- Under Notification à
Primary (urban) Co-operative Banks
for rehabilitation of sick
small scale industrial units
Reserve Bank of India, in November
2000, had constituted the Working Group on Rehabilitation of Sick SSI units,
under the Chairmanship of Shri S.S. Kohli, Chairman, Indian Banks’
Association, to review the existing guidelines in regard to rehabilitation of
sick Small Scale units and to
recommend the revision of the guidelines for rehabilitation of current sick and
making them transparent and
non-discretionary. Reserve Bank of
India has accepted all the major
recommendations of the Group.
Enclosed is a complete set of revised guidelines, with regard to
rehabilitation of sick units in the SSI sector with specific reference to
definition of sick SSI units, its monitoring, viability norms, incipient
sickness, as also, reliefs and concessions from banks/financial institutions in
the case of potentially viable units. The
emphasis of the rehabilitation effort in case of SSI units is on early detection
of signs of incipient sickness, adequate and intensive relief measures and their
speedy application rather than giving a long span of time to the units for
rehabilitation. Accordingly, revised guidelines and important changes
vis-a-vis existing guidelines are detailed in Annexures I
and II respectively.
This set of revised guidelines will supersede all our earlier circulars
and guidelines laid down in connection with rehabilitation of SSI units.
We need hardly emphasize that timely and adequate assistance to
potentially viable SSI units which have already become sick or are likely to
become sick is of the utmost importance not only from the point of view of the
financing banks but also for the improvement of the national economy, in view of
the sector’s contribution to the overall industrial production, exports and
employment generation. The banks
should, therefore, take a sympathetic attitude and strive for rehabilitation, in
respect of units in the SSI sector, particularly wherever the sickness is on
account of circumstances beyond the control of the entrepreneurs.
Banks are also advised to take a pro-active stance in providing timely
assistance for rehabilitation of small scale units, which are affected by the
industrial down turn and delays in payments against supplies made by them to
large scale and other units.
4. In the case of units which are not capable of revival, banks should try for a settlement and/or resort to other recovery measures expeditiously.
It may be noted that the enclosed guidelines are applicable to industrial
units which were being financed by the bank before they turned into sick units.
We reiterate that UCBs are not expected to take over financing of sick
industrial units, particularly, those financed by commercial banks earlier, in
view of the risks involved.
Please acknowledge receipt to the concerned Regional Office.
REHABILITATION OF SICK SSI UNITS
1. It is of utmost
importance to take measures to ensure that sickness is arrested at the incipient
stage itself. The branch/bank officials should keep a close watch on the
operations in the account and take adequate measures to achieve this objective.
The managements of the units financed should be advised about their
primary responsibility to inform the banks if they face problems which could
lead to sickness and to restore the units to normal health. The organizational
arrangements at branch level should also be fully geared for early detection of
sickness and prompt remedial action. Banks/Financial Institutions will have to identify the units showing symptoms of sickness
by effective monitoring and provide additional finance, if warranted, so as to
bring back the units to a healthy track. An illustrative list of warning signals
of incipient sickness that are thrown up during the scrutiny of borrowal
accounts and other related records e.g. periodical financial data, stock
statements, reports on inspection of factory premises and godowns, etc. is given
in Appendix-I which will serve as a useful guide to
the operating personnel. Further, the system of asset classification introduced
in banks will be useful for detecting advances, which are deteriorating in
quality, well in time. When an
advance slips into the sub-standard category, as per norms, the branch/bank
should make full enquiry into the financial health of the unit, its operations,
etc. and take remedial action. The
bank/branch officials who are familiar with the day-to-day operations in the
borrowal accounts should be under obligation to identify the early warning
signals and initiate corrective steps promptly. Such steps may include providing
timely financial assistance depending on established need, if it is within the
powers of the branch manager, and an early reference to the controlling office
where the relief required are beyond his delegated powers.
The branch/bank manager
may also help the unit, in
sorting out difficulties which are non-financial in nature and require
assistance from outside agencies like Government departments / undertakings,
Electricity Boards, etc. He should also keep the term lending institutions
informed about the position of the units wherever they are also involved.
