BACKGROUND: INDIAN OVERSEAS BANK SME DEPARTMENT CENTRAL OFFICE POLICY ON NURSING AND REHABILITATION OF SICK MSME UNITS Micro, Small and Medium Enterprises are the growth engines of the Indian Economy due to their ability to create jobs, foster entrepreneurship and to provide depth to the industrial base of the economy. They contribute significantly to the GDP and exports from the country. To ensure systematic and smooth growth of the MSME sector, the Government of India enacted the Micro, Small and Medium Enterprises Act 2006 on 16.06.2006 and implemented the act with effect from 02.10.2006. Due to this Act, the concept of Tiny/Small Scale Industries Sector was replaced by the expanded MSME sector which included Micro, Small, Medium Manufacturing as well as Service Enterprises. Since then, various policies have been formulated and implemented with regard to flow of Credit to MSME Sector, growth parameters, relief measures, etc., Taking into account these developments, it is now felt that our Bank should have a comprehensive policy for nursing and rehabilitation of sick MSME units. Although our Bank has a policy for nursing and rehabilitation of sick industrial units, now it is necessary to formulate and implement a policy for sick MSME units encompassing both manufacturing and service sector. RBI has also advised all banks to put in place such a policy as suggested by working group on Rehabilitation of Sick Small and Medium Enterprises constituted under the chairmanship of Dr. K.C.Chakrabarty. Accordingly, the draft nursing and rehabilitation policy for Sick MSME Enterprises is framed as under and submitted for approval of the Board.
POLICY ON NURSING AND REHABILITATION OF SICK MSME UNITS INDEX CONTENT PAGE NO. Preamble 1 Objectives of the Policy 1 Scope and Coverage 2 Definition of MSME Enterprises 2 Definition of sickness 3 Symptoms of Sickness 4 Definition of Incipient Sickness 4 Identification of Sick MSME units 6 Viability Criteria 7 Viability Benchmark Levels 8 Viability Studies 9 Concessions and Relief 12 Formulation of Nursing and Rehabilitation Package 15 Implementation of Nursing and Rehabilitation package 18 Discretionary Powers 19 Prudential Norms for Restructured Accounts 20 Concluding Remarks 20 ANNEXURE Debt Restructuring Mechanism for MSME Enterprises 22
POLICY ON NURSING AND REHABILITATION OF SICK MSME UNITS PREAMBLE: In spite of diligent appraisal, meticulous planning and careful execution at all levels, sickness is not an uncommon feature for an enterprise. A host Of internal and external factors play vital roles in the success of manufacturing as well as service enterprises. Profitable operation of the enterprise depends on several situations some of which are not within control of the entrepreneurs. Sickness of a financed unit can be quite damaging for the Bank. Hence it is essential that a sickness-prevention plan as well as a nursing plan is put in place to protect interests of the bank as well as the unit. It is of utmost importance to take measures to ensure that sickness is arrested at incipient stage itself. The branch officials will have to identify the early warning signals and initiate corrective steps promptly. Such steps may include providing timely financial assistance depending on established need, if it is within the powers of the Branch, and an early reference to controlling office where the relief required is beyond the delegated powers of the Branch Manager. Borrowal account may be restructured at this state itself wherever warranted. But like in any other sector, some units in MSME sector may become sick in spite of close monitoring, due to reasons beyond their control. Such units will have to be dealt with sympathetically and to be rehabilitated if they are potentially viable. OBJECTIVES OF THE PLICY The objectives of the rehabilitation policy are to give guidelines in the following areas: Identifying the sickness at an early state Initiating remedial measures promptly with a pro active approach Formulation and implementation of rehabilitation package for potentially viable sick MSME units The guidelines under the policy are intended to provide a proactive and flexible framework for timely nursing and rehabilitation of potentially viable sick MSME units.
:: 2 :: SCOPE AND COVERAGE This policy covers: Definition of incipient sickness and sickness in MSME units. Restructuring of MSME Enterprises (including Service Enterprises). Identification of sick MSME units eligible for consideration under this policy. Viability benchmarks Viability studies and determination of viability. Concession and relief that could be extended under rehabilitation package. Formulation of Nursing and Rehabilitation package. Discretionary powers for approval of rehabilitation package for debts of MSME units. Prudential norms for restructuring accounts. DEFINITION OF MSME ENTERPRISES Micro, Small and Medium Enterprises Development Act 2006 defines Micro, Small and Medium Enterprises based on (a) investment in Plant and Machinery in respect of manufacturing enterprises and (b) cost of equipments in respect of Service Enterprises. CLASSIFICATIONS MFG/SERVICE INVESTMENT IN PLANT & MACHINERY/ EQUIPMENTS MICRO LEVEL - I MANUFACTURING Upto Rs. 10 lacs SERVICE Upto Rs. 4 lacs MICRO LEVEL - Ii MANUFACTURING Rs. 10 lacs to Rs. 25 lacs SERVICE Rs. 4 lacs to Rs.10 lacs SMALL MANUFACTURING Rs. 25 lacs to Rs. 500 lacs ENTERPRISES SERVICE Rs. 10 lacs to Rs. 200 lacs MEDIUM MANUFACTURING Rs. 500 lacs to Rs. 1000 lacs ENTERPRISES SERVICE Rs. 200 lacs to Rs. 500 lacs For computing the investments, the original cost of plant and machinery/equipments should be taken into account and cost of land and building and other specified items should be excluded.
