“The bank is a friend, philosopher and guide of small enterprises” was the guiding motto for all banks during the past five decades. This seems to have been made into the derisive saying “A banker is one who lends an umbrella when the sun shines and takes it back when it starts raining”, by the RBI circular of March, 17, 2016, on small units in financial distress.

This circular, according to the written statement of Kalraj Mishra, the minister for micro, small and medium enterprises (MSME) recently in Parliament, was issued on the basis of a notification issued by the ministry. The latest instructions do not recognise ground realities and could do incalculable harm to the growth of the MSME sector, especially to micro and small enterprises.

Draconian directive

The main directions of RBI to banks now are as follows: One month before a loan turns into a non-performing asset (NPA), that is, in cases where principal or interest payment is overdue between 31 and 60 days, it should be taken up for Corrective Action Plan (CAP) by banks/creditors. This would be done by the branch manager of the bank in respect of small loans with aggregate limits up to ₹10 lakh and by a committee for bigger advances. An elaborate procedure has been laid down for composition of the committee.

The options under CAP would generally include (a) rectification : obtaining a commitment from the borrower to regularise the account without any assistance from the lending bank; (b) restructuring : consider the possibility of restructuring the account, if it is prima facie viable and the borrower is not a wilful defaulter; and (c) recovery : once the first two options are seen as not feasible, due recovery process should be initiated.

According to these instructions, the decision on viability of the unit should be taken at the earliest but not later than within three months of the unit becoming sick under any circumstances. In respect of micro (manufacturing) enterprises with an investment in plant and machinery up to ₹5 lakh, and micro (service) enterprises with an investment in equipment up to ₹2 lakh, the branch manager may take a decision on viability and record the same, along with the justification.

If these instructions were applicable prior to 2015, let us consider the impact. During the big deluge in Chennai in December 2015, many micro and small enterprises engaged in photocopying service and similar activities lost all their machinery and equipment. In such a scenario, if the unit had taken a bank loan, branch managers, in their eagerness to reduce the level of NPAs, might have taken the easy way out by declaring the unit unviable, and started the recovery process.

In the context of government rules governing banks, declaring the borrower viable and giving further loan might warrant ‘vigilance’ (penal) action, should the unit later prove to be unviable. Declaring the unit unviable would not call for such enquiry. And, if the bankruptcy code were in existence, the borrower would be made bankrupt and his/her entire life would be ruined.

What Chakrabarty recommends

Let us juxtapose these instructions with the earlier RBI circular issued in November 1, 2012, based on the recommendations of the Chakrabarty Working Group on rehabilitation of potentially viable sick units, on dealing with sick micro and small enterprises. Briefly, they ordained that a micro or small enterprise would be considered ‘sick’ if any of its borrowal accounts remained NPA for three months or if there is erosion in the networth due to accumulated losses to the extent of 50 per cent of its net worth during the previous accounting year.

This would, according to the working group, enable banks to take timely action in identifying sick units for their revival. Once identified, the banks must examine the viability or otherwise of the unit. If found viable, a rehabilitation package should be fully implemented within six months from the date the unit is declared potentially viable or viable.

While identifying and implementing the rehabilitation package, banks are advised to do a ‘holding operation’ for a period of six months. This will allow small-scale units to draw funds from the cash credit account at least to the extent of the deposit of sale proceeds during the period of such ‘holding operation’.

The decision on viability of the unit should be taken at the earliest but not later than three months of the unit becoming sick under any circumstances. The declaration of the unit as unviable, as evidenced by the viability study, should have the approval of the next higher authority/present sanctioning authority for both micro and small units. In case such a unit is declared unviable, an opportunity should be given to the unit to present the case before the next higher authority.

Go back to earlier format

Comparing the two instructions, the March 2016 circular seems to place the burden on proving viability or otherwise on the unit, whereas the earlier instructions required the bank to prove unviability. Further, in the latest directive, action is triggered one month before the account turns NPA, whereas the earlier instructions called for action to be taken three months after it would become an NPA.

It will be observed from the RBI instructions prior to March 2016 that the objective was to assist the NPA borrowers in micro and small enterprises to re-establish their productive capacity with as much help as possible from the lending banks.

However, the later instructions appear to lay more emphasis on the banks and creditors safeguarding their interests, than nursing micro and small enterprises back to health. In fact, the definition of sick small units appears irrelevant now, as banks have to take action well before the account becomes NPA.

It is a fact that micro and small enterprises are extremely vulnerable to ‘acts of God’ or those of bigger enterprises to whom they might be ancillary units.

Banks should, therefore, approach the problems of such units with greater sensitivity. It is absolutely necessary that the instructions of March 2016 are not made applicable to micro and small enterprises.

Would the RBI and the Centre urgently review the matter and reinstate the 2012 circular in this regard?

The writer is Deputy Managing Director (Retired), SBI

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