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

  

The Government of India has enacted the Micro, Small and Medium Enterprises Development

(MSMED) Act, 2006 on June 16, 2006 which was notified on October 2, 2006. With the

enactment of MSMED Act 2006, the paradigm shift that has taken place is the inclusion of the

services sector in the definition of Micro, Small & Medium enterprises, apart from extending

the scope to medium enterprises. The MSMED Act, 2006 has modified the definition of micro,

small and medium enterprises engaged in manufacturing or production and providing or

rendering of services. The Reserve Bank has notified the changes to all scheduled commercial

banks.

1.1 Definition of Micro, Small and Medium Enterprises

(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 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 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 (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.

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

10 lakh;

(ii) A small enterprise is an enterprise where the investment in equipment is more than Rs.10

lakh but does not exceed Rs. 2 crore; and

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

crore but does not exceed Rs. 5 crore.

1.2 Bank Loans to Micro and Small enterprises, both Manufacturing and Service are eligible

to be classified under Priority Sector advance as per the following:

1.2.1 Direct Finance

1.2.1.1 Manufacturing Enterprises

The Micro and Small 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 notified by the Government from time to time. The manufacturing enterprises are defined

in terms of investment in plant and machinery.

1.2.1.2. Loans for food and agro processing

Loans for food and agro processing will be classified under Micro and Small Enterprises,

provided the units satisfy investments criteria prescribed for Micro and Small Enterprises, as

provided in MSMED Act, 2006.

1.2.1.3 Service Enterprises

Bank loans up to Rs.5 crore per borrower / unit to Micro and Small Enterprises engaged in

providing or rendering of services and defined in terms of investment in equipment under

MSMED Act, 2006.

1.2.1.4 Export Credit

Export credit to MSE units (both manufacturing and services) for export of goods/services

produced / rendered by them.

1.2.1.5 Khadi and Village Industries Sector (KVI)

All loans sanctioned to units in the KVI sector, irrespective of their size of operations and

location and amount of original investment in plant and machinery. Such loans will be eligible

for classification under the sub-target of 60 percent prescribed for micro enterprises within the

micro and small enterprises segment under priority sector.

1.2.1.6. If the loans under General credit Card (GCC) are sanctioned to Micro and Small

Enterprises, such loans should be classified under respective categories of Micro and Small

Enterprises.

1.2.2 Indirect Finance

(i) Loans to persons involved in assisting the decentralised sector in the supply of inputs to

and marketing of outputs of artisans, village and cottage industries.

(ii) Loans to cooperatives of producers in the decentralised sector viz. artisans village and

cottage industries.

(iii) Loans sanctioned by banks to MFIs for on-lending to MSE sector as per the conditions

specified in extant Master Circular on Priority Sector Lending.

1.3 Lending by banks to medium enterprises will not be included for the purpose of

reckoning of advances under the priority sector.

1.4 Since the MSMED Act, 2006 does not provide for clubbing of investments of different

enterprises set up by same person / company for the purpose of classification as Micro, Small

and Medium enterprises, the Gazette Notification No. S.O.2 (E) dated January 1, 1993 on

clubbing of investments of two or more enterprises under the same ownership for the purpose

of classification of industrial undertakings as SSI has been rescinded vide GOI Notification No.

S.O. 563 (E) dated February 27, 2009.

SECTION - II

2 Scheme of Small Enterprises Financial Centres (SEFCs):

As per announcement made by the Governor in the Annual Policy Statement 2005-06, a

scheme for strategic alliance between branches of banks and SIDBI located in clusters, named

as “Small Enterprises Financial Centres” has been formulated in consultation with the Ministry

of SSI and Banking Division, Ministry of Finance, Government of India, SIDBI, IBA and select

banks and circulated to all scheduled commercial banks on May 20, 2005 for implementation.

SIDBI has so far executed MoU with 15 banks (Bank of India, UCO Bank, YES Bank, Bank of

Baroda, Oriental Bank of Commerce, Punjab National Bank, Dena Bank, Andhra Bank, Indian

Bank, Corporation Bank, IDBI Bank, Indian Overseas Bank, Union Bank of India, State Bank of

India and Federal Bank). List of MSME clusters covered by existing SIDBI branches is furnished in

Annex II.

