My blogs are only subject oriented - Finance, agriculture, MSMEs, Cooperation, Corporate Governance etc. Do not relate to any comments on caste, religion, sex etc.
Sunday, February 21, 2016
MSMEs Cry for Attention
Start-Ups in MSMEs, particularly
in manufacturing can now look for vertical growth instead of horizontal growth
with the MSME Ministry revising the definition of plant and machinery to
include all such equipment owned by the same owner(s) across the districts and
country to be reckoned for classification of MSME under the MSME Development
Act 2006. In the long run this redefinition would do lot good to the sector.
The sector may witness in the short term more NPAs.
NPAs in MSMEs put to stress test,
at pre-shock level were 5.04 percent as of December 2015 with no significant
contribution to the losses as percent of either profit or capital. The industry
NPA level was 6.68 percent although at the systemic level MSMEs represent 5.94
percent. Only 7.9% constitute MSME
advances to the total advances. (FSR 12, December 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. By just allowing postponement of instalments for three
months, they christen as restructuring without going into the processes of
restructuring. The restructured standard advances to sub-standard advances were
range bound at 0.09 to 0.38 percent indicating that not much restructuring took
place in the sector.
Banks know for sure that the
MSMEs as vendors to the large industry and infrastructure sectors could not
realise their bills within 90 days and unable even to pay interest turned NPAs.
There is reluctance among banks for either restructuring or revival of even
Credit origination is also no
less to blame. State Bank group is thrusting its insurance products as a
compulsory product along with credit. The size depends upon the loan
sanctioned. The Banks debit the working capital loan account with the premium
running to lakhs of rupees. SBI Life pays hefty commissions to the staff who
cross-sells this product to the loanees. Monitoring and supervision are hit
hard by inadequate field staff leaving most accounts for arm chair
surveillance. Even the CMI data is passed off as compliance formality and not
as monitoring tool.
A couple of cases will prove the
point: An innovative entrepreneur manufacturing edible cutlery financed by one
of the public sector banks in 2013 almost close to going into commercial
production 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
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
Even as the CNN-IBN was
interviewing the entrepreneur for his Innovation Award, a notice under SARFESI
Act 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, another leading
public sector bank declared the account as NPA of a partnership firm
manufacturing electric transformers for installation in rural areas. This
partnership firm whose Managing Partner is financially illiterate inducted a
knowledgeable partner in financials 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 Bank proceeded against the collateral security.
None of the unit’s guarantees
devolved on the bank. The Bank holds deposits to the tune of Rs.51lakhs with
different maturity dates. After the formation of Telangana State, it has secured
Rs.7crores worth work orders on hand since June 2015. Its goods are of BIS
The hidden fact later revealed
was that the relationship manager after suspending him has been booked by the
CBI. There would appear to be a calculated effort to bail out the official by
closing the unit and its collateral security came in handy. Government of
Telangana took serious view of this instance as it would affect the 50 families
dependent on the unit.
State Government offered in both the cases
joint monitoring if rehabilitated. But the banks are slow to act. Telangana Government
has put in a progressive industrial policy that also included a policy for
revival believing 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 once the
Bank concerned approved the revival plan.
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.
It is time that the RBI monitors
the MSMEs on a more robust data at the regional levels and ensures compliance
of the guidelines. RBI data reveals only less than 5% of potentially viable
units were revived during the last decade as compared to a huge corporate debt
restructuring that went bust.
"The FM would do well to include in the budget tax
incentives for strategic partners’ investments in revival of the potentially
viable units. RBI may also consider redefining NPAs under the sector
differently and also allow takeover of any viable unit if the parent bank is
willing to shed it in a manner that such advance would not add to the baggage
of NPAs of the receiving bank."
The Author is an economist and
MSME Lead Consultant, Government of Telangana, Hyderabad.