Framework for Revival and Rehabilitation of MSMEs: Overview

Framework for Revival and Rehabilitation of MSMEs: Overview

Question: The Ministry of Micro, Small & Medium Enterprises has recently notified a Framework for Revival and Rehabilitation of MSMEs, as per powers conferred under section 9 of the Micro, Small and Medium Enterprises Development Act, 2006. Provide an overview of this governance initiative.

Salient Features

The key features of this framework which complements RBI notifications of 2012 and 2014 is as follows.

• Identifying incipient stress: Banks/creditors are required to identify incipient stress before loan account of MSME turns into NPA in the account.

• MSME should also voluntarily initiate proceedings against the order in case the enterprise reasonably expects failure of business or inability to pay debts prior to accumulated losses of enterprise equal to half or more of entire net worth

• Setting up a committee: All banks should set up one or more committees for distressed MSMEs which avail credit facilities from banks

• Committee should also comprise bank representatives as well as state government independent experts and representatives

• Forming a corrective action plan: The Committee will explore numerous options for resolving the stress in account. It will form early and feasible solution for preserving the economic value of underlying assets along with lenders’ loans and allow the enterprise to persist with its business

• Through the operation of the Corrective Action Plan, enterprise should be allowed to avail secured and unsecured credit for business operations

• Choice of options under corrective action plan: This may influence rectification, restructuring of the account and recovery once the previous two options are not feasible

• Mode of restructuring: In case the committee makes the decision to restructure the account as a corrective action plan, it can either refer to the the Enterprise Debt Restructuring Cell following the decision to restructure or the same as independent of the EDR mechanism
• In case the EDR mechanism is opted for, detailed TEV-Techno Economic Viability Study is carried out. In case it is viable, the restructuring package is finalised within 30 days of signing off from the final CAP

• Norms for asset clarification and provisioning: In case the structuring proposal is under consideration by the Committee/EDR, usual asset clarification norm will continue to apply. For rapid implementation of the restructuring process, special asset classification would benefit on restructuring of account as per extant guidelines

• Regarding wilful defaulters and non cooperative borrowers: As far as wilful defaulters are concerned, banks are needed to adhere to RBI guidelines

• Concerning the review: In case recovery action has to be taken against an enterprise, review of Committee decision may be requested

Facts and Stats

• The MSME framework will enable lenders and debtors to assist in revival and rehabilitation

• In the latest Doing Business Report, joint project of WB and International Finance Corporation, India is ranked 137 out of 189 economies for resolution of insolvencies

• According to the report, resolving insolvency takes an average of 4.3 years and costs 9% of the debtor’s estate