SECTION - III

3 Targets for lending to Micro and Small enterprises (MSE) sector by Domestic

Commercial Banks and Foreign Banks operating in India

3.1 Advances to micro and small enterprises (MSE) sector shall be reckoned in computing

achievement under the overall Priority Sector target of 40 percent (32 percent for Foreign

Banks operating in India with less than 20 branches) of Adjusted Net Bank Credit (ANBC) or

credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher.

3.2 Bank loans above Rs.5 crore per borrower / unit to Micro and Small Enterprises engaged

in providing or rendering of services and defined in terms of investment in equipment under

MSMED Act, 2006, shall not be reckoned in computing achievement under the overall above

Priority Sector targets. However, such loans would be taken into account while assessing the

performance of the banks with regard to their achievement of targets prescribed by the Prime

Minister’s Task Force on MSMEs for lending to MSE sector.

3.3 In terms of the recommendations of the Prime Minister’s Task Force on MSMEs, banks

are advised to achieve a 20 per cent year-on-year growth in credit to micro and small

enterprises and a 10 per cent annual growth in the number of micro enterprise accounts.

3.4 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. 10 lakh and micro (service)

enterprises having investment in equipment up to Rs. 4 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. 10 lakh and up to Rs. 25 lakh, and

micro (service) enterprises with investment in equipment above Rs. 4 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, in terms of the

recommendations of the Prime Minister’s Task Force, 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.

3.5 The target for lending to Micro Enterprises within the MSE sector (i.e. 60% of total

lending to MSE sector should go to Micro enterprises) will be computed with reference to the

outstanding credit to MSE sector as on preceding March 31st.

SECTION - IV

4 Common Guidelines / Instructions for Lending to MSME Sector

4.1 Issue of Acknowledgement of Loan Applications to MSME borrowers

Banks have been advised to mandatorily acknowledge all loan applications, submitted manually

or online, by their MSME borrowers and ensure that a running serial number is recorded on the

application form as well as on the acknowledgement receipt. Banks are further encouraged to

start Central Registration of loan applications. The same technology may be used for online

submission of loan applications as also for online tracking of loan applications.

4.2 Collateral

Banks are mandated not to accept collateral security in the case of loans upto Rs.10 lakh

extended to units in the MSE sector. Banks are also advised to extend collateral-free loans upto

Rs. 10 lakh to all units financed under the Prime Minister Employment Generation Programme

of KVIC.

Banks may, on the basis of good track record and financial position of the MSE units, increase

the limit of dispensation of collateral requirement for loans up to Rs.25 lakh (with the approval

of the appropriate authority).

Banks are advised to strongly encourage their branch level functionaries to avail of the Credit

Guarantee Scheme cover, including making performance in this regard a criterion in the

evaluation of their field staff.

4.3 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.

4.4 Specialised MSME branches

Public sector banks have been advised to open at least one specialised branch in each district.

Further, banks have been permitted to categorise their MSME general banking branches having

60% or more of their advances to MSME sector in order to encourage them to open more

specialised 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/centres

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. The existing

specialised 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 extend finance/render other services to other sectors/borrowers.

4.5 Delayed Payment

Under the Amendment Act, 1998 of Interest on Delayed Payment to Small Scale and Ancillary

Industrial Undertakings, penal provisions have been incorporated to take care of delayed

payments to MSME units. After the enactment of the Micro, Small and Medium Enterprises

Development (MSMED), Act 2006, the existing provisions of the Interest on Delayed Payment

Act, 1998 to Small Scale and Ancillary Industrial Undertakings, have been strengthened as

under:

(i) The buyer has to make payment to the supplier on or before the date agreed upon

between him and the supplier in writing or, in case of no agreement, before the appointed day.

The period agreed upon between the supplier and the buyer shall not exceed forty five days

from the date of acceptance or the day of deemed acceptance.

(ii) In case 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.

