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SARFAESI Act Management Of NPA (Non Performing Assets) – Part III

Reserve Bank of India issued a circular DBOD.No.BP.BC/ 42/21.04.048/2012-13 dated September 14, 2012 addressed to The Chairman and Managing Director/ Chief Executive Officer of All Scheduled Commercial Banks (Excluding RRBs) on NPA Management – Requirement of an Effective Mechanism and Granular Data which states, Please refer to the paragraph 100 (extract enclosed) of the Monetary Policy Statement 2012-13 announced on April 17, 2012.

2. As mentioned therein, asset quality of banks is one of the most important indicators of their financial health. However, it has been observed that existing MIS on the early warning systems of asset quality, needed improvement. Banks are, therefore, advised that they should review their existing IT and MIS (Management Information system) framework and put in place a robust MIS mechanism for early detection of signs of distress at individual account level as well as at segment level (asset class, industry, geographic, size, etc.). Such early warning signals should be used for putting in place an effective preventive asset quality management framework, including a transparent restructuring mechanism for viable accounts under distress within the prevailing regulatory framework, for preserving the economic value of those entities in all segments.

3. The banks’ IT and MIS system should be robust and able to generate reliable and quality information with regard to their asset quality for effective decision making.” Further the said circular also furnishes the extract from Monetary Policy statement of April 17, 2012 as announced by the then RBI Governor Mr. Subbha Rao which states, “NPA Management – Requirement of a Strong Mechanism and Granular Data

The asset quality of banks is one of the most important indicators of their financial health. It also reflects the efficacy of banks’ credit risk management and the recovery environment. It is important that the signs of distress in all stressed accounts are detected early and those which are viable are also extended restructuring facilities expeditiously to preserve their economic value. During annual financial inspection (AFIs), it has been observed that the restructuring facilities are not readily extended to small accounts. To improve the banks’ ability to manage their non-performing assets (NPAs) and restructured accounts in an effective manner and considering that almost all branches of banks have been fully computerised, it is proposed:

• to mandate banks to put in place a robust mechanism for early detection of signs of distress, and measures, including prompt restructuring in the case of all viable accounts wherever required, with a view to preserving the economic value of such accounts;”

What more evidence needed to show how the banks and financial institutions implemented the RBI guidelines on preventing slippage of NPA accounts? It clearly shows that banks and FIs have not implemented a robust mechanism for preventing accounts becoming NPA as directed by RBI even after 10 years of RBI recommendations which prompted the RBI Governor to make statement to mandate the banks and FIs to implement such a mechanism. The policy statement of RBI Governor also confirms the fact how the banks and FIs treat the SME sector when he observed, “During annual financial inspection (AFIs), it has been observed that the restructuring facilities are not readily extended to small accounts.”

As per Report of Prime Minister’s Task Force on Micro, Small and Medium Enterprises Government of India January 2010, the following observations are made regarding the major issues faced by MSMEs which is of significance for the survival and development of MSMEs. They are, “Major issues concerning the MSME sector

4. Although Indian MSMEs are a diverse and heterogeneous group, they face some common problems, which are briefly indicated below:

Lack of availability of adequate and timely credit;

• High cost of credit;

Collateral requirements;


Limited access to equity capital;

• Problems in supply to government departments and agencies;

Procurement of raw materials at a competitive cost;

• Problems of storage, designing, packaging and product display;

• Lack of access to global markets;

Inadequate infrastructure facilities, including power, water, roads, etc;

• Low technology levels and lack of access to modern technology;

• Lack of skilled manpower for manufacturing, services, marketing, etc;

• Multiplicity of labour laws and complicated procedures associated with compliance of such laws;

Absence of a suitable mechanism which enables the quick revival of viable sick

Enterprises and allows unviable entities to close down speedily; and

• Issues relating to taxation, both direct and indirect, and procedures thereof.

