Delayed Payment is the prime cause of Stressed Assets
A Panel Discussion on Stressed Assets was held at Vidarbha Industries Association along with Business Standard (Smart Business) on 18th March. The program was titled “Stressed Assets shouldn’t Stress you out”. The Panelists were Mr Somdev Singh Chief Commercial Officer, Essel Utilities, Mr Rahul Dixit, Vice Chairman – CII Vidarbha Zonal Council and Director, Midland Diesel, Mr Sudharkar Atre – Freelance Faculty on Banking and member VIA Stressed Assets Committee and Mr Sitaraman Iyer, Partner – Khatri & Iyer Chartered Accountants and member VIA Stressed Assets Committee.
There should be a difference in the treatment of stressed assets and willful defaulters, the suggestions for the same have been given to the Maharashtra Government, Said Mr. Atul Pande, President, VIA.
During the Panel Discussion, Mr. Atre discussed the history of the Stressed Assets in India and enlightened the audience on the Classification Norms of Stressed Assets. He said that the relaxation post 1st April 2015 the restructured assets invite additional provisioning while before 31st March 2015 it was not so. This withdrawal of relaxation under the IRAC norms has discouraged banks from helping genuine stressed SMEs which has further aggravated the problem. The panel was of the view that while the external environment of the business has not changed but the Financial discipline required from the borrower has changed and become more stringent. So while the account is classified as stressed if the payment cycle is not met, the payment from the customers gets delayed beyond 180 days. To take care of these problems the business should necessarily be on Letters of Credit or such other Instrument. Mr. Atre also suggested that the Framework for Revival and Rehabilitation of MSMEs issued by RBI on 17th March 2015 is yet to be fully operational and the once the committees as per that Framework are operational then various current problems of the SMEs would be addressed. Further he suggested that the stringent measures of recovery like invocation of the SARFAESI Act should only be initiated once all other options of Restructuring and Rehabilitation are exhausted.
Mr Dixit while quoting the press figures mentioned that the Entire NPA in Indian Banking System currently is Rs 6,00,000 Crores and is concentrated mainly with the Large Corporates. The MSME form 80% of the Indian Industry and contribute substantially to the Indian GDP, there Share of the NPA is miniscule and this difference needs to be highlighted. The funding requirement of the MSME is different and norms for the funding are also different. Their promoters normally pledge the personal assets against the loans in contrast to the funding to the Corporates. There may be willful defaulters but they form a very miniscule percentage. Also the unit may be stressed because of financial indiscipline but it is important to note that a financial disciplined unit may also become stressed due to external factors, because these units by there very nature are more vulnerable to the challenges of the environment. The LSE’s get there loans restructured but in case of MSME’s it’s a rarity and a very difficult process. He suggested that the Banks currently are fair weather friends but should be 4 AM friends i.e., they should stand by the entrepreneur in his hour of need if the project is good, contrary to the current scenario, wherein if there is loss and the entrepreneur goes to the bank with the genuine scenario instead of helping they reduce the rating of his business and make the revival that much more difficult. He was hopeful that the revival is round the corner and was uncertain about the readiness of the MSME’s to participate in this revival and boom. He urged the MSME’s to be assertive with the customers for better terms, price and treatment. This can be achieved by providing solutions to the customer’s problems, creating value propositions, and investing in research.
Mr Iyer was critical of the witch-hunt and victimization of the bankers in the Kingfisher episode as he suggested that the financial factors at the time of loan disbursal satisfied the norms. He also stressed that while there are examples of loans being settled for 30% of the stressed amount the 4900 crores offer was rejected, which in hindsight seems like a missed opportunity. In case of MSME loans disbursal he suggested that the loan appraisal mechanism is insufficient and mismatched to the needs of the MSME. Today the state of the Stressed MSME is like that of the victim stuck on the 40th floor of the elevator with nowhere to go but wait for the outside help. From his experience he stated that everyone at all levels in the bank are pushing the file upwards so that the onus of sanction of the particular loan is shifted which is resulting in the complete breakdown of the credit disbursal mechanism for the MSME’s. He asserted that there has been negative growth in the MSME’s business in the last 3-4 years and that is due to lack of technology up gradation, inappropriate business models, improper disclosures and lack of proper book keeping and disclosures. Due to these inconsistencies even the Private Equity Funds were reluctant to fund in this region. He said that India is the only economy where if the venture fails the entire family fails and suffers rather than only the business suffering. This attitude is a huge hurdle in enhancing Entrepreneurship in India and will require a shift in the mindset.
Mr Somdev Singh, gave Corporate perspective to the discussion and stated that the Bankers also are fearful in the current scenario since, if any account which they had appraised, approved or sanctioned turns into a stressed assets then there retirement funds are suspended and the service records get negatively affected, in such a scenario there reluctance is understandable. He further suggested to the MSME’s that Business Models are continuously evolving and they need to be part of these models. Frugal Engineering Ideas and Destructive Business Ideas are the latest buzzwords and the MSME’s need to participate in these models. He also suggested that the MSME’s should analyse weather their business models while generating profit create value. He informed the audience that normally businesses generate around 10-15% value while Toyota generates 60% in there operations. Any model which is generating value less that 10-15% is at risk. He urged the MSME’s to go up the value change to be relevant.
Mr Rohit Agrawal, Chairman – VIA Economy & Finance Forum, elaborated about the initiave taken by VIA to assist stressed assets and urged the MSME’s to be more forthcoming in their problems and reach out to VIA if they have any difficulty in regards to there businesses, he also urged to register with the VIA Committee on Stressed Units so that a comprehensive dialogue can be initiated at all levels.