Further, banks have been advised to fix sub-limits within the overall working capital limits to

the large borrowers specifically for meeting the payment obligation in respect of purchases

from MSMEs.

4.6 Revised Guidelines for Rehabilitation of Sick Micro and Small Enterprises

In view of the recommendations of Working Group on rehabilitation of potentially viable sick

units (Chairman: Dr. K. C. Chakrabarty), regarding changing the definition of sickness and the

procedure for assessing the viability of sick MSE units, a Committee was set up by the Ministry

of MSME to look into the issue. Based on the recommendation of the Committee,

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 by banks

before declaring a unit as unviable.

As per the new guidelines, a Micro or Small Enterprise (as defined in the MSMED Act 2006) may

be said to have become Sick, if (a) any of the borrowal account of the enterprise remains NPA

for three months or more OR (b) there is erosion in the net worth due to accumulated losses to

the extent of 50% of its net worth during the previous accounting year.

The revised guidelines also provide the procedures to be adopted by the banks before declaring

any unit as unviable. Banks have been advised that the decision on viability of the unit should

be taken at the earliest but not later than 3 months of becoming sick under any circumstances

and the rehabilitation package should be fully implemented within six months from the date

the unit is declared as 'potentially viable' / 'viable'.

4.7 Micro and Small Enterprises Sector – The imperative of Financial Literacy and

consultancy support

Keeping in view the high extent of financial exclusion (92 per cent) in the MSME sector, it is

imperative for banks that the excluded units are brought within the fold of the formal banking

sector. The lack of financial literacy, operational skills, including accounting and finance,

business planning etc. represent formidable challenge for MSE borrowers underscoring the

need for facilitation by banks in these critical financial areas. Moreover, MSE enterprises are

further handicapped in this regard by absence of scale and size.

the banks 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, as per their comparative advantage. The bank

staff should also be trained through customised training programs to meet the specific needs of

the sector.

4.8 Structured Mechanism for monitoring the credit growth to the MSE sector

In view of the concerns emerging from the deceleration in credit growth to the MSE sector, an

Indian Banking Association (IBA)-led Sub-Committee (Chairman: Shri K.R. Kamath) was set up to

suggest a structured mechanism to be put in place by banks to monitor the entire gamut of

credit related issues pertaining to the sector. Based on the recommendations of the

Committee, banks have been advised to:

· strengthen their existing systems of monitoring credit growth to the sector and put in

place a system-driven comprehensive performance management information system

(MIS) at every supervisory level (branch, region, zone, head office) which should be

critically evaluated on a regular basis;

· put in place a system of e-tracking of MSE loan applications and monitor the loan

application disposal process in banks, giving branch-wise, region-wise, zone-wise and

State-wise positions. The position in this regard is to be displayed by banks on their

websites; and

· monitor timely rehabilitation of sick MSE units. The progress in rehabilitation of sick MSE

units is to be made available on the website of banks.

4.9 Revised General Credit Card (GCC) Scheme

In order to enhance the coverage of GCC Scheme to ensure greater credit linkage for all

productive activities within the overall Priority Sector guidelines and to capture all credit

extended by banks to individuals for non-farm entrepreneurial activity, the GCC guidelines have

been revised on December 2, 2013.

4.10 State Level Inter Institutional Committee

In order to deal with the problems of co-ordination for rehabilitation of sick micro and small

units, State Level Inter-Institutional Committees (SLIICs) were set up in the States. However, the

matter of continuation or otherwise, of the SLIIC Forum has been left to the individual States /

Union Territory. 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

useful forum for adequate 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 based on the data

furnished by banks. Among others, 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.

4.11 Empowered Committee on MSMEs

As part of the announcement made by the Union Finance Minister, at the Regional Offices of

Reserve Bank of India, 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/SSI 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/financial institutions and the state government in removing

bottlenecks, if any, to ensure smooth flow of credit to the sector. The committees may decide

the need to have similar committees at cluster/district levels.

