The Reserve Bank of India (RBI) directs banks to evaluate the existing lending policies for the micro and small enterprises (MSEs). The banking regulator asks banks to outline guidelines for restructuring the potentially viable ailing units.

RBI also said that banks should state the policies regarding the extension of credit facilities and non-discretionary One-Time Settlement (OTS) schemes so as to recover the bad loans.

The apex body has asked the banks to send the status report by June 30, 2009. In fact, working group headed by K C Chakrabarty, Chairman and Managing Director of Punjab National Bank has even submitted the report soon after the RBI's directive.

The move has been initiated by the RBI at the backdrop of banks hesitance in lending. Due to the fear of rising non-performing assets in the economic slowdown, banks are becoming risk-averse and are not extending finance to the MSEs.

As per the RBI data, loan disbursement to the MSE sector increased by 35.4% to Rs 2,39,399 crore during the year ended February, 2009 as compared to 67.4% loan growth disbursement to Rs 1,76,819 crore during the same period, a year ago. Moreover the sector has been extended credit at 16%, double the rate at which large companies access bank credit.

Reviewing the problems faced by the MSEs, RBI has directed banks to step up rehabilitation of sick units which can be revived. "These guidelines, in fact, include the initial sickness stage and, if implemented as intended, could significantly prevent or arrest sickness at the initial stages. Such MSE units, which turn sick in spite of debt restructuring, are expected to be few and would fall within the ambit of the extant guidelines on rehabilitation of potentially viable sick units," said RBI.

Further on the basis of their settlement of non-performing loans and commercial judgment, RBI has permitted banks to carry out OTS schemes for the MSE sector. "It is necessary that the banks have their own non-discretionary OTS policy, which enables their officials to make quick and judicious decisions on OTS," said the apex body.

Meanwhile banks have also announced a special scheme for helping MSEs at the time of slowdown. In order to tide over the cash flow difficulties, banks would extent extra working capital limits for the units.

Also, banks have been allowed by the RBI to restructure the accounts of viable units for a second time without hampering the status. This would help the MSEs in renewing their operations, getting financial backup and avoid becoming a non-performing account.