Never borrow from private lenders, in times of cash crunch: Adv Manoj Harit
Micro, small and medium enterprises (MSMEs) have been generating not just employment but also revenue. MSMEs are a good source of revenue for the government as well. But unfortunately, they end up fighting a fierce battle when it comes to financing their needs, Advocate Manoj Harit pointed.
Harit, who was speaking at a special seminar on ‘Entrepreneurs: Dealing with contingencies and understanding options’, organised by Moneylife Foundation and Capital First in Mumbai, said, “Unfortunately, under-financing at each stage, besides unacceptable practices followed by banks are the most significant reasons for failures of MSMEs that the government needs to address.”
Harit practises at the Bombay High Court and has specialised in helping businesses to deal with various recovery actions. Advising the entrepreneurs, he stressed, "Never borrow from private lenders during such times. Do not go for personal loans so that you can pump money in the business. Run a tight ship, cut down your expenditure. And most importantly never lose focus on profitability of your business.” Harit has been an entrepreneur himself (he ran a textile unit) and is still engaged in horticulture at Malegaon while practising law in Mumbai.
He explained that many a times entrepreneurs fail to understand first signs of sickness. But many a times instead taking corrective measure, they end up seeking more funding from banks. “When bank asks for additional collateral, entrepreneurs sometimes end up with personal guarantees or even pledge homes. What is needed here is the entrepreneur should generate more revenues with same infrastructure or cut costs or expenses and thus reduce loss,” he added. The Reserve Bank of India (RBI) has stated that it is duty of the bank to identify sickness at the incipient stage and recommends that the lender should either restructure the debt, or rehabilitate the unit with additional finance, or take measure to nurse it until it comes out of sickness.
“There are master circulars, guidelines issued by regulators. But banks hardly follow this.” In addition, on 8 February 2018, the Reserve Bank has issued a new circular extending the 90 day deadline to 180 days for MSMEs. “Unfortunately, many MSME accounts are still being marked as NPAs based on earlier provisions and under recovery process,” Harit said.
The Debt Recovery Tribunal (DRT) has a set procedure to handle recovery cases. Harit said, “When an account becomes NPA, the lender issues notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act. But many borrowers fail to understand and respond to this notice. Then when the lender issues a notice for recovery under Section 13(4), the borrower, runs to a lawyer for help. However, since the entrepreneur had failed to respond to first notice, it become difficult to defend later.”
Measures under Section 13(4) include symbolic possession, physical possession, takeover of management, appointment of an agent or manager, sale, and transfer of the asset after sale. The borrower can file appeal after 45 days before the DRT, but is should accompany with a written application giving sufficient cause to condone the delay. However, when an appeal is beyond the first chance of 45 days, the borrower loses a huge opportunity to contest with all valid grounds right from the inception of the recovery action.