If a unit is not able to service its loan dues for a period of 90 days, its account is termed as NPA (nonperforming asset). This period of default was 180 days until March 31, 2004. Earlier to this, it was one year. May bewith a view to moving towards internationally best practices and to ensure greater transparency, it has been decided to adopt the ‘90-day overdue’ norm ,as opposed to 180 days or 365 days. But are we as a nation ready to adopt this todayIJ
Highly developed countries have their systems streamlined especially the MSMEs. Their telephone system is a permanent installation; the electricity supply is of high quality and continuous. An import container directly lands at the factory premises. We are way behind today in ensuring such facilities for our MSMEs whereas the penal action of classifying the account as NPA at 90 days of default is enforced.
Why are we following such a system which leads to destruction of our assetsIJ Imagine an industry in India of about 20 years old-- all infrastructure intact, profit making and employing about 500 work forces. Supposing due to some unavoidable circumstances, its account becomes NPA; the bank recalls the loan, files case and blocks all credit lines of the promoters. Result: Gradually, the production dwindles, the machines stop one after the other, become junk, the buildings start breaking down and the workers lose their jobs.
Why are we doing thisIJ Is it to comply with some international regulating bodies like IMF, WTO, etcIJ We could always ask for a dispensation since our infrastructure is not ready yet. This could save public assets of billions of rupees from destruction and millions of jobs.
The present system of NPA has proven to be a total failure in India. Why should we follow this system thenIJ let alone MSMEs, even the linking sectors like agriculture are in jeopardy today. One Rupee which was equivalent to one dollar on the day of our independence has crossed Rs 66 mark to a dollar today. There is a dire need now to review our banking system, especially in classification of NPA. The biggest woe of the banks today is to battle the rising NPA accounts. An analysis of their latest quarter results shows that the cumulative gross NPAs of 24 listed public sector banks, including market leader SBI and its associates, stood at Rs 3, 93,035 crore as on December 31, 2015.
This is nearly 1.5 times of their total market value, which currently stands at Rs 2,62,955 crore. Informatively, the share of NPA of the MSME sector is rather insignificant in comparison to the big borrowers, above Rs 500 crore loan baskets.
In MSME, most NPAs are for reasons beyond the control of the promoters such as under financing, piecemeal financing and delayed financing, besides licencing issues, unpaid bills from PSUs and the Government etc. Most MSME entrepreneurs are first generation entrepreneurs, many of them give up excellent jobs in pursuit of a meaningful enterprise. But in spite of their best efforts, many MSMEs accounts become NPA due to various issues.
A case was reported recently in Odisha where the working capital of an MSME unit in the plastic sector engaging about 120 work forces and earning reasonable profits, was not enhanced for nine years in spite of the raw material cost increasing by about 120 per cent. Under such circumstances, the unit had no choice but to go on reducing its capacity utilisation and finally landed up as an NPA. Similarly, another unit which was denied enhancement and was struggling for survival, was fortunate enough to transfer the account from the PSU bank to a private bank, which is today flourishing with a national brand and with about Rs 300 crore turnover. Yet in another case, a unit in Cuttack, Jagannath Plastics Packs Private limited which was denied working capital enhancement from SBI and was in dire situation, was able to fortunately switch over the account to Axis Bank which funded the need based enhancement. Since then their turnover has not only increased to about Rs 100 crore from about Rs 500 crore, they are also recipient of several National Awards.
Conversely, there are many examples of MSME units which have not been fortunate enough to organize a takeover or transfer of the account from one bank to the other and purely for inadequate finance, have suffered capacity underutilization until the unit is termed NPA, sick, closed and today fighting court cases. Whereas, the banking rules as applicable must be same for all banks, imagine a situation if Axis Bank or any other bank would not have taken over the account, the unit would have suffered closer bringing severe loss to the State.
It is pertinent to observe that all the facilities and sops provided towards funding of an MSME unit is only applicable to standard accounts. Whereas, over 50 per cent of the accounts today in the MSME sector are either stressed accounts or NPA accounts, not eligible for the bank finance as per the banking practice today. A great amount of public fund is locked up in these units and to make the situation worse when the bank strictly follows the 90 days NPA norms, and thereafter recalls the loan and files suit, the assets created by the public funds which are indeed public assets are subjected to continuous decay and destruction.
Hence, to ensure the MSME sector thrives, the following measures may be taken.
* Roll back the NPA period for MSMEs to 180 days of default from 90 days as on date.
*For export oriented units, this period of default to be enhanced to 365 days so as to enable our MSMEs to compete with countries like China and other developed nations in the international market.
* Until such amendment is made effective, quarterly review of working capital limit for all MSME units must be taken up with need based enhancement proportionately with the increase in the input cost.
* In case the account still turns NPA, restructuring with need based enhancement must be provided as per RBI guidelines.
* liberal Funding of potentially viable NPA units should be encouraged so as to revive such units. The banks and FIs must be extended freehand to exercise their powers in funding such units.
* Before recalling the loan or filing of any suit, the proposal must be approved by SlIIC (State level Inter-Institutional Committee) and/or Empowered Committee of RBI.
* When the period of default has been reduced from 365 days to 180 days for classifications of NPA, the working capital review and enhancement should also be reduced from 365 days to 90 days.
* In MSME sector if one unit turns NPA the sister company, if any, must be entitled to raise funds.
* The banks/FIs must be empowered to coordinate with other related departments for smooth running of the industries.
(The writer is working chairperson, EFCAI and former chairman, Orissa Assembly of Small and Medium Enterprise (OASME), efcai12@gmail.com)