MSMEs Suffered with Unrealistic NPA Norms: FISME

Micro, Small and Medium Enterprises (MSMEs) in India seems to be disappointed with RBI Governor Raghuram Rajan because of double whammy unleashed by NPA norms and third party ratings during his regime.

The controversial RBI ‘Framework for Revitalising Distressed Assets’ and its related provisions of Special Mention Account (SMA) were introduced in Feb 2014 and is said to have created huge problems in the MSME sector.

Devised as an early warning system, the mechanism became a millstone around their neck.

As per the guidelines, an account could be termed as SME-0 even if the Principal or interest payment is not overdue for more than 30 days if the Banker feared delinquency.

Further, the account is termed as SMA-1 with delay in Principal or interest payment overdue between 31-60 days and SMA-2 when delay between 61-90 days. RBI needs to be notified in all such cases.

“How unrealistic it is to term an MSME account SMA for not paying loan instalment within 30~90 days when most of their buyers whether public or large private sector companies seldom pay them before 180 days” asks Neeraj Kedia,  Chairman of Banking Committee, Federation of Indian Micro and Small & Medium Enterprises (FISME).

Though for bulk of NPAs it is a few large business houses which are responsible, yet the Banks became extremely edgy rendering thousands of MSMEs on the brink of financial disaster, Kedia adds.

According to S.P. Gupta, a financial consultant based in NCR, “Earlier if there were genuine delays in payment, Banks used to be considerate but after fresh RBI guidelines 2015, Banks would not listen and mark the account SMA putting all facilities to a standstill.”

Similarly, the Bank Loan Rating (BLR) prescribed by RBI on all accounts having exposure of Rs. 5 crore or more, is inherently found defective where an MSME is benchmarked with a large industry leader on parameters such as market share and other financial ratios.

It is alleged that the design of the rating agencies is flawed which gives more credence to share capital than working capital and puts MSMEs at a disadvantageous position.

“Once an MSME receives a ‘not-so-great’ rating, its financial costs rise tremendously: it has to pay higher interest rate, higher processing fee for loans, higher cost for non-fund based limits”, says Gupta.

Owing to large number of complaints about Credit Rating, FISME had suggested setting up of a Credit Rating Ombudsman comprising of eminent experts from banking and rating industry to look at grievances from the industry, including review of credit ratings assigned by the rating agencies.

The issues of SMA accounts and BLR rating were raised up to highest levels in RBI but people at the helm were too caught up with NPAs of large companies to look at MSME pains rues FISME.