Banks Are Not Helping MSMEs and Here Is What Should Be Done
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. 
 
Further Blows
 
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.
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COMMENTS

S. Ganesan

5 days ago

Bankers are scared of Vigilance Enquiry in case something genuinely goes wrong. Since Vigilance officials get promotion based on number of officials they have "hanged" many vigilance officials, without having any knowledge of the subject, attribute motives. I have been informally told (I do not have written evidence) that punishments have been awarded even by over ruling the Enquiry Officer's report. (By this, I do not claim that all Bank officials are Gods and have no malafide intentions at all)

If this fear is removed in genuine lapses, the position will improve

Banks Need Rs20 Lakh Crore Fresh Deposits To Meet Credit Demand: CRISIL
With rising demand, bank credit in India is expected to grow 13% to 14% during FY18-19 and FY19-20, forcing banks, especially private sector lenders, to aggressively mobilise deposits. To meet the increased demand, banks will have to raise about Rs20 lakh crore as fresh deposits, says a research note by CRISIL.
 
CRISIL estimates bank credit in India would grow at a pace about 13%-14% on average between fiscals 2019 and 2020, significantly faster compared with the 8% seen in fiscal 2018, which would force a change in the deposit mobilisation plans of banks over the medium term. To meet this credit growth, the ratings agency says, banks will have to raise about Rs25 lakh crore over the two fiscals. While Rs5 lakh crore-Rs6 lakh crore is expected to become available through the release of statutory liquidity ratio (SLR) funds, about Rs20 lakh crore would need to be raised through fresh deposits.
 
Rama Patel, director, CRISIL Ratings says, “Over the first nine months of this fiscal, banks have already raised deposit rates by an average of 40-60 basis points We expect banks to sharpen focus on deposit mobilisation over the medium term through attractive rate offerings across tenors in both bulk and retail segments. That, in turn, could further increase the cost of funds of banks, given that deposits account for the bulk of their funding.”
 
Traditionally, banks have utilised their excess SLR in the initial period of credit revival. "They would do that this time around as well. That said bulk of the credit demand would be met by deposit growth and to a minor extent by other resource raising options like infrastructure bonds. That would be well above the average annual deposit mobilisation of about Rs7 lakh crore over the past few years. It would also put upward pressure on the interest rates bank offer on deposits," the ratings agency says.
 
CRISIL says it expects banks to maintain on average 4% surplus SLR when credit growth picks up, compared with around 8% today. This, it says, when juxtaposed with the Reserve Bank of India (RBI)’s plan to reduce the SLR limit to 18% by March 2020, would translate to a release of Rs5-Rs6 lakh crore from the SLR kitty to meet credit demand.
 
"Consequently, the asking rate of annual deposit growth would be a significant 400 basis points higher at around 10% compared with about 6% growth in fiscal 2018. To be sure, this is way lower than the about 25% peak seen in fiscal 2007," CRISIL says.
 
According to the ratings agency, deposit growth has been declining over the past decade, and particularly in the past three years when it saw a significant drop as interest rates offered on fixed deposits dipped below the returns on other financial investment avenues. That diverted the flow of household financial savings away from banks.
 
“Lower deposit growth has meant a steady rise in the credit to deposit ratio (C/D Ratio) on a stock basis, which is expected to touch 78% by the end of fiscal 2019, compared with 73% at the end of fiscal 2017 (see Chart 1). Banks will need to raise at least Rs19-Rs20 lakh crore of fresh deposits until March 2020 to keep the credit-deposit ratio near 80%, which in itself would be highest in a decade,” says Krishnan Sitaraman, senior director, CRISIL Ratings.
 
 
According to the ratings agency, private banks with strong balance sheets and robust credit growth are expected to lead the race for deposits and will account for about 55%-60% of the incremental deposit mobilisation. These would be followed by public sector banks outside the RBI's prompt corrective action framework with around 30%-35%.
 
"Private banks have already gained 7% market share in deposits over the past five years to touch about 30% (see Chart 2 above) and are well poised to gain further backed by superior technology, service levels and ability to acquire customers. Meanwhile, increasing volatility in the equity market, moderating flows into other investment avenues, and hike in bank deposit rates in recent months could bring some household financial savings back into bank deposits," CRISIL concludes.
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COMMENTS

Dr.Dhananjaya Bhupathi

1 week ago


1. If Congress comes to power in 2019, Rahul Gandhi shall mobilize INR.50 lac crores of deposits with a single stroke of his pen by raising deposit interest rates. Because, India is a developing country; though many Indians are rich. Balance of INR.30 lac crores shall be utilized by CONG LEAD UPA for politicking.
2. If the PMO/UFM wants huge sums, besides LIC transferred its huge reserves in bankrupt IDBI---putting good money on irrecoverable NPAs of IDBI. General Insurance Companies, UIICO., NIICO., etc., also possess huge surplus moneys.
3. By incorporating Bank wage + Pension Issues in CPC [CENTRAL PAY COMMISSION] & increase Bank Deposit Interest rates, the ruling BJP lead NDA can mobilize huge sums to fulfill Modiji’s dream of BRIGHT FUTURE FOR THE TEAMING MILLIONS OF INDIAN YOUTH .

4. https://www.youtube.com/watch?v=T7fOf8rUrdw.
SATYAMAEVA JAYATHE!!!

VASANT KULKARNI

2 weeks ago

HOW WILL BE TAKERS FOR SUCH LOANS?

Ramesh Poapt

2 weeks ago

lower aum for mfs! welcome change!

RBI penalises UCO Bank, Axis Bank and Syndicate Bank
The Reserve Bank of India (RBI) has imposed separate monetary penalties on lenders -- UCO Bank, Axis Bank and Syndicate Bank -- over deficiencies in complying with different regulatory norms.
 
The RBI imposed a penalty of Rs 2 crore each on UCO Bank and Axis Bank for non-compliance with its circular on 'Collection of Account Payee Cheques - Prohibition on Crediting Proceeds to Third Party Account' and Master Directions on 'Frauds - Classification and Reporting by commercial banks and select FIs'.
 
In addition, a separate penalty of Rs 20 lakh was imposed on Axis Bank for contravention of the directions contained in 'Master Circular on Detection and Impounding of Counterfeit Notes' and, the 'Circular on Sorting of Notes - Installation of Note Sorting Machines'.
 
In another statement, the RBI said it has imposed a penalty of Rs 1 crore on the government-owned Syndicate Bank for non-compliance with the directions contained in 'Master Circular on Frauds - Classification and Reporting' and 'Circular on Risk Management Systems in Banks'.
 
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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COMMENTS

VASANT KULKARNI

2 weeks ago

FROM WHOSE POCKET PENALTY WILL BE RECOVERED..? TAXPAYERS OR DEPOSITORS?

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