A.1. The Government of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 in terms of which the definition of micro, small and medium enterprises is as under:
(a) Enterprises engaged in the manufacture or production, processing or preservation of goods as specified below:
(I) A micro enterprise is an enterprise where investment in plant and machinery does not exceed Rs. 25 Lakh;
(ii) A small enterprise is an enterprise where the investment in plant and machinery is more than Rs. 25 Lakh but does not exceed Rs. 5 crore; and
(iii) A medium enterprise is an enterprise where the investment in plant and machinery is more than Rs.5 crore but does not exceed Rs.10 crore.
In case of the above enterprises, investment in plant and machinery is the original cost excluding land and building.
(b) Enterprises engaged in providing or rendering of services and whose investment in equipment (original cost excluding land and building and furniture, fittings and other items not directly related to the service rendered or as may be notified under the MSMED Act, 2006 are specified below.
Bank’s lending to the Micro and Small Enterprises is reckoned for priority sector advances. Lending to Medium enterprises is not eligible to be included for the purpose of computation of priority sector lending
Priority sector lending include only those sectors as part of the priority sector, that impact large sections of the population, the weaker sections and the sectors which are employment-intensive such as agriculture, and tiny and small enterprises.
All advances granted to units in the KVI sector, irrespective of their size of operations, location and amount of original investment in plant and machinery will be treated as loans to the micro enterprises segment within the MSE Sector and covered under priority sector advances.
As per extant policy, certain targets have been prescribed for banks for lending to the Micro and Small enterprise (MSE) sector. The targets for domestic banks and foreign banks are slightly different keeping in mind the limited presence of the foreign banks. The domestic commercial banks are expected to enlarge credit to priority sector and ensure that priority sector advances (which include the micro and small enterprises sector) constitute 40 per cent of Adjusted Net Bank Credit (ANBC) or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher.
In order to ensure that sufficient credit is available to micro enterprises within the MSE sector, banks should ensure that:
(a) 40 per cent of the total advances to MSE sector should go to micro (manufacturing) enterprises having investment in plant and machinery up to Rs. 5 Lakh and micro (service) enterprises having investment in equipment up to Rs. 2 Lakh ;
(b) 20 per cent of the total advances to MSE sector should go to micro (manufacturing) enterprises with investment in plant and machinery above Rs. 5 Lakh and up to Rs. 25 Lakh, and micro (service) enterprises with investment in equipment above Rs. 2 Lakh and up to Rs. 10 Lakh. Thus, 60 per cent of MSE advances should go to the micro enterprises.
(c) While banks are advised to achieve the 60% target as above, the allocation of 60% of the MSE advances to the micro enterprises is to be achieved in stages viz. 50% in the year 2010-11, 55% in the year 2011-12 and 60% in the year 2012-13
For Foreign banks the targets are the same except that Foreign banks are expected to enlarge credit to priority sector and ensure that priority sector advances (which includes the MSE sector) constitute 32 per cent of Adjusted Net Bank Credit (ANBC) or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher. Within the overall target of 32 per cent to be achieved by foreign banks, the advances to MSE sector should not be less than 10 per cent of the adjusted net bank credit (ANBC) or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher
Public sector banks have been advised to open at least one specialized branch in each district. The banks have been permitted to categorize their MSME general banking branches having 60% or more of their advances to MSME sector, as specialized MSME branches for providing better service to this sector as a whole. As per the policy package announced by the Government of India for stepping up credit to MSME sector, the public sector banks will ensure specialized MSME branches in identified clusters/centers with preponderance of small enterprises to enable the entrepreneurs to have easy access to the bank credit and to equip bank personnel to develop requisite expertise. Though their core competence will be utilized for extending finance and other services to MSME sector, they will have operational flexibility to extend finance/render other services to other sectors/borrowers.
