Policy on Management / Restructuring of MSME Stressed Assets
GUIDELINES FOR RESTRUCTURING OF MSME ADVANCES
Restructuring is an act in which a lender, for economic or legal reasons relating to the borrower's financial difficulty as appended below grants concessions to the borrower. Restructuring would normally involve modification of terms of the advances / securities, which would generally include, among others, alteration of repayment period / repayable amount / the amount of instalments / rate of interest / rollover of credit facilities / sanction of additional credit facility / enhancement of existing credit limits / compromise settlements where time for payment of settlement amount exceeds three months.
After introduction of Goods and Services Tax (GST) as tax reform measures, RBI has allowed certain relief for borrowers temporarily viz. 180 days delinquency norms in place of normal delinquency norms of 90 days for the purpose of IRAC under MSME sectors for formalisation of the sector under GST regime vide direction no. RBI/2017-18/129. DBR No.BP.BC.100/21.04.048 /2017-18 dated 07.02.2018. and followed up direction no RBI/2017-18/186 DBR No. BP.BC.108/21.04.048/2017-18 dated 06.06.2018.
Now RBI has further advised vide direction no. RBI/2018-19/100. DBR No.BP.BC.18/21.04.048 /2018-19 dated 01.01.2019 for restructuring of stressed accounts under MSME sector without down gradation of asset classification as one time measure.
Present policy is modified suitably taking above RBI directions in to consideration as under :
The provisions made as on January 1, 2019 in this framework shall be applicable to MSME having loan limits up to 25 crore. including accounts under multiple banking arrangements (MBA)
The borrower account is in default but is a ‘Standard Asset’ as on January 1,2019 and continues to be classified as a ‘Standard Asset’ till the date of implementation of the restructuring.
The borrowing entity is GST-registered on the date of implementation of the restructuring. However, this condition will not apply to MSMEs that are exempt from GST-registration.
The restructuring of the borrower account is implemented on or before March 31, 2020. A restructuring would be treated as implemented if the following conditions are met:
- all related documentation, including execution of necessary agreements between lenders and borrower / creation of security charge / perfection of securities are completed by all lenders; and
- the new capital structure and / or changes in the terms and conditions of the existing loans get duly reflected in the books of all the lenders and the borrower.
2. Identification of incipient stress:
2.1 Identification by banks or creditors: Before a loan account of Micro, Small and medium Enterprises turns into Non performing assets (NPA) as per RBI framework, Banks and Creditors should identify incipient Stress in account by creating three sub categories under the special mention account(SMA) category given in the table below:
||Principal or interest payment overdue between 01-30 days
||Principal or interest payment overdue between 31-60 days
||Principal or interest payment overdue between 61-90 days
On the basis of the above early warning signals, the branch maintaining the account should consider the stressed MSME account for purpose resolution of stress within 5 working days for a suitable Corrective action Plan (CAP) for disposal by delegated authority. In course of drawing resolution plan the restructuring of advance is to be suitably considered.
2.2 The accounts Identified as SMA should be examined for CAP by the branch itself under the authority of the branch manager. However, the cases, where the branch manager has decided the option, of recovery under CAP instead of rectification or restructuring, should be referred, to the Zonal Office for their concurrence.
2.3 Identification by the Borrower Enterprise - Any MSME borrower may voluntarily initiate proceedings under this Framework, if the enterprise reasonably apprehends failure of its business or its inability or likely inability to pay debts or 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, by making an application to the branch. When such a request is received by lender, the account should be examined by Branch Manager at the earliest but not later than, five working days from the receipt of the application, to examine the account for a suitable CAP.
3. Application for a Corrective Action Plan(CAP):
The Bank branch, on identifying an MSME account as SMA or suitable for consideration under the Framework or on receipt of an application from the stressed enterprise, Branch shall evaluate the proposal to decide suitable CAP. In event of restructuring, the proposal should be processed immediately and to be placed before delegated authority for sanction.
