A worker operates a machine inside a small scale manufacturing unit in Mumbai. File
| Photo Credit: Reuters

The Supreme Court has held that banks or creditors are required to identify the incipient stress in the account of the Micro, Small and Medium Enterprises (MSMEs), before their accounts turn into non-performing assets.

A Bench headed by Justice Bela Trivedi pronounced the recent order in a batch of appeals filed by MSMEs, represented by advocate Mathews J. Nedumpara, focusing on a notification ‘Instructions for the Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises’ issued on May 29, 2015 under Section 9 of the MSMED Act, revised by the Reserve Bank of India (RBI) in March 2016 in exercise of the powers conferred by Section 21 and 35(A) of the Banking Regulation Act.

The court held that the May 2015 notification has “statutory force binding to all Scheduled commercial banks, licensed to operate in India by the RBI”.

“The entire exercise as contained in the ‘Framework for Revival and Rehabilitation of MSMEs’ is required to be carried out by the banking companies before the accounts of MSMEs turn into non-performing asset (NPA),” the court held.

However, the Bench directed that it would also be incumbent on the part of the MSMEs concerned to produce authenticated and verifiable documents/material for substantiating its claim of being MSME before its account is classified as NPA.

“If that is not done, and once the account is classified as NPA, the banks i.e. secured creditors would be entitled to take the recourse to Chapter III of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) Act for the enforcement of the security interest,” the two-judge Bench ordered.

The appellant MSMEs had challenged a Bombay High Court decision of January 11, which dismissed their writ petitions. The High Court had held that banks and Non-Banking Financial Companies (NBFCs) were not obliged to adopt the restructuring process as contemplated in the May 2015 notification without any specific applications for the purpose from MSMEs.

Mr. Nedumpara had argued that the banks could not have classified the loan accounts of the MSMEs as NPA without following the procedure laid down in the May 2015 notification.

“It was incumbent on the part of the banks/ NBFCs to identify incipient stress in the account… and to explore various options to resolve the stress in the account as contemplated in the May 2015 notification,” Mr. Nedumpara had argued.

Watch: Union Budget gives a leg-up to MSMEs, manufacturing sector

The Union Budget for 2024-2025 has a package of support measures for the Micro, Small and Medium-scale Enterprises (MSMEs) and the labour-intensive manufacturing sector.

According to the Economic Survey tabled on Monday, the contribution of MSMEs to all-India manufacturing output in FY 22 was 35.4% and the share of MSME-made products in exports in FY 24 was 45.7%.

“This budget provides special attention to MSMEs and manufacturing, particularly labour-intensive manufacturing. We have formulated a package covering financing, regulatory changes, and technology support for MSMEs to help them grow and also compete globally,” said Finance Minister Nirmala Sitharaman.

The budget proposes a credit guarantee scheme that will work on pooling of credit risks of MSMEs to facilitate term loans to MSMEs for purchase of machinery and equipment without collateral or third-party guarantee. A separately constituted self-financing guarantee fund will provide, to each applicant, guarantee cover up to ₹100 crore, while the loan amount may be larger. The borrower will have to provide an upfront guarantee fee and an annual guarantee fee on the reducing loan balance. Public sector banks will build in-house capabilities to assess MSMEs for credit. They will also take a lead in developing a new credit assessment model, based on the scoring of digital footprints of MSMEs in the economy so that MSMEs without a formal accounting system are also covered.

Credit availability

In a move to provide relief to MSMEs during stress period, credit availability will be supported through a guarantee from a government promoted fund. The limit of Mudra loans will be enhanced to ₹20 lakh from the current ₹10 lakh for those who have repaid previous loans under the ‘Tarun’ category.

To facilitate MSMEs unlock their working capital by converting their trade receivables into cash, the turnover threshold of buyers for mandatory onboarding on the TReDS platform will be reduced from ₹500 crore to ₹250 crore. “This measure will bring 22 more CPSEs and 7,000 more companies onto the platform,” the Finance Minister said.

E-Commerce Export Hubs will be set up on public-private-partnership mode so that MSMEs and traditional artisans sell their products in the international markets.

An investment-grade energy audit of traditional micro and small industries will be done in 60 clusters and financial support will be provided to shift them to cleaner forms of energy and implementation of energy efficiency measures. The scheme will be replicated in another 100 clusters in the next phase. Rental housing with dormitory type accommodation for industrial workers will also be facilitated on PPP mode.

Sudhir Jha, national convener, All India Manufacturers Organisation and vice-president of the MSME Development Forum, said the MSME policy of the government needed a relook to improve the entire eco system of MSMEs to meet the current challenges.

The revamped credit guarantee scheme for Micro, Small and Medium Enterprises (MSMEs) will take effect from April 1, through infusion of ₹9,000 crore in the corpus, said Union Finance Minister Nirmala Sitharaman while presenting the Union Budget 2023.

“This will enable additional collateral-free guaranteed credit of ₹2 lakh crore. Further, the cost of the credit will be reduced by about 1%,” she said.

“Further, in cases of failure by MSMEs to execute contracts during the COVID-19 period, 95% of the forfeited amount relating to bid or performance security will be returned to them by government and government undertakings. This will provide relief to MSMEs”, the Finance Minister said.

The total allocation for the MSME Ministry will see a nearly 42% increase for 2023-24 with ₹22,138 crore to be made available compared to ₹15,629 crore in 2022-23. Schemes such as Raising and Accelerating MSME Performance (RAMP) and Scheme for Fund for Regeneration of Traditional Industries (SFURTI) will see significantly higher allocation compared to FY23.

The Federation of Indian Micro and Small & Medium Enterprises (FISME) and the Coimbatore District Small Industries Association (CODISSIA) said in press statements that to ensure MSMEs received payments on time, the Budget has proposed that deduction for expenditure incurred on payments made to MSMEs will be allowed for buyers only when the payment is actually made. This means buyers cannot claim deduction without paying the MSMEs.

The FISME added that setting up of a National Financial Information Registry will help create a robust information system and help MSMEs access loans. The Common Universal Identifier for businesses proposed in the Budget will also rid MSMEs of the need for having multiple identities, it added.