RBI to banks: Quickly resolve stress in SME sector; include subject expert

Apr 20, 2016

All banks and financial institutions will have to set up committees to look into the functioning of sick enterprises and come up with a plan for their rehabilitation within 30-90 days, according to a fresh set of guidelines issued by the Reserve Bank of India (RBI). The guidelines have been prepared in consultation with the Ministry of Micro, Small and Medium Enterprises (SMEs). Banks and financial institutions have to set up committees in all districts and take time-bound decisions on how to best help ailing enterprises with a view to rehabilitating them. The development is part of the government’s efforts to boost the SME sector, which of late has seen quite a few enterprises turning sick. The move is also linked to the Government’s mission to strengthen the Make in India initiative.

Bank Committee to have SME expert

All banks having exposure to the SME sector have to set up committees in all districts that they are present in or at least at the level of Divisional or Regional Offices and will be responsible for resolving the reported stress of SMEs having loan limits up to Rs. 25 crore. The panel must include an independent external expert with expertise in SME-related matters.

Time-bound remedial action to help SMEs

Once stress has been identified in an enterprise or such an application received, the committee has to convene its meeting within five working days. This removes the possibility of committees dragging their feet over the issue. The Panel must formulate a suitable Corrective Action Plan (CAP) before the loan account of an SME turns into a Non-Performing Asset (NPA) and recovery proceedings have to be initiated.

Within 30 days of convening its first meeting for a specific enterprise, the Committee must take a decision and notify the enterprise within 5 working days. Implementation of the plan must be completed within 30 days (if the CAP is rectification) and within 90 days (if the CAP is restructuring). The Committee decides the manner of recovery on the basis of latest audited accounts of the SME, including net worth, liabilities, nature of stress, and suggested remedial actions. The committee has to make provisions in the CAP for payment of tax or other dues and for the enterprise to be able to avail both secured and unsecured credit for its business operations. In case recovery is considered as CAP, it should be initiated at the earliest.

If the CAP envisages restructuring of debt, the Committee will conduct a detailed Techno-Economic Viability (TEV) study and finalize the terms of such a restructuring. An SME can also voluntarily inform the Committee if it apprehends failure of business or inability to pay debts or if there is more than 50% erosion of its net worth. Cases of frauds and malfeasance will not be ineligible for restructuring.

When is an SME under stress?

Signs of stress include a delay of 90 days or more in submission of financial statements; profits falling short of projections by 40% or more; diversion of funds for unauthorized purposes; return of three or more checks on account of insufficient balance; or promoters selling off shares due to the financial instability of the enterprise.

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