The application formats should be submitted by the borrowers along with the following:
- Latest audited accounts of the Enterprise including its Net worth;
- Details of all liabilities of the enterprise, including the liabilities owed to the State or Central Government and unsecured creditors, if any;
- Nature of stress faced by the enterprise; and suggested remedial actions;
- The Borrower enterprise should disclose the details of all its liabilities, including the liabilities owed to the State or Central Government and unsecured creditors, if any.
Branch may examine the list of creditors for authenticity and determining the total liability of the Enterprise in order to arrive at a suitable CAP' and not for payments of the same by the banks/lenders.
If the corrective action plan decided by the branch /zonal office envisages restructuring of the debt of the enterprise, for the accounts with exposure of Rs.20.00 crore and above, TEV study is to be undertaken.
For restructuring proposal for exposure up to Rs.25.00 crore where only change in COD/ extension of repayment period/ rescheduling without additional funding is involved TEV study should not be insisted upon. However, sanctioning authority for resolution plan (RP) could stipulate TEV study for lesser exposure, If required. TEV study should be completed and report is to be submitted by consultants, 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). Upon finalization of the terms of the corrective action plan, the implementation of that plan shall be completed by the concerned 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.
During the period of operation of CAP, the enterprise shall be allowed to avail both secured and unsecured credit for its business operations as envisaged under the terms of CAP.
For MSME borrowers having credit facilities under a Consortium of Banks or Multiple Banking Arrangement (MBA), the consortium leader, or the bank having the largest exposure to the borrower under MBA, as the case may be, shall take lead role if the account is reported as stressed either by the borrower or any of the lenders under this Framework. Lead Lender will also coordinate between the different lenders. Branch shall communicate to lead lender status of account as default/stressed immediately on receipt of early warning signals and requisition for consortium meeting at earliest to explore suitable CAP under intimation to other members of consortium.
4. The options under CAP may include:
(a) Rectification:- Obtaining a commitment, specifying actions and timelines, from the borrower to regularize the account so that the account comes out of Special Mention Account status or does not slip into the Non-Performing Asset category and the commitment should be supported with identifiable cash flows within the required time period and without involving any Ioss or sacrifice on the port of the existing lenders. The rectification process should primarily be borrower driven. However, the branch may also consider providing need based additional finance to the borrower, if considered necessary, as port of the rectification process. It should however be ensured that this need based additional finance is intended only for meeting, in exceptional cases, unavoidable increased working capital requirement. In all cases of additional finance for working capital, any diversion of funds will render the account as NPA. Further, such additional finance should ordinarily be an ad-hoc facility to be repaid or regularized within a maximum period of six months. Additional finance for any other purpose, as also any roll-over of existing facilities, or funding not in compliance with the above conditions, will tantamount- to restructuring. Further, repeated rectification with funding, within the space of one year, will be treated as a restructuring and no additional finance should be sanctioned under CAP, in cases where the account has been reported as fraud by any lender.
(b) Restructuring:- Consider the possibility of restructuring the account, if it is prima facie viable and the borrower is not a wilful defaulter, i.e., there is no diversion of funds, fraud or malfeasance, etc. Commitment from promoters for extending their personal guarantee along with their net worth statement supported by copies of legal titles to assets may be obtained along with a declaration that they would not undertake any transaction that would alienate assets without the permission of the Bank. Any deviation from the commitment by the borrowers affecting the security or recoverability of the loan may be treated as a valid factor for initiating recovery process. The lenders in the consortium may sign an Inter-Creditor Agreement and also require the borrower to sign the Debtor-Creditor Agreement which would provide the legal basis for any restructuring process. Further, a stand-still clause (as defined in extant guidelines on Restructuring of Advances) may be stipulated in the Debtor-Creditor Agreement to enable a smooth process of restructuring. The stand-still clause does not mean that the borrower is precluded from making payments to the lenders. The Inter-Creditor agreement may also stipulate that both secured and unsecured creditors need to agree to the final resolution.
c) Recovery:- Once the first two options at (a) and (b) above are seen as not feasible, due recovery process may be resorted to. The branch may decide the best recovery process to be followed, among the various legal and other recovery options available, with a view to optimizing the efforts and results. At this level, a senior executive from the Recovery Department will be involved in finalizing the recovery process.