:: 3 :: Definition of Sickness: MICRO AND SMALL ENTERPRISES Reserve Bank of India had given a definition of Sick Small Scale Industries, but after the introduction of the SME concept in lieu of the SSI, no separate definition of Sick SME was available. Now the working group on rehabilitation of sick MSME units headed by Dr. K.C.Chakraborty has come out with a definition of sick small enterprises which is as follows: A Micro or Small Enterprise (as defined in the MSMED Act 2006) may be said to have become sick, if Any of the borrowal accounts of the enterprise remains NPA for three months or more Or There is erosion in the net worth due to accumulated losses to the extent of 50% of its net worth. RBI has advised the Banks to prepare the policy on Restructuring/Rehabilitation of potentially viable sick units, in the light of recommendations of the working group. The present policy accepts the above definition for identifying the sick units in the micro and small segment. MEDIUM ENTERPRISES A non SSI Sick Unit is a Non SSI Industrial Undertaking (regardless of type of incorporation) whose accumulated loss as at the end of the latest financial year, equals or exceeds its entire net worth (viz. paid up capital and free reserves). Dr. K.C. Chakraborty working group has not made any recommendations to modify the definition of non SSI sick unit. Hence this policy is based on the above definition of Sick Medium Enterprises.
:: 4 :: SYMPTOMS OF SICKNESS Any unit which is facing problem will throw up many symptoms and signals giving indications to the bank that all is not well with the unit. Some of the important symptoms/signals can be: Lack of healthy movement of stocks and rising level of inventories. Frequent return of cheques issued by the party/inability of the party to promptly honour the bills drawn on them. Non Submission/Delayed Submission of stock statements/financial statements Frequent return of cheques deposited/bills drawn by the party. Lack of healthy fluctuations in CC account. Default in payment of interest charged to borrowal account and default in payment of term loan instalments. Frequent request for granting of excess/enhancement of limits/adhoc limits without corresponding increase in sales. Low capacity utilization. Poor current ratio. The above list is illustrative and not exhaustive. Different units may emit different types of signals, which may not be uniform. We should be well equipped to pick up these signals promptly and probe into it. After identifying the reasons for irregularities, corrective measures have to be initiated at the appropriate time to avoid sickness. DEFINITION OF INCIPIENT SICKNESS: This policy accepts the definition of ` incipient sickness` as given by Dr. K.C. Chakrabarty working group which is as follows:
:: 5 :: MICRO AND SMALL ENTERPRISES A Micro or Small Unit may be treated to have reached the stage of incipient sickness/potential sickness, if any of the following events are triggered: A. There is delay in commencement of commercial production by more than six months for reasons beyond the control of the promoters and entailing cost overrun. B. The company incurs losses for two years or cash loss for one year, beyond the accepted time frame on account of changes in economic and fiscal policies affecting the working of MSEs or otherwise. C. The capacity utilization is less than 50% of the projected level in terms of quantity or the sales are less than 50% of the projected level in terms of value during a year. MEDIUM ENTERPRISES For a medium incipient sick unit, the committee has accepted the definition of `Non-SSI WEAK UNIT` given by RBI, which is as follows: A non SSI weak unit is a non SSI industrial undertaking (regardless of type of incorporation) if a. Any of its borrowal accounts (principal or interest) has remained overdue for a period exceeding one year or b. There is erosion in the net worth due to accumulated losses to the extent of 505 of its net worth during the previous financial year. This policy accepts above definition to identify an incipient Sick Medium Enterprise. RESTRUCTURING OF MSME ENTERPRISES (INCLUDING SERVICE ENTERPRISES) All MSME enterprises (in standard, sub-standard, and doubtful categories) which require restructuring and pass the test of viability may be restructured under the provisions of Debt Restructuring Mechanism for Small and Medium Enterprises. Detailed guidelines regarding restructuring are given in the Annexure. :: 6 ::
All MSME Enterprises identified as incipient sick should be restructured with proactive approach if they are viable, so that further deterioration is arrested. At present neither RBI nor the Working Committee has defined the sick service enterprise. Service enterprises in need of nursing can be rehabilitated through Debt Restructuring Mechanism for Small and Medium Enterprises. Accounts of Service Enterprises requiring concessions shall be restructured and relief measures available under Debt Restructuring Mechanism will be given. IDENTIFICATION OF ELIGIBLE SICK MSME UNITS Following categories of MSME borrowers are eligible for Nursing and Rehabilitation under this policy. a. All non corporate MSME borrowers irrespective of their level of dues to the bank. b. All corporate MSMEs which