An SSI unit should be considered 'Sick'
any of the borrowal accounts of the unit remains substandard for more
than six months i.e. principal or interest, in respect of any of its borrowal
accounts has remained overdue for a period exceeding one year. The requirement
of overdue period exceeding one year will remain unchanged even if the present
period for classification of an account as sub-standard, is reduced in due
there is erosion in the net worth due to accumulated cash losses to the
extent of 50 per cent of its net worth during the previous accounting year;
the unit has been in commercial production for at least two years.
would enable banks to take action at an early stage for revival of the units.
For the purpose of formulating nursing programme, banks should go by the above
definition with immediate effect.
3. Viability of Sick SSI
unit may be regarded as potentially viable if it would be in a position, after
implementing a relief package spread over a period not exceeding five years from
the commencement of the package from banks, financial institutions, Government (
Central / State ) and other concerned agencies, as may be necessary, to continue
to service its repayment obligations as agreed upon
those forming part of the package, without the help of the concessions after the
aforesaid period. The repayment period for restructured (past) debts should not
exceed seven years from the date of implementation of the package. In the case
of tiny/decentralised sector units, the period of reliefs/concessions and
repayment period of restructured debts which were hitherto, two years and three
years respectively have been revised, so as not to exceed five and seven years
respectively, as in the case of other SSI units. Based on the norms specified
above, it will be for the banks/financial institutions to decide whether a sick
SSI unit is potentially viable or not. Viability of a unit identified as sick,
should be decided quickly and made known to the unit and others concerned at the
earliest. The rehabilitation package should be fully implemented within six
months from the date the unit is declared as 'potentially viable' / 'viable'.
While identifying and implementing the rehabilitation package, banks/FIs are
advised to do ‘holding operation' for a period of six months. This will allow
small-scale units to draw funds from the cash credit account at least to the
extent of their deposit of sale proceeds during the period of such ‘holding
is emphasised that only those units which are considered to be potentially
viable should be taken up for rehabilitation. The reliefs and concessions
specified are not
to be given in a routine
manner and have to be decided by
bank/financial institution based on the commercial judgment and merits of each
case. Banks have also the freedom to extend reliefs and concessions beyond the
parameters in deserving cases. Only
in exceptional cases, concessions/ reliefs beyond the parameters should be
considered. In fact, the viability
study itself should contain a sensitivity analysis in respect of the risks
involved that in turn will enable firming up of the corrective action matrix.
Norms for grant of reliefs and concessions by banks/financial institutions to
potentially viable sick SSI units for rehabilitation are furnished in Appendix-II.
Units becoming sick on account of wilful mismanagement, wilful default,
unauthorized diversion of funds, disputes among partners / promoters, etc.
should not be considered for rehabilitation and steps should be taken for
recovery of bank’s dues. The
definition of wilful default, will broadly cover the following:
Deliberate non-payment of the dues despite adequate cash flow and good
Siphoning off of funds to the detriment of the defaulting unit.
Assets financed have either not been purchased or have been sold and
proceeds have been misutilised.
Misrepresentation/falsification of records.
Disposal/removal of securities without bank's knowledge.
Fraudulent transactions by the borrower.
views of the lending banks in regard to wilful mismanagement of funds/defaults
will be treated as final.
The delay in the implementation of agreed rehabilitation packages should be reduced. One of the factors contributing to such delay was found to be the time taken by banks having multiple branches for obtaining clearance from the Head Office for the relief and concessions. As it is essential to accelerate the process of clearance, the banks may delegate sufficient powers to senior officers at various levels to sanction the bank's rehabilitation package drawn up in conformity with the prescribed guidelines.
Continuous irregularities in cash credit/overdraft accounts such as
inability to maintain stipulated margin on continuous basis or drawings
frequently exceeding sanctioned limits, periodical interest debited remaining
Outstanding balance in cash credit account remaining continuously at the
Failure to make timely payment of instalments of principal and interest
on term loans;
Complaints from suppliers of raw materials, water, power, etc. about non-
payment of bills;
Non-submission or undue delay in submission or submission of incorrect
stock statements and other control statements;
Attempts to divert sale proceeds through accounts with other banks;
Downward trend in credit summations;
Frequent return of cheques or bills;
Steep decline in production figures;
Downward trends in sales and fall in profits;
Rising level of inventories, which may include large proportion of slow
or non-moving items;
Larger and longer outstandings in bill accounts;
Longer period of credit allowed on sale documents negotiated through the
bank and frequent return by the customers of the same as also allowing large
discount on sales;
Failure to pay statutory liabilities;
Utilization of funds for purposes other than running the units.
Not furnishing the required information/data on operations in time.