4.12 Debt Restructuring Mechanism for MSMEs

(i) As part of announcement made by the Hon'ble Finance Minister for stepping up credit to

small and medium enterprises, a debt restructuring mechanism for units in MSME sector has

been formulated by Department of Banking Operations & Development of Reserve Bank of

India and advised all commercial banks

These detailed guidelines have been issued to ensure restructuring

of debt of all eligible small and medium enterprises. These guidelines would be applicable to

the following entities, which are viable or potentially viable:

(a) All non-corporate MSMEs irrespective of the level of dues to banks.

(b) All corporate MSMEs, which are enjoying banking facilities from a single bank, irrespective

of the level of dues to the bank.

(c) All corporate MSMEs, which have funded and non-funded outstanding up to Rs.10 crore

under multiple/ consortium banking arrangement.

(d) Accounts involving willful default, fraud and malfeasance will not be eligible for

restructuring under these guidelines.

(e) Accounts classified by banks as “Loss Assets” will not be eligible for restructuring.

For all corporate including MSMEs, which have funded and non-funded outstanding of Rs.10

crore and above, Department of Banking Operations & Development has issued separate

guidelines on Corporate Debt Restructuring Mechanism

DBOD Mail Box clarification

dated June 6, 2013.

(ii) In the light of the recommendations of the Working Group on Rehabilitation of Sick MSEs

(Chairman: Dr. K.C. Chakrabarty), all commercial banks were advised

to:

(a) put in place loan policies governing extension of credit facilities,

Restructuring/Rehabilitation policy for revival of potentially viable sick units/enterprises and

non- discretionary One Time Settlement scheme for recovery of non-performing loans for the

MSE sector, with the approval of the Board of Directors and

(b) implement recommendations with regard to timely and adequate flow of credit to the

MSE sector.

(iii) Banks have been advised to give wide publicity to the One Time settlement scheme

implemented by them, by placing it on the bank’s website and through other possible modes of

dissemination. They may allow reasonable time to the borrowers to submit the application and

also make payment of the dues in order to extend the benefits of the scheme to eligible

borrowers.

4.13 Cluster Approach

(i) 60 clusters have been identified by the Ministry of Micro, Small and Medium Enterprises,

Government of India for focused development of Small Enterprises sector. All SLBC Convenor

banks have been advised to incorporate in their Annual Credit Plans, the credit requirement in

the clusters identified by the Ministry of Micro, Small and Medium Enterprises, Government of

India.

As per Ganguly Committee recommendations banks have been advised that a full-service

approach to cater to the diverse needs of the MSE sector 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/or other cluster specific data.

(ii) As per announcement made by the Governor in paragraph 157 of the Annual Policy

Statement 2007-08, all SLBC Convenor banks have been advised vide letter RPCD.PLNFS.No.

10416/06.02.31/ 2006-07 dated May 8, 2007 to review their institutional arrangements for

delivering credit to the MSME sector, especially in 388 clusters identified by United Nations

Industrial Development Organisation (UNIDO) spread over 21 states in various parts of the

country. A list of SME clusters as identified by UNIDO has been furnished in Annex III.

(iii) 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. Accordingly, appropriate measures have been taken to improve the

credit flow to the identified clusters of micro and small entrepreneurs from the Minorities

Communities residing in the minority concentrated districts of the country.

(iv) 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

CounsellingCentres for MSEs. Each lead bank of a district may adopt at least one MSE cluster.

4.14 Credit Linked Capital Subsidy Scheme (CLSS)

Government of India, Ministry of Micro, Small and Medium Enterprises 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% for all units of micro and small enterprises up to loan ceiling at

Sr. No. (i) above.

(iii) Calculation of admissible subsidy will be done with reference to the purchase price of

plant and machinery instead of term loan disbursed to the beneficiary unit.

(iv) SIDBI and NABARD will continue to be implementing agencies of the scheme.

