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MSMEs on the Roller Coaster: Unhelpful Banks and Less Understood Regulations

Updated: Aug 08, 2016 08:08:58am

MSMEs on the Roller Coaster: Unhelpful Banks and Less Understood Regulations

By B. Yerram Raju and K. Manicka Raj


Hyderabad, Aug 8 (KNN) In a recent address RBI Governor Raghuram Rajan said, “A Banker who lends with the intent of never experiencing a default is probably over-conservative and will lend to too few projects, thus hurting the growth.” In the same vein he added, “Indeed, sometimes banks signed up to lend based on project reports by the promoters’ investment bank (in the case of MSMEs chartered accountants), without doing their due diligence.”

There is a total mismatch between the banks understanding and RBI's intentions on the guidelines issued in respect of MSME financing , follow up and useful implementation of the various schemes. Because of accumulation of NPAs banks seem to have lost their sense of judgement and MSMES are the victims and the SARFAESI ACT 2002 has become very handy. Even in the best of times banks did not revive or restructure small scale industries more than 1.5 percent of their own assessed potentially viable enterprises as revealed by the RBI Annual Reports.

Rajan has succinctly summarised a few cardinal principles for dealing with stressed assets:

“1. Viability does not depend on the debt outstanding, but on economic value. Debt may have to be written down to correspond to what is viable.

2. Complete projects that are viable even if it require additional funds infusion.

3. Don’t throw good money after bad money simply because there is unreliable promise that debt becomes serviceable.”

Unfortunately by not following such principles, Banking is in a terrible mess now and one wonders whether the latest amendments to the Debt Recovery Laws would save the situation. When breach of regulations get honours how can a law help? The involvement and commitment to provide lifeline to SMEs is literally absent and the mindset to have a feel of the segment is virtually absent. 

Although the Banks are supposed to suggest OTS in deserving cases as per RBI guidelines issued in 2009 there is little evidence to banks volunteering to do it. In fact they tend to give this facilitation only when the collateral security value falls short of the outstanding loan amount. Wherever the collateral security value is more than the total outstanding loan, SARFAESI Act proceedings are resorted to as first option.

After they fail to realise in public auction of the collateral security, they hand over to the ARC  the same assets at a large discount and take tradable Security Certificate. Before this discounted sale of asset to the ARC, Bank could as well offer to the borrowing SME at even a lesser discount, under OTS and give the first right of refusal. This would have actually saved the Banks the ordeal and the loss on the declared NPA asset could have been minimal. However, this approach carries the risk of compromising Bank’s interests by a few unscrupulous Managers handling this portfolio. Such risk can be mitigated by better checks and balances and tweaking discretionary powers under such circumstances appropriately.

If every file relating to SAFRAESI Act proceedings has this mandatory check list for compliance we feel that the sector would be saved of savagery of perverse regulatory interpretation and banks would also be saved of NPAs in this segment.






1. Before declaring the Account as NPA Banks should identify incipient sickness by classifying the accounts into SMA-0; SMA-1; SMA-2

SMA-0 -Principal or interest payment 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 61-90 days

2. Communicate the classification to the borrower


RBI/2015-16/338 FIDD.MSME & NFS.BC.No.21/06.02.31/2015-16 dated 17th March 2016





In case of SMA-0- Discuss with Entrepreneur and Handhold the enterprise;


RBI Master Circular : RBI/2015-16/101 DBR.No.BP.BC.2/21.04.048/2015-16  dated July1, 2015



In case of SMA-1 Early Warning Signals: Corrective Action Plans (CAP) in 5days of noticing the stress in the asset

Up to Rs.10lakhs limit Branch should introduce the CAP mandatorily

Zonal Committee to take action


Para 2.2 of the circular in item 1 supra.


In case of SMA-2, discuss with the entrepreneur the plan for restructuring/revival and finalise within 30 days;

If TEV study were to be decided by the Committee, then the study and revival package as recommended should be put in place within 60 days

Zonal Committee to take action as per the above circular.


If the enterprise fails to revive after the CAP/Revival Plan, option for OTS should be allowed. Mandatory notice to be issued in this regard.

