MSMEs are in the eye of the storm with NPAs reaching 5.90 percent as of March 2015 even though the net accretion to the portfolio has gone down from 12.3% in 2014 in terms of number of accounts to 10.1% with a corresponding decline in amount outstanding from 23.9% to 13.6%. The industry NPA level was 5.47 although at the systemic level both industry and MSMEs represent 4.7%. Only 7.9% constitute MSME advances to the total advances. (Financial Stability Report No.11, July 2015)
Risk appetite for the MSMEs is very low among banks and their adherence to the guidelines of both the RBI and GoI to identify sickness at incipient stage and introduce corrective action plans is highly suspect. There is reluctance among banks for either restructuring or revival of even viable advances. Their credit origination has also no less to blame. Monitoring and supervision are hit hard by lack of adequate field staff leaving most accounts for arm chair surveillance.
A couple of cases will prove the point: There is an innovative entrepreneur manufacturing edible cutlery financed by one of the public sector banks in 2013. Almost close to going into commercial production it was declared NPA. During the two years, not even once the bank officials visited the unit – not even when it shifted the machinery to a different location under advice to the bank. SLIIC directed the bank to offer six months’ time but the bank chose to give only 3 months – all because it has a collateral – the only residential building of the entrepreneur valued at Rs.10mn as against the outstanding loan of Rs.6.5mn and interest overdue of Rs.0.23mn.
The tragedy was that even as the CNN-IBN was interviewing the entrepreneur for his Innovation Award, a notice under SARFASI was slapped on the house. The unit has market inquiries for the products – edible spoons, forks, chopsticks, etc and at least five developing economies and UK evinced interest in transfer of technologies. Coffee Day is the first domestic buyer and a few more are on line. Marketing this product is cost intensive and time consuming. Given the reprieve the unit would show case India in its Make in India drive.
In another case, SBI of all banks, chose to declare the account as NPA of a firm manufacturing transformers. This partnership firm whose Managing Partner is illiterate in financial accounting has inducted a knowledgeable partner at the instance of its Relationship Manager. The Relationship Manager and the Accounting Partner colluded to submit an inflated balance sheet for drawing far in excess of the working capital limits. The excess drawal was later regularised by enhancing the limits.
When the unit’s fortunes declined due to severe power outages and agitations for separate state in Telangana, it became NPA. The orders from the GENCO also did not come through for the same reason. In 2013 the unit was proceeded legally because it has full cover of tangible collaterals. None of the unit’s guarantees devolved on the bank. The Bank holds deposits to the tune of Rs.0.50mn with different maturity dates. It has Rs.700mn worth work orders on hand. It goods are of BIS standard. The unit is functioning.
State Government offered in both the cases joint monitoring if rehabilitated. But the banks did not relent. Government of Telangana has put in a progressive industrial policy that also included a policy for revival because it believed that healthy growth of industry should not have in the neighbourhood sick units. It has plans to establish ‘Industrial Clinic’ for monitoring the incipient and sick units in MSME sector on a priority basis with facilities for diagnosis and TEV studies at the hands of the competent consultants under PPP mode. It proposes to give the revived units incentives on par with the new units to improve the cash flows.
All PSBs, as per June 2, 2015 guidelines of the Union Ministry of MSMEs, are expected to arrive at a corrective action plan when the accounts indicate deterioration and monitor it for sixty days and also take up TEV study of the unit for ensuring viability. Each Bank is expected to set up Zonewise Committees to examine and approve such proposals with the speed required. But these are yet to be set up.
On top of this, Banks though moving on CGTMSE coverage, their partial coverage of guarantee - term loan is under the collateral cover while the working capital is under guarantee cover. When there is default of the unit under term loan due to non-payment of interest for 90 days, it becomes NPA qualifying for SAFRAESI proceedings. No wonder the sectoral restructured standard advances ratio is just around 4% as per the Financial Stability Report July 2016 (p.22).
It is time that the RBI monitors the MSMEs on a more robust data at the regional levels and ensure compliance of the guidelines.