equity instead of more debt is the dream. Debt compounds; equity buys you time to iterate. But if you’re already an NPA, your unit economics are likely bleeding from more than just a lack of funds. Is it bad management, a dying product, or a structural shift in your industry? Throwing equity at a sinking ship doesn’t plug the hole; it just keeps the lights on while the water rises. Unless the fund has iron-clad governance and deep industry expertise to pick winners from the debris, this money could vanish into a black hole of interest payments and vendor dues.

We also have to talk about the 'so what' for the ecosystem. If this fund becomes a dumping ground for bad loans, institutional LPs and private co-investors will stay miles away. To make this work, the government shouldn't just be a lender of last resort; it needs to be an active turnaround partner. This means demanding board seats, stringent restructuring of operations, and the power to replace failing management. Without these teeth, we’re just delaying the inevitable at the cost of the public exchequer.

What do you think? Should the state act as the ultimate venture debt provider for distressed small businesses, or does this risk keeping inefficient firms alive at the cost of the next generation of hungry startups? Let’s hear your take.