RPCD. SME&NFS. BC.No.102/06.04.01/2008-09 dated May 4, 2009


If the OTS doesn’t get finalised, then the Manager has to communicate to the borrower and controlling authority recovery through legal process – Borrower can request within 10 working days;

Bank Committee to convey decision within 30 days

Paragraph 11. RBI/2015-16/338 FIDD.MSME & NFS.BC.No.21/06.02.31/2015-16 dated 17th March 2016


1. Notice of default to repay the overdues within 60 days has to be issued.

2. Before issue of notice of attachment of collateral security, Bank has to discuss the value of the collateral with the borrower

3. Banker has to get the valuation of the property by the official valuer mandatorily.

4. Bank has to communicate such value to the borrower.

5. Allow the borrower to re-exercise OTS option at the official value given by the valuer.

6. If the borrower doesn’t want to settle through OTS then the Bank proceeds against the collateral securities.

Section 13(2) of the SARFAESI Act 2002


Bank has to give 30 days notice to the borrower before exercising its right to proceed against the property for sale by auction after the expiry of notice period.

Section 5 of SAFRAESI Act 2002


Bank can approach Asset Reconstruction Company (ARC) and the ARC  issues a Security Receipt and has to put a specific scheme for reconstruction/sale

Section 8 of SAFRAESI Act

As per the new guidelines, a Micro or Small Enterprise (as defined in the MSMED Act 2006) may be said to have become Sick, if (a) any of the borrowal account of the enterprise remains NPA for three months or more OR (b) there is erosion in the net worth due to accumulated losses to the extent of 50% of its net worth during the previous accounting year.

Banks have been advised that the decision on viability of the unit should be taken at the earliest but not later than 3 months of becoming sick under any circumstances and the rehabilitation package should be fully implemented within six months from the date the unit is declared as 'potentially viable' / 'viable' (para 4.6 of file:///G:/RBI%20circulars/RBI%20Master%20Circular%20on%20MSMEs.pdf dated July 1, 2015)






Bank has to advise the borrower in writing in case of any and all of the following aspects:

  • Deliberate non-payment of the dues despite adequate cash flow and good net worth;
  • Siphoning off of funds to the detriment of the defaulting unit;
  • Assets financed either not been purchased or been sold and proceeds have been misutilised;
  • Misrepresentation / falsification of records;
  • Disposal / removal of securities without bank's knowledge;
  • Fraudulent transactions by the borrower.


RBI Master Circular on wilful defaulters -RBI/2014-15/73 DBR.No.CID.BC.57/20.16.003/2014-15 dated July 1, 2015 (updated till January 1, 2015


Borrower differing with such notification can approach the Grievance Redress Committee of the Bank located at its Zonal/Head Office

The Committee’s decision is final and shall be communicated to the disputant within fifteen days.

Same as above.


*Dr. B. Yerram Raju is an economist and presently Adviser, MSE Facilitation Council,  Government of Telangana and Mr K.Manicka Raj, I.A.S., Commissioner of Industries, Govt. Of Telangana. The views expressed are personal. (KNN India)


