By Mukesh Mohan Gupta
Since the present government came into power, it has focussed on the support to MSMEs. The government is well aware that the MSMEs have more than 30% contribution in the GDP of the country with the second largest employment generator and will play a major role in making India a developed and Atmanirbhar Bharat.
The intention of the government to support was clear when they used the powers given to the central government under Section 9 of the Micro Small and Medium Enterprises Development Act 2006. The central government has the power to issue a notification for the purposes of facilitating the promotion and development and enhancing the competitiveness of MSMEs.
Using this power the Ministry of MSME issued a notification on May 29, 2015, namely “Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises” to provide a simpler and faster mechanism to address the stress in the accounts of MSMEs and to facilitate the promotion and development of MSMEs.
However, the Reserve Bank of India took note of it and found that there are certain provisions in the said notification which may not be compatible with the regulatory guidelines on Income Recognition, Asset Classification and Provisioning norms notified by the RBI.
The central bank, therefore consulted with the central government, MSME Ministry and issued the revised notification on March 17, 2016 for the Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises.
Eligible MSMEs
MSMEs having an exposure of up to Rs 25 crore from one bank, under consortium or multiple finance are covered under the Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises.
Timelines Under Framework
The intention of the government to support the MSMEs in their stressed time is evident from the strict timelines prescribed in the notification issued by the Reserve Bank of India, which are summarised in the below table:
| Activity under the Framework | Calendar of events & Timeline |
| Notification on Framework for Revival and Rehabilitation of Micro Small and Medium Enterprises by Ministry of Micro Small and Medium Enterprises | Issued on May 29, 2015 |
| Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises issued by Reserve Bank of India | March 17, 2016 |
| Board Approved Policy to operationalize the Framework by banks | Not later than June 30, 2016 |
| Branch to forward stressed accounts with aggregate loan limits above Rs. 10 lakh to the Committee | Within 5 working days of early warning signal |
| Initiation of proceedings Voluntarily by MSME | If enterprise reasonably apprehends: Failure of its business, orIts inability of likely inability to pay debtsThere is erosion in the net worth due to accumulated losses to the extent of 50% of its net worth during the previous accounting year. |
| Meeting of Committee on receipt of above request | Not later than 5 working days from the receipt of the application |
| Notify the enterprise by the Committee | Within 5 working days of admission by the committee |
| MSME to submit the details of all its liabilities owed to the State or Central Government and unsecured creditors, if any | Within 15 days of above notice |
| Notice by the Committee to the Statutory Creditors disclosed by the enterprise | 15 working days from receipt of required information from MSME |
| Decision by the committee on the option to be adoptive under the corrective action plan | Within 30 days of convening its first meeting |
| Notify the above decision to the MSME | Within 5 working days from the date of decision |
| Detailed Techno-Economic Viability Study and finalisation of terms of restructuring, if restructuring is envisaged for aggregate exposure upto Rs 10 crore | Within 20 working days |
| Detailed Techno-Economic Viability Study and finalisation of terms of restructuring, if restructuring is envisaged for aggregate exposure above Rs. 10 crore and upto Rs 25 crore | Within 30 working days |
| Notify the Enterprises about above finalised terms | Within 5 working days |
| Completion of the implementation of the plan, if the CAP is for Rectification | Within 30 days |
| Completion of the implementation of the plan, if the CAP is for restructuring | Within 90 days |
| If the Committee is not able to decide on CAP and restructuring package due to non-availability of information on statutory dues of the borrower | Committee may take additional 30 days for deciding CAP and preparing the restructuring package |
| Restructuring package to stipulate the timeline during which certain viability milestones such as improvement in certain financial ratios may be achieved | After a period of 6 months |
| Request by MSME for review of recovery decision, in case recovery action is decided | 10 working days from the receipt of decision of the committee |
| Decision on above review application by the committee | 30 days from the date of filing |
Indian Banker Association also drafted and issued two formats for the consideration of the branch manager and the respective committee for loans up to Rs 10 lakh and loans more than Rs 10 lakh to Rs 25 crore.
All the banks must also have placed the board-approved policy for the revival and rehabilitation of MSMEs under the framework within the timeline prescribed by RBI.
Now, it was the turn of the banks and banking companies to implement this well-defined and well-drafted mandated notification to support the MSMEs, particularly in their stressed period by identifying incipient stress in the account by creating three sub-categories under the Special Mention Account (SMA) category.
I am witness to the initial implementation of this important notification as many banks nominated me to their committee as an external expert. However, gradually all banks slowed down or stopped calling the meetings of the committee.
