B. Yerram Raju
Banks want to revive. Large
industry wants to revive. Firms like Jet Airways, Zee, Essar Steel and the big
are given breather by the Banks and they are all NPAs for more than a year.
Reserve Bank of India also encourages Banks to come out of the red. But when it
comes to the micro and small enterprises (MSE) who have been vendors to the
large firms and part of the supply chain, Banks almost shut the doors.
Interesting backdrop emerges
from the latest Financial Stability Report. Discussing the sectoral deployment
of Gross Bank Credit, exposure to industry sector expanded by 2.3% in Q2 FY19
as compared a meagre 0.7% in Q4 FY18. Large industry gained the most with almost
3% increase in exposure in the most recent quarter, as compared to 0.8%
recorded in March 2018.
The manufacturing MSME segment
on the other hand languished further as it experienced a negative growth of (-)
1.4% in September as compared to nearly 1% credit expansion recorded in March. Banks
continued to be risk averse as much of credit increase occurred in working
capital segment and not term loan segment.
Banks
are no less to blame than the MSEs for their ills. Many MSE projects have been financed
without consideration of the total costs of the project in most cases that came
to our notice, that includes machinery installation costs, rates and taxes
including GST, loading and unloading charges, transit insurance costs and other
connected expenses. Trial run for
commercial production that should be part of pre-operative costs is also not
included in the total project cost. In
addition, interest during the construction period is also debited to the
working capital account opened simultaneously with the Term Loan account while
such working capital account should be opened only from the date of commercial
operations. Consequently, even by the time the unit starts commercial
production, the unit becomes sick.
Moratorium
should start from the date of release of last installment whereas most banks are
starting from the date of first installment. Sometimes, project implementation delays like
delay in release of successive term loan instalments, receipt of imported
machinery and its erection etc., would result in time overruns and cost
overruns besides repayment starting well before commercial production. This practice leads to inadequate financing of
the enterprise and this is another contributory factor for sickness of the
enterprise.
RBI’s Master Directions dated
March 17, 2016 on Revival and Restructuring suggest that each Bank appoint
Zonal Committee to consider revival. Corrective Action was to be initiated for
Special Mention Accounts – SMA within certain time frame: SMA-0 to be provided
corrective action. SMA-1 to go for restructuring and SMA-2 for recovery. Zonal
Committees were not formed; even where formed, there is no record as to how
many have been revived following the Directives. Though RBI Empowered Committee meets every quarter
no reliable data on the revival of manufacturing MSEs was available. RBI’s
instructions on manufacturing micro and small enterprise revival seem glossy.
Yielding to the pressure of
MSME Ministry, RBI on January 1, 2019, i.e., after a lapse of two years and
over since the Master Directions, new directions for restructuring were issued. This circular clearly says that the
standard assets SMA-0,1,2 need to be restructured and the exercise should be
completed by March 2020 for loans up to Rs.25cr. There is an overdrive among
banks now to restructure the SMA accounts. This is certainly a very efficient
NPA-preventive tool if effectively implemented.
Neither the RBI nor the Banks
consider ‘a known devil is better than an unknown angel’. Some unknown angels are
fast turning into unknown devils as well.
The major issues in revival
are: NPAs for revival require fresh margins from the beleaguered enterprise; provisioning
continues at the same level even after revival; Banks do not have time to have
dialogue with the entrepreneur when the unit develops symptoms of sickness;
long drawn illness turns into a potential cancer turning the unit unviable.
Weeding out willful defaulters is possible even in the first quarter of default
during which time banks invariably tolerate.
It is intriguing that the
units closed for six months due to failure to pay up electricity dues remain
active in banks’ books of accounts. Good number of them has the potential to
revive unless they willfully defaulted. During the first 3months of such
non-payment of electricity dues proper diagnostics would help the revival.
1. All NPA-MSMEs in manufacturing sector up to Rs.1cr due for
consideration for revival even though the banker may take a different view,
should be referred to an external accredited institution (EAI):
a. Such accreditation could be given for an independent
organization like the Industrial Health Clinic wherever set up or to a
Committee set up by the State Government involving bank representatives that
should include MSME-DI. The Committee should also hear the entrepreneur.
2. Above Rs.1cr but up to Rs.25cr, such consideration for
revival shall be referred to a Committee of the Bank at the appropriate level
that should include ‘MSME Expert’, MSME-DI representative, and a State Government
representative in order that interests of sovereign dues is taken due notice of
and equitable attention is devoted for their recovery as part of revival
package. The committee before taking any
decision should hear the view point of the entrepreneur, Revival Policy of the
state government and record the same in the minutes for considering or
otherwise duly giving valid reasons thereof.
4. All such revival package shall consider the following
financial facilitation:
a. Freezing the status of the classification of asset on the
date of reference to the external institution or the Committee of the Bank for
one year or till the date of rejection.
b. Reversal of penal interest and other penal charges;
c. Charging simple interest at MCLR from the date of reference
for one year;
d. Fees/Charges levied by the EAI including IHCs should be
borne by the GoI through a special fund set up for the purpose;
e. Bank should share ‘pari pasu’ charge on the borrower’s
assets for any external funding towards borrower’s margin including such
funding by the IHCs;
f. Additional funding where required, should be charged at
MCLR by the involved agencies.
Such guidelines should be
applicable to all the Banks, NBFCs, SIDBI and SFCs. ‘Behind every small
enterprise, there is a story worth knowing.’
