SMA classification and diversion signals in a farm-equipment unit
Deccan Farm Equipment, a partnership firm in Nagpur, holds a cash credit limit of ₹80 lakh and a term loan of ₹1.50 crore repayable in 84 monthly instalments of about ₹3.10 lakh. The term loan was sanctioned 28 months ago on a projected DSCR of 1.65. In the last two quarters the cash credit has run in excess on 41 days, the longest continuous excess being 12 days at ₹19 lakh, and the term loan instalments for May and June were debited and returned unpaid twice each; the oldest overdue is now 52 days. Stock statements for the last two quarters have not been submitted and the factory insurance expired in March. Electricity bills show consumption down 38% year on year. The promoter has gifted 0.8 acre of the unit's land to his wife by a registered deed, and CIBIL shows a housing loan of ₹65 lakh taken from a housing finance company six months ago. Market enquiry reports that the unit has taken up low-margin job work for a local competitor.
1. Assign the asset classification and SMA status of the account, and explain the reasoning.
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The account is a standard asset in SMA-1.
Asset classification is driven by how long the account has remained overdue. Although the term instalments were returned unpaid twice, the longest continuous overdue is 52 days - beyond 30 days but within 60. That is the SMA-1 band (31-60 days). If the overdue crosses 60 days, the account moves to SMA-2, and beyond 90 days it becomes a sub-standard NPA.
The cash credit excess does not by itself determine classification; it matters because it shows the account is not being operated within the sanctioned limit, but the trigger here is the unpaid instalments and the interest overdue. Both conditions should be reported to the central repository as SMA-1 in the next reporting cycle.
The point of the exercise is that the account is still a standard asset - which is precisely the window in which corrective action is cheapest. Once it slips to SMA-2, the branch typically loses the option of an early restructuring that retains standard status.
2. Which facts point to diversion of funds or wilful default rather than genuine business stress, and what evidence would you gather before concluding?
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Genuine stress would show up in weak sales, falling margins and delayed collections. Several facts here do not fit that pattern.
Transfer of land to the spouse by gift. Unit land is charged to the bank; transferring 0.8 acre by registered deed while the loan is stressed points to asset stripping and affects enforceability of the mortgage. Obtain the deed, the encumbrance certificate and the bank's charge position.
Fresh personal borrowing. A ₹65 lakh housing loan taken six months ago, while instalments were being dishonoured, suggests the promoter is moving personal wealth out of the business or has cash outside the unit. Obtain his personal balance sheet, ITR and the HFC sanction letter.
Contradiction between activity and filings. Electricity consumption down 38% and job work at low margins while stock statements are withheld is a classic combination - the unit may be selling output without bringing proceeds to the account, or the stock may not exist. A surprise stock audit, examination of GST e-way bills and comparison of GSTR-3B with bank credits will show whether turnover is being routed elsewhere.
Insurance lapsed and statements withheld. Both are breaches of sanction terms and are typically signs that the borrower has stopped treating the bank as a stakeholder. Record these in writing before any recall, because they establish breach of covenant rather than mere non-payment.
3. Outline the account-level action plan for the next 90 days, indicating what the branch can do itself and when escalation is warranted.
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Days 0-30: issue a written notice for default of instalments and non-submission of stock statements; freeze further drawings beyond the sanctioned limit and stop any ad hoc limit; obtain the stock statements and get insurance reinstated at the borrower's cost; conduct a stock audit and a physical verification of the hypothecated assets, including the 0.8 acre transferred.
Days 30-60: put the account on a corrective action plan requiring the promoter to bring ₹15-20 lakh of capital, restore margins and clear the overdue; test viability on realistic FY2025 numbers instead of the original DSCR of 1.65. Since the unit still has a functioning business and a willing promoter, a time-bound corrective plan is worth one cycle. Ask for the spouse's gift deed to be reversed or for an equivalent unencumbered property to be offered as collateral.
Days 60-90: if overdue crosses 60 days (SMA-2) with no capital infusion, escalate to the regional office with a recommendation for recall and action under the SARFAESI Act, issuing a 60-day notice under Section 13(2). Also report the promoter to the credit information companies and initiate a wilful default examination if the transfer of land and the fresh personal borrowing remain unexplained.