have exposure only to our Bank. c. All corporate MSMEs which have funded and non funded outstandings upto Rs.10 crores under multiple/consortium banking arrangements. Following category of borrowers are not eligible for rehabilitation under this policy. a. Accounts classified as loss assets by the bank. b. Borrowers indulging in frauds and malfeasance. c. Willful Defaulters. In case of Willful Defaulters, the reasons for classifying the borrower as Willful defaulter, especially in old cases where the manner of Classification of the borrower as willful defaulter was not transparent, will be reviewed as per RBI norms. If it turns out that the borrower will be able to rectify the default if opportunity is made available under the Debt Restructuring Mechanism for MSMEs, such cases will be admitted for Nursing and Rehabilitation with the approval of the Board of Directors of the Bank. d. The corporate sick Medium Industries are covered under the provisions of Sick Industrial Companies (Special Provisions) Act, 1985. Rehabilitation of units which are already referred to BIFR/AAIFR under the said Act will be decided by BIFR/AAIFR. :: 7 ::
VIABILITY CRITERIA AND BENCH MARKS VIABILITY CRITERIA: a. MICRO AND SMALL ENTERPRISES A Micro or Small Enterprise may be regarded as potentially viable if it would be in a position, after implementing a relief package spread over a period not exceeding five years from the commencement of the package from banks, financial institutions, Government (Central /State) and other concerned agencies, as may be necessary to continue to service its repayment obligations as agreed upon including those forming part of the package, without the help of the concessions after the aforesaid period. The repayment period for restructured (past) debts should not exceed seven years from the date of implementation of the package. b. MEDIUM ENTERPRISES A Medium Enterprise may be regarded as potentially viable if it would be in a position, after implementing a relief package spread over a period not exceeding seven years from the commencement of the package from banks, financial institutions, Government (Central / State) and other concerned agencies, as may be necessary to continue to service its repayment obligations as agreed upon including those forming part of the package, without the help of the concessions after the aforesaid period. The repayment period for restructured (past) debts should not exceed ten years from the date of implementation of the package. :: 8 ::
VIABILITY BENCHMARK LEVELS: I. The unit should satisfy the following benchmark levels to ensure viability on giving effect to the rehabilitation package. RATIO a. Debt Service Coverage Ration (DSCR) b.current Ratio c.long Term Debt/TNW Ratio (i.e., Debt Equity Ratio) d.holiday period for payment of instalments and interest e.repayment period BENCHMARK Average DSCR of more than 1.15 and more than 1 in each year is considered adequate. Above unity & progressively improving. 3.1 (Promoters to bring in additional funds in the form of capital only and not in the form of loans.) Depending on the adequacy of cash surplus. a)micro and Small Enterprises Entire restructured dues should be adjusted within a maximum period of 7 years. (Including holiday period), but the interest concessions will be available only for a period of 5 years. b)medium Enterprises Entire restructured dues should be adjusted within a maximum period of 10 years. (Including holiday period), but the interest concessions will be available only for a period of 7 years. Restructured dues with concessionary rates of interest/inadequate security should get precedence in repayment. Repayment period of restructured dues of sick units will be governed by RBI guidelines in force from time to time. :: 9 ::
VIABILITY STUDEIS AND DETERMINATION OF VIABILITY OF SICK MSME UNITS Sick MSME units shall be asked to submit the revival plan for continuing the activity. After examination of the plan, the branch and Regional Office (or CCPC as the case may be) will jointly hold detailed discussions with the borrower on all aspects of revival plan. Thereafter, the branch shall forward the rehabilitation proposal to their Regional Office/CCPC with specific recommendations. While conducting the viability studies and during the period of working out the details of the rehabilitation package (if the unit is found viable). Holding operation may be permitted the Regional Head concerned, for a period of six months. Under the holding operation the unit will be allowed to draw funds from the cash credit account to the extent of 100% of sale proceeds credited into the account. Regional Offices/CCPC shall arrange for conducting the viability study of the proposals received from branches, either in-house or by engaging outside agency as under: Outstanding exposure only to IOB d.exceeding Rs. 5 crores e.rs. 2 Crores to Rs. 5 Crores f.below Rs.2 Crores g. Micro Enterprises Up to outstanding of Rs.10 lacs Viability study to be done by By a competent agency engaged in conducting viability studies at the discretion of the Bank and/or by utilizing the in house facilities available at the Bank. Cost of the study to be borne by the borrower. By utilizing the in house facilities available at the Bank with or without the assistance of outside consultants. Fees payable to the consultant should be borne by the borrower. By utilizing the in house facilities available at the Bank. On the basis of available information, Branch Manager may take a decision on viability and record the same along with reasons and justifications. :: 10 ::