4.15 Committees on flow of Credit to MSE sector

4.15.1 Report of the High Level Committee on Credit to SSI (now MSE) (Kapur Committee)

Reserve Bank of India had appointed a one-man High Level Committee headed by Shri S L

Kapur, (IAS, Retd.), Former Secretary, Government of India, Ministry of Industry to suggest

measures for improving the delivery system and simplification of procedures for credit to SSI

sector. The Committee made 126 recommendations covering wide range of areas pertaining to

financing of SSI sector. These recommendations have been examined by the RBI and it has been

decided to accept 88 recommendations which include the following important

recommendations:

(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.

A circular was issued to all scheduled commercial banks vide RPCD.No.

PLNFS.BC.22/06.02.31/98-99 dated August 28, 1998 thereby advising implementation of the

Kapur Committee Recommendations.

4.15.2 Report of the Committee to Examine the Adequacy of Institutional Credit to SSI

Sector(now MSE) and Related Aspects (Nayak Committee)

The Committee was constituted by Reserve Bank of India in December 1991 under the

Chairmanship of Shri P. R. Nayak, the then Deputy Governor to examine the issues confronting

SSIs (now MSE) in the matter of obtaining finance. The Committee submitted its report in 1992.

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 credit limits to SSI (now MSE) units computed 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 (both working capital and term loan) of SSIs(now MSE);

(v) ensure that there should not be any delay in sanctioning and disbursal of credit. In case

of rejection/curtailment of credit limit 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) openspecialised 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.

A circular was issued to all scheduled commercial banks vide RPCD. PLNFS/ BC. No. 61/06.0262/

2000-01 dated March 2, 2001 thereby advising implementation of the Nayak Committee

Recommendations.

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

Committee)

As per the announcement made by the Governor, Reserve Bank of India, in the Mid-Term

Review of the Monetary and Credit Policy 2003-2004, a “Working Group on Flow of Credit to SSI

sector” was constituted under the Chairmanship of Dr. A S Ganguly.

The Committee made 31 recommendations covering wide range of areas pertaining to

financing of SSI sector. The recommendations pertaining to RBI and banks have been examined

and RBI has accepted 8 recommendations so far and commended to banks for implementation

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 due to the peculiar situation of

hilly terrain and frequent floods causing hindrance in the transportation system;

(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 as also interest rate structure of deposits kept by foreign banks with

SIDBI for their shortfall in priority sector lending.

4.15.4 Policy Package for Stepping up Credit to Small and Medium Enterprises -

Announcements made by the Union Finance Minister on August 10, 2005

The Hon'ble Finance Minister, Government of India had announced on August 10, 2005, a Policy

Package for stepping up credit flow to Small and Medium enterprises. Some of the salient

features of the policy package are as under:

• Definition of Small and Medium Enterprises (MSMEs)

• Fixing of self-targets for financing to MSME sector by banks

• Measures to rationalize the cost of loans to MSME sector

• Measures to increase the outreach of formal credit to the MSME sector

• Cluster based approach for financing MSME sector

• Constitution of Empowered Committees for MSMEs in the Regional Offices of Reserve Bank

• Steps to rationalize the cost of loans to MSME sector by adopting a transparent rating system

with cost of credit being linked to the credit rating of enterprise.

• Banks to consider taking advantage of Credit Appraisal & Rating Tool (CART), Risk Assessment

Model (RAM) and the comprehensive rating model for risk assessment of MSME proposals,

developed by SIDBI for reduction of their transaction costs.

• Banks to consider the ratings of MSE units carried out through reputed credit rating agencies

under the Credit Rating Scheme introduced by National Small Industries Corporation.

• Wider dissemination and easy accessibility of the policy guidelines formulated by Boards of

banks as well as instructions/guidelines issued by Reserve Bank by displaying them on the

respective banks’ web sites as well as web site of SIDBI and also prominently displaying them at

the bank branches.

4.15.5 Major Instructions issued to Public Sector banks subsequent to the policy

announcements

On the basis of the Policy Package as announced by the Union Finance Minister, some of the

major instructions issued by Reserve Bank to all public sector banks were as under:

Public sector banks were advised to fix their own targets for funding SMEs in order to achieve a

minimum 20% year on year growth in credit to SMEs. The objective is to double the flow of

credit from Rs. 67,600 crore in 2004-05 to Rs. 1,35,200 crore to the SME sector by 2009-10, i.e.

within a period of 5 years.

