Banks are most likely to be supportive of RBI Governor Raghuram Rajan’s measures in the fight against bad loans, which are estimated to have ballooned to Rs. 4 lakh crore. The RBI has set a cleanup target for the banking sector of March 2017 and has already started cutting off what it calls ‘forbearance’ when it comes to bad debts and provisioning.
The Centre has created a framework for revival and rehabilitation of MSMEs, which account for nearly half of the non-performing assets (NPAs) of banks from the industry sector, Union Minister Kalraj Mishra said that of the Rs 1.13 lakh crore NPA of banks from industries, the MSME sector alone accounts for Rs 40,000 crore to Rs 50,000 crore, he said. The high NPAs or bad loans of the sector are a cause for concern for the Ministry, which has created a framework for revival and rehabilitation of the units, Mishra said. It provides for identification of incipient stress in MSMEs, and the committee constituted by banks for distressed firms would prepare a corrective action plan so that they are given an opportunity to get revived, rehabilitated or closed, he said.
Why are accounts of MSME units turning NPAs, and how can we address the situationIJ Besides, under-financing and delayed financing which are the main reasons of an MSME account turning NPA, not addressing the NPA account through the State level Inter Institutional Committee and not rehabilitating the unit in time deteriorate the situation further. When the MSME sector suffers, it has a toll on the agriculture sector and the large-scale sector too.
Though only about 40% of total NPAs of the industries sector is on account of MSMEs, the impact is so large that the country is heading for an economic recession. The factory output growth has slowed down to 2%; exports have also slumped, the rupee has been devalued to touch Rs 66 to a Dollar which was Re 1 to a Dollar on the day of Independence.
This obviously proves that MSME is the real growth engine of any nation and the link between the agriculture and large industries sectors.
Punjab is rich because of flourishing MSMEs and agriculture and not because of large industries. Odisha is poor because of our sluggish MSMEs and agriculture sector.
Realising this, the Odisha Government has been initiating steps towards promotion of MSMEs. A new MSME Department has been lunched; various schemes have been promoted, but the main issue of MSME, i.e, financing of potentially viable NPA units and stressed accounts still remains. These units are not eligible for regular bank finance.
We cannot overlook viable NPA units since they constitute over 50% of the total MSME units in the country and may be around 70% in Odisha. The banks are left with only the remaining 50/30% MSMEs to achieve their target. It is so natural that banks are complaining of lack of good proposals. On the contrast, if the banks are allowed a free hand to take over, finance and revive potentially viable NPA units at their own discretion, the financial woe of not only the banks but the country can be addressed. When the infrastructure is ready, the unit is fully set up and runs for years; if it turns NPA due to some unavoidable situation beyond the control of the promoters, it is wise to rehabilitate the unit rather than exercising coercive measures to extract funds from the helpless and poor promoters while allowing the public assets to rot. This situation is highly detrimental, responsible for spreading poverty.
India has many problems. Poverty is one such problem, top in the list for decades, and seems to be on the rise. The gap between rich and poor is widening. Unequal distribution of wealth is the biggest cause. How do we address this situationIJ
Money is circulated through banks or other financing institutions. There are petty borrowers, MSME borrowers and large-scale borrowers, besides the retail sector. When a petty borrower or an MSME borrower is unable to service the loan for more than 90 days, his entire loan is recalled, recovery action is initiated either through DRT (Debt Recovery Tribunal) or through the SARFAESI Act. His business comes to a grinding halt; the employees lose their job; the Government loses revenue. If it is a manufacturing unit, there is a loss of product leading to rise in inflation< The entrepreneur instead of running his enterprise gets busy defending his assets from being auctioned. Months and years pass by, the unit, the promoters, directors and guarantors are all blacklisted against availing credit through any legal route. No one gains, the biggest loser being the nation.
Whereas the large borrowers generally escape this situation since before their account is classified as NPA, the bank either restructures their account or provides enhancement. It’s natural that the bank cannot afford to allow a big ticket loan to be declared NPA. If it does, provisioning for the NPA account will bring severe loss to the bank, depending on the size of the loan, it can even lead to bankruptcy of the bank. The big borrowers keep borrowing more and more. Since 2007, credit to 10 big corporate houses has more than doubled as per the RBI.
This system of banking widens the gap between rich and poor. A rich man is provided more and more loans to prevent his account from becoming NPA whereas for an MSME borrower the situation is reverse. Even when deserving, they are refused enhancement. Obviously, when the need-based funding is not provided in time, the capacity utilisation of the unit keeps reducing until it reaches the breakeven point and below. Finally, the unit starts incurring loss and turns NPA.
Especially when the market value of the assets exceeds the borrowing, some banks with a view to recovering their dues at ease deny a needful enhancement. This has a serious impact to the economy and thousands of such cases leads to recession.
The SBI alone needed Rs 2.3 lakh crore to meet BASElIII Norms in year 2013. Where does this money come fromIJ
Our immediate concern must be for the stressed/NPA MSME units. Most of us are aware that an account becoming NPA is mainly through accidents rather than incompetence. Example: When the payment is delayed beyond 90 days from a Government department or from any public sector which is common, the account turns NPA for no fault of the promoters. NPA creation not a sin; banks should do handholding, said RBI Deputy Governor Mundra.
Association’s viewpoints for financing of MSME NPA units:
1. Resources locked up in the NPA units must be recouped through providing need-based refinance. Banks and FIs to be allowed freehand to take over any NPA account from any other bank/FI.
2. All potentially viable NPA units must be rehabilitated by banks as per decision of the SlIIC or independently as the case may be.
3. listing of names in CICs like CIBIl etc., must be for information only, and any funding decision should not be denied due to such listing unless it is a case of willful default.
If NPA is a disease, it must be treated and not allowed to perish. It affects the employees, the revenue, the products, the unit, its assets so also the promoters and their families. It affects the society and the nation. It is the most serious issue now which must be attended with immediate effect and appropriate notification issued to all banka/FIs to refinance and rehabilitate the potentially-viable NPA units through legal routes. This will add capacity utilisation with minimum investment and with a shortest period of time.
(The writer is working chairperson, Entrepreneurs & Finance Customers Association of India-EFCAI. Email: - efcai12@gmail.com)