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In recognition of the problems being faced by the Micro and Small Enterprises
(MSE) particularly with respect to rehabilitation of potentially viable sick units, the
Reserve Bank had constituted a Working Group under the Chairmanship of Dr. K C
Chakrabarty, then Chairman and Managing Director, Punjab National Bank.
A MSE unit is considered sick
a) 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

A MSE is considered sick when
a) any of the borrowal account of the
NPA (Non
Performing Asset) for three months or

1. A Micro or Small Enterprise (as defined in the MSMED Act 2006) may be said
to have become Sick, if
a. Any of the borrowal account of the enterprise remains NPA for three
months or more
b. There is erosion in the net worth due to accumulated losses to the extent of
50% of its net worth during the previous accounting year.

After identifying a sick unit, the causes of its sickness should be diagnosed
and remedial measures decided after examination of its viability in
consultation with other lenders, as far as practicable.


The rehabilitation package should be based on analysis of past operations and

address the deficiencies. The promoters should be involved in the preparation
of the package. A joint package preparation in consultation with working
capital banker would ensure that the package addresses all relevant issues
affecting its turnaround.


Study of the feasibility of operating the unit at the existing level of installed
capacity and within the prevailing business environment should be carried out
in addition to reappraisal of management set up and market prospects.


In respect of units covered under the ECGC/CGTMSE guarantee,

rehabilitation measures could be considered subject to approval of the package
by ECGC/CGTMSE as the case may be.







2. It is emphasised that only those units which are considered to be potentially viable
should be taken up for rehabilitation. No unit will be taken up for rehabilitation by
the banks/FIs unless the financial viability is established and there is a reasonable
certainty of repayment from the borrower, as per the terms of rehabilitation

Waivers/ Funding

i) Interest Dues on Cash Credit and Term Loan

If 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.
iii) Term Loans
The rate of interest on term loans may be reduced (from the date it started incurring
cash losses), where considered necessary, by up to 3% in case of micro/ decentralized
sector units and upto 2% for other small enterprises, subject to the floor of Banks
base rate.
a. The cut off date for reduction in interest rate would be the date from which
interest has been in default.
b. In the case of multiple loan accounts, the earliest date of interest default
should be taken as the cut off date.

c. Reduction in the rate of interest as stated above could be considered in
isolation for restructuring an account as well as a part of a restructuring
iv) Working Capital Term Loan (WCTL)
After 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 may be reduced by upto 3% in case of micro/ decentralized
sector units and upto 2% for other small enterprises, subject to the floor of Banks
base rate.
v) Working Capital
Interest on working capital may be reduced by up to 3% in case of micro/
decentralised sector units and upto 2% for other small enterprises, subject to the floor
of Banks base rate.
vi) Contingency Loan Assistance
For meeting escalations in capital expenditure to be incurred under the rehabilitation
programme, banks/financial institutions may provide, where considered necessary,
appropriate additional financial assistance up to 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

Additional finance assistance

Need-based additional working capital limit/term loan required for restarting /

operating the unit on viable lines could also be considered as part of the rehabilitation
package for the following purposes :
a. Purpose

For purchase of balancing equipment or overcoming the identified bottlenecks

in the existing plant & machinery, civil construction, etc.


For payment of statutory liabilities and pressing creditors (excluding

borrowings from promoters, their friends and associates) to the extent
considered necessary. Such dues should be normally allowed to be liquidated
over a period of time in instalments.


To raise margin money for additional working capital needed for



To meet cash losses (after excluding interest on both term loans and working
capital borrowings) that may be incurred during the period of implementation
of the rehabilitation package.


To meet retrenchment compensation, if required.


For any other purpose considered necessary for revival of the unit/ concern..

b.Interest Rate
Interest on additional working capital limit/ term loan may be charged upto base rate
plus 1.50%.
c. Repayment period
i. To be fixed on a case-to-case basis with adequate moratorium depending on
the projected cash-flow and DSCR. While the desirable DSCR is 1.5 : 1, the
same could be relaxed upto 1.25 : 1 by the sanctioning authority.
ii. The repayment period should normally not exceed 7 years from the date of
disbursement of additional assistance.


The principal instalments could be rescheduled with a repayment period not

exceeding 7 years from the date of implementation of the package.

Cash Losses

Cash 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 included in the
rehabilitation cost and funded by the bank.
Future 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 (i.e., after excluding interest) on working
capital etc., due to the bank(s) and should be funded.

Leasing of plant
i. If the sick unit is not viable on its own, the possibility of leasing of the plant
and machinery of the sick unit to a healthy company, which may be in a
position to make better use of the installed facilities and facilitate recovery of
dues to the Banks could be explored.
ii. The sick unit undertaking manufacturing activity on behalf of a healthy
company on the basis of processing fees could also be considered.