The banks have been advised to put in place loan policies governing extension of credit facilities for the MSE sector duly approved by their Board of Directors. Banks have, however, been advised to sanction limits after proper appraisal of the genuine working capital requirements of the borrowers keeping in mind their business cycle and short term credit requirement. As per Nayak Committee Report, working capital limits to SSI units is computed on the basis of minimum 20% of their estimated turnover up to credit limit of Rs.5crore.
A composite loan limit of Rs.1crore can be sanctioned by banks to enable the MSME entrepreneurs to avail of their working capital and term loan requirement through Single Window. All scheduled commercial banks were advised that the banks which have sanctioned term loan singly or jointly must also sanction working capital (WC) limit singly (or jointly, in the ratio of term loan) to avoid delay in commencement of commercial production thereby ensuring that there are no cases where term loan has been sanctioned and working capital facilities are yet to be sanctioned.
Cluster based approach to lending is intended to provide a full-service approach to cater to the diverse needs of the MSE sector which may be achieved through extending banking services to recognized MSE clusters. A cluster based approach may be more beneficial (a) in dealing with well-defined and recognized groups (b) availability of appropriate information for risk assessment (c) monitoring by the lending institutions and (d) reduction in costs.
Some financial institutions offer their customers flexible repayment options with unequal EMIs. In step-up loans, the EMI is low initially and increases as years roll by (balloon repayment). In step-down loans, EMI is high initially and decreases as years roll by. Step-up option is convenient for borrowers who are in the beginning of their careers. Step-down loan option is useful for borrowers who are close to their retirement years and currently make good money.
EMI, especially one you are paying for your home loan, is a big chunk in your monthly budget so plan properly about your EMI payment and be prepared for any change that may occur in future.
Banks have been mandated to grant collateral free loans up to Rs.5 Lakh to all MSE borrowers. Banks have been further advised that they may, on the basis of good track record and financial position of the SSI (Now MSE) units, increase the limit of dispensation of collateral requirement for loans from the existing level of Rs.15 Lakh to Rs.25 Lakh with the approval of the appropriate authority.
The Ministry of MSME, Government of India and SIDBI set up the Credit Guarantee Fund Trust for Micro and Small Enterprises ( CGTMSE) with a view to facilitate flow of credit to the MSE sector without the need for collaterals/ third party guarantees. The main objective of the scheme is that the lender should give importance to project viability and secure the credit facility purely on the primary security of the assets financed. The Credit Guarantee scheme (CGS) seeks to reassure the lender that, in the event of a MSE unit, which availed collateral- free credit facilities, fails to discharge its liabilities to the lender, the Guarantee Trust would make good the loss incurred by the lender up to 85 per cent of the outstanding amount in default.
The CGTMSE would provide cover for credit facility up to Rs. 100 Lakh which has been extended by lending institutions without any collateral security and /or third party guarantees. A guarantee and annual service fee is charged by the CGTMSE to avail of the guarantee cover. Presently the guarantee fee and annual service charges are to be borne by the borrower. p>
With a view to facilitating credit flow to the MSME sector and enhancing the comfort-level of the lending institutions the MSME units credit rating done by reputed credit rating agencies should be encouraged. Banks are advised to consider these ratings as per availability and wherever appropriate structure their rates of interest depending on the ratings assigned to the borrowing SME units.
Credit rating is not mandatory but it is in the interest of the MSE borrowers to get their credit rating done as it would help in credit pricing of the loans taken by them from banks.
With the enactment of the Micro, Small and Medium Enterprises Development (MSMED), Act 2006, for the goods and services supplied by the MSEME units payments have to be made by the buyers as under:
(I) The buyer to make payment on or before the date agreed on between him and the supplier in writing or, in case of no agreement before the appointed day. The agreement between seller and buyer shall not exceed more than 45 days.
(ii) The buyer fails to make payment of the amount to the supplier, he shall be liable to pay compound interest with monthly rests to the supplier on the amount from the appointed day or, on the date agreed on, at three times of the Bank Rate notified by Reserve Bank.
