RBI data reveals that less than 5% of potentially viable units in the MSME sector were revived during the past decade compared with the huge corporate debt restructuring that went bust. Time to rethink?
While stories of tens of thousands of crores of bad loans from big corporates hog the headlines, not many, including lenders, regulators or even the government are even looking at the Micro, Small and Medium Enterprises (MSME) segment. What is more shocking is despite having a good record, very few of these MSMEs are provided the greening or corporate debt restructuring (CDR) facility. Consider these two real life stories…
An innovative entrepreneur manufacturing edible cutlery financed by one of the public sector banks in 2013, almost close to going into commercial production, was declared as non-performing asset (NPA). During the two years, not even once did the bank officials visit the unit – not even when it shifted the machinery to a different location under advice to the bank. The State Level Inter-Institutional Committee (SLIIC) directed the bank to offer six months’ time but the bank chose to give only 3 months – all because it has collateral – the only residential building of the entrepreneur valued at Rs1 crore, as against the outstanding loan of Rs65 lakh and interest overdue of Rs23 lakh.
Even as CNN-IBN TV channel was interviewing the entrepreneur for his Innovation Award, a notice under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) was slapped on his house. The unit has market inquiries for the products – edible spoons, forks, and chopsticks, and at least five developing economies and UK evinced interest in transfer of technologies. Coffee Day is the first domestic buyer and a few more are on line. Marketing this product is cost intensive and time consuming. Given the reprieve, the unit would show case India in its ‘Make in India’ drive.
In another case, a leading public sector bank declared as NPA the account of a partnership firm manufacturing electric transformers for installation in rural areas.
This partnership firm whose managing partner is financially illiterate inducted a knowledgeable partner in financials at the instance of its relationship manager. The relationship manager and the accounting partner colluded to submit an inflated balance sheet for drawing far in excess of the working capital limits. The excess withdrawal was later regularised by enhancing the limits.
When the unit’s fortunes declined due to severe power outages and agitations for separate state in Telangana, it became an NPA. The orders from the power generation companies (GENCO) also did not come through for the same reason. In 2013, the Bank proceeded against the collateral security.
None of the unit’s guarantees devolved on the bank. The bank holds deposits to the tune of Rs5 lakh with different maturity dates. After the formation of Telangana State, it has secured Rs70 crore worth work orders since June 2015. Its goods are of good quality and are recognised by Bureau of Indian Standards (BIS).
It appears that there was a calculated effort to bail out a bank official by closing the unit and its collateral security came in handy. Government of Telangana took serious view of this instance as it would affect the 50 families dependent on the unit. In both cases, the state government offered joint monitoring, if rehabilitated. But the banks are slow to act.
The NPAs in MSMEs put to stress test, were 5.04% as of December 2015 with no significant contribution to the losses as percentage of either profit or capital. The industry NPA level was 6.68%. Only 7.9% constitute MSME advances to the total advances. (FSR 12, December 2015)
Risk appetite for the MSMEs is very low among banks and their adherence to the guidelines of both the Reserve Bank of India (RBI) and Government of India (GoI) to identify sickness at the incipient stage and to introduce corrective action plans, is highly suspect. By just allowing postponement of instalments for three months, they label such loans as restructuring without going into the processes of restructuring. The standard advances were restructured to sub-standard advances and were range bound at 0.09% to 0.38% indicating that not much restructuring took place in the sector.
Banks know for sure that the MSMEs as vendors to the large industry and infrastructure sectors could not realise their bills within 90 days and thus unable even to pay interest turned NPAs. There is reluctance among the banks for either restructuring or revival of even viable advances.
Credit origination is also no less to blame. State Bank group is thrusting its insurance products as a compulsory product along with credit. The size depends upon the loan sanctioned. The banks debit the working capital loan account with the premium running to lakhs of rupees. SBI Life pays hefty commissions to the staff who cross-sells this product to the borrowers. Monitoring and supervision are hit hard by inadequate field staff leaving most accounts for arm-chair surveillance. Even the CMI data is passed off as compliance formality and not as monitoring tool.
There are some good signs for MSMEs though particularly in manufacturing. They can now look for some growth with the Ministry revising the definition of plant and machinery to include all such equipment owned by the same owner(s) across the districts and country to be reckoned for classification of MSME under the MSME Development Act 2006. In the long run, this redefinition would do a lot of good to the sector. In the short term, the sector may witness more non-performing assets (NPAs).
Telangana Government has put in a progressive industrial policy that also included a policy for revival believing that healthy growth of industry should not have in the neighbourhood many sick units.
It has plans to establish ‘Industrial Clinic’ for monitoring the incipient and sick units in MSME sector on a priority basis with facilities for diagnosis and techno economic viability (TEV) studies at the hands of the competent consultants under public-private partnership (PPP) mode. It proposes to give the revived units incentives on par with the new units to improve the cash flows once the bank concerned approved the revival plan.
All Public Sector Banks (PSBs), as per 2 June 2015 guidelines from the Ministry of MSMEs, are expected to arrive at a corrective action plan when the accounts indicate deterioration and monitor it for 60 days and also take up TEV study of the unit for ensuring viability. Each bank is expected to set up zone wise committees to examine and approve such proposals with the speed required. But these are yet to be set up.
On top of this, banks though moving on Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) coverage, their partial coverage of guarantee - term loan is under the collateral cover while the working capital is under guarantee cover. When there is default of the unit under term loan due to non-payment of interest for 90 days, it becomes an NPA qualifying for SAFRAESI proceedings.
It is time that the RBI monitors the MSMEs on more robust data at the regional levels and ensures compliance of the guidelines. RBI data reveals only less than 5% of potentially viable units were revived during the last decade as compared to a huge corporate debt restructuring that went bust. The Finance Minister would do well to include in the budget tax incentives for strategic partners’ investments in revival of the potentially viable units. RBI may also consider redefining NPAs under the sector differently and also allow takeover of any viable unit if the parent bank is willing to shed it in a manner that such advance would not add to the baggage of NPAs of the receiving bank.
(Dr Yerram Raju Behara
is a former senior executive of SBI and an economist and risk management specialist. He is also MSME Lead Consultant for the Govt of Telangana. The views expressed in the article are his personal.)