A well-established MSME running for decades with infrastructure, market and manpower all set, just by defaulting payment of installment or interest for 90 days does not mean that the unit becomes sick and must be destroyed.
Just by changing the nomenclature from Standard Asset to a Non-Performing Asset (NPA) such a unit does not become sick. Soon after 90 days of default, the entire loan is recalled notwithstanding if the loan was gradually availed and accumulated for years. How can a unit not be able to pay the monthly installment for 90 days, refund the entire money within 60 days, as stipulated under SARFAESI notice 13(2). Immediately on expiry of 60 days, if the entire amount is not refunded, case is filed; borrowers, guarantors and the unit are all blacklisted by
publishing their names in CICs (Credit Information Companies) such as CIBIl. All these spontaneous actions have ruined many healthy and truly performing, even export-oriented units.
Reserve Bank of India Governor Raghuram Rajan has hit the bull’s eye by recognising that NPAs are not alarming but action should be taken before the situation worsens. He talks about rescheduling of loans to revive units that can generate revenues. “In the long run, some of the bad assets can produce revenues. We need to put them back on track,” said Rajan. Most banks are rather scared to fund bad assets even if it is extremely capable of generating revenue. If the original banker has a mindset not to support the unit because of its own reasons which could also be personal, other bankers should be given free hand to take over the account and fund need-based requirements in the unit’s interest.
Strange, no one seems to understand the significance of returns that an MSME unit provides to the nation. The MSME sector is the country’s growth engine; it is the link between large-scale units and agriculture; and at the same time, we tolerate destruction of such units even when the account goes bad under circumstances beyond promoters’ control.
Almost every day, we see in newspapers “Possession Notices”. Each notice brings a death warrant for the enterprise and the entrepreneurs both. It is an indicator of unemployment, revenue loss and loss of produce which leads to inflation. Why are so many units failing in our country and especially in our StateIJ Are the entrepreneurs bad; was it because of policy change; marketing problems; labour unrest or due to issues relating to fundingIJ Was the appraisal or the selection of the entrepreneur badIJ It is extremely important to identify and rectify the problems. Association studies have revealed that the major issues relate to funding, either inadequate or delayed funding. That is why the closure notices are issued by banks and not by any other authorities concerned. There are banks like the IDBI Bank which seldom issue such notices, whereas banks like the SBI publish maximum of such notices. Maybe, they fund maximum, but we cannot afford to have so many failures. Appraisal has to be made with care and diligence; so also need-based funding must be provided. Thousands of crores of public money is locked up in such units which Rajan is now trying to revive.
A unit which supplied transformer to the Government received its payment after about six months. The account became NPA. The parent banker did not agree to restructure. Why shouldn’t any other banker be allowed to take over the account and save the unitIJ
Coercive measures can be initiated for fraudulent and willful defaulters but not for innocent promoters to recover the dues. The unit, its directors and the guarantors are deprived of raising funds through any legal route by publishing their names in CICs such as CIBIl. This makes the situation still worse; the borrowers abandoning their project spend their valuable time in courts defending themselves.
CIBIl score will decide whether a unit or a promoter is eligible for being funded or not. Are CIBIl or CICs statutory bodiesIJ There are many cases pending in courts against gross misreporting. CIBIl blames the parent banker for misreporting. Soon, there could be a situation where a large part of our country would not qualify for a loan scoring below the minimum qualifying mark in CIBIl. The RBI must intervene and set up a control system to ensure funding of a genuine proposal which must not be derailed just because of a negative entry in the CIR of CIBIl. CIBIl or any CIC must have a system to screen and certify their reports that they publish since it deals with the career and life of a borrower.
The RBI restructuring norms are generally flouted by banks. As per the present system, there is no reward for a bank officer for reviving a unit, but on the contrary if his attempt to revive an NPA account fails, he is penalised. Hence, an NPA file is shifted from one desk to another in the quickest possible way and, finally, the target is to handover the NPA file to the bank’s lawyer as a discharge of their responsibilities. An alternate banker is not permitted to step in.
Funding a new unit and an inexperienced promoter may be essential, but reviving the existing, viable sick units and funding an experienced promoter is definitely a lesser risk. With investment of as small as about Rs 500 crore for revival of potentially-viable units, we can turn around the country’s economic situation and with the shortest possible time.
After a cyclone last year, there was bumper catch of big size seer fish at sea near the Digha fishing harbour in the east coast. Even a small boat could fetch about Rs 20 lakh worth catch per night. Their only requirement was to find the right size of fishing nets. It was then the responsibility of a fishing net factory to provide them with their requirement of nets. If such a factory was nonexistent or sick, fishermen had no choice but to lose their catch. Such collective results have severe impact on the state economy.
Odisha, as per Rajan’s index, is the country’s least developed State. It is imperative that we now focus on how to develop the State. We must focus on our MSMEs and agriculture to have the desire result in the quickest way. Odisha has 1,23,292 MSMEs, about 50 per cent being either sick or suffering from incipient sickness due to no access to bank finance. Even, the ones running are not able to ensure full capacity utilisation mostly due to inadequate working capital. We suggest the RBI’s intervention in Odisha as a test case.
Association’s viewpoints:
1) RBI to strengthen SlIIC (State level Inter Institutional Committee). The decision of SlIIC must be binding on all agencies. If required, statutory powers be vested with SlIIC.
2) All potentially viable closed, sick or units under stressed accounts be listed and need-based funding ensured.
3) Quarterly review of working capital for running units be undertaken and funds released as appropriate.
4) OSFC, which is responsible for industrialisation, is sick today mostly because the units failed and installments were defaulted. As per association reports, most units failed due to inadequate/delayed working capital finance. OSFC must be revived to fund MSMEs again.
5) Most farmers in the State are struggling for credit. When they are unable to meet the requirement of a bank for credit, they avail high-interest loans from moneylenders and fall in trap. The banks be sensitised to fund needy farmers.
6) Many viable MSMEs in the State are either closed or under NPA tag. The revenue locked up in these units be released by allowing free hand for any other bank to take over the account.
7) OTS (One-Time Settlement) is a legal means of exit. There is no provision today for any bank or FI to fund for OTS. Many units with high net worth are struggling to source funds for OTS and exit. If the unit or its promoters are not willful defaulters, any banks or FI as per their discretion be allowed to fund for the OTS needs of such units. At least, the ARCs (Asst Reconstruction Companies) be encouraged for such funding.
There are thousands of workers from Odisha presently employed in States like Gujarat, Tamil Nadu and Goa. It is because most of our MSMEs are struggling. We must first provide the basic requirement of funding our MSME and agriculture sectors. Sure, the State’s per capita income shall rise. After all, we have a tradition of entrepreneurship.
(The writer, the Working Chairperson of the Entrepreneurs & Finance Customers Association of India- EFCAI, can be contacted at efcai12@gmail.com )