home > Info > DEBT RESTRUCTURING MECHANISM FOR SMEs

Definition of SMEs:

"At present a Small Scale Industrial Unit is an undertaking in which investment in plant and machinery, does not exceed Rs.1.00 crore, except in respect of certain specified items under hosiery, hand tools, drugs and pharmaceuticals, stationery items and sports goods, where this investment limit has been enhanced to Rs.5 crore. Units with investment in plant and machinery in excess of SSI limit  and upto Rs.10.00 crores may be treated as Medium Enterprises (ME)".

I.ELIGIBILITY

(A) As per Scheme, the following entities which are  viable or potentially viable are eligible for restructuring:

i.        All non-corporate SMEs irrespective of the level of dues to banks.  

ii.      All corporate SMEs, which are enjoying banking facilities from a single bank, irrespective of the level of dues to the bank. 

iii.    All corporate SMEs, which have funded and non-funded outstanding  up to Rs.10 crore under multiple/ consortium banking arrangement . 

iv.     In respect of BIFR cases banks should ensure completion of all formalities in seeking approval from BIFR before implementing the package.  

(B) Following accounts are not eligible for restructuring:

 (i)  Accounts involving wilful default, fraud and malfeasance. 

(ii) Accounts classified by banks as “Loss Assets
 

In terms of RBI's guidelines, the procedure for identification of the wilful defaulters has been made more transparent.  While corporates indulging in frauds and malfeasance will continue to remain ineligible for restructuring under the Debt restructuring Mechanism for SMEs as hitherto, a review of the reasons for classification of the borrower as wilful defaulter will be made specially in old cases and satisfy that the borrower is in a position to rectify the wilful default provided he is granted an opportunity under the Debt Restructuring Mechanism for SMEs.  Such exceptional cases be admitted for restructuring with the approval of the Board of Directors of the Banks only.  The Banks may ensure that cases involving frauds or diversion of funds with malafide intent are not covered.

 Accounts involving fraud and malfeasance will continue to remain ineligible for restructuring under these guidelines.

 II. VIABILITY

The viability of the units will be assessed as per Bank’s existing financial  benchmark levels, in order to make the unit viable in 7 years and the repayment period for restructured debt not  to exceed 10 years.
 

The existing benchmark levels  are :

Key Ratios

Permitted level

Current Ratio

1.33(without inclusion of maturing liabilities within 12 months under CL)

 

1.20 (inclusion of maturing liabilities under CL)

Debt Equity

(1)  3:1 for Term loan upto  Rs 10 lakhs

(2)  2:1 for other Term Loans

TNW : TOL

1:3

DSCR

1 : 1.5  to  2

Int servicing ratio

1:  1.5  to  2

Security coverage

a)     1 to 1.25 times of advance value for WC limits

b)     1.2 to 1.33 times for Term Loans

III. TIME FRAME FOR RESTRUCTURING

Maximum period of 60 days from date of receipt of requests with requisite details  to work out restructuring package and implement the same.

IV. PRUDENTIAL NORMS FOR RESTRUCTURED ACCOUNTS

i) Treatment of ‘standard’ accounts subjected to restructuring 

a) Rescheduling of the instalments of principal alone, would not cause a standard asset to be classified in the sub-standard category, provided the borrower’s outstanding is fully covered by tangible security. However, the condition of tangible security may not be made applicable in cases where the outstanding is up to Rs.5 lakh, since the collateral requirement for loans up to Rs 5 lakh has been dispensed with for SSI / tiny sector. 

b) Rescheduling of interest element would not cause an asset to be downgraded to sub-standard category subject to the condition that the amount of sacrifice, if any, in the element of interest, measured in present value terms, is either written off or provision is made to the extent of the sacrifice involved.   

c) In case there is a sacrifice involved in the amount of interest in present value terms, as at (b) above, the amount of sacrifice should either be written off or provision made to the extent of the sacrifice involved. 

