The Reserve Bank of India (RBI) has asked banks to review their existing policies for lending to micro and small enterprises (MSEs) and frame norms for restructuring sick units that are potentially viable. RBI also said that banks should frame policies on extension of credit facilities and non-discretionary One-Time Settlement (OTS) schemes for recovery of non-performing loans.

The central bank has asked banks to communicate the status by June 30, 2009. This directive follows the submission of a report by a working group headed by K C Chakrabarty, Chairman and Managing Director, Punjab National Bank.

Banks are risk-averse and are reluctant to lend to the MSE sector due to fears of rising non-performing assets in an economic downturn. According to RBI data, loans to the MSE sector went up by 35.4 per cent to Rs 2,39,399 crore during the year ended February, 2009 as against a rise of 67.4 per cent to Rs 1,76,819 crore till the same month last year.

The MSE sector has been borrowing loans at 16 per cent, which is double the rate at which large companies access bank credit. After reviewing problems faced by the sector, RBI has asked banks to step up rehabilitation of sick units which can be revived.

“These guidelines, in fact, include the initial sickness stage and, if implemented as intended, could significantly prevent or arrest sickness at the initial stages. Such MSE units, which turn sick in spite of debt restructuring, are expected to be few and would fall within the ambit of the extant guidelines on rehabilitation of potentially viable sick units,” RBI said.

RBI has allowed banks to carry out OTS schemes for the MSE sector based on their settlement of non-performing loans and commercial judgment.

“It is necessary that the banks have their own non-discretionary OTS policy, which enables their officials to make quick and judicious decisions on OTS,” the central bank said.

Keeping in mind the adverse impact of the economic slowdown, banks – under the aegis of the Indian Banks’ Association – have floated a special scheme for helping MSEs. Banks would enhance extra working capital limits for units to tide over cash-flow problems. Also, RBI has allowed banks to restructure accounts of viable units for a second time without lowering the status.

This would give units breathing time to re-orient their operations, get financial support and avoid becoming a non-performing account.

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