A Key to Revive Sick MSMEs
There has been a steady increase in the number of sick MSMEs in India. Of the total 1.33 crore MSMEs in the country, around 2,48,890 were reported sick in March 2013. The number has risen from 88,635 units in March 2012 after the new definition of sickness given by the Reserve Bank of India (RBI).
As per the extant guidelines, 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 non-performing asset for three months; or b) There is erosion in the net worth due to accumulated losses to the extent of 50 per cent of its net worth during the previous accounting year.
Alarming statistics show that around 29,000 units are being added to the sick list every year. The sick MSMEs amount to a staggering outstanding bank credit of over Rs 7,000 crore.
Factors Behind Rising MSME Sickness
There are a gamut of reasons contributing to the rising sickness prevalent in the sector, including inflation, rising cost of all inputs, and the falling rupee that has led to expensive imports. Even though the sickness is spread across all sectors, it is comparatively more prevalent in manufacturing sector that incurs high costs.
Pointing out the reasons behind rising incidence of sickness, UK Joshi, Director, ASSOCHAM states limited financial resources as the key reason behind industries turning into losses. He says, “Sickness among MSMEs is a big concern. The main cause for the sickness is the unavailability of resources against the rising demand. These businesses are unable to meet the requirements of growing business, such as working capital, financial management, technology up-gradation, manpower, logistics and cash flow. MSMEs have limited resources to carry out the effective management like procurement, hiring, waste management and resource planning in the organisation that helps the units to grow successfully.”
With competition from international businesses, lack of product innovation has been the death knell of many local business units.
“High-cost loans severely impact the industry. For every 1 per cent increase in interest rate, the net profit of an SME comes down by 20 per cent. To add to this, outdated product design, poor quality and packaging, delay in processes and delivery take a toll on MSMEs. Also, if entrepreneurs do not stress on product innovation, then they run the risk of becoming outdated,” says Rajiv Chawla, Chairman, Integrated Association of Micro Small and Medium Enterprises of India (IamSMEofIndia).
Many experts believe that for creditors, the revival of a loss making company means repayment of a certain percentage of the total outstanding debt. But for a true turnaround of a commercially viable sick unit, a more structured approach is required.
“One of the important components (of recovery of a sick company) is the formation of a rehabilitation scheme after considering the true reasons for the downturn of the business by such people who are genuinely concerned about the revival of a sick company. The other important component is the commitment from the management of the sick company to stick to the sanctioned rehabilitation scheme and remain aligned to the market forces to keep the business afloat,” says Deepak Dahiya, Managing Partner, Legal Imperials, a Delhi and Chicago-based law firm.
Banks To Do More
According to the study, gross NPAs of listed banks have doubled since September 2011, while net NPAs have risen by 140 per cent during the first half of this fiscal. Loss making MSMEs have contributed around 16 per cent towards the total bank NPAs.
Experts note that since banks are the main fund providers for MSMEs, they can play an important role in preventing potential defaulters in time. Apart from that, they should offer specific, tailored schemes suiting business requirements of
“Banks should keep an eye on the borrower’s performance by going through their balance sheets and other financial indicators such as quick ratio and liquid asset ratio. An extension of their role from conventional debtors to the counsellor, who could guide businesses in designing strategies matching the requirements of the market, is the need of the hour. Moreover, VCs can play a role in financing MSMEs and help them to grow rapidly,” says Joshi.
With growing financial stress on banks, ASSOCHAM also suggests setting up of a special fund for sick MSMEs.
Chawla bets on what extra a financial institution can do for reviving viable units, as he says, “For years, banks have been helping MSMEs by restructuring loans and rescheduling instalments. But they can also help in reviving these stress accounts by linking them to their good customers. They can appoint business experts or can take mentors on their boards, who would guide the entrepreneur. There will be chances of reviving at least 50 per cent sick units in this way and it will cost much less than the legal charges to recover the bad loans.”
Sell-off: A Good Business Idea?
“The primary issue with regard to sale of a loss making MSME is the absence of a market. However, one of the most important issues with MSMEs is its respective approvals and licenses. An MSME, though loss making, may be considered for a strategic purchase in case all regulatory approvals and consents are duly in place,” says Naresh Thacker, Partner, Economic Laws Practice (ELP).
However, others are of the view that selling off an enterprise should be the last option.
“It is always beneficial for a country to have profit-making MSMEs that definitely help in keeping the national economy healthy, and it is also vital to take practical decisions leading to the sale of loss making MSMEs where there is no hope left from a commercial or practical standpoint,” says Dahiya.
When your company is at growth stage, it is of prime importance to revisit your business plan and evaluate how it is justifying th...