Basis for classification
Principal or interest not overdue for more than 30 days but account showing signs of incipient stress
Principal or interest payment overdue between 31-60 days
Principal or interest payment overdue between 61-90days
Friday, March 18, 2016
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:
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.
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.
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
(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)”.
(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.
(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