Bad loans are the biggest concern of our economy today. In the MSME sector, bad loans are mostly due to inadequate funding and lack of rehabilitation. Whereas, discussions on the issues are being held at every quarter, there is no accountability fixed as yet.
The Reserve Bank of India refers the issues to the Banking Ombudsman; the Banking Ombudsman washes off their hands by stating that they do not deal with commercial issues which is not covered in their scope of works; the State Governments complain that the banks do not hear their request /instructions since they are under the Union Finance Ministry; the senior officials in the bank do not like to interfere in the decisions made by the Relationship Manager/The Dealing Officer concerned, especially in credit decisions. Who shall an MSME borrower complain for redressal of his grievanceIJ
Interestingly, Union MSME Minister Kalraj Mishra is also helpless in ensuring need-based bank finance to MSMEs. He on November 19, 2014 said banks are reluctant while sanctioning loans to entrepreneurs belonging to the sector.
“The flow of credit to the micro, small & medium enterprise (MSME) sector is not adequate. The MSMEs are facing huge difficulties while availing loans from banks. Despite the provision of collateral free, banks don’t sanction loans, causing distress to small entrepreneurs, ignoring RBI guidelines,” Mishra said at an Assocham event in
New Delhi.
Similarly in the Enterprise Odisha held last week, MSME Minister Jogendra Behera said the MSMEs in the State are not being provided need-based bank loans in time. At most SlBC meetings, it is a regular agenda for Government representatives to press on the bankers for funding the MSMEs adequately and in time.
This only figures in the minutes whereas the banks’ statistics of funding MSMEs do not show any improvement and NPAs keep rising. Further, the banks’ statistics also needs to be verified to match with the guidelines issued.
So, the already distressed MSME entrepreneurs/guarantors are left with no choice but to watch their enterprises getting sick day by day, slipping in to the NPA category and eventually spending rest of their life fighting court cases.
Even the Union Finance Minister Jaitley has advised bankers to act professionally which obviously means following the guidelines of the RBI and the Government. Whereas such lapses are largely prevalent, there is no authority or a forum where a banking complain can be registered and redressed in time.
Realising that MSME is the growth engine of the nation, the link between agriculture and large-scale sector, the Union MSME Ministry and the SIDBI have set up the Credit Guarantee Fund Trust for Micro & Small Enterprises (CGTMSE) to facilitate credit flow to the MSE sector without the need for collaterals/third party guarantees. But most banks under some pretext or the other do not extend such collateral-free loans to the MSME sector.
As per RBI information, the total NPAs of all scheduled commercial banks in India was `71,113 crore on March 31, 2002, `1,37,100 crore on March 31, 2012, `1,79,721 crore on March 31, 2013), while on March 31, 2014 the figure rose sharply to `3,00,000 crore. So, while during 10 years from 2002 to 2012, the NPA increased by `66,000 crore, it has touched the alarmingly high figures of `62,000 in one year in 2012-3 and `1 lakh crore in 2013-14.
As per information, out of 17 banks, the number of NPA accounts below `1 crore was 45.25 lakh which is 99.49% of total NPA accounts in number. Value-wise total NPAs in these accounts was `40, 948 crore which is 35% of the total value. This means the just 0.5% of total accounts have 65% of the total NPA amount. One such bank, for an example, has 73% of NPA stuck in just 30 accounts.
This indicates the MSME sector’s gross NPA amount is negligible compared to the large-scale sector. But the banks target the small NPA account holders despite the fact that the cost of recovery is much higher than the realisation, resulting in futile exercise. But banks still go after these small account holders as they are easy prey to harassment by banks and that such small account holders are unable to defend themselves in courts as it requires high legal expenses. Most of them have already lost their securities or collaterals to the banks. Once an MSME is classified as NPA, it is death for the unit. The RBI guidelines on rehabilitation of sick units are seldom followed by banks.
Often banks turn down rehabilitation on the basis of unavailability. Realising this, the RBI has also set clear guidelines as under:
a. A sick unit should be declared unviable only if the viability status is evidenced by a viability study.
b. The said viability study & the declaration of the unit as unviable should have the approval of the next higher authority (MSMEs/ present sanctioning authority for tiny micro enterprises.
c. The next higher authority should take such decision only after giving an opportunity to the promoters of the unit to present their case. They should be informed in written about the reasons for declaring the unit as sick and unviable before giving this opportunity so that the promoters can present their case properly, within 7 days from the date of such decision.
d. Decision of the above higher authority should be informed to the promoters in writing. The above process should be completed in a time bound manner.
This procedure as per association finding is never followed by any bank. Hence, to free the struggling entrepreneur and the guarantors in cases other than established frauds, they should be allowed to exit preferably with settlement of about 10% of principal outstanding as compromise amount.
Our association’s viewpoints:
1) The Banking Ombudsman must cover all complaints against a bank. Complaints concerning decisions of banks like need-based funding, periodical enhancement of working capital, rehabilitation of sick units, assessing viability of the unit, delay in sanctioning of the loan, etc., must also be covered within the ambit of the Ombudsman.
2) The Ombudsman must dispose of cases under a time-bound programme which must be binding on banks. However, banks may appeal against the order of the Ombudsman to the SlIIC Chairman, who may decide on a case-to-case basis either independently or jointly with the RBI Empowered Committee.
3) Accountability should be fixed on individual dealing officers of the bank for adequate and timely funding of MSMEs, similarly, for rehabilitation of the unit with need-based funding. A provision for penalising the defaulting bank official must be incorporated in the MSME Act along with rewards for successful rehabilitation of sick units.
4) The RBI must have working cells to dispose of complaints against banks on a daily basis. The State Director of Industries and the MSME Department must be empowered to resolve banking issues of borrowers on a daily basis.
5) Since the SlIIC (State level Inter Institutional Committee) has been formulated by the RBI and chaired by the Secretary Industries, it is the most appropriate forum to resolve all banking issues of MSMEs. The SlIIC must be vested with statutory powers and its decision must be binding on all agencies concerned. SlIIC meetings must be held once every month for speedy disposal of banking issues with focus on rehabilitation of potentially viable NPA units.
The growth in gross advances of public sector banks having halved to 9% for the quarter ended Sept-2014 does not actually reflect on the slowdown of economy, but conversely, since the restrictions and legalities of sanctioning loans today by banks to the MSMEs are too complex, the loan growth has halved, resulting in slowdown of the economy.
As a result, the cash-starved MSMEs are operating with capacity underutilisation. This has brought down the GDP to 5.3% in September quarter in spite of considering construction as part of industry. It is the most alarming situation in the country today which needs to be tackled directly by the Prime Minister’s office & with personal intervention of the Prime Minister himself in order to make his dream of “Make in India” come true. The solution is very simple, to reduce bad loans, rehabilitate the existing potentially viable NPA MSME units & to ensure need based funding of quarterly working capitals to the MSME units.
(The writer, the Working Chairperson of the Entrepreneurs & Finance Customers Association of India- EFCAI, can be contacted at efcai12@gmail.com )