By Sudhakar Atre:
AFTER publication of articles ‘Restructuring of advances of stressed MSMEs’ and ‘Challenges in restructuring of advances of stressed MSMEs’ in The Hitavada. Various stakeholders sought clarifications on many issues but the most of the queries were regarding the concept of stress and viability for restructuring of MSMEs. This article will try to address those issues. 1) Reserve Bank of India (RBI) guidelines issued on January 1, 2019 permitting all banks and NBFCs for restructure advances to stressed MSME accounts with aggregate exposure upto Rs 25 crore without downgrading the asset to substandard (NPA) category states that banks/NBFCs should formulate a policy for this scheme and draw a framework for viability assessment of the stressed accounts. So to be eligible under the scheme the unit should be in financial stress and it should become viable after restructuring. Even though the RBI guidelines issued is silent about defining the words “Stressed” and “Viable” and it has been left to individual bank/NBFC to define the same. Hence the concept may differ from bank to bank, but by interpreting RBI guidelines issued on March 17, 2016 and from information available on websites of different banks a common minimum definition of words
“Stressed” and “Viable” can be discussed. 2) Stress: To understand stress one has to understand the meaning of default. Default means non-payment of debt when whole or any part or installment of the amount of loan/debts has become due and payable and is not repaid by the borrower. For revolving facilities like cash credit, default would also mean, the outstaying balance remaining continuously in excess of the sanctioned limit or drawing limit, whichever is lower, for more than 30 days. Based on the default of principal or interest payment or any other amount wholly or partly, the sub-categorisation under Special Mention Account (SMA) is made by banker.
When principal or interest payment or any other amount wholly or partly remains overdue between 1 to 30 days the account is classified as SMA-0, if it remains overdue between 31 to 60 days the account is classified as SMA-1 and if it remains overdue between 61 to 90 days the account is classified as SMA-2.
3) The Annexure I of RBI guidelines dated March 17, 2016 also gives a list of signs of stress for categorising an account as SMA-0 which include (i) Delay of 90 days or more in (a) submission of stock statement / other stipulated operating control statements or (b) credit monitoring or financial statements or (c) non renewal of facilities based on audited financials. (ii) Actual sales / operating profits falling short of projections accepted for loan sanctioned by 40% or more; or a single event of non-cooperation / prevention from conduct of stock audits by banks; or reduction of Drawing Power (DP) by 20% or more after a stock audit; or evidence of diversion of funds for unapproved purpose; or drop in internal risk rating by 2 or more notches in a single review. (iii) Return of 3 or more cheques (or electronic debit instructions) issued by borrowers in 30 days on grounds of non-availability of balance/DP in the account or return of 3 or more bills/cheques discounted or sent under collection by borrower. (iv) Devolvement of Deferred Payment Guarantee (DPG) installments or Letters of Credit (LCs) or invocation of Bank Guarantees (BGs) and its non-payment within 30 days.
(v) Third request for extension of time either for creation or perfection of securities as against time specified in original sanction terms or for compliance with any other terms and conditions of sanction. (vi) Increase in frequency of overdrafts in current accounts. (vii) The borrower reporting stress in the business and financials. (viii) Promoters pledging/selling their shares in the borrower company due to financial stress.
4) Viability: The post restructuring viability of units is generally assessed on following parameters: a) The unit should become viable in maximum five years after restructuring. b) The repayment period for restructured (past) debts should not exceed 10 years from the date of implementation of the restructuring package.
c) The unit should be able to have positive cash accruals position within 12 months from the date of implementation of rehabilitation package. d) Current ratio of minimum 1.1:1 as a result of restructuring package to be achieved so that the unit does not face liquidity problem once the restructuring package has been implemented. e) Margin on stocks and receivables may be reduced upto 15% and gradually stepped up once the liquidity improves as a result of the restructuring package after 12 months. f) The unit should start generating positive cash accruals within a moratorium of maximum 12 months and will be able to meet all repayment obligations as per the restructuring package. Having discussed above mentioned points it will be clear that conditions of stress and viability may not be uniform for MSMEs and hence Rerserve Bank of India seems to be justified in leaving it to discretion of respective banks to address the issue on merits of each case. (The author is a freelance writer on banking. He can be contacted on [email protected] gmail.com)