Public sector banks were advised to follow a transparent rating system with cost of credit being

linked to the credit rating of the enterprise.

All banks, may make concerted efforts to provide credit cover on an average to at least 5 new

small/ medium enterprises at each of their semi-urban/ urban branches per year.

The banks may ensure specialized MSME branches in identified clusters/ centres with

preponderance of small Enterprises to enable the entrepreneurs to have easy access to the

bank credit.

4.15.6 Working Group on Rehabilitation of Sick SMEs (Chairman: Dr. K.C. Chakrabarty)

In the light of the recommendations of the Working Group on Rehabilitation of Sick MSEs

(Chairman: Dr. K.C. Chakrabarty, the then CMD of Punjab National Bank), all commercial banks

were advised

to:

a) put in place loan policies governing extension of credit facilities, Restructuring/Rehabilitation

policy for revival of potentially viable sick units/enterprises and non- discretionary One Time

Settlement scheme for recovery of non-performing loans for the MSE sector, with the approval of

the Board of Directors and

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

MSE sector as detailed in the aforesaid circular.

Banks were also advised vide above circular dated May 4, 2009 to consider implementation of

the recommendations, inter alia, that lending in case of all advances upto Rs 2 crores may be

done on the basis of scoring model. Banks have further been advised

to undertake a review of their loan policy

governing extension of credit facilities to the MSE sector, with a view to using Board approved

credit scoring models in their evaluation of the loan proposals of MSE borrowers.

4.15.7 Prime Minister’s Task Force on Micro, Small and Medium Enterprises

A High Level Task Force was constituted by the Government of India (Chairman: Shri T K A Nair)

to consider various issues raised by Micro, Small and Medium Enterprises (MSMEs).The Task

Force recommended several measures having a bearing 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.

A circular was issued to all scheduled commercial banks

advising implementation of the recommendations of

the Prime Minister’s task Force on MSMEs.

The report of the Prime Minister’s Task Force on Micro, Small and Medium Enterprises is

available on the website of Ministry of Micro, Small and Medium Enterprises (msme.gov.in)

4.15.8 Working Group to Review the Credit Guarantee Scheme for Micro and Small

Enterprises

A Working Group was constituted by the Reserve Bank of India under the Chairmanship of Shri

V.K. Sharma, Executive Director, to review the working of the Credit Guarantee Scheme of

CGTMSE and suggest measures to enhance its usage and facilitate increased flow of collateral

free loans to MSEs.

The recommendations of the Working Group included, inter alia, mandatory doubling of the

limit for collateral free loans to micro and small enterprises (MSEs) sector from Rs.5 lakh to

Rs.10 lakh and enjoining upon the Chief Executive Officers of banks to strongly encourage the

branch level functionaries to avail of the CGS cover and making performance in this regard a

criterion in the evaluation of their field staff, etc. have been advised to all banks.

A circular was issued to all scheduled commercial banks

mandating them not to accept

collateral security in the case of loans upto Rs 10 lakh extended to units in the MSE sector and

advising them to strongly encourage their branch level functionaries to avail of the CGS cover,

including making performance in this regard a criterion in the evaluation of their field staff.

Necessary action is being taken to implement the other recommendations of the Group which

would result in enhanced usage of the Guarantee Scheme and facilitate increase in quality and

quantity of credit to the presently included, as well as excluded, MSEs, leading eventually, to

sustainable inclusive growth.

4.16 Banking Codes and Standard Board of India (BCSBI)

The Banking Codes and Standard Board of India (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) as defined in the Micro Small and Medium Enterprises Development

(MSMED) Act, 2006. It provides protection to MSE and explains how banks are expected to deal

with MSE for their day to-day operations and in times of financial difficulty.

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

Reserve Bank of India (RBI) and banks will comply with such instructions /directions issued by

the RBI from time to time.

4.16.1 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 relationship between MSE and banks and also ensure timely and

quick response to banking needs.

(g) Foster confidence in the banking system.