Framework for Revival and Rehabilitation of MSMEs- An early stage support for SMEs showing signs of stress.
MSME framework creates breathing space for entrepreneurs who may be experiencing symptoms of distress in the business due to various internal and external reasons.
Recently I interacted with an entrepreneur who intended to acquire an ailing power equipment servicing business. The subject company has become an NPA in the bank recently. The company had slipped into distress mainly due to problems associated with power sector as power distribution companies were not placing the orders for servicing due to their own poor financial profile.
His bank has initiated recovery steps as per their policy. The bank was not willing to listen to the proposal for equity investment and rather have been pestering promoters to regularise the account. They have been threatened with recovery action under SARFAESI act.
The new investment proposal was meant to revive the business through part funding the overdues and the rest was proposed to be used for working capital needs of business. The new investors offered to park the investment in a no-lien account until they receive written confirmation of acceptance of their proposal.
The bank was not willing to accept the proposal as this involves the restructuring of loan accounts of the firm and thus it will remain NPA for at least one year. Instead they were keen to regularise the loan accounts from proposed new investment, However, it was not acceptable to promoters as there will be no money left to finance the working capital.
I had suggested them to seek relief under Framework for Revival and Rehabilitation of MSMEs. After much persuasion and mail correspondence, the bank agreed to consider the proposal under the framework and permitted restructuring proposal along the lines sought by investors and existing promoters.
How the Framework solved the deadlock?
The framework suggests that on the basis of the early warning signals, either branch or borrower can seek Corrective Action Plan (CAP) with appropriate authorities in the bank where the borrower is having a major share of loans. The framework facilitates fresh assessment of financial aspects of business and arriving at a mutually acceptable repayment plan which may also include fresh funding.
Since the framework is regulatory in nature, the notice or request to consider Corrective Action Plan must be addressed by the bank and to be done in timely.
The key points enshrined in the framework are as below:
- Exposure Limit: The subject framework is applicable to MSMEs having loan limits up to Rs.25 crore, including accounts under consortium or multiple banking arrangements (MBA).
- Identification by banks or creditors – Before a loan account of a Micro, Small and Medium Enterprise turns into a Non-Performing Asset (NPA), banks or creditors should identify incipient stress in the account under Special Mention Account (SMA) reports.
- Identification by the Borrower Enterprise – Any MSME borrower may voluntarily initiate proceedings under this Framework if borrower apprehends failure of its business or its inability or likely inability to pay debts or there is erosion in the net worth.
Please read: Symptoms Of Distress
- The borrower can make an application either to the branch or directly to the Committee for Stressed Micro, Small and Medium Enterprises constituted at regional Office or Zonal office of bank exclusively to deal with cases under the framework.
- All eligible stressed MSMEs have access to the Committee for resolving the stress in these accounts in accordance with regulations prescribed in this Framework.
- Where an application is filed by a bank/lender and admitted by the Committee, the Committee will notify the concerned enterprise about such application within five working days and enterprise will have to submit details sought in 15 days.
- The framework also covers the assessment of statutory dues. It is mentioned here that this information is required for determining the total liability of the enterprise in order to arrive at a suitable CAP and not for payments of the same by the lenders.
- The options under CAP by the Committee may include: (a) Rectification:– Obtaining a commitment, specifying actions and timelines, from the borrower to regularise the account,(b) Restructuring:– Consider the possibility of restructuring the account, if it is prima facie viable and the borrower is not a wilful defaulter,(c) Recovery:– Once the first two options at (a) and (b) above are seen as not feasible, due recovery process may be resorted to.
- The process is rigidly time bound. Upon finalisation of the terms of the corrective action plan, the implementation of that plan shall be completed by the concerned bank within 30 days (if the CAP is Rectification) and within 90 days (if the CAP is restructuring). In case recovery is considered as CAP, the recovery measures should be initiated at the earliest.
- The decisions agreed upon by a majority of the creditors (75% by value and 50% by number) in the Committee would be considered as the basis for proceeding with the restructuring of the account and will be binding on all lenders under the terms of the Inter-Creditor Agreement.
- Additional Finance: If the Committee decides that the enterprise requires financial resources to restructure or revive, it may draw up a plan for providing such finance.
- In case a borrower has undertaken diversification or expansion of the activities which has resulted in the stress on the core business of the group, a clause for sale of non-core assets or other assets may be stipulated as a condition for restructuring the account.
Framework- Right step to support guided turnaround of stressed MSMEs:
We have been reiterating about the need for prudent financial management to navigate the challenges and capitalise the opportunities. However, sometimes businesses may suffer losses due to wrong strategies, products or changes in market-places.
In such circumstances, even well-run SMEs may cave in and end in causing severe distress to families of entrepreneurs and employees. The present framework is one step in right direction to help entrepreneurs to secure breathing space and ensure the turnaround of their business.
How this Framework is placed vis-a-vis Bankruptcy Code (IBC 2016):
This framework can be placed alongside Bankruptcy code. However, the option of bankruptcy comes at the later stage. At the initial stage of distress, this framework is of great help for SMEs to bring stability in financial management.
In the previous blog, we had discussed how Insolvency and Bankruptcy Code supports to SMEs. Please read:Insolvency and Bankruptcy Code 2016 (IBC 2016)- A ray of hope for distressed SMEs in India
The framework provides an opportunity for stressed MSMEs for undertaking course correction or resolving any issue relating to under financing. This is an opportunity if let go off, the unit may fall to distress and resulting in the series of default events that may muddle the business. Eventually the unit may have to undergo Bankruptcy proceedings.