OTS Module for NPA Accounts under MSME Sector

The Government of India has since enacted the Micro, Small and Medium Enterprise Development (MSMED) Act-2006 on June 16, 2006, which was notified on 2nd October,2006. Consequent to enactment of MSEMED Act-2006, Micro, Small and Medium Enterprises (MSME) have been clearly defined and broadly classified under Manufacturing and Service Enterprises.

The Micro Enterprise (Manufacturing) is defined as – Enterprises engaged in the manufacture / production, processing or preservation of goods and where investment in Plant and Machinery [Original Cost excluding Land and Building and the items specified by the Ministry of Small Scale Industries vide its notification no. S.O. 1722 (E) dated October 5, 2006] does not exceed Rs.25 lac.

The Micro Enterprises (Service) is defined as – Enterprises engaged in providing/rendering of services and whose investment in equipment [Original Cost excluding Land and Building and furniture, fittings and other items not directly related to the service rendered or as may be notified under the MSMED Act, 2006] does not exceed Rs. 10 lac.

The Micro Enterprises (Service) shall include Small Road and Water Transport Operators, Small Business, Professional and Self-employed Persons, and all other service enterprises whose investment in equipment does not exceed Rs.10 lac.

The Small Enterprises (Manufacturing) is defined as – Enterprises engaged in the manufacture/production, processing or preservation of goods and whose investment in Plant and Machinery [Original Cost excluding Land and Building and the items specified by the Ministry of Small Scale Industries vide its notification no. S.O. 1722 (E) dated October 5, 2006] is above Rs.25 Lac to Rs.5 Crore.

The Small Enterprises (Service) is defined as – Enterprises engaged in providing/ rendering of services and whose investment in equipment [Original Cost excluding Land and Building and furniture, fittings and other items not directly related to the service rendered or as may be notified under the MSMED Act, 2006] is above Rs.10 lac to Rs.2 Crore.

The Small Enterprises(Service) shall include Small Road and Water Transport Operators, Small Business, Professional and Self Employed Persons, and all other service enterprises whose investment in equipment is above Rs.10 lac to Rs. 2 Crore

The Medium Enterprises (Manufacturing) is defined as – Enterprises engaged in the manufacture / production, processing or preservation of goods whose investment in Plant and Machinery [Original Cost excluding Land and Building and the items specified by the Ministry of Small Scale Industries vide its notification no. S.O. 1722 (E) dated October 5, 2006] is more than Rs. 5 Crore but does not exceed Rs.10 Crore.

The Medium Enterprise (Service) is defined as – Enterprises engaged in providing/rendering of services and whose investment in equipment [Original Cost excluding Land and Building and furniture – fitting) is more than Rs.2 Crore but does not exceed Rs. 5 Crore.

COVERAGE

1. All MSME advances classified as NPA.
2. All MSME accounts where recovery proceedings have been initiated subject to communication duly made to the Court/DRT/Certificate Officer etc.

VALUATION OF SECURITIES

As per existing Prudential Norms, the valuation of collaterals is to be made at least once in every three years. In case, the same has not been done the latest valuation is to be done through approved / empanelled valuer before deciding on the compromise sum. For deciding on compromise proposals in NPA accounts having outstanding/notional outstanding of Rs.1.00 crore and above, the valuation report of charged securities should not be more than one year old. Further in case of large properties or wherever there is wide variation between the last recorded value and the present valuation, the genuineness should be certified/justified by way of visit/inspection of the properties by two bank officials.

NETWORTH OF BORROWER/GUARANTOR

The net worth of the borrower / guarantor is indicative of the availability of other assets excluding the assets charged to the bank. In absence of quantification of present Net Worth, the assessment of benchmark may not reflect the true ability of the borrower/guarantor to repay the loan. Branches are, therefore, required to estimate/quantify the Net Worth through personal visit/discreet local information, lifestyle of the borrower/guarantor, obtaining documentary evidences, scrutiny of balance sheet etc.

SOURCE OF PAYMENT

Branches / Offices should advise the borrowers to provide a written statement about source of settlement amount. The statement thus provided should be examined critically before official acceptance of the compromise proposal and should be narrated in details in the proposal.

REPAYMENT TERM

The amount of settlement should be usually paid in lump sum within a period of 90 days of communication of bank’s approval. In deserving and exceptional cases depending upon cash flow or source of payment, settled amount may be paid in monthly/quarterly installments with down payment of at least 10-25% while offering the settlement and the payment of balance amount may be extended up to 6-12 months with interest @3% below PLR simple on reducing balances.

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