The country’s micro, small and medium enterprises (MSMEs) are at worse situation at this stage “for a much lesser fault of theirs” as compared to the stressed power projects that are currently seeking a relief from default guidelines stipulated by the Reserve Bank of India (RBI), Rajiv Kumar, Secretary of the Department of Financial Services, said in a submission before the Parliamentary Committee on Energy.
On February 12 this year, the RBI had issued a ‘Revised Framework for Resolution of Stressed Assets’ that stipulates that default of even a single day in payment of interest or principal amount would trigger a formulation of resolution plan by the committee of creditors. This framework states that the resolution plan has to be implemented within 180 days, otherwise the stressed asset would end up with the National Company Law Tribunal (NCLT). The Parliamentary Committee on Energy had studied the impact of this circular on non-performing assets of electricity sector and tabled the report on Tuesday in Lok Sabha.
Highlighting the problem in formulating a separate framework for resolution of stressed assets in power sector, Kumar, according to the report, told the committee: “The possibility of the similar demands (of exemption from RBI’s guidelines) from similarly placed sectors cannot be ruled out. It could be shipping, cement and more particularly MSMEs. MSMEs are at a much worse situation at this stage than these (stressed power) projects and for a much lesser fault of theirs. This demand can come from all those sectors. So, should we have a separate sector-specific NPA (non-performing asset) resolution regime or an overarching regime?”
According to the Finance Ministry, as on September 30 last year, NPAs in medium and small enterprises — as reported by scheduled commercial banks (SCBs) — were 8.34 per cent of the total outstanding advances. In comparison, the NPAs reported by SCBs for overall advances were 10.21 per cent.
Shiv Pratap Shukla, Minister of State for Finance, told the Lok Sabha on April 6 this year: “The reasons of NPAs in MSEs … include lack of demand, shortage of working capital, non-availability of raw materials, power shortage, marketing problems, labour and management problems, equipment problems, delayed payments, etc.”
Last month, Parliament passed amendments to the bankruptcy law that empowers homebuyers to be recognised as financial creditors, lower the minimum voting threshold for the committee of creditors to approve a resolution plan and provide a special dispensation for promoters of MSMEs to bid for their own companies.
According to the amendments, defaulting promoters of MSMEs will now be exempted from certain restrictions imposed by Section 29A of the Insolvency and Bankruptcy Code, enabling them to bid for their own companies. This exemption, however, will not be available to wilful defaulters, who have been barred from bidding for their own companies.
Section 29A bars a number of entities from bidding for companies being put out for resolution including — wilful defaulters, un-discharged insolvent, persons banned from trading in securities market, and an account classified as NPA for more than one year and failing to pay overdue amount before submission of the bids. Unlike in the case of large companies, it’s bit difficult to attract resolution applicants in the case of MSMEs. So, a relaxation is being made to ensure that small companies are not headed towards liquidation because of the limitations imposed by the law on existing promoters.