Consultants empanelled by the Bank (presently being done by our Banking Operations Department) for Techno Economic Viability Study will be utilized for consultation / viability studies. Regional Offices shall decided the name of the outside agency (from the approved panel) to be entrusted with the viability study or engaged for consultation, whenever outside agency is to be involved. In respect of Corporate MSMEs (other than medium industries covered under Sick Industrial Companies [Special Provisions] Act 1985) having dues of less than Rs.10 crore to more than one Bank (besides IOB) under Multiple / Consortium arrangement, the decision to conduct the viability study and the agency to be engaged will be taken in consultation with other financing banks. The viability study should be conducted (in house or by outside agency) taking into account the following aspects: a. Causes for sickness. b. Future market for products/services. c. Managerial competence of the borrowers to implement the rehabilitation. d. Technical Viability any technology up gradation is required. e. Financial Viability whether the projections are acceptable. f. Any concessions available from the State Government as per the rehabilitation policy of the State concerned. g. Ability of the borrowers to bring in their contribution. During the viability study causes for sickness should be investigated and diagnosed. Major causes of sickness are: a. Lack of Demand b. Non availability of raw materials c. Power Shortage d. Labour Problems e. Equipment Problems f. Management Problems g. Diversion of Funds h. Technological obsolescence i. Poor Infrastructure j. Change in Government policies k. Delayed/Inadequate sanction of credit by banks. l. Huge debtors and delayed receipts of dues
:: 11 :: The causes of sickness shall be adequately addressed while working out of the rehabilitation package. The unit will be regarded as potentially viable if it satisfies the viability criteria and viability benchmarks stipulated. After the viability study, if the unit is declared as potentially viable based on the stipulated criteria and benchmarks, the detailed nursing and rehabilitation package will be worked out. If the unit is judged to be unviable the same should have the approval of the next higher authority. It will also be informed to the borrower and other institutions concerned. The borrowers shall be informed in writing about the reasons for considering the unit as unviable and an opportunity will be given to promoters of the unit to present their case once again. The disposal of such appeals will be considered by the next layer of authority. If the unit is confirmed as unviable, appropriate recovery measures have to be initiated without loss of time. TIME FRAME FOR VAIBLITY STUDY: The viability study will be completed within three months of the unit becoming sick. :: 12 ::
CONCESSIONS AND RELIEFS THAT COULD BE EXTENDED TO MSME UNITS Depending on need, some or all of the following concessions will be given to sick MSME units under Nursing and Rehabilitation. NATURE OF CONCESSION 1. Interest on fresh and existing (renewed) working capital MEDIUM ENTERPRISES Prevailing BR or 1% below the applicable rate whichever is lower. MICRO AND SMALL ENTERPRISES Interest shall be reduced by 3% for Micro sector and 2% for other units subject to floor Base Rate 2. Interest on existing Term Loan Reduction by a maximum of 2 % from the applicable rate Reduction of interest on Term Loan to be reduced by 3% in case of Micro and 2 % in the case of other SMEs subject to Floor Rate 3. Interest on fresh Rehabilitation Term Loan (RTL). (For Small manufacturing units for start up expenses and margin for working capital). 4. Interest on Contingency Loan Assistance to meet escalations in capital expenditure under the rehabilitation scheme. 5. Interest on Working Capital Term Loan (WCTL). Prevailing BPLR or 1% below the applicable rate whichever is lower. Not applicable. 1 % below the prevailing BR or 1% below the applicable rate whichever is lower. 1 % over base rate or 1% below applicable rate or as prescribed by SIDBI / NABARD where refinance is obtained, whoever is the least subject to minimum of base rate At the concessional rate allowed for working capital assistance. 1 % over base rate or 1 % below applicable rate whichever is lower subject to a minimum of Base Rate. 6. Interest on Funded Interest Term Loan (FITL). 2 % below the prevailing BPLR or 1% below the applicable rate whichever is lower. NIL for a period of three years at the discretion of the bank. 7. Repayment period for Funded Interest Term Loan. Normally 3 to 5 years (Can be prolonged to 6 to 7 years in exceptional cases). As far as possible should get precedence over, or is spread over a shorter duration than the repayment of institutional loans. To be repaid within 7 years from the date of commencement of implementation of rehabilitation Programme.
