The Reserve Bank of India (RBI) has issued the Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises (MSMEs) along with operational instructions, to all banks for immediate implementation.
Under the Framework, cases for all MSME loan accounts where principal or loan instalments are overdue for 60 days or above are to be compulsorily placed before the district committee for stressed MSME assets for developing corrective action plan (CAP).
The Framework issued by the RBI is a much revised version of the identical notification issued by the Ministry of MSME way back in May, 2015, but being issued by RBI is sacrosanct for the Banks.
Any MSME borrower may also voluntarily initiate proceedings under this Framework, if the enterprise reasonably apprehends failure of its business or its inability or likely inability to pay debts or 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, by making an application to the branch or directly to the Committee.
The committee with member from the state convenor Bank, representative of the state Government, one independent expert and representatives from all other Banks involved, in case of a consortium lending, has to prepare a corrective action plan (CAP) for the enterprise within 30 working days.
The crucial criteria for taking up any MSME account for rehabilitation or restructuring is their categorisation as special mention account (SMA). An account will be classified SMA-0 if principal or interest payment not overdue for more than 30 days but account showing signs of incipient stress, SMA-1 principal or interest payment overdue between 31-60 days.
An account will be classified SMA-2 if principal or interest amount is overdue between 61 and 90 days. It is the last SMA 2 accounts for which RBI has specified compulsory CAP by the District Committee. For the other two categories it is for the Banks to decide whether to forward the case to the Committee or take an internal corrective action.
For other two categories, the Bank concerned has to take an internal call for corrective action. For accounts with amount outstanding at less than Rs. 10 lakhs again, the Bank has to decide internally. However, if the bank decides for a recovery, the case should positively be forwarded to the Committee for concurrence.
Before preparing the CAP, the Committee will call all assets and liabilities details for the stressed account and if the MSME concerned do not respond within 15 days, the committee will take ex-parte decision. According to RBI guidelines the CAP will be either for rectification of the account, or for restructuring and recovery is the last resort.
According to an expert on MSME credit, the success of the framework is pivoted on the constitution and efficiency of the Committee for stressed MSME accounts because its vintage avatar the State Level Inter Institutional Committee, popularly known as SLIIC was neither sleek nor prompt in handling cases of sick MSMEs and functioned more like a financial mortuary, with identical function.
Rectification process will primarily be borrower driven where, CAP will recommend commitment from the enterprise to regularise the account supported with identifiable cash flows within the required time period and without involving any loss or sacrifice on the part of the existing lenders. The Committee may also consider providing need based additional finance to the borrower, if considered necessary.
Under restructuring the lenders in the Committee may sign an Debtor-Creditor Agreement with the borrower which would provide the legal basis for any restructuring process. However, restructuring will be initiated, if it is prima facie viable and the borrower is not a wilful defaulter. Commitment from promoters for extending their personal guarantee may also be obtained.
As per RBI instructions, revival and rehabilitation of MSMEs having loan limits up to Rs.25 crore will be in terms of the operating instructions under this Framework and supersedes earlier Guidelines on Rehabilitation of Sick Micro and Small Enterprises except those relating to Reliefs and Concessions for Rehabilitation of Potentially Viable Units and One Time Settlement.