5. The decisions agreed upon by a majority of the creditors (75% by value and 50% by number) in the consortium would be considered as the basis for proceeding with the restructuring of the account, and will be binding on all lenders under the terms of the Inter-Creditor Agreement. If the consortium decides to proceed with recovery, the minimum criteria .for binding decision, if any, under any relevant laws or Acts shall be applicable.
Detailed time-lines are given for carrying out various activities under the Framework. If the branch is not able to decide on CAP and restructuring package due to non-availability of information on statutory dues of the borrower, the branch may take additional time not exceeding 30 days for deciding CAP and preparing the restructuring package. However" they should not wait beyond this period and proceed with CAP.
7. Additional Finance
7.1 If the branch decides that the enterprise requires financial resources to restructure or revive, it may draw up a plan for provision of such finance. 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 of loans. Additional funding provided under restructuring / rectification as part of the CAP will have priority in repayment over repayment of existing debts. Therefore, instalments of the additional funding which fall due for repayment will have priority over the repayment obligations of the existing debt.
7.2 If the existing promoters ore not in a position to bring in additional funds the consortium may allow the enterprise to raise secured or unsecured loans.
7.3 Provided further, that the consortium may, with the consent of all creditors recognized, provide such loans higher priority than any existing debt.
8. If the Bank decides on options of either 'Rectification' or 'Restructuring', but the account fails to perform as per the agreed terms under these options, the bank shall initiate recovery under option
9. Restructuring by the consortium
- Restructuring cases shall be taken up by the consortium only in respect of assets reported as Standard, Special Mention Account or Sub-Standard by one of more lenders of the consortium.
- However, the consortium may consider restructuring of the debt, where the account is doubtful with one' or two lender/s but it is Standard or Sub-Standard in the books of majority of other lenders (by value).
- Willful defaulters shall not be eligible for restructuring. However, the consortium may review the reasons for classification of the borrower as a willful defaulter and satisfy itself that the borrower is in a position to rectify the wilful default. The decision to restructure such cases shall have the approval of the Board of concerned bank within, the consortium who has classified the borrower as willful defaulter.
- 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 consortium 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 contained in circular no. RBI/2017-18/131 DBR.No. BP.BC.101/21.04. 048/ 2017-18 February 12, 2018 on Resolution of Stressed Assets – Revised Framework.
9.3. Conditions relating to Restructuring under the Framework:
- Under this Framework, the restructuring package shall stipulate the timeline during which certain viability milestones such as improvement in certain financial ratios after a period of 6 months may be achieved.
- The Bank shall periodically (preferably half-yearly] review the account for achievement / non- achievement of milestones and shall consider initiating suitable measures including recovery measures as deemed appropriate
- Any restructuring under this Framework shall be completed within the specified time periods.
- The Bank shall optimally utilize the specified time periods so that the aggregate time limit is not breached under any mode of restructuring.
- If the Bank 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.
- The general principle of restructuring shall be that the stake holders bear the first loss of the enterprise rather than the lenders, In the case of a company, the Bank may consider the following options when a loan is restructured.
- Possibility of transferring equity of the company by promoters to the lenders to compensate for their sacrifices:
- Promoters infusing more equity into their companies; 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.
- 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 if under the Techno-Economic Viability study, the account is likely to become viable on hiving off of non-core activities and other assets.
- For restructuring of dues in respect of listed companies, lenders may be, ab-initio, compensated for their loss or sacrifice (diminution In fair value of account in net present value terms) by way of issuance of equities of the company upfront, subject to the extant regulations and statutory requirements.
- 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.