NATURE OF CONCESSION 8. Repayment period for Funded Term Loan (FTL). MEDIUM ENTERPRISES The repayment period for restructured debts may extend up to a maximum period of 10 years, but the interest concession will be available only for a period of 7 years being the outer limit for rehabilitation. MICRO AND SMALL ENTERPRISES Should not normally exceed 7 years from the date of restructuring and 15 years from the date of first disbursement of original loan. For Micro Enterprises, the repayment period should not exceed 10 years from the date of restructuring. Staggered or ballooning repayment may also be permitted so that the instalments are aligned to the cash flows. 9. Repayment period for Working Capital Term Loan (WCTL). 10 Waiver of Penal Interest 11 Relaxation in Margin Norms Fund Based Limits Non Fund Based Limits 12 Increasing the Working Capital limits due to stretched working capital cycle and reduced sales - do - - do - Waiver of Penal Interest from the beginning of the accounting year in which the unit started incurring cash losses continuously Waiver of Penal Interest from the date of account becoming NPA or started incurring cash losses whichever is earlier. Margin requirements on inventory / stock/ receivables may be reduced up to 10% from the stipulated level on case to-case basis wherever warranted. The reduced margin should not be less than 15% for stock and 20% for receivables. Reduction in margin by 5% to 10% from the stipulated level in respect of Non Fund Based Limits such as LC / LG may be considered in deserving cases. Reduction in margin will not give relief to units where stocks/ receivables are accumulated due to stretched sales cycle. In such cases, adhoc limits may be sanctioned up to 30 % of existing fund based limits based on merits and subject to availability of drawing power. The adhoc loan will be repayable in a maximum of two years with a
moratorium of 6 months during which only interest will have to be serviced. 13 Financing for purchase of Gensets on soft terms, specially in power deficit states. 14 Rephasement of existing Term Loan 15 Approval from ECGC/CGTMSE wherever applicable Reduced margin of say 15% may be stipulated for purchased at Gensets by MSE units. Longer repayment periods from 3 to 5 years depending on their cash flow for purchase of Gensets by MSE units may be considered. 10 years. In deserving cases, RO can extend the repayment period up to 15 years. ECGC/CGTMSE should approve the package for such units covered under the Scheme.
:: 15 :: FORMULATION OF NURSING AND REHABILITATION PACKAGE: Once the sick SME unit is declared as potentially viable, nursing and rehabilitation programme will be worked out quickly taking into account following aspects: a. Requirements for additional funds for working capital and for up gradation of machinery, if required b. Projected financial statements covering the nursing period. c. Arrangement for recovery of overdue debts and disposal of unwanted assets. d. Marketing arrangements e. Arrangement for Competent Management performance. Concessions and relief as stipulated in the policy will be extended to the units on case to case basis while working out the rehabilitation package and will not to be given in a routine manner. Interest rate concession given will be subject to annual review. To make the rehabilitation package more meaningful, necessary support for business restructuring, modernization, expansion, diversification and technological up-gradation as felt necessary may be given. Staggered or ballooning repayment can also be permitted so that the instalments are aligned to the cash flows. i) INTEREST DUES ON CASH CREDIT AND TERM LOAN If penal rates of interest or damages have been charged, such charges will be waived from the accounting year of the unit in which it started incurring cash losses continuously. After this is done, the unpaid interest on term loans and cash credit during this period will be segregated from the total liability and funded in the form of Funded interest Term Loan. Unadjusted interest dues such as interest charged between the date up to which rehabilitation package was prepared and the date from which actually implemented will also be funded on the same way as above.
:: 16 :: ii) EXCESS IN CASH CREDIT AND TERM LOAN ACCOUNTS After the unadjusted interest portion of the cash credit account is segregated as indicated at (i). The balance representing principal dues will be treated as irregular to the extent if exceeds drawing power. This amount will be funded as working capital term loan. After the unadjusted interest portion of the term loan account is segregated as indicated at (i), the balance representing principal dues will be treated as irregular to the extent it exceeds drawing power. This amount will be funded as funded term loan. iii) RESTRUCTURING OF EXISTING TERM LOAN Existing Term Loans (after segregating the interest dues and irregular portion) will be restructured in line with projected cash flows. Maximum repayment period shall not exceed 7 years for Micro and Small Enterprises and 10 years for Medium Enterprises. iv) CASH LOSSES Cash losses are likely to be incurred in the initial stages of the rehabilitation programme till the unit reaches the breakeven level. Such cash losses excluding interest as may be incurred during the nursing programme may also be financed by the Bank, if bank is the only financier. If bank and a financial institution are involved in the rehabilitation package, the financial institution concerned should finance such cash loss. l Interest will be charged on the funded amount at our BPLR rate. Future cash losses in this context will refer to losses from the time of implementation of the package up to the point of cash break even as projected. Future cash losses as above, should be worked out before interest (i.e. after excluding interest) on working capital etc., due to the banks and should be financed by the financial institution/bank as above. The interest due to the Bank will be funded by the Bank separately.
