Monday, August 24, 2015

LENDING TO MSME SECTOR Visit postdated 24/7/16 for the latest version



SECTION - I

Micro, Small & Medium Enterprises Development (MSMED) Act, 2006

The Government of India has enacted the MSME Development (MSMED) Act, 2006 on June 16, 2006 which was notified on October 2, 2006.

Definition of MSME

(a) Manufacturing Enterprises i.e. Enterprises engaged in the manufacture or production, processing or preservation of goods as specified below:

(i)   A micro enterprise is where investment in plant and machinery does not exceed Rs. 25 lakh;

(ii)   A small enterprise is where the investment in plant and machinery is more than Rs. 25 lakh upto Rs. 5 crore;

(iii)  A medium enterprise is where the investment in plant and machinery is more than Rs.5 crore upto Rs.10 crore.

In case of the above enterprises, investment in plant and machinery is the original cost excluding land and building and the items specified by the Ministry of Small Scale Industries.

(b) Service Enterprises i.e. Enterprises engaged in providing or rendering of services and whose investment in equipment is as specified below:

(i)  A micro enterprise is where the investment in equipment does not exceed Rs. 10 lakh;

(ii)  A small enterprise is where the investment in equipment is more than Rs.10 lakh upto Rs. 2 crore; and

(iii) A medium enterprise is where the investment in equipment is more than Rs. 2 crore upto Rs. 5 crore.

Section – II

Priority Sector Guidelines for MSME sector
Loans to MSME, for both Manufacturing and Service sectors are eligible to be classified under the Priority Sector as per the following norms:

Manufacturing Enterprises
The MSME engaged in the manufacture or production of goods specified in the first schedule to the Industries (Development and Regulation) Act, 1951 and as notified by the Government. The Manufacturing Enterprises are defined in terms of investment in plant and machinery.

Service Enterprises
Bank loans up to Rs.5 crore per borrower / unit to Micro and Small Enterprises and Rs.10 crore to Medium Enterprises engaged in providing or rendering of services.

Khadi and Village Industries Sector (KVI)

All loans to units in the KVI sector will be eligible for classification under the sub-target prescribed for Micro Enterprises under priority sector.

Bank loans to food and agro processing units will form part of agriculture.

Other Finance to MSMEs

(i)  Loans for assisting the decentralized sector in the supply of inputs to and marketing of outputs of artisans, village and cottage industries.

(ii)   Loans to co-operatives of producers in the decentralized sector viz. artisans, village and cottage industries.

(iii)  Loans to MFIs for on-lending to MSME sector.

(iv) Credit outstanding under General Credit Cards (including Artisan Credit Card, Laghu Udyami Card, Swarojgar Credit Card, and Weaver’s Card etc. for catering to the non-farm credit needs of individuals).

(v) Outstanding deposits with SIDBI on account of priority sector shortfall.

MSME units will continue to enjoy the priority sector lending status up to three years after they grow out of the MSME category concerned.


SECTION - III

Targets / sub-targets for lending to MSME sector by Domestic Commercial Banks and Foreign Banks operating in India

Advances to MSME sector shall be considered under the overall Priority Sector target of 40%.

Domestic Commercial Banks are required to achieve a sub-target of 7.5 percent for lending to Micro Enterprises. The sub-target for foreign banks operating in India with 20 branches or more would be made applicable post 2018 after a review in 2017.

Bank loans above Rs.5 crore per borrower to Micro and Small Enterprises and Rs.10 crore to Medium Enterprises engaged in providing services, shall not be considered under the overall Priority Sector targets. However, such loans would be taken into account for targets prescribed by the Prime Minister’s Task Force on MSMEs for lending to MSE sector.

In terms of the recommendations of the Prime Minister’s Task Force on MSMEs, banks are advised to achieve:

(i)                 20 per cent year-on-year growth in credit to micro and small enterprises,
(ii)               10 per cent annual growth in the number of micro enterprise accounts and
(iii)             60% of total lending to MSE sector as on preceding March 31st to Micro enterprises


SECTION - IV

Common guidelines / instructions for lending to MSME sector

Issue of Acknowledgement of Loan Applications to MSME borrowers
Banks have been advised to acknowledge all loan applications from MSME borrowers and ensure that a running serial number is recorded on the application form as well as on the acknowledgement receipt. Technology may be used for online submission of loan applications as also for online tracking of loan applications.

Collateral
No collateral security is to be taken for loans up to Rs.10 lakh for units under MSE sector. This also covers units financed under the PMEGP. On the basis of good track record and financial position of the unit, this limit can be raised to Rs.25 lakh.

