The Reserve Bank of India (RBI) on Saturday said it was looking to revise the definition of ‘sick units’ to help those units regain financial health.
"We are going to change the definition of sick units. The standing advisory committee is looking into that," K C Chakrabarty deputy governor of RBI said in a speech at a small and medium enterprises event on Saturday .
A unit is declared sick when 50 per cent of its net worth is eroded. Chakrabarty said when such a erosion happened, the company was nearly dead. He said banks are unable to revive most sick units despite being equipped with infrastructure like workforce and training facilities.
“Not even two per cent of the total number of sick units have been nursed back by banks,” he said, adding once the definition is revised, banks would be more encouraged to act and save potential defaulters in time. "We have a very good hospital and health management system. We treat the sick, but whosoever comes to the hospital goes to the funeral ground," he said providing an analogy on the banks' handling of sick units.
In December 2011, total outstanding to medium and small enterprises was at Rs 4,82,540 crore, a growth of 11 per cent over last year, while credit to medium enterprises grew 25 per cent to Rs 1,98,570 crore in the same period, according to a RBI data.
Chakrabarty said over 90 per cent of the SME entrepreneurs in the country were either self-financed or not financed. He suggested banks to monitor branch-wise targets of MSME lending that would make branch managers responsible.
He said the banking industry needed to move away from the comfort of risk cover provided by the credit guarantee trust fund for micro and small enterprises (CGTSME). “The purpose of any insurance scheme is not to provide indiscriminate finance,” said Chakrabarty, pointing out that banks often tend to advance funds without proper due diligence since the CGTSME scheme insures 75 per cent of the loans given. “We need to have an exit policy there,” he said.
Commenting on the passage of the Factoring Bill, he said despite the passage of the legislation, not many factoring companies had been set up, and there was no clarity on performance of existing ones.
"Now that the Factoring Bill has come, I don't see much enthusiasm in banks and financial institutions to set up factoring companies. But, we have to do that," he said.