:: 17 :: v. CONTINGENCY LOAN ASSISTANCE For meeting escalations in capital expenditure to be incurred under the rehabilitation programme, Bank will provide where necessary, appropriate additional financial assistance up to 15% of the estimated cost of rehabilitation by way of contingency loan assistance. Interest on this contingency assistance will be charged at the concessional rate allowed for working capital assistance. This is applicable only for Micro and Small Enterprises. vi) FUNDS FOR STAR UP EXPENSES AND MARGIN FOR WORKING CAPITAL In some cases, there may be need to provide the units under rehabilitation with funds for start up expenses (including payment of pressing creditors) or margin money for working capital in the form of long term loans. Where a financial institution is not involved, Bank will provide loan for start up expenses. vii. PROMOTERS ONCTIBUTION Promoter`s contribution towards the rehabilitation package is to be fixed as under: MICRO AND SMALL ENTERPRISES: 10% (minimum) of additional long-term requirement for Micro Level II Enterprises and 20% for small enterprises. It need not be insisted upon for Micro Level I Enterprises. For arriving at promoter`s contribution, the monetary value of the sacrifices from banks, financial institutions and Government may be taken into account, in addition to the long-term requirement of funds under the rehabilitation package. At least 50% of the promoter`s contribution has to be brought in immediately and the balance within six months. MEDIUM ENTERPRISES a) From existing promoters, 30% of long-term requirements of funds including monetary value of sacrifice from banks/financial institutions/ Government, under rehabilitation package. b) For units having technocrats/professional managements or packages involving change of management, 30% of long-term requirements of funds excluding monetary value of sacrifice. c) 50% of promoter`s contribution has to be brought in immediately and the remaining within 6 months as per requirement of rehabilitation package.
:: 18 :: IMPLEMENTATION OF NURSING AND REHABILITATION PACKAGE The nursing package worked out as per the above guidelines shall be implemented within 60 days of approval. Borrowers consent in writing should be obtained before implementation. The implementation shall be stringently monitored at all levels to ensure that the unit is nursed back to good health. The Bank will have the Right to Recompense the quantum of which will be limited to waiver (excluding penal interest and liquidat4ed damages) plus present value of economic loss on account of reduction in interest rate. At the discretion of Bank, the Right to Recompense will be available at any time after 3 years of implementation of the package and up to 2 years after complete repayment of the restructured term loan/working capital term loan/funded interest from loan etc., Further the Bank will also invoke Right to Recompense when the (i) borrower declares divided/withdraws profits more than 10% of the average capital; or (ii) approaches the Bank for prepayment of the borrowings. Working capital Term Loan shall be secured by first charge on the fixed assets of the borrowing units. If the fixed assets are under charge to State Finance Corporation/Term Lending Institution, the Bank at its discretion may insist first paripassu charge with these institutions. In the event of default in servicing of restructured debts for a period exceeding six months at any given point of time, during the nursing period, the restructuring package will be withdrawn, at the discretion of the Bank.
:: 19 :: DISCRETIONARY POWERS FOR APPROVAL OF REHABILITATION PACKAGE FOR DEBTS OF SMEs: The discretionary powers for approval of Nursing and Rehabilitation package may be as under: Rs. In lacs Sanctioning Authority Aggregate per borrower Discretionary Powers* Of which unsecured portion Should not exceed Chairman and Managing Director 6000 4500 Executive Director 4500 3000 General Managers Corporate Credit 3000 1500 General Managers Heading the Rights 2250 1125 Deputy General Managers 600 300 Assistant General Managers 300 150 *The amount includes existing dues plus fresh sanctions (both fund based and non fund based) *The total unsecured portion of relief package (FITL+WCTL+RTL) should be within the discretionary powers of the sanctioning authority for sanction of unsecured advances. If not, the rehabilitation proposal has to be referred to appropriate layer of authority for sanction. *Sanctioning authorities will submit the sanctions made by them to next layer of authority for review. Any waiver or write off that results from the process of nursing and rehabilitation will be within the ceiling limits prescribed for the respective layer of authority, which is as under at present: Rs. In lacs CMD 50.00 ED 37.50 GM 20.00 DGM 5.00 AGM 2.50 Proposals involving extension of relief and concessions beyond the prescribed parameters may be considered by ED/CMD, who can
:: 20 :: Consider such proposals, subject to the total waiver/write off remaining within the discretionary powers vested with them. All other cases may be referred to Management Committee of Board for necessary sanction. PRUDENTIAL NORMS FOR RESTRUCTURED ACCOUNTS Asset classification and income recognition of accounts under Nursing and Rehabilitation will be made as per the extant prudential norms of RBI for restructured accounts. Provision is to be made towards diminution in the fair value of advance, if any, and such diminution in value is to be intimated to Credit Monitoring Department, Central Office to make provision at Central Office level. CONCLUDING REMARKS The policy is subject to guidelines / instructions of regulatory authorities such as RBI/Government of India. Therefore, the policy will be amended with the approval of the Board whenever revised guidelines are received from the Regulatory Authorities. The policy will be in force until a review is made by the Board of Directors for accommodating the emerging situations.
