‘Default’ means non-payment of debt (as defined under the Insolvency and Bankruptcy Code) when whole or any part or installment of the debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be.
For revolving facilities like cash credit, default would also mean, without prejudice to the above, the outstanding balance remaining continuously in excess of the sanctioned limit or drawing power, whichever is lower, for more than 30 days.
Restructuring is an act in which a lender, for economic or legal reasons relating to the borrower’s financial difficulty, grants concessions to the borrower. Restructuring would normally involve modification of terms of the advances/securities, which would generally include, among others, alteration of payment period/payable amount/instalments/rate of interest; rollover of credit facilities; sanction of additional credit facility/release of additional funds for an account in default to aid curing of default/enhancement of existing credit limits; compromise settlements where time for payment of settlement amount exceeds three months.
A few significant features make the approach to resolution a welcome departure. Firstly, the lenders should have a Board-approved policy for Resolution Plan; second, they should conform to transparent timelines for implementing Resolution Plan; third, they shall require independent credit evaluation (ICE) of the residual debt by credit rating agencies (CRAs) specifically authorised by the Reserve Bank of India for this purpose. Fourth, the cost of such independent credit evaluation should be borne by the lender and not the borrower.
On January 9, 2018, the MSME Sub-committee of the SLBC of Telangana State met under the Chairmanship of KT Rama Rao, the then Minister for Industries and Commerce & Information Technology. Rama Rao advised the banks to refer all cases that are posted for Sarfaesi action a priori to Telangana Industrial Health Clinic Ltd (TIHCL), an organisation set up by the State government to provide relief to the stressed micro and small manufacturing enterprises and revive them. The idea was not to wind up those enterprises that are revivable. But banks in Telangana lent a deaf ear to his advice.
Banks that should be holding the account of an MSME for long, could be having a myopic view for a variety of reasons. It has been noticed that 50 per cent of stress has come from banks. Even on day one, there were occasions when the units were told to adjust their limits within the discretionary powers of the local manager and that they would be sanctioned quickly; there was under-assessment of the working capital due to ignorance of the activity the unit is engaged in; frequent petty jealousies between the incumbents – either field officer or manager that led the unit to stress.
Lack of knowledge of the managers of the activities and lack of monitoring and supervision have also contributed to the stress of the units. Indiscretion of the manager has also turned the account as a non-performing asset (NPA) and later the manager proceeded against the collateral securities. It will be difficult in all these situations for the banks to agree for restructuring or revival as it would lead to compromising their earlier stance, which leads to accountability.
There are several units that have been impacted adversely by government policies, turning them sick or incipient sick – eg, customs duties, GST and delayed release of incentives that were built into the working capital cycle. These units are also revivable.
There have been cases where they are captive ancillaries to major corporate houses like Jet Airways, Air India where payments are unduly delayed and they defy remedy because they are not preferred creditors in the resolution plan of the IBC.
There will be some units that are willful defaulters and some units that deserve safe burial. There will be some units that could have become sick or incipient sick where the sector itself is facing failure. Units in such sectors cannot be revived.
In the MSME manufacturing sector, all the above reasons qualify for a third eye to look at the unit dispassionately, diagnose the real reason for sickness or stress and give a qualifying certificate that the unit is revivable under a particular format and that it should be done within time.
But the banks are not agreeable either for timelines or a third party solution for revival like that from TIHCL. Now that the RBI is clear on this matter, it is hoped that once the MSME Committee finalises its recommendations, the MSME sector will also get a solution for revival and restructuring within such guidelines as applicable for the corporate loans.
(The author is an economist and risk management specialist and Adviser, TIHCL. The views are personal)