(iii) For any goods supplied or services rendered by the supplier, the buyer shall be liable to pay the interest as advised at (ii) above.
(iv) In case of dispute with regard to any amount due, a reference shall be made to the Micro and Small Enterprises Facilitation Council, constituted by the respective State Government.
To take care of the payment obligations of large corporate borrowers to MSEs, banks have been advised that while sanctioning/renewing credit limits to their large corporate borrowers (i.e. borrowers enjoying working capital limits of Rs. 10 crore and above from the banking system), to fix separate sub-limits, within the overall limits, specifically for meeting payment obligations in respect of purchases from MSEs either on cash basis or on bill basis.
Banks were also advised to closely monitor the operations in the sub-limits, particularly with reference to their corporate borrowers’ dues to MSE units by ascertaining periodically from their corporate borrowers, the extent of their dues to MSE suppliers and ensuring that the corporate pay off such dues before the ‘appointed day’ /agreed date by using the balance available in the sub-limit so created
A viable/potentially viable unit may apply for a debt restructuring if it shows early stage of stickiness. In such cases the banks may consider to reschedule the debt for repayment, consider additional funds etc. A debt restructuring mechanism for units in MSME sector has been formulated and advised to all commercial banks .The detailed guidelines have been issued to ensure restructuring of debt of all eligible small and medium enterprises. Prudential guidelines on restructuring of advances have also been issued which harmonizes the prudential norms over all categories of debt restructuring mechanisms (other than those restructured on account of natural calamities).
The principles and prudential norms for asset classification on restructuring of advances are prescribed in Part B of the Master Circular DBOD.No.BP.BC.12/21.04.048/2011-12 dated July 1, 2011 on 'Prudential Norms on Income Recognition, Asset Classification and provisioning pertaining to Advances'.
The special regulatory treatment for asset classification, under which the asset classification would not change upon restructuring, will be available to the borrowers engaged in important business activities, subject to the compliance with certain conditions as specified in para 14 of the above circular.
As per the extant guidelines, a unit is considered as sick when any of the borrowal account of the unit remains substandard for more than 6 months or there is erosion in the net worth due to accumulated cash losses to the extent of 50% of its net worth during the previous accounting year and the unit has been in commercial production for at least two years. The criteria will enable banks to detect sickness at an early stage and facilitate corrective action for revival of the unit.
Viable/potentially viable MSE units/enterprises, which turn sick in spite of debt re-structuring, would need to be rehabilitated and put under nursing. It will be for the banks/financial institutions to decide whether a sick SSI unit is potentially viable or not. Viability of a unit identified as sick, should be decided quickly and made known to the unit and others concerned at the earliest. The rehabilitation package should be fully implemented within six months from the date the unit is declared as 'potentially viable' / 'viable'. The rehabilitation package should be fully implemented by banks within six months from the date the unit is declared as potentially viable/viable. During this six months period of identifying and implementing rehabilitation package banks/FIs are required to do “holding operation” which will allow the sick unit to draw funds from the cash credit account at least to the extent of deposit of sale proceeds.
Scheduled commercial banks have been advised to put in place a non -discretionary One time Settlement scheme duly approved by their Boards. The banks have also been advised to give adequate publicity to their OTS policies.
EMI, especially one you are paying for your home loan, is a big chunk in your monthly budget so plan properly about your EMI payment and be prepared for any change that may occur in future.
The Banking Codes and Standard Board of India (BCSBI) constituted a Working Group comprising members from select banks, Indian Banks Association, Rural Planning & Credit Department of Reserve Bank of India to formulate a Banking Code for SME Customers. On the basis of discussions with Industry Associations, banks, SIDBI and Government agencies, The Banking Codes and Standard Board of India (BCSBI) have 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) as defined in the Micro Small and Medium Enterprises Development (MSMED) Act, 2006. The Code may be accessed on the website of BCSBI www. bcsbi.org.in
