Wednesday, July 19, 2017

NPAs of MSEs Need Alert Banking

NPAs of MSEs Need alert Banking

Grouped under unorganized sector, micro, small enterprises (MSEs) are suppliers to the organized medium and large enterprises. With GST they would migrate from unorganized to organized territory ere long.

Many entrepreneurs have been wondering about their future as their working capital cycles shake up. Credit to them has been on the continuous decline from the banks. In spite of GoI guidelines of June 2015 and master directions of the RBI, several deserving non-willful defaulters’ accounts have not been revived/restructured. Zonal Committees for MSME stressed asset resolution continue to make an apology of their presence. The remedy suggested by the RBI in its master directions with SMA(0,1,2) proved worse than the disease going by the analysis presented below based on the data in RBI Bulletin January 2017.

In June 2017 RBI Bulletin one finds the results of quarterly Industrial Survey with useful analytics. There are informative tables on assessment and expectations of production, order books, pending orders, capacity utilization, levels of raw material inventory, finished goods inventory, working capital finance and its availability from banks for the last nine quarters.  CSO and NSSO data also periodically releases the data on IIP. This data gives the picture of decline in production and market failures. PMI (Purchasing Managers Index) for manufacturing sector in June 2017 showed up the lowest in the last four months. Associations like the CII, ASSOCHAM, FICCI and Banks like the SBI, HDFC, HSBC and rating agencies also periodically have been releasing Business environment survey reports. These Reports could have been used for making credit decisions and containing NPAs with timely corrective interventions. Such data could have been part of the implementation tools for banks to lend responsibly and in time.

Banks should be aware of the cascading effect of NPAs in the large and medium manufacturing enterprises on their vendors, MSEs. Every bank branch financing both these sectors knows that the bills payable to the later are continually getting delayed in spite of conforming to terms and conditions of supply.

Banks’ efforts in reducing non-performing assets by various channels such as Lok Adalats, Debt Recovery Tribunals(DRTs) and invoking SARFAESI Act provisions reveal:
1.  By March 31, 2016, number of cases referred to various courts, DRT, Sarfaesi and Lok Adalat have increased nearly 2 times from 2014-15 in both SCB and PSB.
2.  SCB Cases increased to 46,54,753 from 31,55,672 (2014-15) while the PSB Cases referred increased to 44,23,080 from 27,81,552(2014-15) indicating that the private sector banks recourse to the above legal mechanisms reduced by 1,42,447 firms.

3.  Recovery of NPA has decreased in both SCB and PSB in 2015-16, Gap between amount involved and amount recovered is large as given below.
4.     NPA recovery has gone down in 2015-16 from 2014-15 as shown above.
5.     Banks took recourse to all the available channels for recovering NPAs.
Chart below indicates that recovery through DRT and Lok Adalat has improved from previous year whereas recourse to SARFAESI declined by 52% from 25600 Cr in 2014-15 to 13179 Cr in 2015-16.

There is large gap between the amount involved and amount recovered in the SARFAESI channel. Percentage of recovery across SCBs and PSBs showed a decline from 12.14 and 13.77 in 2014-15 to10.28 and 10.32 respectively in 2015-16.
Banks can proactively solve the NPAs in MSE sector if they keep their eyes and ears open. Impact of sectoral failures caused by economic downturn both within and outside the country is available in the periodic assessments of various organizations indicated above. Similarly, they are also aware of which of the large and medium enterprises are postponing payments to their vendors, viz., MSEs. In both the instances banks can proactively provide succor to the weaklings in the industry through the periodic rescheduling of repayments when they will continue to be treated as standard assets if they are able to pay up the interest obligation. This is not to be treated as revival effort but a survival effort.
In all other cases, revival as per the RBI directives can be done in good time. It is imprudent for a bank to wait for the account to become NPA to attempt revival process as is sometimes, some banks are choosing to do. Alert banks can significantly reduce the NPAs of MSEs.
For all charts go to the link below.