  1. Shahnawaz Ahmad
    Shahnawaz Ahmad 10/08/2016 8:30 AM

    Vaise to article Sahi explaine kiya hai Lekin NPA ka % kyo badh raha hai uska kuchh reason SE yeh bhi hai 1. MSME ke maximum T/L v cc account ko branch me firm ke cc account SE linked ker diye jate hai Chunki cc account raw material ke liye main hota hai Us account SE sirf raw material purchasing ke estemal hota hai ya sale SE ane wale payment ke liye Every month bank cc account SE apna cc v t/l ka intt v stallment ko leleta hai Chahe firm ka bussiness theek hua Ho poor Dheere dheere cc account fund bank stallment v intt me chala jata hai Ek do sal me cc limit account ka fund khatam Ho jata hai industry trouble me a ker NPA me turn Ho jati hai 2. Jab ki cc account ke fund ko intt v stallment me Katai estemal kerna ek crime hai 3. Yadi saving ya current account SE profit ka fund deposit kiya jaye jo intt v stallment esi account jata rahega Aisi condition 2 bate hoti hai A. Yadi firm ko profit Hota hai to saving ya current account SE stallment v intt serve hota rahega B. Yadi profit generate NAHI Ho raha hai to kum SE kum cc account ka fund save rahta hai Fir bank examine ker sakta hai firm ko Kya trouble Trouble ko examine kerte hue firm ya bank uski roktham ker sakta hai Cc account me trouble me NAHI hoga Firm ki life long hogi 2. NPA ka dusra reason Ek bar cc limit ka account open hone ke bad Us account renewal theek tarah SE NAHI kiya jata hai Jaise market me raw material ke rate her 3 SE 4 mah me increase Ho rahe hai 5 sal me rate 200 SE 300 % tuk badh ja rahe hai Jisse available fund bilkul hi insufficient Ho Jata hai Aisi condition firm ko inhabcement kerne ki zarurat hoti hai Lekin bankers sme account ke need ke hisab SE NAHI enhance kerte hai NPA ka iiird reasons Sme per lagne wake intt SE bank kafi zyada charge kerte hai Chunki Sme industry ke pass skilled man power sales marketing v infrastructure ki Kami hoti hai Yaha sms ka intt kafi REASIONABLE na hoker higher side me lagane SE msme trouble me rahta hai 4. Industry ko above reasons SE fund crises 2 years ke bad hi ana shuru Ho jati hai Jisme main reason raw material ke price badhne SE Ho rahi hai Aisi condition me undustry ke dwara cc limit enhance kerne ya estemal me ane wale machinery ya infrastructure development kerne ka request jab bank ko diya jata hai to genuine case ko bhi bank consider NAHI kerta hai Yaha yeh samajhne wali bat hai ki Yadi industry fund crises ko dekhte hue bank SE fund ke liye request de diya jata hai to bank serfesai ka misuse NAHI ker sakta Serfesai act SE clear hai ki Yadi bank SE enhance ka Anurodh kiya Gaya hai to aise condition me serfesai ka estemal na kiya jaye billi industry ki genuine demand ko dekha jaye Per Yaha Ilya hai Jaise hi bank SE industry demand kerti hai Immudiate bank notice de deta hai Serfesai ka galat use NPA hone ke bad notice NAHI jari kiya ja sakta hai Na full amount recall kiya ja sakta hai Serfesai ka estemal running industry ke case me doubtful account me kiya jata hai Ya fraud cases me Doubtful account Suppose ki kisi industry account 31.12.2015 ko NPA hua hai Yadi payment intt ya stallment ya dono hi deposit NAHI hota hai to Yeh account sub standard ek year 30.12.2916 tuk rahega 31.12.2016 SE leker 30.22.2018 tuk bhi payment deposite NAHI kiya jata hai to yeh bad account me convert Ho jata hata hai Fir bhi account theek NAHI hua to 31.12.2018 SE leker 30.12.2019 ke beech bhi theek NAHI hota hai to doubtful account me divert Ho jata hai Chunki industry ko chalana ke liye serfesai act bhi time kafi diya hai Lekin bank Es rules ko follow hi NAHI kerta hai Kuch case aise bhi hai ki jus din account NPA hote hai same date me bank dwara serfesai act ke 13/2 ki notice de Di gayi hai Kuchh case me 3 SE 3 mah 6 mah me notice de ker total fund recal kerna bank ki practice hai Aur auction process start kerta hai Act ne kafi time diya hai En period me kisi bhi industry ko bank ke positive rahne SE rehabilitate ker save kiya ja sakta hai Per bank cgtsme scheme ke tahat cgtsme scheme ka na Jayaz fayeda uthate hue industry ko sale kerne me intt lets hai Dhyan rahe ki cgtsme scheme me trust bank ko 75% tuk risk cover deta hai Aisi conditions me bank industry ko rehabilitate na ker turant industry ko sale ker deta hai Aur 75% cgtsme scheme ke tahat trust SE fund claim ker leta hai Bank Pahle prime security sale kerta hai fir trust 75% leker apne principal SE zyada PA jata hai Yadi cgtsme scheme SE bank fund na claim ker paye to majboor hoker bank industry ko rehabilitate karega Fir rehabilitate kerne alawa bank ke pass option NAHI hoga Es cgtsme scheme ke bad SE hi bank ka rehabilitate ka % kafi kum hua hai Thanks From Shahnawaz Ahmad Chairman I I A AMETHI

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