Lack of oversight on credit guarantee raises concerns

Lack of oversight on credit guarantees raises concerns

Just a year back, Pradeep Malgaonkar, the chief executive (CEO) of Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme was extolling the great strides it made in the geographical space of such guarantees. The Trust has issued cumulative guarantees to 23.23 lakh MSE loans involving an aggregate credit of Rs1.08 lakh crore over the past 16 years. Its corpus grew to Rs4,328 crore as of 31 March 2016. About 133 member lending institutions are participating in the scheme. 

But the Reserve Bank of India (RBI) in its Annual Report for 2016 expressed concerns about overleveraging of corpus and the way the guarantee scheme is functioning. Information asymmetry and adverse selection on the part of member lending institutions seem to worry the regulator. More worrisome issue is the absence of regulatory oversight on this institution. 

Industrial Health Clinic for Telangana MSEs on the Anvil

Telangana Government has already put in place transparent, accountable, progressive and globally acclaimed industrial policy through TSiPass, T-Hub etc. Its inclusive industrial growth agenda required that the MSEs that actually oil the wheels of innovation shall be put on even keel with non-discriminatory promotional framework.

This has propelled the Industries Minister to adequately and appropriately respond to the call of the MSME Associations in the State that bee-lined to him to pour out their woes with the bank’s hurried actions in declaring them as NPAs only to sell of their silver that included their only dwelling house!!. KT. Rama Rao, Minister for Telangana deserves kudos for taking the initiative of reaching the Governor RBI directly – the first ever such effort in the Federal Republic of India to bat for the MSEs’ issues.

STRENGTHEN THE MSE FACILITATION COUNCIL SOONER THAN LATER

Most micro and small enterprises suffer from delayed payments for their supplies and services. Several contractual engagements with both the government and public sector undertakings also are not honoured.

In line with the long-standing demand of small-scale sector to alleviate the problem of delayed payments the Delayed Payments Act came into being in 1993. The hope that the small scale industries would be relieved of the stress in working capital was short-lived due to ineffective implementation. The Act has been amended in September 1998 providing for payment of penal interest at 150% of the prime lending rate of SBI, defining default period as 120 days. It also provided for an alternative mechanism of arbitration and conciliation and also redefined the term supplier to include any institution, agency or undertaking notified as such by the Union Government. Industrial Facilitation Councils empowered to act as arbitrators/conciliators were to be notified by the State/UT governments. The amendments were effected to strengthen the Act, to make it more useful without disturbing the buyer - seller cordial relations and to provide a relief to the small suppliers from undergoing the cumbersome recourse of legal redressal through civil suits.

Subsequently, in 2006 when the MSME Development Act was brought in, the Delayed Payments Act was subsumed in Sections 15to18 of the MSMED Act whereby the MSE Facilitation Councils replaced the Industrial Facilitation Councils. 

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.

Are we on the right track in tackling NPAs?

Are we on the right track for NPA resolution?

B. Yerram Raju*

In the last few years, barring the 2008 Recession and its global impact, no subject other than NPAs of the Indian Banks has occupied so much print space and media attention.

If good number of banks in the public sector has faltered in loan origination succumbing to external pressures, some others have failed to supervise their loan portfolio. But their contribution to NPA portfolio may not be more than 25 percent. NPAs that turn as bad loans are the real culprits. Only 20 percent of the total quantum of loans at the doorsteps of legal system could be resolved to the satisfaction of the banks, notwithstanding the projected empowerment of banks through the SARFAESI Act. The real reason is, therefore, beyond banks – the law and justice.

MSME Amendment Bill Destroys the Sector

MSMEs in India have great significance as they will be the drivers of ‘Make in India’, Start Up India, and Digital India strategies unfolded by the Union Government. They are governed by the provisions of MSME Development Act 2006, with the principal objective of promoting, developing and enhancing the competitiveness of the MSMEs.

