RBI?s move to restructure MSME loans amounts to treating obesity and anorexia wi

Posted by Sanjaykale on August 4th, 2016

In the din and bustle of mounting non-performing assets (NPAs) that attracted world-wide attention, the Reserve Bank of India (RBI) in its 17 March 2016 circular took up the unfinished agenda of KC Chakrabarty Committee (2007) Report to remedy incipient sickness of the micro, small and medium enterprises (MSME) sector.

 The units having sanctioned limits of Rs10 lakh and above, but up to Rs25crore are all bracketed for treatment with a single brush and this is unfortunate.

 The instructions also presumed that all is well with the banks and the MSMEs alone are responsible for their financial failures. Banks, with very few exceptions, stopped cash flow based or order-based lending for working capital of the MSMEs.

 The Nayak Committee norm of 20% of turnover as minimum working capital limit has been taken to be the maximum and not the minimum in the case of several micro and small enterprises.

 Some of the reasons for the units falling into SMA-0 category are, inadequate or delayed bank finance, repayment obligations on term loans, which are incommensurate with the cash flows, inadequate startup period for repayment of term loans. Banks would be averse to review their own inadequacies.

 The other uncovered area is the adverse effects of (a) MSME Loan drawn agitations in the States leading to failure of infrastructure like power and water; (b) units affected by natural calamities like the floods, cyclones, and earthquakes that result in partial or full damage to the assets financed. Remedies are not possible within 90 days.

 MSME units broadly fall into – stand-alone enterprises; ancillary enterprises and cluster based enterprises. While those in the former category could be having wider markets, ancillary enterprises and even some cluster based enterprises operate in narrow markets. If the anchor industries failed, the dependent MSEs would be a pack of cards in spite of themselves.

 The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme extends guarantee cover to units availing limits up to Rs1 crore within certain threshold if the primary lender extends loans sans collateral. It is mandatory to lend up to Rs10 lakh without seeking collateral security.

 Several banks take collateral for term loans and grant collateral free advances up to Rs10 lakh working capital. Once installment or interest becomes overdue beyond 90 days, both working capital and the term loan, the unit becomes NPA and the collateral security gets invoked for realization of all the loans. There is no mention of the treatment of CGTMSE covered loans in the latest circular.

 Source: http://www.moneylife.in/article/rbis-move-to-restructure-msme-loans-amounts-to-treating-obesity-and-anorexia-with-the-same-medicine/46410.html

Like it? Share it!


About the Author

Joined: June 23rd, 2016
Articles Posted: 22

More by this author