Banks should encourage their staff to avail of the Credit Guarantee Scheme cover, and make their performance in this regard a criterion of their evaluation.

Composite loan
A composite loan limit of Rs.1 crore can be sanctioned by banks to enable the MSE entrepreneurs to avail of their working capital and term loan requirement through Single Window.

Specialised MSME branches
Public sector banks are to open at least one specialised branch in each district. Branches with 60% or more of their advances in MSME sector may be categorized as specialized MSME branches. PSBs will ensure specialized MSME branches in identified clusters. The existing SSI branches may also be redesignated as MSME branches. Though their core competence will be utilized for extending finance and other services to MSME sector, they will have operational flexibility to render other services to other sectors as well.

Delayed Payment
(i)                 The buyer has to pay the supplier on or before the date agreed upon in writing or before the appointed day. The period agreed upon shall not exceed 45 days from the date of acceptance or the day of deemed acceptance.
(ii)               In case the buyer fails to pay, he shall be liable to pay the amount together with compound interest with monthly rests at three times the bank rate from the appointed day or, from the date agreed upon.
(iii)             This will be applicable to any types of goods supplied or services rendered by the supplier.
(iv)    Matters of dispute regarding amount shall be referred to the Micro and Small Enterprises Facilitation Council, constituted by the respective State Government.

Banks are advised to fix sub-limits within the overall working capital limits to the large borrowers for meeting the payment obligation to MSMEs.

Revised Guidelines for Rehabilitation of Sick Micro and Small Enterprises
The objective of the revised guidelines is to hasten the process of identification of a unit as sick, early detection of incipient sickness, and to lay down a procedure to be adopted before declaring a unit as unviable.

A Micro or Small Enterprise becomes Sick, if (a) any of the borrowal account remains NPA for three months or more OR (b) there is erosion in the net worth due to accumulated losses upto 50% of its net worth during the previous accounting year.

Banks should take the decision on viability within 3 months of the unit becoming sick and the rehabilitation package should be fully implemented within 6 months from the date the unit is declared as 'potentially viable'.

Micro and Small Enterprises Sector – The imperative of Financial Literacy and consultancy support
Scheduled commercial banks have been advised that the banks could either separately set up special cells at their branches, or vertically integrate the function of financial literacy and operational skills, including accounting and finance, business planning etc. in the Financial Literacy Centres (FLCs). The bank staff should also be trained through customised training programs to meet the specific needs of the sector.

Structured Mechanism for monitoring the credit growth to the MSE sector
Based on the recommendations of the an IBA-led Sub-Committee (Chairman: Shri K.R. Kamath), banks have been advised to:

·      strengthen their existing systems of monitoring credit growth to the sector and put in place a system-driven performance MIS at every supervisory level which should be critically evaluated on a regular basis;

·      put in place a system of e-tracking of MSE loan applications and monitor their disposal in banks, giving branch, region-, zone and State-wise positions. This information is to be displayed by banks on their websites; and

·      monitor timely rehabilitation of sick MSE units. The progress is to be made available on the website of banks.

Revised General Credit Card (GCC) Scheme
In order to enhance the coverage of GCC Scheme to ensure greater credit linkage, the GCC guidelines have been revised on Dec 2, 2013.

State Level Inter Institutional Committee (SLIIC)
SLIIC were set up in the States to deal with the problems of co-ordination for rehabilitation of sick micro and small units. However, the matter of continuation of the SLIIC Forum has been left to the individual States. The meetings of these Committees are convened by Regional Offices of RBI and presided over by the Secretary, Industry of the concerned State Government. It provides a forum for interfacing between the State Government Officials and State Level Institutions on the one side and the term lending institutions and banks on the other. It closely monitors timely sanction of working capital to units which have been provided term loans by SFCs, implementation of special schemes such as Margin Money Scheme of State Government and reviews general problems faced by industries and sickness in MSE sector. The representatives of the local state level MSE associations are invited to the meetings of SLIIC which are held quarterly. A sub-committee of SLIIC looks into the problems of individual sick MSE unit and submits its recommendations to the forum of SLIIC for consideration.

Empowered Committee on MSMEs
Empowered Committees on MSMEs have been constituted under the Chairmanship of the Regional Directors with the representatives of SLBC Convenor, senior level officers from two banks having predominant share in MSME financing in the state, representative of SIDBI Regional Office, the Director of Industries of the State Government, one or two senior level representatives from the MSME Associations in the state, and a senior level officer from SFC/SIDC as members. The Committee will meet periodically and review the progress in MSME financing as also rehabilitation of sick Micro, Small and Medium units. It will also coordinate with other banks/FIs and the state government in removing bottlenecks. The committees may decide the need to have similar committees at cluster/district levels.

