All about NPA imbroglio in MSME sector Co-financing provides adequate risk mitigation to existing lenders

RBI statistics show that stressed assets in Indian banking have reached the alarming level of 16% of the total assets. MSMEs, however, suffering a cascading effect of their elder brothers in corporates as vendors, are at the fringe, with around 8%. The extent of ‘wilful default’ as defined by RBI and the contribution of ‘financial illiteracy’ of MSMEs cannot be established by data. Hidden or undisclosed reasons for NPAs in banks’ books have been narrated in a few research studies that include CII, FICCI, ASSOCHAM, CAB, etc, but they had no institutional solutions.

Karimnagar district in Telangana has thrown up a few cases. An entrepreneur manufacturing unbranded detergent who received all accolades from the government found himself on the decks due to his market restricted only to the state government during 2008-14. Another from the same place, engaged in manufacturing and innovative recycling of batteries for automobiles with market restricted to the state public transport undertaking that actually saved no less than Rs 35 lakh per month to the entity, became an NPA and sold off his property to settle debt under the OTS. A third entrepreneur, engaged in manufacturing paints at Jeedimetla IE in Hyderabad, similarly suffered in strategically positioning himself in the market.

In yet another case, a polymer unit in Paloncha town suffered due to partnership dispute and delayed release of state-announced incentives for the last three years. There were 23 entrepreneurs invited to establish handloom and power loom units in a textile park, but they suffered because of the promised infrastructure not materialising for years. All incentives due to them were released.

Forward and backward linkages were absent and they landed themselves in the NPA saga. We notice that of the 52 NPAs or partially-closed units approaching us for resolution, 60% were on sick bed due to non-financial problems—power failure or irregular power supply, heavy commercial tax dues in arrears and strategic management issues. And 38% were due to delayed release of incentives, and 12 more units in steel and aluminium sector suffered due to high power costs and lost their competitiveness compared to other neighbouring states.

One of the large private banks indulged in behest lending to the MSMEs without due diligence and the limits were below Rs 10 lakh. They are shown in the NPA books although all of them qualify to be lent under the CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises). With regard to the other units with limits below Rs 50 lakh but above Rs 10 lakh, they did not even bother to conduct the Techno Economic Viability (TEV) study expected of them for revival for the past one year.

A PSB found a unit eligible for restructuring after the TEV study but imposed onerous conditions for restarting the unit. They were sold to the ARC even while the unit requested for OTS. Another PSB sanctioned term loan but did not release working capital as the unit failed to produce the market guarantee projected at the time of sanction. Term loan unserviced as a result is on the threshold of NPA.

Excepting 10%, most of the problems of MSMEs required non-financial support—marketing strategy, product differentiation, process change, reprieve at the hands of the state government for waiver of power dues/interest, waiver or postponement of commercial tax arrears or financial literacy. Such support can hardly come from the banks who suffer from acute staff shortage at the credit monitoring platform. There are banks that have a myriad of SME loan products but sparsely delivered.

Delayed sanctions, delayed release of sanctioned limits even for running units, and lack of time for counselling and mentoring MSMEs in particular, efforts to cushion them through collateral securities have all been the sources of NPAs in this sector. This has thrown up the need for looking at alternate institutional mechanisms.

In addition, 50 units requiring non-financial interventions, counselling, projectisation for revival were all put on resolution process, thanks to the government sponsored Telangana Industrial Health Clinic Ltd that started with a small corpus fund. It is such new institutional mechanisms that would alone help the revival of sick MSMEs as co-financing provides adequate risk mitigation to existing lenders.