Money & Banking
RBI’s move to restructure MSME loans amounts to treating obesity and anorexia with the same medicine
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.
 
(Dr Yerram Raju Behara or Dr B Yerram Raju  is a former senior executive of SBI and an economist and risk management specialist. He is also MSME Lead Consultant for the Government of Telangana. The views expressed in the article are his personal.)

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RBI’s MSME restructuring drive is a dicey move: Report
While the RBI's AQR move was a master stroke to clean bank books and stop the evergreening of stressed loans, the move to restructure MSME loans can have an opposite effect, warns Religare Capital in a report
 
The Reserve Bank of India (RBI) has allowed banks to restructure micro, small and medium enterprises (MSME) loans up to Rs25 crore by devising a corrective action plan (CAP) and opting for the rectification or restructuring and recovery of such stressed accounts. However, this move can have an opposite effect, says a research report from Religare Capital Markets Ltd.
 
"While with this move, the RBI is looking at faster resolution of stress in MSME accounts, we think the impact would be starkly opposite to the central bank’s asset quality review (AQR) drive which aimed at cleaning up bank books. Banks may also witness a surge in MSME restructuring, making it difficult to keep a tab on such loans," the report says.
 
The RBI has issued guidelines for restructuring of MSME accounts with outstanding debt up to Rs25 crore. Banks have been directed to form a committee and devise a corrective action plan (CAP) for all stressed MSME loans, of which accounts with loan limits up to Rs 1mn have to be dealt with at the branch level. Moreover, a stressed MSME with debt in excess of Rs10 lakh can directly apply for a CAP. The committee, within 30 days of convening its first meeting, has to zero in on any one of the following three options to be adopted under CAP:
 
(a) Rectification (fresh loan disbursement to stressed MSME accounts): Banks can grant MSME borrowers additional funding for six months in order to revive the account, while ensuring there is no net present value (NPV) hit on their books. While such accounts would retain their existing classification, fraud cases would fall under the restructured category if rectification along with the six-month funding option is availed more than once during a year. Only in exceptional cases, banks would be allowed to fund the working capital requirement of MSMEs, while in the normal course, an account would directly slip into NPA in case of diversion of funds.
 
(b) Restructuring of existing loans: This applies to standard accounts, special mention accounts or sub-standard accounts with one or more lenders (but not majority of lenders). The moratorium for restructuring would be six months and the restructuring package should outline the milestones to be achieved after this period. No timeline however has been prescribed for attending full normalcy with respect to MSME loans. Also, restructuring can be done only if the borrower is not a wilful defaulter and if majority of creditors approve the same. In addition, MSME promoters would have to extend personal guarantees for restructuring.
 
(c) Recovery: Banks can resort to the recovery of loans if either rectification or restructuring is not found viable, and initiate the process at the earliest.
 
 
Religare Capital says while the RBI's AQR move was a masterstroke to clean bank books and stop the evergreening of stressed loans, the move to restructure MSME loans can have an opposite effect.  It feels, the volume of loans under MSME restructuring will be large compared with corporate debt restructuring (CDR), making it difficult to monitor them. 
 
"We think even standard accounts will opt for this scheme (as done by many corporates earlier) since it eases the interest and debt repayment burden in the near term. Note that lower provisions on stressed loans don’t go down too well with investors. Loans to MSME sector form 12-15% of total system loans. It is difficult to ascertain the exact impact of the RBI’s move, as MSME exposure already classified as NPAs in the books of banks is not known. However, we believe PSBs are likely to offer this scheme to a large number of MSMEs," it concluded.

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COMMENTS

B. Yerram Raju

11 months ago

First the MSME loan portfolio will not be as large as estimated by the Religare Capital. Second, standard assets do not qualify for restructuring as stressed assets under incipient sickness alone qualify for the three "R' effort.

As already mentioned in my article on the subject, a couple of tiers between Rs.10lakhs and Rs.2500lakhs are necessary to give proper effect to the guidelines.

It is a welcome move that the borrowers can now seek the review under this arrangement. The wearer knows where the shoe pinches.

FDI to reduce India's current account deficit: Moody's
Chennai : Credit rating agency Moody's Investors Service on Thursday said India's rising foreign direct investment (FDI) inflows reduces the current account deficit and also the external financing needs.
 
In a statement Moody's said it does not expect widening of India's current account deficit based on its assumptions that commondity prices will remain low in 2016 and 2017.
 
According to Moody's, FDI inflows are expected to climb due to central government's measures like liberalisation of foreign investment limits and 'Make in India' initiative.
 
"These trends are credit positive, as they lower India's susceptibility to external shocks at a time when capital flows to emerging markets are volatile and weak economic conditions globally, particularly in the Gulf states, may dampen remittances," said the Moody's statement, quoting Marie Diron, senior vice president for the Sovereign Risk Group.
 
According to Moody's, a lower energy import bill and policy measures to contain gold imports are contributing to keeping the trade deficit at moderate levels.
 
Going forward, the announcement in the latest budget of the imposition of an excise tax on gold is likely to dampen overall gold imports.
 
Additionally, the value of oil imports decreased by 37.5 percent - or Rs. three trillion (US$44.3 billion) - in the 12 months to February 2016 compared with the previous year, despite a 10 percent increase in the volume of petroleum imports, Moody's said.
 
However, the prospect of subdued global economic activity - in particular in the Gulf states where more than half of remittances to India originate - may lead to a significant and prolonged weakening of remittance inflows.
 
This development is likely to prevent India's current account from returning to balance and could lead to its renewed widening.
 
The rapid rise in FDI inflows mitigates the risks related to a possible widening of the current account deficit from weaker remittances by diminishing India's external financing needs from other inflows in the form of credit and equity inflows.
 
Net FDI inflows into India hit an all-time high in January 2016, at $3 billion on a 12-month moving average basis.
 
India's current account deficit is now more than covered by its FDI inflows. The rise in FDI points to stronger investor interest in India on the back of robust economic growth.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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