MSMEs on the Roller Coaster
Unhelpful Banks and Less Understood Regulations
B. Yerram Raju and K. Manicka Raj*
In a recent address RBI Governor Raghuram Rajan said: “A Banker who lends with the intent of never experiencing a default is probably over-conservative and will lend to too few projects, thus hurting the growth.” In the same vein he added: “Indeed, sometimes banks signed up to lend based on project reports by the promoters’ investment bank (in the case of MSMEs chartered accountants), without doing their due diligence.”
There is a total mismatch between the banks understanding and RBI's intentions on the guidelines issued in respect of MSME financing , follow up and useful implementation of the various schemes. Because of accumulation of NPAs banks seem to have lost their sense of judgement and MSMES are the victims and the SARFAESI ACT 2002 has become very handy. Even in the best of times banks did not revive or restructure small scale industries more than 1.5 percent of their own assessed potentially viable enterprises as revealed by the RBI Annual Reports.
Rajan has succinctly summarised a few cardinal principles for dealing with stressed assets:
“1. Viability does not depend on the debt outstanding, but on economic value. Debt may have to be written down to correspond to what is viable.
2. Complete projects that are viable even if it require additional funds infusion.
3. Don’t throw good money after bad money simply because there is unreliable promise that debt becomes serviceable.”
Unfortunately by not following such principles, Banking is in a terrible mess now and one wonders whether the latest amendments to the Debt Recovery Laws would save the situation. When breach of regulations get honours how can a law help? The involvement and commitment to provide lifeline to SMEs is literally absent and the mindset to have a feel of the segment is virtually absent.
Although the Banks are supposed to suggest OTS in deserving cases as per RBI guidelines issued in 2009 there is little evidence to banks volunteering to do it. In fact they tend to give this facilitation only when the collateral security value falls short of the outstanding loan amount. Wherever the collateral security value is more than the total outstanding loan, SARFAESI Act proceedings are resorted to as first option.
After they fail to realise in public auction of the collateral security, they hand over to the ARC the same assets at a large discount and take tradable Security Certificate. Before this discounted sale of asset to the ARC, Bank could as well offer to the borrowing SME at even a lesser discount, under OTS and give the first right of refusal. This would have actually saved the Banks the ordeal and the loss on the declared NPA asset could have been minimal. However, this approach carries the risk of compromising Bank’s interests by a few unscrupulous Managers handling this portfolio. Such risk can be mitigated by better checks and balances and tweaking discretionary powers under such circumstances appropriately.
If every file relating to SAFRAESI Act proceedings has this mandatory check list for compliance we feel that the sector would be saved of savagery of perverse regulatory interpretation and banks would also be saved of NPAs in this segment. For Check list refer to