It is obvious from the report that the banks and financial institutions have not adhered to the RBI and Government of India directives on financing of SMEs and did not cater to the needs of the industries particularly SMEs and also the flow of credit to them and imposing collateral requirements to avail loans.

Considering the importance of financing the SME sector for their contribution to the GDP of the nation and the employment generation, RBI issued their circular RPCD.MSME & NFS.BC.No.20/06.02.31/2012-13 dated August 1, 2012 addressed to all Scheduled Commercial Banks on Micro and Small Enterprises Sector – The imperative of Financial Literacy and consultancy support which states, “ It is observed from the Fourth Census on MSMEs, that the extent of financial exclusion in the MSME sector is very high (92 per cent). It is, therefore, imperative for banks that the excluded units are brought within the fold of the formal banking sector.

2. Studies have revealed that lack of financial literacy, operational skills , including accounting and finance, business planning etc. represent formidable challenge for MSE borrowers underscoring the need for facilitation by banks in these critical financial areas. Moreover, MSE enterprises are further handicapped in this regard by absence of scale and size.

3. To effectively and decisively address these handicaps, bank branches need to have a more proactive role in the affairs of their MSE clients by providing them with financial literacy and consultancy support. For this, banks could either separately set up special cells at their branches, or vertically integrate this function in the Financial Literacy Centres (FLCs) set up by them, as per their comparative advantage. The bank staff should also be trained through customized training programs to meet the specific needs of the sector.” Even though the banks advertise having undertaken such activities, in practice no such facilities are available from the banking side for the SMEs. When coming to the financing of such small projects, SMEs get the least priority.

RBI issued a circular RPCD.MSME & NFS. BC. No.74 / 06.02.31 /2012-13 dated May 9, 2013 on Structured Mechanism for monitoring the credit growth to the MSE sector wherein among other things the following guidance were also stated;

Rehabilitation of Sick Units:

Timely detection of sickness is critical for any enterprise, as any delay may impinge on the revival prospects of sick, but potentially viable units. In order to speed up the process for identification of a unit as sick, and its rehabilitation, revised guidelines have been issued by RBI vide circular No. RPCD.CO.MSME &NFS.BC.40/06.02.31/2012-13 dated November 01, 2012 which are to be followed in letter and spirit. The guidelines emphasize on the speedy process of identification of a unit as sick, early detection of incipient sickness and prescribe a procedure to be adopted by the banks, before declaring a unit as unviable.

The banks may evolve a system driven mechanism for monitoring rehabilitation of sick MSE units. Each bank should constitute a MSE Rehabilitation Cell (MRC) at all its Zonal / Circle Head Quarters. The Cell should be responsible for monitoring identification of sick units / incipient sickness, conducting viability study, follow-up action, etc. for timely rehabilitation of viable / potentially viable sick MSE units.

Sensitizing branch level functionaries: Banks need to sensitize their Branch level functionaries of the requirements of the MSE sector and hold training programs to improve the awareness of guidelines pertaining to the sector, at branch level.”

The pertinent point that is emphasised is the Sensitizing branch level functionaries of banks. But the factual position in the banks is that majority of branch functionaries and many of the zonal level and Head Office level functionaries also including higher level executives lack the required knowledge and expertise about law and practice of banking and many of them even may not know about the existence of such RBI directives and notifications.

Report of the Working Group to review the existing guidelines on restructuring of advances and align them with the guidelines on CDR Mechanism by Department of Banking Operations and Development, Reserve Bank of India suggests various means and extant guidelines on Corporate Debt Restructuring and Debt Restructuring Mechanism for Small and Medium Enterprises (SMEs) and other accounts which are to be diligently implemented and the progress monitored by the banks and financial institutions which would facilitate the rehabilitation of sick and incipient sick units and other business ventures thereby reducing the level of NPA in banks and financial institutions.

What ails the banks and financial institutions which impedes the reduction of NPA and what steps are to be undertaken by them to effectively implement the mechanisms to reduce NPAs?

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