- 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.