- In order to distinguish the differential security interest available to secured lenders, partially secured lenders and unsecured lenders, the consortium may consider various options, such as:
- prior agreement in the Inter-Creditor Agreement among the above classes of lenders regarding repayments;
- a structured agreement stipulating priority of secured creditors;
- appropriation of repayment proceeds among secured, partially secured and unsecured lenders in certain pre-agreed proportion.
10. Prudential Norms on Asset Classification and Provisioning:
Post-restructuring, NPA classification of these accounts shall be as per the extant IRAC norms.
Accounts classified NPA can be restructured; however, the extant asset classification norms governing restructuring of NPAs will continue to apply.
As a general rule, barring the above one-time exception, any MSME account which is restructured must be downgraded to NPA upon restructuring and will slip into progressively lower asset classification and higher provisioning requirements as per extant IRAC norms. Such an account may be considered for up gradation to ‘standard’ only if it demonstrates satisfactory performance during the specified period.
Specified Period’ means a period of one year from the commencement of the first payment of interest or principal, whichever is later, on the credit facility with longest period of moratorium under the terms of restructuring package. ‘Satisfactory Performance’ means no payment (interest and/or principal) shall remain overdue for a period of more than 30 days. In case of cash credit / overdraft account, satisfactory performance means that the outstanding in the account shall not be more than the sanctioned limit or drawing power, whichever is lower, for a period of more than 30 days.
11. Repayment Schedule
Repayment schedule is not more than 10 years.
- Incipient Sickness
It is of utmost importance to take measures to ensure that sickness is arrested at the incipient stage itself. The branches should keep a close watch on the operations in the account and take adequate measures to achieve this objective. The management of the Unit financed should be advised about their primary responsibility to inform the Bank if they face problems which could lead to sickness and to restore the Units to normal health. The organizational arrangements at branch level should also be fully geared for early detection of sickness and prompt remedial action. The Branches/ Zonal Offices will have to identify the Units showing symptoms of sickness by effective monitoring and provide additional finance, if warranted, so as to bring back the Units to a healthy track. An illustrative list of warning signals of incipient sickness that are thrown up during the scrutiny of borrowal accounts and other related records e.g. periodical financial data, stock statements, reports on inspection of factory premises and godowns, etc. is given in Appendix-I which will serve as a useful guide to the operating personnel.
- When an advance slips into the sub -standard category, as per norms, the operating office should make full enquiry into the financial health of the Unit, its operations, etc. and take remedial action. The branch officials who are familiar with the day to day operations in the borrowal accounts should be under obligation 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 manager, and an early reference to the respective office where the relief required are beyond his delegated powers. The branch manager may also help the Unit, in sorting out difficulties which are non -financial in nature and require assistance from outside agencies like Government departments / undertakings, Electricity Boards, etc. He should also keep the term lending institutions informed about the position of the Units wherever they are also involved.
- In spite of their best efforts and intentions, sometimes borrowers find themselves in financial difficulty because of factors beyond their control. All assisted projects do not always operate on expected lines due to various reasons such as managerial, technical, financial or marketing problems resulting in lower or irregular cash flows and/or inability to pay off the dues to the lender(s) in a timely manner.
- The benefits of rehabilitation are that, while on one hand the asset is retained in the books of the Bank, on the other hand the account turns into a performing asset and the yield in the account is better as compared to an account where a compromise settlement is to take place. Thus rehabilitation of the sick account is the most desired recovery tool for NPAs.
- However, rehabilitation has its own challenges. While an active participation of the borrower is utmost essential, the participation of other term lenders/creditors/working capital banker(s) is also important and in case any party is not co-operative, success of the rehabilitation package becomes suspect.
Rehabilitation package for sick Units
All potentially viable sick Units/service sector projects assisted by the Bank are eligible to seek rehabilitation packages for revival. The Unit should be capable of being restored to normal health within a reasonable time. However, sick Units categorized as a case of suspected fraud are not eligible for such package and steps should be taken for recovery of bank's dues.
Discussions should be held with the promoters of sick but potentially viable Units to work out a suitable rehabilitation programme to turnaround the Unit. There is scope to improve use of this tool of NPA management further to reduce the number of sick Units in the Bank's portfolio as well as to improve recovery from sick but viable Units.