Now, it was the judiciary’s turn to ensure the implementation of the intention of the government to support MSMEs. This has been ensured through a recent judgement by a bench of Hon’ble Supreme Court in case of Pro Knits v/s Board of Directors of Canara Bank & Ors clubbed with some other cases of similar nature, on August 01, 2024.
An appeal was filed by the appellant MSMEs challenging the order dated 11.01.2024 passed by the High Court of Judicature at Bombay in Writ Petition (L) No. 20100 of 2023 and Others, whereby the High Court has dismissed the said Writ Petitions by holding that the Banks/ Non-Banking Financial Companies (NBFCs) are not obliged to adopt the restructuring process as contemplated in the Notification dated May 29, 2015 issued by the MSME Ministry on its own without there being any application by the petitioners/ MSMEs.
The appellants basically challenged the actions of the respondent banks/NBFCs taken by them against the appellants under the provisions contained in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 without following the procedure prescribed under the Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises.
The Supreme Court set aside the order of the High Court with the remark “that the findings recorded by the High Court in the impugned order that the Banks are not obliged to adopt the restructuring process on its own or that the Framework contained in the Notification dated 29.05.2015, as revised from time to time could not be said to be mandatory in nature, are highly erroneous and cannot be countenanced.”
The Supreme Court observed that “it is absolutely clear that the Instructions for the Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises as notified by the Central Government vide the Notification dated 29th May, 2015 in exercise of the powers conferred under Section 9 of the MSMED Act, as revised by the RBI Notification dated 17th March, 2016, and the Master Directions i.e. the Reserve Bank of India (Lending to Micro, Small and Medium Enterprises Sector) Directions, 2016, issued by the Reserve Bank of India in exercise of the powers conferred by Section 21 and 35(A) of the Banking Regulation Act, having statutory force, are binding to all Scheduled Commercial Banks, licensed to operate in India by the Reserve Bank of India, as stated in the said Directions.”
Way Forward for Banking Companies
It is now mandatory for the banking companies to follow the due procedure as defined by the central government, Ministry of MSME and the RBI in cases of MSMEs having exposure up to Rs 25 crore before classifying them as NPA and/or to initiate any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
It is also made clear that it is mandatory on the part of banking companies to follow the guidelines even if the MSME does not apply to the bank for their revival and rehabilitation.
Way Forward for MSMEs
The Supreme Court has rightly observed that “it would be incumbent on the part of the concerned MSME also to produce authenticated and verifiable documents/material for substantiating its claim of being MSME, before its account is classified as NPA.”
It is now the duty of all MSMEs to obtain the UDYAM Registration being the only certificate to identify the status of MSME. This certificate is available free of cost in an online mode. The MSMEs should get their UDYAM Registration and need to submit it with their lenders with proper acknowledgement to make them understand that they are registered MSMEs.
Way Forward for Government and RBI
While the intention of the central government and Reserve Bank of India is clear to support the MSME, the following developments occurred after the Ministry of Micro Small and Medium Enterprises issued a notification on May 29, 2015:
– It has been more than 9 years since Micro Small and Medium Enterprises issued the notification for MSMEs having loan limits up to Rs 25 crore
– The Corporate Debt Restructuring (CDR) / Joint Lenders’ Form are not in existence now to consider MSME proposals of more than Rs 25 crore
– Definition of MSME has also been widened to cover businesses having turnover up to Rs 250 crore
– Government has committed to support MSMEs during their stress period under the Special Mention Account category with a government guarantee during the budget announcement.
Based on the above developments, the government should now consider covering all MSMEs within the ambit of the framework for the revival and rehabilitation of MSMEs, so that no MSME is left out from their basic right of revival and rehabilitation before any harsh action is taken against them which finishes not only the career of the promoters of MSMEs but also put many employees on road.
Another concern of the bankers is related to the downgrading of accounts on rehabilitation of any account. The RBI should also come up with guidelines for allowing existing loans to MSMEs classified as ‘standard’ to be restructured without a downgrade in the asset classification under the Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises as was allowed by RBI on August 6, 2020.
There is also a need for clarification on the applicability of the Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises by all commercial banks, small finance banks, local area banks, regional rural banks, primary (urban) co-operative banks, state co-operative banks, district central co-operative banks, all-India financial institutions and NBFCs.
Mukesh Mohan Gupta is a Chartered Accountant and has served on the Board of Dena Bank as an Independent Director. He was also nominated as a member on the National Board of MSME, Ministry of MSME. Views expressed are personal. Reproducing this content without permission is prohibited.