Debt Restructuring Mechanism for MSMEs
(i)                 Prudential Guidelines on SME Debt Restructuring by banks have been advised by Department of Banking Operations & Development vide their guidelines on Restructuring of Advances by banks.

(ii)               All commercial banks were advised to:
(a)      put in place loan policies, Restructuring/Rehabilitation policy for revival of potentially viable sick units and OTS scheme for recovery for the MSE sector, and
(b)      implement recommendations on timely and adequate flow of credit to the MSE sector.

(iii)             Banks should give wide publicity to their OTS scheme, by placing it on the bank’s website and through other possible modes of dissemination.

Cluster Approach
All SLBC Convenor banks are to incorporate the credit requirement in the clusters identified by the Ministry of MSME, in their Annual Credit Plans,.

(i) Banks have been advised that a full-service approach may be achieved through extending banking services to recognized MSE clusters by adopting a 4-C approach namely, Customer focus, Cost control, Cross sell and Contain risk. A cluster based approach to lending may be more beneficial:
(a)  in dealing with well-defined and recognized groups;
(b)  availability of appropriate information for risk assessment and
(c)  monitoring by the lending institutions.

Clusters may be identified based on factors such as trade record, competitiveness and growth prospects and other data.

(ii)               All SLBC Convenor banks have been advised to review their institutional arrangements for delivering credit to the MSME sector, especially in 388 clusters identified by United Nations Industrial Development Organisation (UNIDO).

(iii)             The Ministry of MSME has approved a list of clusters under SFURTI and MSE-CDP located in 121 Minority Concentration Districts. Appropriate measures have been taken to improve the credit flow to the identified clusters of micro and small entrepreneurs from the Minority Communities residing in the minority concentrated districts.

(iv)             Banks should open more MSE focused branches at different MSE clusters which can also act as Counseling Centers for MSEs. Each lead bank of a district may adopt at least one MSE cluster.

Scheme of Small Enterprises Financial Centres (SEFCs):
A scheme for strategic alliance between banks and SIDBI located in clusters, named as “Small Enterprises Financial Centres” has been formulated in consultation with the then Ministry of SSI and Banking Division, Ministry of Finance, SIDBI, IBA and select banks. SIDBI has so far executed MoU with 15 banks.

Credit Linked Capital Subsidy Scheme (CLSS)
Ministry of MSME has conveyed their approval for continuation of the Credit Linked Capital Subsidy Scheme (CLSS) for Technology Upgradation of Micro and Small Enterprises from X Plan to XI Plan (2007-12) subject to the following terms and conditions:
(i)  Ceiling on the loan under the scheme is Rs.1 crore.
(ii)  The rate of subsidy is 15% up to loan ceiling of Rs. 1 crore.
(iii)  Subsidy will be calculated based on the purchase price of plant and machinery instead of term loan disbursed.
(iv) SIDBI and NABARD will continue to be implementing agencies of the scheme.


Banking Codes and Standard Board of India (BCSBI)
BCSBI has formulated a Code of Bank's Commitment to Micro and Small Enterprises. This is a voluntary Code, which sets minimum standards of banking practices for banks to follow when they are dealing MSEs. The Code does not replace or supersede regulatory or supervisory instructions issued by the RBI and banks will comply with such instructions issued by the RBI from time to time.

Objectives of the BCSBI Code
The Code has been developed to:
(a)    Give a positive thrust to the MSE sector by providing easy access to efficient banking services.
(b)  Promote good and fair banking practices by setting minimum standards in dealing with MSE.
(c)   Increase transparency so that a better understanding of what can reasonably expected of the services.
(d)  Improve understanding of business through effective communication.
(e)  Encourage market forces, through competition, to achieve higher operating standards.
(f)  Promote a fair and cordial relations between MSE and banks and also ensure timely and quick response to banking needs.
(g)  Foster confidence in the banking system.




