Every political formation in India pays lip-service to the critical role of micro, small and medium enterprises (MSMEs). Contributing nearly 30% to India’s GDP and employing over 1.24mn (million) people, MSMEs are the backbone of the nation’s economy. An MSME ministry was formed in 2007 under the United Progressive Alliance (UPA), while the National Democratic Alliance (NDA) introduced a series of initiatives, including better credit support, digital adoption, technology upgrades, credit guarantees and skill development to help this sector.
That is not all. On 29 May 2015, the MSME ministry’s notification, titled “Framework for Revival and Rehabilitation of MSMES”, promises to address the biggest concern of Indian entrepreneurs in this segment– coercive recovery practices by banks. This framework outlined steps to identify early signs of financial distress and required lenders to establish committees to explore recovery and hand-holding options, before classifying loans as non-performing assets (NPAs) or initiating coercive recovery action.
The Reserve Bank of India (RBI) was tasked with the implementation of the notification; yet, according to the National MSME Borrowers Association, this directive was ignored. Lenders ignored the notification, later arguing in court that it was non-binding. Consequently, MSMEs facing financial difficulties find themselves stripped of assets and embroiled in legal battles, having often pledged personal assets to secure formal credit.
Even though top banking officials acknowledge that the system is skewed against MSMEs, nobody makes the effort to change things. In contrast, the biggest corporate defaulters, such as Jatin Mehta (Suraj/Winsome Diamonds), Mehul Choksi (Gitanjali Gems), Nirav Modi, Vijay Mallya and the Sandesara family of Sterling Biotech, have been allowed to abscond and run away abroad, leaving lenders with bad loans of tens of thousands crore rupees.
In scores of cases, banks have written off as much as between 80%-90% of their loans. The latest and most high profile one is Anil Ambani. Advocate Mathew J Nedumpara, who has fought many MSME cases, says, Reliance Communications owed Rs49,000 crore to 53 banks; but the Mumbai bankruptcy court allowed it to be settled for just Rs455 crore or 0.92% of the total debt! His companies are still considered eligible to bid for government defence contracts. Indian banks wrote off bad loans worth Rs14.56 lakh crore in the nine financial years starting 2014-15, mostly on account of large borrowers; but one never hears of these defaulter industrialists losing their private homes. On the contrary, they continue to live in luxury and hire the most expensive lawyers to fight their cases.
In stark contrast, Manisha Mehta, president of the National MSME Borrowers Association, said at a press conference on 25th October that no bank or lender—not even the State Bank of India (SBI)—had ever constituted a committee to help stressed MSMEs, as required by the 2015 notification. Instead, lenders exploited their lack of legal knowledge to initiate ruthless recovery action shaming them through advertisements, rather than helping them.
Ms Mehta, who is herself battling recovery actions, says that lenders obtained a judgement from the Bombay High Court order saying that the 2015 notification was not binding on them, since provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) override other Acts including the MSME Act. Meanwhile, the MSME ministry as well as RBI seem to have done nothing for nearly 10 years to ensure implementation.
A glimmer of hope appeared on 1 August 2024 when the Supreme Court ruled in M/s Pro Knits vs Canara Bank (along with a clutch of other appeals) said that the 2015 notification is, indeed, binding. Terming the Bombay High Court’s ruling ‘highly erroneous’, the apex court said that the May 2015 notification has statutory force.
However, this ruling offers cold comfort for MSMEs whose assets have already been seized through coercive action under the SARFAESI act. Especially since the Court decided not to direct their matters to be heard afresh by the high court.
Although MSMEs facing future distress may benefit from the Court’s decision, those who have already lost their businesses and assets are left with limited recourse. Many of the examples shared by the MSME Association are heartrending, because each of them represents entrepreneurs who staked everything to follow their dreams.
For instance, Radhakrishan Dhanjal of Kamal Construction Company, a high net-worth individual, mortgaged his home against cash-credit facilities and a bank guarantee, only for the lender to repossess the house when he was hospitalised. He alleges that the home was worth 10 times his borrowing. All he can do now is fight a costly and unequal legal battle against a powerful institution.
Similarly, Mahesh Kumar, proprietor of MSE Industries, wrote a touching letter to the prime minister on 9 February 2023, after losing his business. He and his wife set up a company in 2007, to cater exclusively to Bharat Heavy Electricals Limited (BHEL) at Trichy. All was well until 2017, when they were hit by glitches and teething troubles in implementation of the goods and services tax (GST).
They were unable to get their GST validated or to generate e-way bills for purchase orders. Filing a litigation did not work nor did the government help small entrepreneurs struggling with GST registration. This led to cascading issues resulting in delays in paying BHEL and loan defaults, which could have been resolved. Instead of assistance, the bank refused to restructure loans or accept a one-time settlement offer of Rs2.95 crore. Instead, the MSME unit was repossessed and auctioned for a paltry Rs2.92 crore, says, Mr Kumar, who alleges that the market value was Rs12 crore. The bank continues to demand repayment of Rs6.7 crore and has humiliated him by publishing his photos as a defaulter for a whole year. Approaching the debt recovery tribunal (DRT) would require him to pay 50% of the outstanding loan upfront which is both steep and impractical.
Manisha Mehta’s own company, Perfect Infra Engineers, was a successful unit that suffered badly after large clients, such as Lavasa Corporation and Unity Infra Projects went bankrupt. Despite repaying 55% of the Rs9.5-crore loan, she faced coercive recovery actions, including the sale of her residential property pledged with the bank. Her factory in Pune was forcibly seized leaving her tied up in litigation before multiple forums.
Her story exemplifies the injustice faced by MSMEs who, unlike large corporations, lack protection and are subjected to shabby treatment and harsh recovery measures, although they are the real job-creators in India.
While finance minister Nirmala Sitharaman called for a comprehensive analysis of job-creation at a World Bank event, perhaps her ministry could start by examining how MSME policies and banking practices affect job-creators. These small enterprises, which are the real engines of job growth, deserve far better support from government as well as banks.
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