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 viable advances.

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 Rs.2.3mn.

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 standard.

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.