SMEs under distress-Grab the windows of opportunities to turnaround

SMEs experiencing distress should seek relief under new regulations meant for assisting turnaround without waiting for bankers to act and stay away from suppressing their financial difficulties.

Recently Indian Express reported that the deputy governor of the Reserve Bank of India (RBI), S S Mundra, held banks responsible for the large number of ‘sick’ micro, small and medium enterprises (MSMEs). Mundra, who was speaking at the 13th convocation of the Pune-based National Institute of Bank Management (NIBM), also said the banks have not paid enough attention to this sector.

“At RBI we continue to feel somewhat dismayed that the sector is not getting the kind of attention that it needs to get. Particularly in helping them to deal with the period of strain which always comes in the life of enterprises,” he said. Last year, Mundra said the RBI had come up with guidelines for banks to have committees in every district where these enterprises could go to put up their cases. This he said followed the legislations brought forth by the Government of India last year for rejuvenation of the sector. “It is really upsetting to see some of them are not even aware of the legislation. Some who are aware have not put up the setup,” he said. The sector, Mundra said, had the potential for growth and bankers should help them. Banks have not used the tools to help the sector in terms of automatic enhancement of term loans, he said.


Are banks solely responsible for assisting MSMEs in distress?

The concern of RBI is understandable given the magnitude of NPA in the banking industry and illiquidity of these assets.

The question I would like to pose-

Should entrepreneurs wait for Bankers or anybody else to get relief or can he pursue himself to explore the reliefs available to navigate the distress?

At the outset, we welcome two new landmark regulations/legislations which have created huge space for supporting and hand holding of stressed businesses. They are:

  1. Framework for Revival and Rehabilitation of Stressed MSMEs:

We have discussed the details of the framework in our previous blog: Framework for Revival and Rehabilitation of MSMEs- An early stage support for SMEs showing signs of stress.

  1. Implementation of Insolvency and Bankruptcy Code (IBC 2016):

We have discussed the details and relevance for SMEs in India in the Blog: Insolvency and Bankruptcy Code 2016 (IBC 2016)- A ray of hope for distressed SMEs in India.

These two are the landmark in the sense that they will enhance the entrepreneurs’ confidence and accelerate investment in the country for the following reasons:

  1. It is the fact the business failure has huge financial, social and emotional backlash in Indian society. Many businesses that have potential to grow and create huge wealth & job opportunities to the people have chosen to remain cautious due to fear of failure.
  2. The fast changing business environment is causing severe disruptions to the business enterprises and SMEs are found to be highly vulnerable to such disruptions as many of them are part of the supply chain of large businesses.

No progressive society can afford to ignore citizens who are in distress. Giving an opportunity for a stressed entity is a societal responsibility. New regulations have met this goal and together have become a significant support especially for SMEs in India.

Now the question is who has to act first- banker or entrepreneur to remedy the stress?

The guidelines provide for either of them to take initiative to seek support under the framework. However, when I was analysing the remarks of RBI I found that there are certain developments which may be attributed to lack of momentum on the bankers’ side in the adoption of new regulations.

They are:

The diversity of borrowing sources:

Nowadays the SMEs do not confine their borrowing to one bank rather they source various types of loans for different purposes from different banks/NBFCs. Though the provision under MSME framework provides for the major banker to take lead, diverse source of borrowing which has different yardsticks and policies towards the recovery of loan make it a daunting task for the lead banker to bring all of them on board despite enabling regulations.

The tech-driven processes leading to lesser interaction:

The technology has been positioned as a key differentiator for the competitive edge and reducing the cost of transactions for banks as well as customers. Online banking has been wholeheartedly embraced by the customers for obvious advantages and speedier trade settlements.  However, these developments are leading to decreased interaction between the customers and bankers. As a result, the visibility to borrower’s borrowing and his exact financial situation is difficult to estimate to prompt them to act swiftly.

Probably these developments are reasons for the loosening of the relationship between bankers and MSMEs.

How to approach the process of the turnaround: Take onto yourself the burden:

At the outset, stressed MSMEs should not wait for a banker to take action on his own volition. Now the law has empowered you to express your difficulty without fearing the recovery action.

If you feel that stress is seemingly hardening, take a step back, analyse the situation, seek remedy under the regulations quickly. Please remember, in stressed situation procrastination leads to business loss and will erode the value of the enterprises in the eyes of stakeholders especially employees, suppliers, and customers.

Review the situation:

To treat an ailment, we need to diagnose the patient. The first place to start if your business is failing is to look within the company. This is known as self-evaluation or self-assessment. You have to know what the situation is and what the problem is. When you already know the circumstances, you can now take appropriate actions. When looking within, focus on the key areas such as strategy, people, customers, product, market, process, and finance. Narrow the focus of the problems the business is experiencing.

Prepare the suitable plan to come out of stress:

Once you have analysed the situation and flagged the challenges, address them on war foot. Prepare a financial plan that should reflect the revised business strategy if any and debt servicing plan. Explore any opportunity with the major leader for debt consolidation to reduce the interest burden. You may seek fresh financing, however, do not make it a point seek fresh loan unless clearly justified as stressed companies may not be able to sustain increased debt servicing burden.

Get Advice:

Consult a nonprofit organisation like the Debt Counselling centres of various banks who have been extending counselling services at free of costs for borrowers.

Otherwise, approach professional financial advisors who have the expertise to assist you in the matter of turnaround. In addition to helping you target areas for immediate improvement and cost reduction, they may also be able to provide valuable insight into long-term sustainability aspects or connect you with outside resources that can help you get your business back on track.

Please read: Why SMEs need professional Financial Advisor

Food for Thought:Cost Cutting- is it a solution always for stressed entities? :The first action of a troubled company is to look at costs. Every expert suggests that a troubled business needs to get its finances in order by cutting spending and eliminating unnecessary expenditures. It is advised to go through the operating budget line by line and look for immediate ways to cut costs.However, cost reduction is not necessarily going to save the company. Sometimes it may boomerang on the company in the event key employees leave the company if they are impacted. The pragmatic approach is to look at the costs and evaluate the significance & impact on the turnaround. Also, explore non-cash alternatives like handing out shares to those who are critical for future.


It is well-known fact that entrepreneurs look for support in times of distress. As we said earlier, the regulations to support entrepreneurship has been improved significantly.

New regulations give legal cover to undertake revival or restructuring of the business. It facilitates the arrival at mutually acceptable solutions to distressed SMEs.

Having been strongly armed by law, entrepreneurs should not feel scary at the visibility of stress but pursue proactively the opportunities available under laws to turnaround the business.