Stressed MSME and Crop Loan: Classification, Provisioning and PSL Tag
The branch has two stressed accounts as on 30 June 2025. Account A is a ₹3.20 crore term loan to a Udyam-registered micro-manufacturing unit, secured by hypothecation of plant and factory land valued at ₹2.40 crore. The unit's only large buyer is a state government contractor whose payment has been delayed since January. The last EMI due on 5 January remained unpaid; on 31 March the account was 85 days overdue. A ₹25 lakh part-payment came on 10 April, but no further instalment was paid. Account B is a ₹18 lakh direct crop loan to a farmer, unsecured, with the last instalment due on 31 January. The farmer says a crop-insurance claim is pending. Both borrowers have given oral assurances of repayment by September. The branch manager wants to treat both accounts as standard, citing the part-payment and the insurance claim, and to continue priority-sector tagging. The zonal office has asked for a note before the 30 June provisioning run.
1. Classify Account A and Account B as on 30 June 2025 under RBI income recognition and asset classification norms. Show the day-count and the effect of the ₹25 lakh part-payment, and state whether oral assurance can justify standard classification.
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Account A: the last unpaid instalment was due on 5 January. On 31 March it was 85 days overdue, so it was SMA-2. The 90-day threshold was crossed on 5 April. The ₹25 lakh part-payment on 10 April did not clear the entire arrears and does not reset the clock for the unpaid instalment. On 30 June the account is an NPA; because it has been NPA for less than 12 months, it is sub-standard. Account B: the instalment was due on 31 January; 90 days were completed on 1 May. On 30 June it is an NPA and sub-standard. A pending insurance claim is not a record of recovery. Oral assurance cannot justify standard classification; the branch needs actual arrears clearance and compliance with the applicable upgrade norms.
2. Compute an indicative provision for Account A and Account B on 30 June, stating assumptions. Would the priority-sector tag change because the accounts are NPA?
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Account A: outstanding ₹3.20 crore; realisable security ₹2.40 crore; unsecured portion ₹0.80 crore. Sub-standard secured portion: 15% × 2.40 = ₹0.36 crore. Unsecured portion: 25% × 0.80 = ₹0.20 crore. Total indicative provision = ₹0.56 crore. Account B: unsecured ₹18 lakh; at the general unsecured sub-standard rate of 25%, provision = ₹4.5 lakh. If the bank's policy applies a specific direct-agriculture sub-standard rate, use that rate and disclose the assumption. PSL tag: the micro-manufacturing loan and the crop loan remain PSL by activity and borrower type. NPA classification changes income recognition and provisioning; it does not by itself remove the PSL label. PSL tagging must not be used to avoid NPA classification.
3. What restructuring or recovery options should the branch consider, and what governance safeguard prevents the note from becoming an evergreening exercise?
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Options: (i) a viability-based restructuring under the RBI framework, after a cash-flow assessment and under a board-approved policy; (ii) negotiated recovery, sale of security, or legal remedies; (iii) for the crop loan, pursue the insurer and consider relief or restructuring only if the policy conditions are met. Safeguard: the note must record the pre-restructuring classification, the viability test, the sacrifice involved, and monthly monitoring triggers. Restructuring must not be used merely to avoid a downgrade. Fresh loans used to pay old dues should be prohibited. The zonal office should approve the package and track the account against agreed milestones.