The
policy to operationalize the Framework is to be put in place by June 30, 2016.
While
IRAC and Provisioning norms pertaining to MSME Advances will continue to be as
per the existing guidelines, the revival and rehabilitation of MSMEs having
limits up to Rs.25 crore will be in terms of these revised operating
instructions. Restructuring of loan accounts with exposure of above Rs.25 crore
will continue to be governed by the guidelines on CDR / JLF mechanism.
The revised Framework supersedes earlier
Guidelines on Rehabilitation of Sick Micro and Small Enterprises, except those
relating to Reliefs and Concessions for
Rehabilitation of Potentially Viable Units and One Time Settlement.
Banks
should continue to report credit information and SMA status of all accounts
above the cut-off exposure of Rs.5 crore and above to the CRILC.
The
provisions shall be applicable to MSMEs having loan limits up to Rs.25 crore,
including accounts under consortium or multiple banking arrangement.
Identification of incipient stress
Identification
by banks or creditors – Before a loan account turns NPA, banks or
creditors should identify incipient stress by creating three sub-categories
under the SMA as given in the Table below:
SMA
|
Basis
for classification
|
SMA-0
|
Principal or interest
not overdue for more than 30 days but account showing signs of incipient
stress
|
SMA-1
|
Principal
or interest payment overdue between 31-60 days
|
SMA-2
|
Principal
or interest payment overdue between 61-90days
|
Based
on the above early warning signals, the branch may forward the stressed
accounts with aggregate limits above Rs.10 lakh to a Committee within five
working days for a suitable CAP (CAP). Forwarding the account to the
Committee for CAP will be mandatory in cases of accounts reported as SMA-2.
Regarding
accounts with aggregate limits up to Rs.10 lakh identified as SMA-2, these
should be mandatorily examined for CAP by the branch itself under the authority
of the branch manager / designated official.
Other
terms and conditions, such as time limits, procedures to be followed, etc.
should be followed by the branch manager / designated official. However, the
cases, where it has been decided to proceed for recovery under CAP, should be
referred to the Committee for their concurrence. The branch manager /
designated official may also examine the accounts reported as SMA-0 and SMA-1.
Identification by the Borrower
Enterprise
-
Any MSME borrower may voluntarily initiate proceedings under this
Framework by making an application to the branch or directly to the Committee
when:
· the enterprise
apprehends failure of its business or its inability to pay debts.
· there is erosion
in the net worth due to accumulated losses to the extent of 50% during the
previous accounting year.
When such a request is received, the
account with aggregate limits above Rs.10 lakh should be referred to the
Committee. The Committee should examine the account for a suitable CAP within
five working days of the receipt of application. The accounts with an aggregate
limit below Rs.10 lakh may be dealt with by the branch manager / designated
official himself for a suitable CAP.
Committees for Stressed MSME:
Every bank shall form Committees for
Stressed MSME as per the following arrangements:
All banks having exposure towards MSME
sector shall constitute a Committee at each District, Division or Regional
Office, depending upon the number of MSME units financed. These Committees will
resolve the reported stress of MSME accounts of the branches falling under
their jurisdiction.
For
MSME borrowers under consortium or multiple banking arrangement, the consortium
leader, or the bank having the largest exposure, shall refer the case to its
Committee, when the account is reported as stressed. This Committee will
coordinate between the different lenders.
The Composition of the Committee shall
be as under:
(a)
The
regional or zonal head of the convener bank, shall be the Chairperson of the
Committee;
(b)
Officer-in-charge
of the MSME Department at the regional or zonal office level, shall be the
member and convener of the Committee;
(d)
One
representative from the concerned State Government.. In case State Government
does not nominate any member, then the bank should proceed to include an
independent expert in the Committee, namely a retired executive of another bank
of the rank of AGM and above.
(e)
When
handling accounts under consortium or MBA, senior representatives of all
lenders having exposure to the borrower.
Banks
should frame a policy on the composition of the Committee, the terms of
appointment of its members, the manner of filling vacancies, and the procedure
to be followed in the discharge of the Committee’s functions. While decisions
of the Committee will be by simple majority, the Chairperson shall have the
casting vote, in case of a tie. In case of accounts under consortium / MBA,
lenders should sign an Inter-Creditor Agreement (ICA) on the lines of Joint
Lenders’ Forum (JLF) Agreement. Banks may put in place dedicated manpower, to
ensure smooth functioning of the Committee and adherence to the stipulated
timelines.
All
eligible stressed MSMEs shall have access to the Committee.
Where
the Committee decides that recovery is to be made as part of the CAP, the
manner and method of recovery shall be in accordance with the existing
policies.
Application to the Committee for a CAP
On
receipt of an application from the stressed enterprise, the lender shall
forward the cases having aggregate limits above Rs.10 lakh to the Committee. Such
enterprises can also file an application for CAP directly to the Committee or
to the largest lender under advice to all its lenders. The IBA may prescribe
suitable application formats, which should include the following:
(b) Details of all
liabilities of the enterprise;
(c) Nature of
stress; and
(d) Suggested
remedial actions
Where
an application is admitted by the Committee, it shall notify the
concerned enterprise within five working days and require the enterprise to:
(a)
respond
to the application or make a representation before the Committee; and
(b)
disclose
the details of all its liabilities, within fifteen working days of receipt of
such notice;
If
the enterprise does not respond, the Committee may proceed ex-parte.
