Nexus of Good: Impressive turnaround

A large number of state industrial corporations are in bad shape. The situation was no different for the State Industrial and Investment Corporation of Maharashtra (SICOM). When Nitin B Jawale, a 2003 batch IAS officer of the Odisha cadre, now on deputation to the Government of Maharashtra, joined as the Managing Director of SICOM, a well-wisher who knew the sector told him that "he was going to preside over the funeral rites of the organisation." The concerns of those who warned him were not out of place as SICOM had experienced a rapid rise in Non-Performing Assets (NPAs), and due to the resultant provisions/write-offs, the Capital to Risk-weighted Assets Ratio (CRAR), also known as Capital Adequacy Ratio (CAR), had dropped to 6.79 per cent, much below the regulatory minimum of 15 per cent. Also, the Leverage Ratio had increased to 17.44 times, far in excess of the regulatory maximum of 7 times. Therefore, in May 2018, the Reserve Bank of India had put SICOM under the Prompt Corrective Action (PCA) framework, directing it not to undertake any further expansion of the credit/investment portfolio. This meant that SICOM was barred from any lending activity and creating fresh loans on its books due to its large-scale NPAs. SICOM's outstanding debt at that time stood at Rs 2,210 crore.

Now, after one and a half years of persistent efforts, Nitin and his team have brought SICOM back to life. SICOM has scripted a turnaround in the most adverse circumstances. It would be interesting to know how it all happened. SICOM was set up by the Government of Maharashtra in 1966 to act as a catalyst in the industrial development of the state by providing industrial finance and advisory services to entrepreneurs. SICOM is entitled to take deposits from state Public Sector Undertakings, and it uses this capital to provide credit to entrepreneurs for industrial activities. In the six decades of its existence, SICOM, as a systemically important NBFC (NBFC-ND-SI, as designated by RBI), helped promote over 8,000 industrial units, some of which include Future Group, Lupin Laboratories, Supreme Industries, Bajaj Auto, Jindal Iron and Steel, etc.

SICOM, in its history of over five decades, has seen numerous highs and lows, particularly after its partial disinvestment in 1996. But never was the situation as dire as it turned out to be at the end of FY 20-21 when, due to preceding market failures and the general economic slowdown induced by COVID, it was laden with huge NPAs.

Despite being vested with powers under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 and State Finance Commission (SFC) Act, making recoveries from these sticky, non-performing assets was hugely challenging. The annual negative carry, that is the difference between income and expenditure (primarily litigation and establishment costs), stood at a staggering Rs 11 crore. To put it simply, the expenditure had grossly overshot the income by Rs 11 crore a year. SICOM, with its liquidity crunch and negative carry, was heading towards a position where it was facing an imminent situation of not being in a position to service even the interest for the debt, let alone repaying the principal. It was at a point where it would not be in a position to disburse salaries to its employees. Its bankruptcy and closure seemed certain.

Nitin, along with his recovery teams, revamped the strategy and pursued debtors vigorously, most of whom were willful defaulters. Taking on this set of people was an extremely difficult task, as a large proportion of them were notorious for their bad debts against many other financial institutions, including commercial banks. These defaulters employed all kinds of pressure tactics, including engaging in passing on veiled threats, dilatory and stalling tactics by taking recourse to legal actions etc. However, team SICOM took them head-on, and vigorously pursued their agenda of recovery. There were multiple instances of failure, but team SICOM persisted, kept on trying, changed strategies, and made course corrections. The result was a large number of matters, pending for over a decade, being resolved and taken to their logical conclusion.

In a period of 18 months, SICOM could recover as much as Rs 177 crore. Furthermore, through its treasury portfolios, additional liquidity of about Rs 147.5 crore was infused. Instead of the negative carry of Rs 11 crore, there was now a positive carry of Rs one crore for FY23! SICOM had set an internal deadline to clear itself out of the default situation with the state PSUs before the end of FY23. By the end of December 2022, it was close to a position where it could do so, and at this point, it approached RBI and started discussions about restarting its lending activities. After examining the financial position of SICOM, the Reserve Bank, which had earlier communicated that SICOM could restart its lending activity only when it gets its Capital to Risk-weighted Assets Ratio (CRAR) to the statutory requirement of 15 per cent or above, reiterated the same.

Due to some good recoveries around Q3 of 22-23, Capital to Risk-weighted Assets Ratio (CRAR) went up to 21 per cent, and the Leverage Ratio went down to a level of 5.64 times the equity. However, the RBI insisted on a board-approved action plan, which was done in mid-January 2023 and submitted to the RBI. Despite the COVID-induced economic slowdown and market slump, SICOM not only repaid the state PSUs the debts with full interest but also got out of default. This makes the SICOM’s revival a splendid achievement, especially when we take note that all this was taxpayers’ money lent for industrial activities.

These sustained and focused recovery efforts also resulted in a reversal of provisions. Due to this, after successive years of losses, SICOM Ltd. earned a profit of Rs 6.52 crore for the year 2021-22. The support of the Board of Directors of SICOM was very crucial for this turnaround. It not only reposed faith in the Managing Director but also guided him in crucial decision-making in various important matters. SICOM is now planning to raise capital from the PSUs of the Government of Maharashtra since it is now in a position to restart its industrial lending operations. It is looking forward to further contributing to the process of industrial development, especially in the development of unindustrialised and backward areas.

What Nitin and his committed team have managed to achieve in the context of SICOM is replicable in the true spirit of the Nexus of Good. Many state PSUs face similar problems. The approach adopted for the revival of SICOM can be of use to such organisations that face similar challenges.

Views expressed are personal