Sunday, July 24, 2016

Lending to MSME Sector

Definition of Micro, Small and Medium Enterprises

(a) Manufacturing Enterprises would mean enterprises engaged in the manufacture or production of goods as specified below:

(i)  A micro enterprise- Investment in plant and machinery does not exceed Rs. 25 lakh;

(ii)A small enterprise- Investment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore; and

(iii)         A medium enterprise- Investment in plant and machinery is more than Rs.5 crore but does not exceed Rs.10 crore.

Investment in plant and machinery is the original cost excluding land and building and the items specified by the Ministry of Small Scale Industries (Annex I of Master Direction).

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

(i)A micro enterprise- Investment in equipment does not exceed Rs. 10 lakh;

(ii)A small enterprise- Investment in equipment is more than Rs.10 lakh but does not exceed Rs. 2 crore; and

(iii)         A medium enterprise- Investment in equipment is more than Rs. 2 crore but does not exceed Rs. 5 crore.

Priority Sector Guidelines for MSME sector

Manufacturing Enterprises
The Micro, Small and Medium Enterprises engaged in the manufacture or production of goods to any industry specified in the first schedule to the Industries (Development and Regulation) Act, 1951 and as notified by the Government from time to time. 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 and defined in terms of investment in equipment.

Khadi and Village Industries Sector (KVI)
All loans to units in the KVI sector will be eligible for classification under the sub-target of 7.5 percent prescribed for Micro Enterprises under priority sector.

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

Other Finance to MSMEs
(i) Loans to entities involved in 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 sanctioned by banks to MFIs for on-lending to MSME sector.

(iv)         Credit outstanding under GCC.

(v)           Overdrafts up to Rs.5,000/- under PMJDY provided the borrower’s annual household income does not exceed Rs.100,000/- for rural areas and Rs.1,60,000/- for non-rural areas. These overdrafts will qualify under Micro Enterprises.

(vi)         Outstanding deposits with SIDBI and MUDRA Ltd. on account of priority sector shortfall.

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

MSMED Act, does not allow clubbing of investments of different enterprises set up by same entity.

Targets / sub-targets for lending to MSME sector

Advances to MSME sector shall be reckoned in computing achievement under the overall Priority Sector target of 40 %.

Domestic Commercial Banks are required to achieve a sub-target of 7.5 % for lending to Micro Enterprises by March 2017. The sub-target for foreign banks with 20 branches and above would be made applicable post 2018.

Bank loans above Rs.5 crore to Micro and Small Enterprises and Rs.10 crore to Medium Enterprises engaged in services shall not be reckoned in computing achievement under Priority Sector targets. However, such loans would be taken into account while assessing achievement of 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 % year-on-year growth in credit to micro and small enterprises,
(ii)           10 % annual growth in the number of micro enterprise accounts and
(ii)           60% of total lending to MSE sector as on preceding March 31st to Micro enterprises

Common guidelines / instructions for lending to MSME sector

Issue of Acknowledgement of Loan Applications to MSME borrowers
Banks are to acknowledge all loan applications and ensure that a running serial number is recorded on the application form as well as on the acknowledgement receipt. Banks are also to put in place a system of Central Registration, online submission and e-tracking of applications.

Banks are not to accept collateral security for loans up to Rs.10 lakh extended to units in the MSE sector and units financed under PMEGP.

On the basis of good track record and financial position of the MSE units, Banks may increase the limit to Rs.25 lakh (with the approval of the appropriate authority).

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

Revised General Credit Card (GCC) Scheme
GCC guidelines were revised to ensure greater credit linkage within the overall Priority Sector guidelines and to capture all credit extended by banks to individuals for non-farm entrepreneurial activity.

Credit Linked Capital Subsidy Scheme (CLSS)
Government launched the CLS scheme for Technology Upgradation of Micro and Small Enterprises 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% for all units of MSEs up to Rs. 1 cr.
(iii)                   Calculation of admissible subsidy will be done with reference to the purchase price of plant and machinery.
(iv)                   SIDBI and NABARD will continue to be implementing agencies.

Streamlining flow of credit to MSEs for facilitating timely and adequate credit flow during their ‘Life Cycle’:

Banks are advised to review their existing policies by incorporating the following provisions:

i)                To extend standby credit facility in case of term loans
ii)              Additional working capital to meet with emergent needs
iii)            Mid-term review of working capital limit, where banks are convinced that changes in the demand pattern require increasing the existing credit limits, every year based on the actual sales of the previous year.
iv)           Timelines for Credit Decisions

Debt Restructuring Mechanism for MSMEs
(i)             All scheduled commercial banks are advised to follow the guidelines on Prudential norms on IRAC and Provisioning.

