Dealing with sick MSME units irks banks

Irum Khan, ET Bureau Oct 25, 2012, 04.27PM IST


MUMBAI: It's a perfect catch-22 situation. 

Should the banks continue the credit flow for sick units or
 should they leave these units to fend for themselves? 

Banks have been haggling with this question since long.

Some agree to stop financing such units to keep a tab on non-performing assets (NPAs). 

Others maintain that a unit going sick should be tested on all scales of potentiality before it is isolated. However according to a document released by Reserve Bank of India (RBI) for Maharashtra most banks keep themselves a few yards away when it comes to reviving such units.

As per a document available, during quarter ending June 30, around 18 banks reported 14,600 sick MSME units or 2.06 percent of the total number of MSMEs (7,07,115) with credits outstanding to the tune of Rs 976.05 cr which is about 0.96 percent of total credit (Rs 1,02,106.81 cr) outstanding as on June 30.

Out of 14,600 sick units, only 746 units (5.11 percent) were reported as 'viable' or units that can be revived and 9862 units (67.55 percent) were found to be 'non-viable' or units that cannot be brought back to its healthy status.

Further, out of 746 viable units, 413 units were put under nursing. Out of all units viability study was yet to be undertaken in respect of 3,992 units. For Andheri, Maharashtra Industrial Development Corporation (MIDC) failed to provide statistics on the issue. However, traders from the region maintain that almost 80 percent industrial units operating in the MIDC premises have reported sick over the years. Industry insiders say that inadequate working capital and timely finance were some of the most common reasons for units turning sick.

Owner of one such unit in MIDC that has now closed down, R Panchal, explained, "We were running a spectacle frame manufacturing firm with 15 employees for 19 years. Soon, complications like obtaining 10-12 trade licenses, labour problem, running around banks and also the permanent issue of local taxes started affecting our business.

According to the norms, a viability study should be accomplished by the banks before a unit is announced as an NPA on non-payment of interest for 90 days. Most of the cases discussed with this newspaper, banks were found to be skipping this study and even if such a study was taken up it mostly led to negative outcomes. 

As reflects the document by the RBI, out of the 18 banks quoted, five banks, namely Axis Bank, Citibank, ICICI Bank, SBH and Syndicate Bank, reported all their sick units as non-viable.


When asked about such viability studies of the 26 Andheri-based NPAs dealing with the SIDBI branch in Andheri, the manager appeared to be in oblivion. He said, "Probably the headquarter office undertakes that." On being asked whether it would be plausible for regional units to liaise with headquarters which has little idea about the intricacies of the cases, the manager did not answer.

Umesh Thalorh, CFO, of Jogeshwari-based BEE Electronic Machines, narrates his experience, "We were into distribution of photocopier machines and we were the only distributors of Canon in India. We had a staff of 400 members and the turnover was Rs 45 cr. The company which ran into profits, however, never anticipated tough times ahead when Canon was officially allowed in the country by Foreign Investment Promotion Board (FIPB). The company started promoting itself very aggressively and this affected our business."

Thalorh, speaking on the assistance provided by the banks, said, "We had taken a working capital loan. However, there was no further exposure given. Whatever little that we were earning went to repay the bank loans. Thus the unit turned sick. More so, there were legal cases lodged by the bankers. The banks could have increased the limit of the exposure or the time span to repay or reduce the interest rate but it didn't take any such measure."

Pradeep Ramanathan, chief advisor, PDS & Associates and chairman, SME Banking and Investment Council of Andheri-based SME Chamber of India, said, "How many times have the banks conducted the viability study jointly with the entrepreneurs themselves? Banks treat almost 80 percent of eroding units as non-viable."


SOLUTIONS PRESENT

Ramanathan, who has also served as the CMD of the Corporation Bank in past opined that banks need to take corrective measures during the implementation process and not when the net worth is completely eroded. Further, Ramanathan said that the system of bank lending works only when the capital comes beforehand.

According to him, the bankers have a mindset to label a unit non-viable than viable he also suggests that Corporate Debt Restructuring (CDR) mechanisms should be applied for smaller loans. "The study should be conducted in a day or two and not leisurely months as units are in urgent need of help. Timely monitoring would help early diagnosis and remedy. When net worth is eroded up to 25 percent mentoring is essential," said Ramanathan.