- Definition of Sick SME Unit
As per extant RBI guidelines, an SME Unit may be classified as sick if :
i) any of the borrowal accounts of the Unit remains sub-standard for more than 6 months i.e. principal or interest, in respect of any of its borrowal accounts has remained overdue for a period exceeding one year. The requirement of overdue period exceeding one year will remain unchanged even if the present period for classification of an account as sub -standard, is reduced in due course;
ii) there is erosion in the net worth of the borrower due to accumulated cash losses to the extent of 50 per cent of its net worth during the previous accounting year ;
iii) the Unit has been in commercial production for at least 2 years.
- Potentially Viable Sick SME Unit
- A sick SME Unit may be regarded as potentially viable if, after implementing a rehabilitation package, spread over a period not exceeding 5 years from the commencement of the package, it would be in a position to continue to service its repayment obligations [including those forming part of the package] without the help of 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. In the case of micro/decentralized sector Units, the period of reliefs/concessions and repayment period of restructured debts not to exceed five and seven years respectively, as in the case of other SME Units.
- Based on the norms specified above, it will be for the bank to decide whether a sick SME Unit is potentially viable or no t. Viability of a Unit identified as sick, should be decided quickly and made known to the Unit and others concerned at the earliest.
- The rehabilitation package should be fully implemented within six months from the date the Unit is declared as 'potentially viable' / 'viable'.
- While identifying and implementing the rehabilitation package, the branches/ Zonal Offices are advised to do 'holding operation' for a period of six months. This will allow small-scale Units to draw funds from the cash credit account at least to the extent of their deposit of sale proceeds during the period of such 'holding operation'.
- Formulation of a rehabilitation package
- After identifying a sick Unit, the causes of its sickness should be diagnosed and remedial measures decided after examination of its viability in consultation with other lenders, as far as practicable.
- The rehabilitation package should be based on analysis of past operations and address the deficiencies. The promoters should be involved in the preparation of the package. A joint package preparation in consultation with working capital banker would ensure that the package addresses all relevant issues affecting its turnaround.
- Study of the feasibility of operating the Unit at the existing level of installed capacity and within the prevailing business environment should be carried out in addition to reappraisal of management set up and market prospects.
- In respect of Units covered under the ECGC/CGTMSE guarantee, rehabilitation measures could be considered subject to approval of the package by ECGC/CGTMSE as the case may be.
Reliefs and Concessions for rehabilitation of Potentially Viable Units
It is emphasized that only those Units which are considered to be potentially viable should be taken up for rehabilitation. No Unit will be taken up for rehabilitation by the Bank unless the financial viability is established and there is a reasonable certainty of repayment from the borrower, as per the terms of rehabilitation package. The viability should be determined based on the acceptable viability benchmarks determined by them, which may be applied on a case-by-case basis, depending on merits of each case.
Illustratively, the parameters may include the Return on Capital Employed, Debt Service Coverage Ratio, Gap between the internal Rate of Return and Cost of Funds and the amount of provision required in lieu of the diminution in the fair value of the restructured advance. In fact, the viability study itself should contain a sensitivity analysis in respect of the risk involved that in turn will enable firming up of the corrective action matrix. Rehabilitation should be done after looking into cash flows of the borrower and assessing the viability of the projects / activity financed by bank. The Units not respect of such accounts should be accelerated.
Norms for grant of reliefs and concessions to potentially viable sick MSE Units for rehabilitation are furnished below:
The principal installments could be rescheduled with a repayment period not exceeding 7 years from the date of implementation of the package.
Cash losses are likely to be incurred in the initial stages of the rehabilitation programme till the Unit reaches the break-even level. Such cash losses excluding interest as may be incurred during the nursing programme may also be included in the rehabilitation cost and funded by the bank.
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 bank(s) and should be funded.
