A Delayed Subsidy, a DSCR Below the Floor, and an RM in a Hurry to Classify
An MSME borrower running a garment unit has a term loan of ₹64 lakh outstanding, sanctioned at 10.50% floating, with 5 years of tenor left and equal annual principal instalments. Projected EBITDA for the coming year is ₹17.50 lakh. The account slipped because a state-government subsidy of ₹18 lakh was delayed; as on 31 March the oldest overdue was 80 days. The promoter expects the subsidy by 5 April and wants the tenor stretched to 8 years. Your credit policy sets a DSCR floor of 1.25 for any restructuring. Meanwhile, the branch MIS is auto-flagging the account for NPA classification, and the relationship manager wants to book it sub-standard "to be safe". The promoter is also offering ₹4 lakh of his own funds.
1. Compute the DSCR for a 5-year and an 8-year tenor, then test whether the promoter's ₹4 lakh infusion saves the proposal.
Read the worked answer
Build the debt service. Interest at 10.50% on ₹64 lakh = ₹6.72 lakh a year (on the reducing balance the average is lower, but for a first-cut DSCR use the opening-year figure and say so).
- 5 years: principal = 64/5 = ₹12.80 lakh; debt service = 12.80 + 6.72 = ₹19.52 lakh; DSCR = 17.50/19.52 = 0.90 - well below the 1.25 floor. The proposal fails as it stands.
- 8 years: principal = 64/8 = ₹8.00 lakh; debt service = 8.00 + 6.72 = ₹14.72 lakh; DSCR = 17.50/14.72 = 1.19 - still short of 1.25.
Now add the ₹4 lakh promoter contribution upfront, reducing outstanding to ₹60 lakh: interest = ₹6.30 lakh; 8-year principal = 60/8 = ₹7.50 lakh; debt service = ₹13.80 lakh; DSCR = 17.50/13.80 = 1.27, which clears the floor.
Judgement: the tenor extension alone does not fix the account; the promoter's own money does the last part of the work. That is exactly the signal a lender should want - the borrower sharing the pain - and it should be made a condition precedent, not a promise.
2. The RM wants to book the account as sub-standard "to be safe". Assess that instruction as on 31 March.
Read the worked answer
The instruction is wrong, and being "safe" is not a permitted basis for classification. Under the IRAC norms, an advance becomes an NPA when interest or instalment remains overdue for more than 90 days. At 80 days the account is an SMA-3 (61–90 days overdue), not an NPA. Booking it sub-standard would overstate provisions and understate profit - a misstatement in the other direction, which is no more defensible than under-provisioning.
Timing matters more than the label. If day 90 falls around 10 April and the subsidy lands on 5 April, the overdue clears before the NPA trigger and the account need not slip at all. If the subsidy does not arrive, the account crosses 90 days in April and becomes sub-standard, with provisioning on the secured portion at the sub-standard rate (15% under the IRAC norms, plus the prescribed general provision on standard assets; confirm the exact rates and the secured/unsecured split from the master circular in force before you commit a number to the books).
What to do instead of classifying on instinct: mark SMA-3, monitor weekly, document the subsidy claim and its expected date, and record the classification decision with reasons - so that the file shows a judgement, not an omission, when the auditors arrive.
3. Frame your recommendation to the credit committee, including the conditions you would attach and the trigger at which you would change course.
Read the worked answer
Recommendation: restructure, but only in this shape.
- Promoter contribution of ₹4 lakh upfront, before the restructuring is effected - a condition precedent, not a post-sanction covenant. Without it the DSCR is 1.19 against a 1.25 floor.
- Tenor extended to 8 years, with the revised instalment fixed at ₹7.50 lakh a year; do not extend to 10 years, which would lift DSCR but simply buy time without improving the unit's cash generation.
- Assignment or escrow of the subsidy claim, with the state authority's sanction letter and claim reference taken on record, so that the ₹18 lakh flows to the account and not through the promoter.
Honest qualification: a DSCR of 1.27 clears a policy floor; it is not comfort. It leaves roughly ₹3.7 lakh of headroom against one year of debt service, so a single bad season breaches it. Attach covenants - no dividend or capital withdrawal, no fresh debt without consent, quarterly stock statements and a stock/receivables audit.
Trigger to change course: if the subsidy is not credited by 5 April and the account crosses 90 days, stop treating it as a restructure-to-be and classify it, then reassess viability. Restructuring an account after it has slipped carries its own classification consequences, so the sequence - contribution, subsidy, then restructuring - matters as much as the structure itself.