The latest Financial Stability Report , published by the Reserve Bank of India (RBI) , states that the sectoral deployment of gross bank credit exposure to industry sector expanded by 2.3% in Q2FY18-19 compared a meagre 0.7% in Q4FY17-18. Large industry gained the most with almost 3% increase in exposure in the most recent quarter, compared to 0.8% in March 2018. The manufacturing micro, small and medium enterprise (MSME) segment, on the other hand, experienced a negative growth of (-) 1.4% in September compared to 1% credit expansion recorded in March. Banks continue 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 MSMEs for their ills. What we found is:
Many MSME projects have been financed without consideration of the total cost of the projects, including machinery installation costs, rates and taxes including goods and services tax (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.
Then there are issues of handling sticky loans. Moratorium should start from the date of release of last instalment whereas most banks are starting from the date of first instalment.
Sometimes, project implementation delays like delay in release of successive term loan instalments, receipt of imported machinery and its erection, 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.
Master directions by the Reserve Bank of India (RBI) dated 17 March 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 timeframe like 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 micro and small enterprises (MSEs) were available. RBI’s instructions on manufacturing micro and small enterprise revival seem glossy.
Yielding to the pressure of MSME Ministry, the RBI on 1 January 2019, or after a lapse of two years and over since the master directions, issued new directions for restructuring.
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 Rs25 crore. There is an overdrive among banks now to restructure the SMA accounts. This is certainly a very efficient preventive tool for NPAs (non-performing assets) if effectively implemented.
Banks, invariably, would like to avoid provisioning and, therefore, categorisation of some assets as NPAs. Some banks even try to provide as long a rope as possible for the unit to pay up the arrears of instalment and/or interest.
But what is intriguing is the units closed for six months due to failure to pay up electricity dues remain active in banks’ books of accounts. Either banks did not visit these units, or they prefer not to declare them as NPAs lest they should show up in provisions.
If a unit continues not to produce for six months, it will end up either in closure or sale. A good number of them have the potential to revive unless they willfully defaulted. During the first three months of such non-payment of electricity dues, proper diagnostics would help the revival.
Since several ailing units suffering in silence would lead to labour retrenchment, idle machinery junking up would be a national loss, here is what should be done:
1. All non-performing MSMEs in manufacturing sector up to Rs1 crore due for consideration for revival even though the banker may take a different view, should be referred to an external accredited institution (EAI). Such accreditation could be given to an independent organisation 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 Rs1 crore but up to Rs25 crore, such consideration for revival shall be referred to a committee of the bank at the appropriate level that should include ‘MSME expert’ 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 have the view point of the entrepreneur and record it in the minutes for considering or otherwise duly giving valid reasons thereof.
3. The committee shall consider the ‘revival policy’ of the state government wherever it is in place.
4. All such revival packages 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 marginal cost based lending rate (MCLR) from the date of reference for one year;
d. Fees or 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, non-banking finance companies (NBFCs), Small Industries Development Bank of India (SIDBI) and state financial corporations (SFCs).
(Dr B Yerram Raju is an economist and risk management specialist. The views are his own.)