Promoter's contribution towards the rehabilitation package is fixed at a minimum of 15 per cent of the additional long -term requirements under the rehabilitation package. It would be desirable that upto 503 of the promoter's contribution is brought in upfront and the balance within 6 months from the date of communication of approval of the package.
For arriving at promoters' 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. While evolving packages, it should be made a precondition that the promoters should bring in their contribution within the stipulated time frame.
Further, in regard to concessions and relief made available to sick Units, bank should incorporate a 'Right of recompense' clause in the sanction letter and other documents to the effect that when such Units turn the corner and rehabilitation is successfully completed, the sacrifices undertake n by the banks should be recouped from the Units out of their future profits/cash accruals.
Other sources of funds for rehabilitation should be identified which could include disposal of stocks/assets not required, rapid collection of outstanding bills, etc.
i) Interest Dues on Cash Credit and Term Loan If penal rates of interest or damages have been charged, such charges should 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 should be segregated from the total liability and funded. No interest may be charged on funded interest and repayment of such funded interest should be made within a period not exceeding three years from the date of commencement of implementation of the rehabilitation programme.
ii) Unadjusted Interest Dues
Unadjusted interest dues such as interest charged between the date up to which rehabilitation package was prepared and the date from which actually implemented, may also be funded on the same terms as at (i) above.
iii) Term Loans
The rate of interest on term loans may be reduced (from the date it started incurring cash losses), where considered necessary, by upto 33 in case of micro/decentralized sector Units and upto 23 for other small enterprises, subject to the floor of Bank's base rate.
iv) Working Capital Term Loan (WCTL)
- The cut-off date for reduction in interest rate would be the date from which interest has been in default.
- In the case of multiple loan accounts, the earliest date of interest default should be taken as the cut-off date.
- Reduction in the rate of interest as stated above could be considered in isolation for restructuring an account as well as a part of a restructuring package.
After the unadjusted interest portion of the cash credit account is segregated as indicated at (i) and (ii) above, the balance representing principal dues may be treated as irregular to the extent it exceeds drawing power. This amount may be funded as Working Capital Term Loan (WCTL) with a repayment schedule not exceeding 5 years. The rate of interest may be reduced by upto 33 in case of micro/decentralized sector Units and upto 23 for other small enterprises, subject to the floor of Bank's base rate.
v) Working Capital
Interest on working capital may be reduced by upto 33 in case of micro/decentralized sector Units and upto 23 for other small enterprises, subject to the floor of Bank's rate.
vi) Contingency Loan Assistance
For meeting escalations in capital expenditure to be incurred under the rehabilitation programme, Bank may provide, where considered necessary, appropriate additional financial assistance upto 15 per cent of the estimated cost of rehabilitation by way of contingency loan assistance. Interest on this contingency assistance may be charged at the concessional rate allowed for working capital assistance.
- Additional Finance Assistance
Need-based additional working capital limit/term loan required for restarting/operating the Unit on viable lines could also be considered as part of the rehabilitation package for the following purposes:
b. Interest rate
- For purchase of balancing equipment or overcoming the identified bottlenecks in the existing plant & machinery, civil construction, etc.
- For payment of statutory liabilities and pressing creditors (excluding borrowings from promoters, their friends and associates) to the extent considered necessary. Such dues should be normally allowed to be liquidated over a period of time in installments.
- To raise margin money for additional working capital needed for rehabilitation.
- To meet cash losses (after excluding interest on both term loans and working capital borrowings) that may be incurred during the period of implementation of the rehabilitation package.
- To meet retrenchment compensation, if required.
- For any other purpose considered necessary for revival of the Unit/concern.
Interest on additional working capital limit/term loan may be charged upto Base rate plus 1.503.
c. Repayment period
- To be fixed on a case -to-case basis with adequate moratorium depending on the projected cash-flow and DSCR. While the desirable DSC R is 1.5 : 1, the same could be relaxed upto 1.25 : 1 by the sanctioning authority.
- The repayment period should normally not exceed 7 years from the date of disbursement of additional assistance.