Unreasonable/wide variations in sales/receivables levels vis-à-vis level
of operation of the unit.
Non co-operation for stock inspections, etc.
Delay in meeting commitments towards payments of installments due,
crystallized liabilities under LC/BGs, etc.
Diverting/routing of receivables through non-lending banks.
viability and the rehabilitation of a sick SSI unit would depend primarily on
the unit’s ability to continue to service its repayment obligations including
the past restructured debts. It is, therefore, essential to ensure that
ordinarily there is no write-off or scaling down of debt such as by reduction in
rate of interest with retrospective effect except to the extent indicated in the
guidelines. The guidelines on
various parameters on reliefs and concessions are given below.
Interest Dues on Cash Credit
and Term Loan
penal rates of interest or damages have been charged, such charges should be
waived from the accounting year of the unit in which it started incurring cash
losses continuously. After this is done, the unpaid interest on term loans and
cash credit during this period should be segregated from the total liability and
funded. No interest may be charged on funded interest and repayment of such
funded interest should be made within a period not exceeding three years from
the date of commencement of implementation of the rehabilitation programme.
Unadjusted Interest Dues
interest dues such as interest charged between the date up to which
rehabilitation package was prepared and the date from which actually
implemented, may also be funded on the same terms as at (i) above.
rate of interest on term loans may be reduced, where considered necessary, by
not more than three per cent in the case of tiny/decentralised sector units and
by not more than two per cent for other SSI units, below the document rate.
Working Capital Term Loan (WCTL)
the unadjusted interest portion of the cash credit account is segregated as
indicated at (i) and (ii) above, the balance representing principal dues may be
treated as irregular to the extent it exceeds drawing power. This amount may be
funded as Working Capital Term Loan (WCTL) with a repayment schedule not
exceeding 5 years. The rate of interest applicable may be 1.5 % to 3% points
below the prevailing fixed rate / minimum lending rate of the bank, wherever
applicable, to all sick SSI units including tiny and decentralized units.
losses are likely to be incurred in the initial stages of the rehabilitation
programme till the unit reaches the break-even level. Such cash losses excluding
interest as may be incurred during the nursing programme may also be financed by
the bank or the financial institution, if only one of them is the financier. But
if both are involved in the rehabilitation package, the financial institution
concerned should finance such cash losses. Interest may be charged on the funded
amount at the rates prescribed by SIDBI under its scheme for rehabilitation
cash losses in this context will refer to losses from the time of implementation
of the package up to the point of cash break-even as projected.
Future cash losses as above, should be worked out before interest
after excluding interest) on working capital etc., due to the banks and should
be financed by the financial institutions if it is one of the financiers of the
unit. In other words, the financial institutions should not be asked to provide
for interest due to the banks in the computation of future cash losses and this
should be taken care of by future cash accruals.
interest due to the bank should be funded by it separately. Where, however, a
commercial bank alone is the financier, the future cash losses including
interest will be financed by it.
interest on the funded amounts of cash losses/interest will be at the rates
prescribed by Small Industries Development Bank of India under its scheme for
on working capital may be charged at 1.5% below the prevailing fixed / minimum
lending rate charged by the bank wherever applicable. Additional working capital limits may be extended at a
rate not exceeding the minimum lending rate chargeable by the bank.
Contingency Loan Assistance
meeting escalations in capital expenditure to be incurred under the
rehabilitation programme, banks / financial institutions may provide, where
considered necessary, appropriate additional financial assistance upto 15 per
cent of the estimated cost of rehabilitation by way of contingency loan
assistance. Interest on this contingency assistance may be charged at the
concessional rate allowed for working capital assistance.
Funds for Start-up Expenses and
Margin for Working Capital
will be need to provide the unit under rehabilitation with funds for start-up
expenses (including payment of pressing creditors) or margin money for working
capital in the form of long-term loans. Where a financial institution is not
involved, banks may provide the loan for start-up expenses, while margin money
assistance may either come from SIDBI under its Refinance Scheme for
Rehabilitation or should be provided by State Government where it is operating a
Margin Money Scheme. Interest on fresh rehabilitation term loan may be charged
at a rate 1.5% below the prevailing fixed / minimum lending rate chargeable by
the bank wherever applicable or as prescribed by SIDBI / NABARD where refinance
is obtained from it for the purpose.
interest rate concessions would be subject to annual review depending on the
performance of the units.
per the extant RBI guidelines, promoter's contribution towards the
rehabilitation package is fixed at a minimum of 10 per cent of the additional
long-term requirements under the rehabilitation package in the case of tiny
sector units and at 20 per cent of such requirements for other units. In the
case of units in the decentralized sector, promoter’s contribution may not be
insisted upon. A need is felt for increasing the promoters' contribution towards
rehabilitation from the present limits.