ii) Treatment of ‘sub-standard’ / ‘doubtful’ accounts subjected to restructuring

a) Rescheduling of the instalments of principal alone, would render a ‘sub-standard’  / ‘doubtful’ asset eligible to  continue in the ‘sub-standard’  / ‘doubtful’ category for the specified period ( as defined in paragraph  VI  below), provided the borrower’s outstanding is fully covered by tangible security.  However, the condition of tangible security may not be made applicable in cases where the outstanding is up to Rs.5 lakh, since the collateral requirement for loans up to Rs 5 lakh has been dispensed with for SSI / tiny  sector. 

b) Rescheduling of interest element would render a sub-standard / ‘doubtful’ asset eligible to be continued to be classified in sub-standard / ‘doubtful’ category for the specified period subject to the condition that the amount of sacrifice, if any, in the element of interest, measured in present value terms, is either written off or provision is made to the extent of the sacrifice involved.  

c)  Even in cases where the sacrifice is by way of write off of the past interest dues, the asset should continue to be treated as sub-standard / ‘doubtful’. 

iii) Treatment of Provision 

a) Provision made towards interest sacrifice should be created by debit to Profit & Loss account and held in a distinct account. For this purpose, the future interest due as per the current BPLR  in respect of an account should be discounted to the present value at a rate appropriate to the risk category of the borrower (i.e., current PLR + the appropriate term premium and credit risk premium for the borrower-category) and compared with the present value of the dues expected to be received under the restructuring package, discounted on the same basis. 

b) Sacrifice to be re-computed on each balance sheet date till satisfactory completion of all repayment obligations and full repayment of the outstanding in the account, so as to capture the changes in the fair value on account of changes in BPLR, term premium and the credit category of the borrower. Consequently, banks may provide for the shortfall in provision or reverse the amount of excess provision held in the distinct account. 

c) The amount of provision made for NPA, to be reversed when  the account is re-classified as a ‘standard asset’ 

V. ADDITIONAL FINANCE:

Additional finance, if any, may be treated as ‘standard asset’ in all accounts viz; standard, sub-standard, and doubtful accounts, up to a period of one year after the date when first payment of interest or of principal, whichever is earlier, falls due under the approved restructuring package.  

If the restructured asset does not qualify for upgradation at the end of the above period, additional finance shall be placed in the same asset classification category as the restructured debt.

VI . UPGRADATION OF RESTRUCTURED ACCOUNTS

The sub-standard / doubtful accounts at para IV (ii)  (a) & (b)  above, which have been subjected to restructuring, whether in respect of principal instalment or interest, by whatever modality, would be eligible to be upgraded to the standard category after the specified period, i.e., a period of one year after the date when first payment of interest or of principal, whichever is earlier, falls due under the rescheduled terms, subject to satisfactory performance during the period.  

VII. ASSET CLASSIFICATION STATUS

During the specified one-year period, the asset classification status of rescheduled accounts will not deteriorate if satisfactory performance of the account is demonstrated during the period. In case, however, the satisfactory performance during the one year period is not evidenced, the asset classification of the restructured account would be governed as per the applicable prudential norms with reference to the pre-restructuring payment schedule. The asset classification would  be bank-specific based on record of recovery of each bank, as per the existing prudential norms applicable to banks. 

VIII. REPEATED RESTRUCTURING:

The special dispensation for asset classification as available in terms of paragraphs IV,V and VI above, shall be available only when the account is restructured for the first time.

IX. PROCEDURE:

a.      The restructing would follow a receipt of a request to that effect from the borrowing units with requisite details .
b.      In case of eligible SMEs which are under consortium/multiple banking arrangements, the bank with the maximum outstanding may, work out the restructuring package,  along with the bank having the secong largest share.

X. OPERATIONAL ASPECTS:

Restructuring should be done by way of rephasement of term loans, blocking of working capital with a repayment schedule, sanction of adddtional finance. Period of rephasement and quantum of blocking/ additonal finance to be determined based on cash flow & genuine credit needs on a case to case basis by the sanctioning authority.

 
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