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RBI’s move to
restructure MSME loans amounts to treating obesity and anorexia with the same
medicine
Dr. B. Yerram
Raju
The units having sanctioned limits of Rs10 lakh and above,
but up to Rs25crore areall bracketed for treatment with a single brush and this
is unfortunate
In the din and bustle of mounting non-performing assets
(NPAs) that attracted world-wide attention, the Reserve Bank of India (RBI) in
its 17 March 2016 circular took up the unfinished agenda of KC Chakrabarty
Committee (2007) Report to remedy incipient sickness of the micro, small and
medium enterprises (MSME) sector.
The units having sanctioned limits of Rs10 lakh and above,
but up to Rs25crore are all bracketed for treatment with a single brush and
this is unfortunate.
The instructions also presumed that all is well with the
banks and the MSMEs alone are responsible for their financial failures. Banks,
with very few exceptions, stopped cash flow based or order-based lending for
working capital of the MSMEs.
The Nayak Committee norm of 20% of turnover as minimum
working capital limit has been taken to be the maximum and not the minimum in
the case of several micro and small enterprises.
Some of the reasons for the units falling into SMA-0
category are, inadequate or delayed bank finance, repayment obligations on term
loans, which are incommensurate with the cash flows, inadequate startup period
for repayment of term loans. Banks would be averse to review their own
inadequacies.
The other uncovered area is the adverse effects of (a) long
drawn agitations in the States leading to failure of infrastructure like power
and water; (b) units affected by natural calamities like the floods, cyclones, and
earthquakes that result in partial or full damage to the assets financed.
Remedies are not possible within 90 days.
MSME units broadly fall into – stand-alone enterprises;
ancillary enterprises and cluster based enterprises. While those in the former
category could be having wider markets, ancillary enterprises and even some
cluster based enterprises operate in narrow markets. If the anchor industries
failed, the dependent MSEs would be a pack of cards in spite of themselves.
The Credit Guarantee Fund Trust for Micro and Small
Enterprises (CGTMSE) scheme extends guarantee cover to units availing limits up
to Rs1 crore within certain threshold if the primary lender extends loans sans
collateral. It is mandatory to lend up to Rs10 lakh without seeking collateral
security.
Several banks take collateral for term loans and grant
collateral free advances up to Rs10 lakh working capital. Once installment or
interest becomes overdue beyond 90 days, both working capital and the term loan,
the unit becomes NPA and the collateral security gets invoked for realization
of all the loans. There is no mention of the treatment of CGTMSE covered loans
in the latest circular.
Where the MSE with Rs10 lakh limit are vendors to the large
scale, corporate, and medium enterprises also financed by the same bank or the
consortium of banks, the failure of these could lead to the failure of the
MSMEs within the naked eye of the banks. This is because such MSEs fail to get
their bills paid in due time (from large clients) calling for repeated
extension of period for repayment. In most such cases, neither the product nor
the processes can take the blame. Madhav Lal Committee (GoI, 2013) suggested
treating such delayed payment for accepted goods as income in the hands of the
company and taxed. This suggestion is worth pursuing.
It is time that the banks incorporate in their loan
agreements a clause to recover the MSE dues for accepted goods by debit to the
purchaser’s account if the bills remain unpaid beyond the tenor of the bill. In
case there are legalities coming in the way, the banks should negotiate for
quick resolution of such dues as mediators between the MSE vendors and the
large enterprises.
It is obvious that the SMA-0 required 30 days under the
extant instructions in which case the NPA for MSMEs need to be redefined to
those falling due beyond 120 days and not 90 days. Basel III dispensations
provide enough leverage to the regulator to be malleable in the case of SMEs
that the RBI can take advantage. Prudential norms and asset classification
needs a review.
Further the fees to be paid for the Techno Economic
Viability (TEV) study has also been left for the bank concerned to decide. An
ailing enterprise may find it difficult to pay for it unless it comes as an
interest-free loan repayable as part of the restructured loan installments.
Treatment of dues to the government by way of taxes, cess
and duties require coordination with the state governments. This is obviously
left for the Board appointed committee to decide.
The Boards are expected to appoint such committee by June
2016 and the Indian Banks’ Association (IBA) to roll out the needed application
forms in the next few weeks. Hopefully, the banks would see the intent of the
RBI in expeditious processes in sanitizing the sector.
The most admirable part of the current instruction is the
review mechanism highlighted in the annexure that provides opportunity for the
aggrieved enterprise to revisit the recovery proceedings for any required correction.
About 14% of the total manufacturing sector credit is
reported for the MSEs while 5.9% of the MSE credit has been declared as NPA.
Banks mostly cover all the government sponsored accounts, most of which are in
the services sector and transport sector under the CGTMSE. There is no
information as to how many and how much of the manufacturing MSEs are covered
under the CGTMSE and the amount covered under collateral securities. Banks
proceeding against the collateral securities under the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest
(SARFAESI) Act seek 10% deposit from the bidders and this acts as a major
deterrent for the bidders. The result is that most such bids exhaust all the
three chances without bids. The whole process takes three months. The Banks
thereafter start exploring other means of recovery or rehabilitation. There are
quite a few cases where the banks scaled down the debt or agreed to
rehabilitate the unit that was considered unviable three months ago. The new
instructions would provide better opportunity for the units confident of
revival to press their case without having to wait for the aforementioned
rigmarole.
In the light of these instructions the role and relevance
of the State Level Inter-Institutional Committee (SLIIC) needs review by the
RBI. The disease is not cured by not naming the medicine but by administering
it in right time. Treating obesity and anorexia with the same medicine.