It is, therefore, open to banks and financial institutions to stipulate a
higher promoters' contribution where warranted. At least 50 per cent of the
above promoters' contribution should be brought in immediately and the balance
within six months. For arriving at promoters' contribution, the monetary value
of the sacrifices from banks, financial institutions and Government may be taken
into account, in addition to the long - term requirement of
the rehabilitation package.
evolving packages, it should be made a precondition that the promoters should
bring in their contribution within the stipulated time frame. Further, in regard
to concessions and relief made available to sick units, banks should incorporate
a ‘Right of Recompense' clause in the sanction letter and other documents to
the effect that when such units turn the corner and rehabilitation is
successfully completed, the sacrifices undertaken by the Fls and banks should be
recouped from the units out of their future profits/ cash accruals.
changes brought out in the revised guidelines
based on the recommendations of the Working Group on Rehabilitation of sick SSI units vis-à-vis Existing Guidelines
The definition of a sick SSI unit may be
If any of the borrowal accounts of the unit remains substandard
for more than six months i.e. principal or interest, in respect of any
of its borrowal accounts has remained overdue for a period exceeding 1
year. The requirement of overdue period exceeding one year will remain
unchanged even if the present period for classification of an account as
sub-standard is reduced in due course;
There is erosion in the net worth due to accumulated cash losses
to the extent of 50 per cent of its net worth during the previous
accounting year; and
The unit has been in commercial production for at least 2 years.
In the case of tiny / decentralized sector units, the period of
reliefs/concessions and repayment period of restructured debts, have
been revised, so as not to exceed five and seven years respectively as
in the case of other SSI units.
While the other existing norms for grant of relief and
concessions which can be extended by banks to potentially viable sick
SSI units may continue, additional working capital limits may be
extended at a rate not exceeding the PLR.
Viability of a unit should be decided quickly and made known to
the unit and others concerned at the earliest. The rehabilitation
package should be fully implemented within six months from the date the
unit is declared as ‘potentially viable’ / ‘viable’. While
identifying and implementing the rehabilitation package, banks/Fls may
be asked to do ‘holding operation’ for period of six months. This
will allow small-scale units to draw funds from the cash credit account
at least to the extent of the deposit of sale proceeds during the period
of such ‘holding operation’.
There is a need for increasing the promoters’ contribution
towards rehabilitation package from the present limits. It is open to
the banks/financial Institutions to stipulate a higher promoters’
contribution, where warranted.
regard to concessions and reliefs made available to sick units, banks
should incorporate, “ Right of
Re-compense” clause in the sanction letter and other documents to
the effect that when such units turn the corner and rehabilitation is
successfully completed, the sacrifices undertaken by the FIs and banks
should be recouped from the units out of their future profits/cash
SSI is considered ‘sick’ when –
any of its borrowal accounts has become 'doubtful' advance i.e.
principal or interest in respect of its borrowal accounts has remained
overdue for a period exceeding 2½ years, and
there is erosion in the net worth due to accumulated cash losses
to the extent of 50 per cent or more of its peak net worth during the
preceding two accounting years.
In the case of
tiny / decentralized sector units, the period of reliefs / concessions
and repayment period of restructured debts will be two years and three
In the existing guidelines there was no mention
about providing additional working capital.
As per the extant guidelines, the banks are
expected to take, as far as possible, a decision on the viability or
otherwise of a unit identified as sick, within a period of three months,
from the date of receipt of complete information on the relevant aspects
from the management of the unit. Further, the finalization of the
nursing programme should be completed within a period of three months
from the date of such decisions.
As regards 'holding operation', it is a new
concept/facility, which was not there in the existing guidelines.
Promoters’ contribution towards rehabilitation
may be fixed at a minimum of 5%
of the additional long term requirements under the rehabilitation
package in the case of tiny sector units and 10% of such requirements
for other units.
Banks have been
advised to incorporate the " Right
of Re- compense” clause in cases where the concessions/reliefs
were beyond the parameters laid down by RBI.