Section – V

Committees on flow of Credit to MSE sector

Report of the High Level Committee on Credit to SSI (now MSE) (Kapur Committee)
The recommendations of the committee were examined by the RBI and it was decided to accept 88 recommendations which include the following important ones:

(i)              Delegation of more powers to branch managers to grant ad-hoc limits;
(ii)            Simplification of application forms;
(iii)          Freedom to banks to decide their own norms for assessment of credit requirements;
(iv)          Opening of more specialised SSI branches;
(v)            Enhancement in the limit for composite loans to Rs. 5 lakh. (since enhanced to Rs.1 crore);
(vi)          Strengthening the recovery mechanism;
(vii)        Banks to pay more attention to the backward states;
(viii)      Special programmes for training branch managers for appraising small projects;
(ix)          Banks to make customers grievance machinery more transparent and simplify the procedures for handling complaints and monitoring thereof.


Report of the Committee to Examine the Adequacy of Institutional Credit to SSI Sector (now MSE) and Related Aspects (Nayak Committee)

All the major recommendations of the Committee have been accepted and the banks have been inter-alia advised to:

(i)                 give preference to village industries, tiny industries and other small scale units in that order, while meeting the credit requirements of the small scale sector;

(ii)               grant working capital limits to SSI (now MSE) units on the basis of minimum 20% of their estimated annual turnover whose credit limit in individual cases is upto Rs.2 crore [ since raised to Rs.5 crore ];

(iii)             prepare annual credit budget on the ‘bottom-up’ basis to ensure that the legitimate requirements of SSI (now MSE) sector are met in full;

(iv)             extend ‘Single Window Scheme’ of SIDBI to all districts to meet the financial requirements of SSIs(now MSE);

(v)               ensure that there is no delay in sanctioning and disbursal of credit. In case of rejection/curtailment of the loan proposal, a reference to higher authorities should be made;

(vi)             not to insist on compulsory deposit as a `quid pro-quo’ for sanctioning the credit;

(vii)           open specialised SSI (now MSE) bank branches or convert those branches which have a fairly large number of SSI (now MSE) borrowal accounts, into specialised SSI (now MSE) branches;

(viii)         identify sick SSI (now MSE) units and take urgent action to put them on nursing programmes;

(ix)             standardise loan application forms for SSI (now MSE) borrowers; and

(x)               impart training to staff working at specialised branches to bring about attitudinal change in them.


5.3 Report of the Working Group on Flow of Credit to SSI (now MSE) Sector (Ganguly Committee)

The Committee made 31 recommendations. The recommendations have been examined and RBI has accepted 8 recommendations so far, which are as under:

(i)                 adoption of cluster based approach for financing MSME sector;

(ii)               sponsoring specific projects as well as widely publicising successful working models of NGOs by Lead Banks which service small and tiny industries and individual entrepreneurs;

(iii)             sanctioning of higher working capital limits by banks operating in the North East region to SSIs (now MSE) , based on their commercial judgment;

(iv)             exploring new instruments by banks for promoting rural industry and to improve the flow of credit to rural artisans, rural industries and rural entrepreneurs, and

(v)               revision of tenure and interest rate structure of deposits kept by foreign banks with SIDBI for their shortfall in priority sector lending.

Working Group on Rehabilitation of Sick SMEs (Chairman: Dr. K.C. Chakrabarty)
In the light of the recommendations, all commercial banks were advised to:

a)    put in place loan policies, Restructuring/Rehabilitation policy for revival of potentially viable sick units and non- discretionary OTS scheme for recovery with respect to MSE sector and

b)   implement the recommendations with regard to timely and adequate flow of credit to this sector.

Lending in case of all advances upto Rs 2 crores may be done on the basis of scoring model. Banks have been advised to review their loan policy on credit facilities to the MSE sector, with a view to using credit scoring models in their evaluation of the loan proposals.

Prime Minister’s Task Force on MSME
The Task Force recommended several measures on the functioning of MSMEs, viz., credit, marketing, labour, exit policy, infrastructure/technology/skill development and taxation. The comprehensive recommendations cover measures that need immediate action as well as medium term institutional measures along with legal and regulatory structures and recommendations for North-Eastern States and Jammu & Kashmir.

Banks are urged to keep in view the recommendations made by the Task Force and take effective steps to increase the flow of credit to the MSE sector, particularly to the micro enterprises.

Working Group to Review the Credit Guarantee Scheme for Micro and Small Enterprises- V.K. Sharma
The recommendations included, mandatory doubling of the limit for collateral free loans to MSE sector from Rs.5 lakh to Rs.10 lakh. CEOs of banks were asked to encourage the staff to avail of the CGS cover and make performance in this regard a criterion of their evaluation.

Based on the Master Circular of 1/7/15.
Please visit www.rbi.org.in  for any further clarification if required…………….. Poppy