Restructuring an MSME after its main buyer enters CIRP
Ganga Plastics, a proprietorship in Kanpur making injection-moulded housings, sells 55% of its output to a single OEM that was admitted to corporate insolvency resolution process four months ago. Its receivables of ₹1.40 crore from that OEM are now a claim before the resolution professional, with an estimated realisation of 18-25 paise in the rupee and no timeline. The unit's cash credit of ₹95 lakh and term loan of ₹60 lakh were regular until the March quarter, when interest was funded by overdrawing; the account has now been overdue for 34 days. FY2024 sales were ₹4.30 crore at a net margin of 4.2%, and depreciation is about ₹12 lakh a year. Two other domestic buyers are willing to place orders if the proprietor can fund ₹35 lakh of new moulds. He has asked for restructuring with a 24-month moratorium and fresh mould finance. Aggregate exposure to the borrower, including the proposed facilities, is well below ₹25 crore.
1. What is the present classification of the account, and is it eligible for restructuring without downgrade?
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With the oldest overdue at 34 days, the account is a standard asset in SMA-1 (31-60 days). It has not yet turned NPA, which is the key to the answer.
Under the RBI framework for restructuring of MSME advances, an account in default but classified standard may be restructured without downgrade if the aggregate exposure within the group does not exceed ₹25 crore and the restructuring is implemented within 90 days of the default. Here the exposure is comfortably below the threshold. But the clock is running: only about 56 days remain. If the package is not implemented in that window, the account becomes NPA, and any restructuring after that will carry NPA classification and a much longer and more costly path to standard status.
So the first action is procedural - put the proposal into sanction well before the 90-day deadline, with the restructuring memorandum signed by the borrower and the promoter's sacrifices documented. Waiting for the next quarterly review would cost the borrower the account's classification.
2. Rebuild the cash flow on a realistic basis and design a restructuring package that a sanctioning authority could accept.
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Start with the doubtful receivable. Realisation at 20 paise gives about ₹28 lakh; the remaining ₹1.12 crore should be assumed lost, provided for, and removed from the working capital cycle and the drawing power. To build the cash flow on the claim would overstate the borrower's capacity.
Rebuilt numbers: post-restructuring sales of about ₹3.60 crore at a 4.5% net margin (the OEM's low-margin volumes are gone, the new buyers are domestic) gives ₹16.2 lakh, plus depreciation of ₹12 lakh = cash accrual of about ₹28 lakh.
Proposed debt: cash credit reduced to ₹70 lakh by a promoter contribution of ₹10 lakh and recovery from the claim, and the term loan of ₹60 lakh restructured. Service on ₹70 lakh at about 11% is roughly ₹7.7 lakh, and a residual term loan of ₹60 lakh over seven years at 9.5% gives an annual instalment of about ₹11.7 lakh. Total debt service is around ₹19.4 lakh, giving a DSCR of about 1.44 - viable.
Structure: 12-month moratorium, not 24 - a 24-month moratorium signals that the unit cannot generate cash and would delay the reckoning. Interest during the moratorium is to be serviced monthly. The ₹35 lakh of mould finance should be sanctioned only against firm purchase orders from the two new buyers, ideally as a separate term loan with a 4-year repayment, not as an increase in the cash credit. All OEM resolution proceeds go into an escrow with the bank, and the resolution claim form must be filed with the RP immediately.
3. What monitoring conditions and safeguards should be attached, and what happens if the borrower reverts to default?
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Conditions: personal guarantee of the proprietor and spouse; mortgage or charge over any property the proprietor holds, including the moulds bought with the fresh finance. The borrower must submit monthly stock and book-debt statements and quarterly 'no default' certificates from other lenders. Sales concentration must be reviewed, with a covenant that no single buyer will exceed 40% of turnover at the end of 12 months. Receivables must be routed through a designated account, and the proprietor must fund ₹10 lakh as contribution before the first disbursement.
Monitoring during the moratorium: quarterly review at 90 days, comparing actual sales and margin against the rebuilt plan, and a stock audit after six months. Any shortfall in interest during the moratorium should trigger a review, not another round of overdrawing.
If the borrower defaults after restructuring, the restructuring fails and the account must be classified as NPA. Recovery then follows the ordinary course: recall, SARFAESI or civil suit, and action against the guarantors. Do not allow a second restructuring on the same stress; a repeat compromise without recovery would be flagged at inspection as evergreening. The primary security - moulds and machinery - should be valued and verified at each review, and loss provisions should be based on the realistic realisable value of the moulds, not their purchase cost.