:: 21 :: GLOSSARY 1 AAIFR Appellate Authority for Industrial and Financial Reconstruction 2 BIFR Board of Industrial and Financial Reconstruction 3 BPLR Benchmark Prime Lending Rate 4 CC Cash Credit 5 CCPC Corporate Credit Processing Centre 6 CMD Chairman and Managing Director 7 DSCR Debt Service Coverage Ratio 8 ED Executive Director 9 FITL Funded Interest Term Loan 10 FTL Funded Term Loan 11 MSME Micro, Small and Medium Enterprises 12 MSMED Act 2006 Micro, Small and Medium Enterprises Development Act 2006 13 MSE Micro and Small Enterprises 14 NABARD National Bank for Agriculture and Rural Development 15 NPA Non Performing Asset 16 RBI Reserve Bank of India 17 RTL Rehabilitation Term Loan 18 SIDBI Small Industries Development Bank of India 19 SSI Small Scale Industries 20 TNW Tangible Net Worth 21 WCTL Working Capital Term Loan
:: 22 :: ANNEXURE DEBIT RESTRUCTURING MECHANISM FOR MICRO, SMALL AND MEDIUM ENTERPRISES (MSMEs) 1. DEFINITION OF MSME ENTERPRISES Micro, Small and Medium Enterprises Development Act 2006 defines Micro, Small and Medium Enterprises based on (a) investment in Plant and Machinery in respect of manufacturing enterprises and (b) cost of equipments in respect of Service Enterprises. CLASSIFICATIONS MFG/SERVICE INVESTMENT IN PLANT & MACHINERY/ EQUIPMENTS MICRO LEVEL - I MANUFACTURING Upto Rs. 10 lacs SERVICE Upto Rs. 4 lacs MICRO LEVEL - Ii MANUFACTURING Rs. 10 lacs to Rs. 25 lacs SERVICE Rs. 4 lacs to Rs.10 lacs SMALL MANUFACTURING Rs. 25 lacs to Rs. 500 lacs ENTERPRISES SERVICE Rs. 10 lacs to Rs. 200 lacs MEDIUM MANUFACTURING Rs. 500 lacs to Rs. 1000 lacs ENTERPRISES SERVICE Rs. 200 lacs to Rs. 500 lacs For computing the investments, the original cost of plant and machinery/equipments should be taken into account and cost of land and building and other specified items should be excluded. 2. Eligibility Criteria i) These guidelines would be applicable to the following entities, which are viable or potentially viable: a. All non-corporate MSMEs irrespective of the level of dues to banks. b. All corporate MSMEs, which are enjoying banking facilities from a single bank, irrespective of the level of dues to the bank. c. All corporate MSMEs, which have funded and non-funded outstanding up to Rs. 10 crore under multiple/consortium banking arrangement
:: 23 :: i. Loss Assets:- Accounts classified by bank as Loss Assets will not be eligible for restructuring. ii. BIFR Cases:- In respect of BIFR cases completion of all formalities in seeking approval from BIFR should be ensured before implementing the package. iii. Cases of Wilful Default:- While corporate indulging in frauds and malfeasance will continue to remain ineligible for restructuring under the Debt Restructuring Mechanism for MSMEs as hitherto, bank may review the reasons for classification of the borrower as willful defaulter specially in old cases where the manner of classification of a borrower as a willful defaulter was not transparent and satisfy itself that the borrower is in a position to rectify the willful default provided the borrower is granted an opportunity under the Debt Restructuring Mechanism for MSMEs. Such exceptional cases may be admitted for restructuring with the approval of the Board of Directors of the bank only. The bank will ensure that cases involving frauds or diversion of funds with malafide intent are not covered. 3. VIABILITY CRITERIA: a) Viability study of the units:- The viability study of the units will be done as mentioned below:- Outstanding exposure only to IOB a. Exceeding Rs. 10 crores b. Rs. 5 crores to Rs.10 crores. c. Below Rs. 5 crores Viability study to be done by By a competent agency engaged in conducting viability studies at the discretion of the Bank and/or by utilizing the in house facilities available at the Bank. Cost of the study to be borne by the borrower. By utilizing the in house facilities available at the bank with or without the assistance of outside consultants. Fees payable to the consultant should be borne by the borrower. By utilizing the in house facilities available at the Bank. Note: 1. outstanding exposure shall mean and include fund based facilities; non-fund based facilities; and investments.