- Cash Losses
- Promoters' Contribution
Leasing of plant
- If the sick Unit is not viable on its own, the possibility of leasing of the plant and machinery of the sick Unit to a healthy company, which may be in a position to make better use of the installed facilities and facilitate recovery of dues to the Bank could be explored.
- The sick Unit undertaking manufacturing activity on behalf of a healthy company on the basis of processing fees could also be considered.
- The relief/concessions to the extent indicated above are not intended to be given as a matter of course in all cases of rehabilitation of sick SME Units/service sector projects.
- The nature and extent of relief/concessions required / warranted within these parameters would be decided depending upon the merits of each case.
- The rehabilitation package would preferably be drawn after crystallizing the dues / liability as on a future date viz., next interest/installment due date.
- However, reduction in interest rate, waiver, etc., could be granted retrospectively also, wherever necessary.
- All interest rate concessions would be subject to annual review depending on the performance of the Units.
Guarantors and third party mortgagors - Confirming parties
The guarantors and third party mortgagors shall be made confirming parties to the arrangements for grant of relief/concessions/waivers, etc., as far as practicable.
Failure to comply with terms and conditions
In case the Unit, to which relief/concessions/waivers have been granted in terms of above guidelines/schemes, does not co -operate or fails to comply with the terms and conditions thereof, the same shall stand withdrawn and the entire amount due prior to grant of such relief, concessions and waivers together with all interest, penal interest, etc. shall become payable to t he Bank at its sole discretion . This shall invariably be stated in all communications of the Bank to borrower advising grant of rehabilitation/ restructuring approval.
Right to get recompensed
Bank has the right to get recompensed for the relief/concessions granted under the restructuring scheme in respect of those Units in which there is improvement in the financial health. A 'Right of Recompense' clause should be incorporated in the sanction letter and other documents to the effect that when such Units turn the corner and rehabilitation is successfully completed, the sacrifices undertaken by bank should be recouped from the Units out of their future profits/cash accruals. However, invocation of the clause would be considered only after taking into account the case specific circumstances, borrower's intentions to pay the dues, track record in meeting commitments, prospects of market growth, need for fresh infusion of funds in the project, diversification/expansion proposed to be undertaken, etc.
Proposals from willful defaulters
Units becoming sick on account of willful mismanagement, willful default, unauthorized diversion of funds, disputes among partners/promoters, etc. will not be considered eligible for rehabilitation and steps should be taken for recovery of bank's dues. The definition of willful default will broadly cover the following:
- 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 have either not been purchased or have been sold and proceeds have been mis-utilised.
- Misrepresentation/ falsification of records.
- Disposal/removal of securities without bank's knowledge; and,
- Fraudulent transactions by the borrower.
- Continuous irregularities in cash credit/over draft accounts such as inability to maintain stipulated margin on continuous basis or drawings frequently exceeding sanctioned limits, periodical interest debited remaining unrealized;
- Outstanding balance in cash credit account remaining continuously at the maximum;
- Failure to make timely payment of installments of principal and interest on term loans;
- Complaints from suppliers of raw materials, water, power, etc. about non - payment of bills;
- Non-submission or undue delay in submission or submission or incorrect stock statements and other control statements;
- Attempts to divert sale proceeds through accounts with other banks;
- Downward trend in credit summations;
- Frequent return of cheques or bills;
- Steep decline in production figures;
- Downward trends in sales and fall in profits
- Rising level of inventories, which may include large proportion of slow or non - moving items;
- Larger and longer outstanding in bill accounts;
- Longer period of credit allowed on sale documents negotiated through the bank and frequent return by the customers of the same as also allowing large discount on sales;
- Failure to pay statutory liabilities;
- Utilization of funds for purposes other than running the Units;
- Not furnishing the required information/data on operations in time.
- Unreasonable/wide variations in sales/ receivables levels vis-a-vis level of co- operation for stock inspections, etc.
- Delay in meeting commitments towards payments of installments due, crystallized liabilities under LC/BGs. etc.
- Diverting/routing of receivables through non-lending banks.