RBI Working Group on MSE Credit: Key Actions for Banks

RBI/2008-09/467 RPCD. SME&NFS. BC.No.102/06.04.01/2008-09 May 4, 2009 All Scheduled Commercial Banks Dear Sir / Madam, Credit delivery to the Micro and Small Enterprises Sector In recognition of the problems being faced by the Micro and Small Enterprises (MSE) sector, particularly with respect to rehabilitation of potentially viable sick units, the Reserve Bank had constituted a Working Group under the Chairmanship of Dr. K. C. Chakrabarty, Chairman & Managing Director, Punjab National Bank. 2. The aforesaid Group submitted its report to Reserve Bank of India in April 2008, covering comprehensively the entire gamut of issues and problems (credit and non-credit related) confronting the sector. The Reserve Bank placed the report on its website and invited comments from all stake holders. The responses and comments on the report have been carefully examined. 3. The recommendations made by the Group need to be considered by Government of India, State Governments and commercial banks ( Annexes I to III respectively ). The recommendations relating to Government of India have been forwarded to them for consideration and necessary action. The recommendations relating to the State Governments have been forwarded to the SLBC Convenor banks for taking up the issue in the SLBC meetings. Other recommendations pertaining to SIDBI have been sent to them. 4. Several recommendations have been made regarding the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) Scheme. These recommendations will be considered by the Standing Advisory Committee on Flow of Institutional Credit to MSEs, in terms of paragraph 114 of the Annual Policy for 2009-10 . 5.The Group has addressed problems being faced by the sector in getting adequate and timely credit. It has also made recommendations not only for timely detection and remedial action with respect to incipient sickness, but also rehabilitation of sick units which can be revived. 6. You are advised to consider, for speedy implementation, the recommendations made by the Working Group set out in Annex III with regard to timely and adequate flow of credit to the MSE sector. 7. The Reserve Bank has carefully considered the Group’s recommendations regarding rehabilitation of potentially viable sick MSE units/enterprises, which essentially aim at timely detection of sickness and adoption of remedial measures to rehabilitate the potentially viable ones. While fully appreciating the sense of the Group’s recommendations, attention of banks is invited to the guidelines issued by the Reserve Bank on MSE debt restructuring in respect of borrowal accounts that show symptoms of stickiness, vide its circulars: DBOD.BP.BC. No.34/21.04.132/2005-06 dated September 8, 2005 DBOD.BP.BC.No.37/21.04.132/2008-09 dated August 27, 2008 These guidelines, in fact, subsume the incipient sickness stage and, if implemented as intended, could significantly prevent or arrest sickness at the initial stages. Such MSE units/enterprises, which turn sick in spite of debt re-structuring are expected to be few and would fall within the ambit of the extant guidelines on rehabilitation of potentially viable sick units/enterprises (vide circular RPCD.No.PLNFS.BC.57/06.04.01/2001-2002 dated January 16, 2002). Banks are, therefore, advised to apply the Reserve Bank’s guidelines on debt restructuring optimally and in letter and spirit. This would be to their advantage as well as their MSE clients. 8. The Group has also recommended that Reserve Bank of India may announce a One Time Settlement Scheme (OTS) for the MSME sector. However, any policy on settlement of non-performing loans is essentially a management function to be exercised by individual banks, based on their commercial judgment. It is necessary that the banks have their own non discretionary OTS policy which enables their officials to make quick and judicious decisions on OTS. As such, banks are advised to put in place a suitable OTS for this sector. 9. Accordingly, in the light of the recommendations of the Group and the Banking Codes Standards Board of India's Code of Commitment for the MSE borrowers, your bank may undertake a review and put in place the following policies for the MSE sector, duly approved by the Board of Directors: Loan policy governing extension of credit facilities Restructuring/Rehabilitation policy for revival of potentially viable sick units/enterprises. Non-discretionary One Time Settlement scheme for recovery of non-performing loans. 10. Please acknowledge receipt and forward an Action Taken Report by June 30, 2009. Yours faithfully, (B.P. Vijayendra) Chief General Manager Encl.: Annex - I to III ANNEX-I Sr. No.

Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2008-09/467 · issued 04 May 2009. The plain-English explanation above is BankPulse’s own independent summary.

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