Two years since the NDA government came to power MSME sector seems to be in a confused state with unresponding credit markets, slow moving equity, and adverse global positioning in spite of large potential for job growth.

MSMEs are redefined in September 2015 by way of amendment to rules to the 2006 MSMSE Act providing for vertical growth. Earlier definitions of SSI and MSMEs post 2006 accommodated horizontal growth and perverse incentives. But all the states have not fallen into grove.

New regulations and rules seem to be compounding the problems for the sector when it comes to revival and rehabilitation even as the Bankruptcy Law provides the long awaited relief for the large industry.

Tweak the laws and rules to prevent NPAs in MSMEs

The micro, small and medium enterprises (MSMEs) are the largest vendors for the Union and State governments in defence, aeronautics, electronics, safe drinking water equipment and services, medical and pharmaceuticals, solar equipment and servicing. The MSME Development Act (MSMED) also provided for MSME Facilitation Council, a quasi-judiciary institution serving as an arbitration and conciliation mechanism for disputes relating to the delayed payments for the goods supplied or services rendered by the supplier at little cost. Jurisdiction is restricted to units functioning within the State, although their dues can be with any undertaking or government outside the State. 

The Story of Dwindling Loan Recovery Cases

The story of dwindling loan recovery cases

There’s no point releasing the names of defaulters if the courts don’t follow up with quick and appropriate action

Have the courts helped banks accelerate the recovery of bad loans? That banks could not create enough confidence in their classification of ‘wilful defaulter’ is correct.

Recent representations to the ministry of MSMEs and the Reserve Bank of India, and agitations by the federations of SMEs prove the point.

If, on the basis of such classification, the list of wilful defaulters is made public, it would certainly damage not just the prestige of the person or institution involved but also permanently close the doors for further economic activity by such entities.

Secondly, the Bankers’ Book of Evidence Act clearly spells out the information that could be disclosed by banks. Thirdly, as RBI Governor Raghuram Rajan has repeatedly said, it hurts the financial system of the country.

A look at the BSR data (see table) shows the speed with which courts have responded to closing the bad debt cases referred to them. The loans recovered through judicial processes are dwindling year after year — it’s just less than 20 per cent of the amount involved.

The number of cases referred to courts increased tenfold between 2012 and 2015. The number of cases settled through any of the three available legal options of recovery of bad loans to banks has been on the decline. The amount involved in legal process of recovery is nowhere near the amount of NPAs declared for the year.

Lok Adalats look like small causes courts where lakhs of cases involve small amounts and the percentage of cases settled was less than 5 per cent in 2014-15. If we look at the DRTs, a highly expensive and time-consuming process, only 14 per cent of the amount involved is settled.

The much touted recovery mechanism through the Sarfaesi Act has not even touched 25 per cent during 2014-15. Its decline year after year is more alarming. Most cases referred under this Act are collateralised MSME loans and not big corporate advances.

Many questions

Some public sector banks have separated the recovery function from credit origination and monitoring. The officials in such outfits whose job is only to recover the bad loans, have already developed a negative mindset and would be averse to lending for development activities.

The questions that arise are: 1. Are the processes wrong? 2. Are the powers not being exercised properly in accordance with the law? 3. Are the properties overvalued at the time of loan origination? 4. Do all these cumulatively contribute to the failure under this Act?

A thorough study is required to go into these issues to fix them properly and make the necessary amendments to the laws and rules in the public interest. Banking reforms must address these core areas.

It is highly desirable that the Supreme Court does all that is required to accelerate the legal recovery process as evidence in most cases is writ large in banks’ accounting books.

DRTs are supposed to resolve the cases within six months. But hardly any instances of this are evident. No purpose would be served by just making the defaulters’ names public unless there are quick exemplary legal punishments meted out to the errant.

(This article was published on April 26, 2016)

http://www.thehindubusinessline.com/opinion/the-story-of-dwindling-loan-recovery-cases/article8524510.ece