On receipt of information relating to
the liabilities of the enterprise, the Committee may send notice to the
statutory creditors, informing them about the application and permit them to
make a representation within 15 working days. These informations
are required for determining the total liability and not for payments by the
lenders.
Within 30 days of convening its
first meeting, the Committee shall take a decision on the option to be adopted
under the CAP and notify the enterprise, within five working days from
the date of such decision.
If the CAP decided by the Committee
envisages restructuring, the Committee shall conduct the detailed
Techno-Economic Viability (TEV) study and finalise the terms of such a
restructuring, within 20 working days (for accounts having aggregate
exposure up to Rs.10 crore) and within 30 working days (for
accounts having aggregate exposure above Rs.10 crore and up to Rs.25 crore) and
notify the enterprise about such terms, within 5 working days.
Upon finalisation of the terms of the CAP,
the implementation shall be completed 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.
Where
an application has been admitted, the enterprise shall continue to perform
contracts essential to its survival but the Committee may impose restrictions
for future revival of the enterprise.
The Committee shall make provisions for
payment of tax or any other statutory dues and the enterprise shall submit such
plan to the concerned taxation or statutory authority and obtain approval of
such payment plan.
CAP by the Committee
The
Committee shall decide the CAP as per the specific requirements of each case.
Techno-Economic viability of each account is to be decided by the concerned
lender before considering restructuring. However, for accounts with aggregate
exposure of Rs.10 crore and above, the Committee should conduct a detailed TEV
study before finalising the CAP.
During the period of operation of CAP,
the enterprise shall be allowed to avail credit for its business operations.
The options under CAP by the Committee
may include:
(a) Rectification:– Obtaining a
commitment from the borrower to regularise the account specifying
actions and timelines,. The commitment should be supported with identifiable
cash flows without involving any sacrifice on the part of the existing lenders.
The rectification process should be
borrower driven. However, the Committee may also consider providing need based
additional finance only for meeting unavoidable increased working capital
requirement. Any diversion of such funds will render the account as NPA. Such
additional finance should ordinarily be an ad-hoc facility to be repaid or
regularised within 6 months.
Additional finance for any other
purpose, any roll-over of existing facilities, or funding not in compliance
with the above conditions, will tantamount to restructuring. Repeated
rectification with funding, within one year, will be treated as a restructuring.
No additional finance should be sanctioned, where the account has been reported
as fraud.
(b)
Restructuring:– Consider the possibility of restructuring
the account, if it is prima facie viable and the borrower is not a
wilful defaulter. Commitment from promoters is to be obtained regarding:
· extending their
personal guarantee,
· their net worth
statement
· copies of legal
titles to assets
· declaration that
they would not undertake any transaction that would alienate assets without the
permission of the Committee.
Any deviation from the commitment may be
treated as a valid factor for initiating recovery process. The lenders in the
Committee may sign an Inter-Creditor Agreement and also require the borrower to
sign the Debtor-Creditor Agreement. The IBA may prepare formats for this
purpose. Further, a stand-still clause may be stipulated in the Debtor-Creditor
Agreement to enable a smooth process of restructuring.
(c)
Recovery:– Once the first two options are seen as
not feasible, recovery process may be resorted to. The Committee may
decide the best recovery process to be followed.
The decisions agreed upon by a majority
of the creditors (75% by value and 50% by number) in the Committee would
be considered, and will be binding on all lenders. If the Committee decides to
proceed with recovery, the minimum criteria for binding decision shall be
applicable.
Time-lines
If the Committee is not able to decide
on CAP and restructuring package due to non-availability of information on
statutory dues, the Committee may take additional time not exceeding 30 days
for deciding CAP and preparing the restructuring package.
Additional Finance
If the Committee decides that the
enterprise requires financial resources to restructure or revive, it may draw
up a plan. Any additional finance should be matched by contribution by the
promoters in appropriate proportion, and this should not be less than the proportion
at the time of original sanction. Additional funding provided under
restructuring as part of the CAP will have priority in repayment over repayment
of existing debts.
If
the existing promoters are not in a position to bring in additional funds the
Committee may allow the enterprise to raise secured or unsecured loans.
The
Committee may, with the consent of all creditors, provide higher priority to such
loans than any existing debt.
If
the Committee decides on options of either ‘Rectification’ or ‘Restructuring’,
but the account fails to perform as per the agreed terms under these options,
the Committee shall initiate recovery.
Restructuring by the Committee
Eligibility
(a)
Restructuring
cases shall be taken up by the Committee only in respect of assets reported as
Standard, SMA or Sub-Standard by one or more lenders of the Committee.
(b)
However,
the Committee may consider restructuring, where the account is doubtful with
one or two lenders but Standard or Sub-Standard in the books of majority of
other lenders (by value).