(ii)           All commercial banks are advised to:
(a)    put in place loan policies governing extension of credit facilities, Restructuring/Rehabilitation and non- discretionary OTS scheme for recovery of non-performing loans for the MSE sector and
(b)   implement recommendations reagarding timely and adequate flow of credit to the MSE sector.

(iii)         Banks are advised to give wide publicity to the OTS scheme implemented by them. They may allow reasonable time to submit the application and make payment in order to extend the benefits of the scheme to eligible borrowers.

Framework for Revival and Rehabilitation of MSMEs

The Ministry of Micro, Small and Medium Enterprises, had notified a ‘Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises’. The revival and rehabilitation of MSME units having loan limits up to Rs.25 crore would be undertaken under this Framework. The revised Framework supersedes Guidelines on Rehabilitation of Sick Micro and Small, except those relating to Reliefs and Concessions for Rehabilitation of Potentially Viable Units and One Time Settlement.

The salient features of the Framework are as under:
i)        Before a loan turns NPA, banks should identify incipient stress by creating three sub-categories under the SMA category
ii)      Any borrower may voluntarily initiate proceedings under this Framework
iii)    Committee approach to be adopted for deciding corrective action plan
iv)    Time lines have been fixed for taking various decisions under the Framework

Structured Mechanism for monitoring the credit growth to the MSE sector

Banks are advised to:
        strengthen their systems of monitoring credit growth 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 the disposal process, giving branch-wise, region-wise, zone-wise and State-wise positions. This 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.

Institutional arrangements

Specialised MSME branches
Banks are advised to open at least one specialised branch in each district. They are permitted to categorise their branches having 60% or more of their advances to MSME sector as specialized MSME branches. The existing specialised SSI branches, may also be redesignated as MSME branches. These branches will have operational flexibility to render other services to other borrowers.

State Level Inter Institutional Committee (SLIIC)
In order to deal with the problems of co-ordination for rehabilitation of sick micro and small units, SLIIC were set up in the States. The meetings of these Committees are convened by RBI and presided over by the Secretary, MSME or Industry of the concerned State Government. It closely monitors timely sanction of working capital to units which have been provided term loans by SFCs, implementation of special schemes such of State Government and reviews general problems faced by industries and sickness in MSE sector. Representatives of the local state level MSE associations are invited to the meetings of SLIIC which are held quarterly.

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

Banking Codes and Standards 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 with Micro and Small Enterprises (MSEs).

The Code does not replace or supersede regulatory or supervisory instructions issued by the RBI.

Objectives of the BCSBI Code
The Code is developed to:
(a)  Give a positive thrust to the MSE sector.
(b)           Promote good and fair banking practices by setting minimum standards.
(c)Increase transparency.
(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 relationship between MSE and banks and also ensure timely and quick response to banking needs.
(g)           Foster confidence in the banking system.

Micro and Small Enterprises Sector – The imperative of Financial Literacy and consultancy support

The lack of financial literacy, operational skills, including accounting and finance, business planning etc. represent formidable challenge for MSE borrowers. To address these handicaps, Scheduled commercial banks are advised that they could either separately set up special cells at their branches, or vertically integrate this function in the Financial Literacy Centres (FLCs) set up by them. The bank staff should also be trained through customised training programs to meet the specific needs of the sector.

Cluster Approach
All SLBC Convenor banks are advised to incorporate in their Annual Credit Plans, the credit requirement in the clusters. They are also encouraged to extend banking services in such clusters.

(i) 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.

(ii) All SLBC Convenor banks were advised to review their institutional arrangements for delivering credit to the MSME sector. The Ministry of Micro, Small and Medium Enterprises has approved a list of clusters under the Scheme of Fund for Regeneration of Traditional Industries (SFURTI) and Micro and Small Enterprises Cluster Development Programme (MSE-CDP) located in 121 Minority Concentration Districts.

(iii)         In terms of recommendations of the Prime Minister’s Task Force on MSMEs banks should open more MSE focused branch offices at different MSE clusters which can also act as Counselling Centres for MSEs. Each lead bank of a district may adopt at least one MSE cluster.

Delayed Payment
(i)             The buyer has to make payment to the supplier on or before the date agreed upon, in case of no agreement, before the appointed day. The period shall not exceed forty five days from the date of acceptance or deemed acceptance.

(ii)           In case the buyer fails to make payment, he shall be liable to pay interest with monthly rests at three times the Bank Rate.

(iii)         The buyer shall be liable to pay interest for any goods supplied or services rendered.

(iv)         In case of dispute, a reference shall be made to the MSE 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 in respect of purchases from MSMEs.
Based on RBI Master Direction Dated 21/07/2016. For further clarifications, please refer  ……………… Poppy