The number should be read in conjunction with the total value of restructured advances that should be pushing the Rs. 2.50 Lakh Crores considering that the number was around Rs.2.20 Lakhs in March 2012! Given the magnitude of the problem, the Reserve Bank of India has recently come out with some important guidelines on the rehabilitation of the sick small and medium companies.
The critical part of the guidelines is that it has made a significant departure on the recognition of the sickness. A small and medium enterprise would be considered to be sick if it fulfills any of the following two conditions:
- If the borrowable account of the enterprise remains NPA for three months or more
- If there is erosion in the net worth due to accumulated losses to the extent of 50% of its net worth
Since it is sufficient, if any one of the two conditions are fulfilled, it enhances the potential for the identification of the sickness closer to the time of incidence; thereby significantly increasing the chances of the recovery. This is akin to the golden hour in the case of medical emergencies in human beings! But then, there has to be transparency and integrity all round.
Having said that there is one concern; the first condition stipulates the need to be an NPA for three months or more. It has been my professional experience that invariably the accounts fly under the radar by ensuring that it does not become an NPA by flying under the radar! It would have been better if the account was classified as sick if it was monitored as potentially sick in any of the four of the preceding six months! That would have ensured that the golden hour was addressed better.
The other part of the condition is about the erosion of 50% of the net worth. One notices that there is a departure from in the definition of the sickness under the MSME Act 2006 which stipulates - "There is erosion in the net worth due to accumulated losses to the extent of 50% of its net worth during the previous accounting year". The RBI guidelines have not stipulated the words highlighted. That would imply that it would be possible for a unit to file an audited balance sheet as on a recent date for the purposes of the rehabilitation.
Times Defined for rehabilitation
The guidelines have also stipulated some critical timelines that are extremely important. The guidelines mandate that a decision on the viability of the unit, for the purposes of the rehabilitation, should be taken within 3 months of the unit having been identified as sick. The other aspect is that unit should be declared unviable only if the viability status is evidenced by a viability study. For micro (manufacturing) enterprises, having investment in plant and machinery up to Rs.5 lakh and micro (service) enterprises having investment in equipment up to Rs. 2 lakh the decision on the viability has been vested with the Branch Manager after recording the same, along with the justification. This is bound to reduce the administrative process. In case a unit is determined as unviable, as evidenced by the viability study, such a decision should be with the approval of the next higher authority/ present sanctioning authority for both micro and small units. In case the unit is determined as unviable, an opportunity should be given to the unit to present the case before the next higher authority.
Concept of Hand Holding
The guidelines have also brought in a new concept of the "Hand Holding" to facilitate preventive measures being initiated. An account will be treated to have reached the "handholding stage"; if any of the following events are triggered:
- there is delay in commencement of commercial production by more than six months for reasons beyond the control of the promoters
- the company incurs losses for two years or cash loss for one year, beyond the accepted timeframe
- the capacity utilization is less than 50% of the projected level in terms of quantity or the sale is less than 50% of the projected level in terms of value during a year
- the bank branches have mandated to directly take timely remedial action which would include an enquiry into the operations of the unit and proper scrutiny of accounts, providing guidance/counseling services, timely financial assistance as per established need and also helping the unit in sorting out difficulties which are non-financial in nature or requiring assistance from other agencies
In order to ensure timeliness for banks for taking remedial action/measures in "handholding stage", the handholding support to such units should be undertaken within a maximum period of two months for the identification of such units. This should enable banks to take timely action in identification of sick units for their revival.
The MSE units that are not revived after intervention by banks at the "handholding stage" need to be classified as sick subject to complying with any one of the two conditions as laid down above and based on a viability study the viable/potentially viable units be provided rehabilitation package. The rehabilitation package should be implemented speedily in a time bound manner. The rehabilitation package should be fully implemented within six months from the date the unit is declared as 'potentially viable' / 'viable'. It has also been mandated that while identifying and implementing the rehabilitation package, banks are to facilitate a "holding operation" for a period of six months. Small-scale units will be permitted, during the "holding operations" to draw funds from the cash credit account at least to the extent of their deposit of sale proceeds.
Exclusion of willful defaulters
Units becoming sick on account of willful mismanagement, willful default, unauthorized diversion of funds, disputes among partners / promoters, etc. are not permitted to be classified as sick units and accordingly not be eligible for any relief and concessions. In such cases, steps would be initiated for the recovery of the bank's dues!
A "willful default" is one where any of the following events is observed:
- the unit has defaulted in meeting its payment / repayment obligations even when it has the capacity to honour the said obligations
- the unit has defaulted in meeting its payment / repayment obligations and has not utilized the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes
- the unit has defaulted in meeting its payment / repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets
- the unit has defaulted in meeting its payment / repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given by him or it for the purpose of securing a term loan without the knowledge of the bank/lender.
From all counts the regulator has come out with a set of guidelines to facilitate the revival of the sick units. It is also incumbent upon the entrepreneurs to utilize these guidelines by approaching the banks on a timely manner to facilitate the process.
Author: R Venkatakrishnan FCA DISA (ICAI)