(c)
Wilful
defaulters shall not be eligible for restructuring. However, the Committee may
review the reasons and satisfy itself that the borrower is in a position to
rectify the wilful default. The decision shall have the approval of the Board
of concerned bank who has classified the borrower as wilful defaulter.
(d) Cases of Frauds and Malfeasance
remain ineligible for restructuring. However, in cases of fraud / malfeasance
where the existing promoters are replaced by new promoters and the borrower
company is totally delinked from such erstwhile promoters / management, banks
and the Committee may take a view on restructuring of such accounts based on
their viability, without prejudice to the continuance of criminal action
against the erstwhile promoters / management. Further, such accounts may also
be eligible for asset classification benefits available on refinancing after
change in ownership, if such change in ownership is carried out under
guidelines on “Prudential Norms on Change in
Ownership of Borrowing Entities (Outside Strategic Debt Restructuring Scheme)”.
Viability
(a)
The
viability of the account shall be determined by the Committee based on
acceptable viability benchmarks determined by them.
(b)
The
parameters may, inter-alia, include the Debt Equity Ratio, Debt Service
Coverage Ratio, Liquidity or Current Ratio, etc.
Conditions relating to Restructuring
under the Framework
(1)
The restructuring package shall stipulate the
timeline during which certain viability milestones after a period of 6
months may be achieved.
(2)
The Committee shall periodically review the account
for achievement of milestones and shall consider initiating suitable measures.
(3)
Any restructuring under this Framework shall be
completed within the specified time periods.
(4)
The Committee shall optimally utilize the specified
time periods.
(5)
If the Committee takes a shorter time for an
activity as against the prescribed limit, then it can have the discretion to
utilize the saved time for other activities provided the aggregate time limit
is not breached.
(6)
The general principle of restructuring shall be that
the stakeholders bear the first loss. In the case of a company, the Committee
may consider the following options, when a loan is restructured:
(a)
Possibility
of transferring equity of the company to the lenders;
(b)
Promoters
infusing more equity into their companies;
(c)
Transfer
of the promoters’ holdings to a security trustee or an escrow arrangement till
turnaround of enterprise to enable a change in management control, if lenders
favour it.
(7)
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.
(8)
For restructuring of dues in respect of listed
companies, lenders may be compensated ab-initio for their loss or sacrifice by
way of issuance of equities of the company upfront.
(9)
If the lenders’ sacrifice is not fully compensated
by way of issuance of equities, the right of recompense clause may be
incorporated to the extent of shortfall.
(10) In order to
distinguish the differential security interest available to secured lenders,
partially secured lenders and unsecured lenders, the Committee may consider various
options, such as:
(a)
Prior
agreement in the Inter-Creditor Agreement regarding repayments;
(b)
A
structured agreement stipulating priority of secured creditors;
(c)
Appropriation
of repayment proceeds among lenders in certain pre-agreed proportion.
(11) The Committee
shall, on request by the enterprise or any creditor, provide information
relating to the proceeding.
Prudential Norms on Asset Classification
and Provisioning
The extant asset classification and
provisioning norms will be applicable for restructuring of accounts under this
Framework.
Review
(1)
In
case the Committee decides that recovery action is to be initiated, such
enterprise may request for a review of the decision within ten working days.
(2)
The
request for review shall be on the following grounds:
(a)
A
mistake or error apparent on the face of the record; or
(b)
Discovery
of new and relevant fact or information.
(3)
A
review application shall be decided by the Committee within thirty days
from the date of filing and if as a consequence of such review, the
Committee decides to pursue a fresh CAP, it may do so.
SMA-0 Signs of
Stress
Illustrative
list of signs of stress for categorising an account as SMA-0:
1. Delay of 90 days
or more in
(a)
Submission of stock statement / other operating control statements or
(b)
Credit monitoring or financial statements or
(c)
Non-renewal of facilities based on audited financials.
2. In the event of
the occurance of the following contingencies
· Actual sales /
operating profits falling short of projections by 40% or more; or
· a single event
of non-cooperation / prevention from conduct of stock audits by banks; or
· Reduction of
Drawing Power (DP) by 20% or more after a stock audit; or
· Evidence of
diversion of funds for unapproved purpose; or
· Drop in internal
risk rating by 2 or more notches in a single review.
3.
A
return of 3 or more chokes/ ECS in 30 days on the grounds of non-availability
of balance/DP in the account or return of 3 or more bills / cheques discounted
or sent under collection by the borrower.
4. Devolvement of
Deferred Payment Guarantee (DPG) instalments or Letters of Credit (LCs) or
invocation of Bank Guarantees (BGs) and its non-payment within 30 days.
5. A third request
for extension of time either for the creation or perfection of securities as
against time specified in original sanction terms or for compliance with any
other terms and conditions of sanction.
6. Increase in
frequency of overdrafts in current accounts.
7. The borrower
reporting stress in the business and financials.
8. Promoter(s)
pledging/selling their shares in the borrower company due to financial stress
Based on RBI Circular dt
17/03/16. Please visit www.rbi.org.in for any further clarification if required….. Poppy