RBI asks banks to start early rehabilitation of sick small units

Banks should give timely and adequate assistance to micro and small-scale enterprises (MSEs) and rehabilitation effort should begin on a proactive basis when early signs of sickness are detected, the Reserve Bank of India (RBI) said in its guidelines on rehabilitation of sick MSEs issued today.

Intervention by banks at the 'handholding stage', ie, immediately after detecting early symptoms of sickness, will ensure that sickness can be arrested at an early stage, RBI said, adding that an account may be treated to have reached the 'handholding stage' if any of the following events are triggered:

  • There is delay in commencement of commercial production by more than six months for reasons beyond the control of the promoters;
  • The company incurs losses for two years or cash loss for one year, beyond the accepted timeframe; and
  • The capacity utilisation is less than 50 per cent of the projected level in terms of quantity or the sales are less than 50 per cent of the projected level in terms of value during a year.

RBI said bank branches should take timely remedial action, which includes an enquiry into the operations of the unit and proper scrutiny of accounts, providing guidance /counselling services, timely financial assistance as per established need and also helping the unit in sorting out difficulties, which are non-financial in nature or requiring assistance from other agencies.

Banks should also make sure that these are undertaken within a maximum period of two months of identification of such units, it said.

According to RBI, a micro or small enterprise may be said to have become sick if any of the borrowal account of the enterprise remains non-performing for three months or more or there is erosion in the net worth due to accumulated losses to the extent of 50 per cent of its net worth during the previous accounting year.

Guidelines for rehabilitation

MSE units, which could not be revived after intervention by banks at the 'handholding stage' need to be classified as sick subject to complying with any one of the two conditions as laid down above and based on a viability study. The viable / potentially viable units should be provided rehabilitation package. The rehabilitation package should be implemented speedily and anyway within six months from the date the unit is declared as 'viable'.

While identifying and implementing the rehabilitation package, banks should do 'holding operation' for a period of six months. This will allow small-scale units to draw funds from the cash credit account at least to the extent of their deposit of sale proceeds during the period of such 'holding operation'.

Units becoming sick on account of willful mismanagement, willful default, unauthorised diversion of funds, disputes among partners / promoters, etc should not be classified as sick units and accordingly should not be eligible for any relief and concessions.

In such cases steps should be taken for recovery of bank's dues. The declaration of a borrower as a willful defaulter should be done strictly in accordance with the extant RBI guidelines.

Banks should take a decision on viability of the unit at the earliest but not later than three months of becoming sick under any circumstances.

For micro (manufacturing) enterprises, having investment in plant and machinery up to Rs5 lakh and micro (service) enterprises having investment in equipment up to Rs2 lakh, the branch manager may take a decision on viability and record the same, along with the justification.

Before declaring any MSE as unviable, RBI said, banks should give them an opportunity to present the case before the next higher authority.

The next higher authority should also take any decision only after giving an opportunity to the promoters of the unit to present their case.

For sick units declared unviable, with credit facilities of Rs1 crore and above, a committee comprising senior official of the bank may examine such proposals so as to make wiser decision, especially while taking decision on rehabilitation proposals, RBI said.

Such decisions should be informed to the promoters in writing and the process should be completed in a time bound manner not more than 3 months.

Banks may, however, take decision in cases of malfeasance or fraud without following the procedure.

One time settlement
If banks decide on relief and concessions for rehabilitation of potentially viable units, they should put in place a non-discretionary `one time settlement' scheme for recovery of non-performing loans for the MSE sector, duly approved by the board of directors.

Such 'one-time settlement scheme' implemented by the bank should also be given wide publicity by placing it on their bank's website and through other possible modes of dissemination.

MSE borrowers should allowed reasonable time to submit rehabilitation application and make payment of the dues in order to extend benefits of the scheme to the eligible borrowers.

In order to accelerate the process of clearances, banks should delegate sufficient powers to senior officers at various levels such as district, divisional, regional, zonal and also at head office to sanction the rehabilitation package drawn up in conformity with the prescribed guidelines.