RBI modifies definition of sickness for assessing viability of MSEs

MSE sick with borrowal account of enterprise remains NPA for 3 months or more erosion in net worth due to accumulated losses to extent of 50% of net worth

The Reserve Bank of India (RBI) has modified the definition of sickness and a procedure for assessing the viability of sick Micro and Small Enterprises (MSEs). According to a notification issued by tRBI on Thursday “a MSE is considered sick when any of the borrowal account of the enterprise remains NPA for three months or more or there is erosion in the net worth due to accumulated losses to the extent of 50% of its net worth.”

The stipulation that the unit should have been in commercial production for at least two years has been removed by the RBI.

Earlier an MSE was considered sick if any of the borrowal accounts of the unit remains substandard for more than six months. This means if principal or interest, in respect of any of its borrowal accounts has remained overdue for a period exceeding one year. The RBI had also said that it will be considered sick if 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.

Earlier there was no stipulated time frame for deciding the viability of a unit. However, now the decision on viability of the unit should be taken at the earliest but not later than 3 months of becoming sick under any circumstances. The RBI has also laid down the procedure for declaring a unit as unviable. In fact now incipient sickness or handholding stage has been defined by the regulator.

The changes have been made because the recent global slowdown has adversely impacted the Indian economy in general and more specifically the MSEs. It was recognised that MSEs suffer the most in such situations especially from discontinuity of business, which they normally are not in a position to bear and become sick immediately.