REHABILITATION OF SICK UNITS

In recognition of the problems being faced by the Micro and Small Enterprises (MSE) 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, then Chairman and Managing Director, Punjab National Bank.

SL.NO. EXISTING GUIDELINES NEW GUIDELINES1 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;

A MSE is considered ‘sick’ when – a) any of the borrowal account of the enterprise remains NPA (Non Performing Asset) for three months or more.

B. DEFINITION OF SICKNESS

1. A Micro or Small Enterprise (as defined in the MSMED Act 2006) may be said to have become Sick, if

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 during the previous accounting year.

c.C. FORMULATION OF A REHABILITATION PACKAGE

i. 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.

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ii. 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.

iii. 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.

iv. 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.

D. RELIEFS AND CONCESSIONS FOR REHABILITATION OF POTENTIALLY VIABLE UNIT

2. It is emphasised 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 banks/FIs unless the financial viability is established and there is a reasonable certainty of repayment from the borrower, as per the terms of rehabilitation package.

9.1 Waivers/ Funding

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.

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 up to 3% in case of micro/ decentralized sector units and upto 2% for other small enterprises, subject to the floor of Bank’s base rate.

a. The cut off date for reduction in interest rate would be the date from which interest has been in default.

b. In the case of multiple loan accounts, the earliest date of interest default should be taken as the cut off date.

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c. 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.

iv) Working Capital Term Loan (WCTL)

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 3% in case of micro/ decentralized sector units and upto 2% for other small enterprises, subject to the floor of Bank’s base rate.

v) Working Capital

Interest on working capital may be reduced by up to 3% in case of micro/ decentralised sector units and upto 2% for other small enterprises, subject to the floor of Bank’s base rate.

vi) Contingency Loan Assistance

For meeting escalations in capital expenditure to be incurred under the rehabilitation programme, banks/financial institutions may provide, where considered necessary, appropriate additional financial assistance up to 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.

9.2 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 :

a. Purpose

i. For purchase of balancing equipment or overcoming the identified bottlenecks in the existing plant & machinery, civil construction, etc.

ii. 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 instalments.

iii. To raise margin money for additional working capital needed for rehabilitation.

iv. 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.

v. To meet retrenchment compensation, if required.

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vi. For any other purpose considered necessary for revival of the unit/ concern..

b.Interest Rate

Interest on additional working capital limit/ term loan may be charged upto base rate plus 1.50%.

c. Repayment period

i. To be fixed on a case-to-case basis with adequate moratorium depending on the projected cash-flow and DSCR. While the desirable DSCR is 1.5 : 1, the same could be relaxed upto 1.25 : 1 by the sanctioning authority.

ii. The repayment period should normally not exceed 7 years from the date of disbursement of additional assistance.

9.3) Reschedulement

The principal instalments could be rescheduled with a repayment period not exceeding 7 years from the date of implementation of the package.

9.4) Cash Losses

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.

10. Leasing of plant

i. 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 Banks could be explored.

ii. The sick unit undertaking manufacturing activity on behalf of a healthy company on the basis of processing fees could also be considered.

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