RBI issued new guidelines for rehabilitation of sick MSEs

Revising definition of sickness in micro and small enterprises (MSEs), the Reserve Bank asked banks for timely and adequate assistance to them as soon as the signs of sickness are detected.




Timely and adequate assistance to MSEs and rehabilitation effort should begin on a proactive basis when early signs of sickness are detected. This stage would be termed as ‘handholding stage’. This will ensure intervention by banks immediately after detecting early symptoms of sickness so that sickness can be arrested at an early stage. An account may be treated to have reached the ‘handholding stage’; 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;

b). The company incurs losses for two years or cash loss for one year, beyond the accepted timeframe;

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.

Also as per the new guidelines, a MSE would be considered sick if any of the borrowal account of the enterprise remains non-performing assets (NPA) for three months or more.  Earlier, a unit was considered sick if its borrowal account remained sub-standard for more than six months. 

However new guidelines stipulate that the banks will not classify units as sick if they reach such a situation on account of "willful mismanagement, willful default, unauthorised diversion of funds, disputes among partners."  Also, the unit needs not to be in commercial production for at least two years to be declared sick.
The new guidelines should be applicable for the year ending March   ending 2013.

Important changes brought out in the revised guidelines are Sr. No. Existing Guidelines New Guidelines 1 A MSE unit is considered sick when: a) If any of the borrowal accounts of the unit remains substandard for more than six months i.e. principal or interest, in respect of any of its borrowal accounts has remained overdue for a period exceeding 1 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; OR b) There is erosion in the net worth due to accumulated cash losses to the extent of 50 per cent of its net worth during the previous accounting year; and AND c) The unit has been in commercial production for at least 2 years. A MSE is considered ‘sick’ when – a) any of the borrowal account of the enterprise remains NPA for three months or more OR b) There is erosion in the net worth due to accumulated losses to the extent of 50% of its net worth. The stipulation that the unit should have been in commercial production for at least two years has been removed. 2 No stipulated time frame for deciding the viability of a unit. The decision on viability of the unit should be taken at the earliest but not later than 3 months of becoming sick under any circumstances. 3 The procedure for declaring a unit as unviable not specified. The procedure for declaring a unit as unviable has been laid down 4 While the concept of incipient sickness was there was no definition of incipient sickness Incipient sickness or ‘handholding stage defined.