:: 24:: 2. Irrespective of the level of dues to the Bank, the above shall apply to (i) all non-corporate MSMEs; and (ii) all Corporate MSMEs which have exposure only to IOB. 3. In respect of Corporate MSMEs having dues of less than Rs.10 crores to more than one Bank (besides IOB) under Multiple/Consortium arrangement the decision to conduct the viability study and the agency entrusted to undertake such study will be taken in consultation with other financing banks. b. Viability Benchmark Levels:- The unit should satisfy the following benchmark levels to ensure the viability on giving effect to the restructuring package. RATIO a. Debt Service Coverage Ratio (DSCR) b. Current Ratio c. Long term debt/tnw Ratio (i.e. Debt Equity Ratio) d. Holiday period for payment of instalments and interest. e. Repayment period BENCHMARK Average DSCR of more than 1.15 and more Than 1 in each year is considered adequate. Above unity & progressively improving. 3;1.(Promoters to being in additional funds in the form of capital only and not in the form of loans) Depending on the adequacy of cash surplus Entire restructured dues should be adjusted within a maximum period of ten years. (including holiday period), but the interest concessions will be available only for a period of 7 years. Restructured dues with concessionary rates of interest/inadequate security should get precedence in repayment. Repayment period of restructured dues of sick units will be governed by RBI guidelines, subject to the discretion of the Bank or Sanctioned Scheme of BIFR. i. In the event of default in servicing of restructured debts for a period exceeding six months at any given point of time, the restructuring package will be withdrawn, at the discretion of the Bank. :: 25 ::
ii. iii. iv. The Bank will have the Right to Recompense the quantum of which will be limited to waiver (excluding penal interest and liquidated damages) plus present value of economic loss on account of reduction in interest rate. At the discretion of the Bank, the Right to Recompense will be available at any time after 3 years of implementation of the package and upto 2 years after complete repayment of the restructured term loan/ working capital term loan/ funded interest term loan etc. Further the bank will also invoke Right to Recompense when the (i) borrower declares dividend/withdraws profits more than 10% of the average capital; or (ii) approaches the Bank for prepayment of the borrowings. Working capital Term Loan should be secured by first charge on the fixed assets of the borrowing units. If the fixed assets are under charge to State Finance Corporation/Term Lending Institution, the Bank at its discretion may insist first paripassu charge with these institutions. 4. Discretionary powers for Restructuring of debts of MSMEs: The following discretionary powers available for Restructuring of Advances as advised in Credit Support Services Dept. Circular No: ADV/250/2008-09 dated 17.02.2009, may be utilized for Restructuring of debts of MSMEs. In the case of BIFR cases, the limits can be sanctioned within overall per borrower limit without any ceiling on secured and unsecured portion. In non-bifr cases, such ceilings will apply. Rs. In lacs Discretionary Powers* Sanctioning Authority Aggregate per borrower Of which unsecured portion Should not exceed Chairman and Managing Director 6000 4500 Executive Director 4500 3000 General Managers Corporate 3000 1500 Credit General Managers Heading the 2250 1125 Rights Deputy General Managers 600 300 Assistant General Managers 300 150
:: 26 :: Branch Manages upto Scale IV are not empowered to sanction restructuring packages though the original limits might have been sanctioned by them. Branch Managers of Scale V and above heading the branches may sanction restructuring packages within their discretionary powers. In case of restructuring of advances which involves sanction of Working Capital Term Loan (WCTL) & Funded Interest Term Loan (FITL) the restructuring package can be sanctioned only by Regional Heads & above. Also in case of sanction of WCIL & FITL where the limits are partly secured or fully unsecured then the sanctioning authorities i.e. Regional Head & above can sanction the limits as per their discretionary powers available for sanction of unsecured limits. In respect of restructuring of standard accounts with additional limits, the sanctioning authorities as mentioned above can sanction the restructuring package within their discretionary powers. The borrowal accounts which are restructured under the powers of various sanctioning authorities should be reported to the reviewing authority for their review in the following month as per guidelines in force. Any observations made by the reviewing authority should be complied with by Branches/Regional Offices. 5. Concessions/Relief that can be extended as part of Restructuring of debts of MSMEs :- As part of restructuring, the concessions/relief may be extended to the extent indicated below:- I For Non-sick units 1. The following layers of authority may reduce the interest rates to the extent mentioned there against, depending on the merits of each case, from the interest rates stipulated/sanctioned by higher authorities including MCB, subject to total waiver/write off, remaining within their discretionary powers. Chairman and Managing Director Upto BPLR 3.5% Executive Director Upto BPLOR-3.5% General Managers (Corporate) Upto 1.5% below applicable rate General Managers(Heading the Region) Upto 1% below applicable rate
:: 27 :: II) For Sick Units:- Sick units may be restructured and rehabilitated as per policy on nursing and rehabilitation of sick MSME units. 6. Time frame The restructuring packages should be worked out and implemented within a maximum period of 60 days from date of receipt of requests. 7. Prudential Norms for restructured accounts RBI is issuing detailed guidelines with regard to prudential norms that govern the restructured accounts from time to time. Based on the RBI guidelines, Central Office has issued detailed circular in this regard. Branches/ Regional Offices are advised to refer to the following circulars for detailed instructions with regard to asset classification and income recognition of restructured accounts. a. Circular No: ADV/65/2001-02 dated 10.12.2001, on Treatment of Restructured Accounts b. Circular No: ADV/444/2005-06 dated 18.02.2006, on Revised Guidelines on Corporate Debt Restructuring (CDR) Mechanism. c. Circular No: ADV/445/2005-06 dated 02.03.2006, on Restructuring of Borrowal Accounts Policy Guidelines. d. Circular No: ADV/204/2008-09 dated 26.09.2008, on Prudential Guidelines on Restructuring of Advances by Banks. e. Circular No: ADV/226/2008-09 dated 18.12.2008, on Prudential Guidelines on Restructuring of Advances. f. Circular No: ADV/231/2008-09 dated 29.12.2008, on Prudential Guidelines on Restructuring of Advances by Banks Calculation of Provision for Diminution in the fair value of restructured advances..