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 and the items specified by the Ministry of Small Scale Industries vide its notification No.S.O.1722 (E) dated October 5, 2006.
(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.
(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.
Q.2. What is the status of lending by banks to this sector?
A.2. Bank’s lending to the Micro ,Small and Medium enterprises as under is eligible to be reckoned for priority sector advances:
a) MSMEs 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 is reckoned for priority sector advances.
b) MSMEs engaged in providing or rendering of services and defined in terms of investment in equipment under MSMED Act, 2006.
Q.4. Are there any targets prescribed for lending by banks to MSMEs?
A.4. As per extant policy, certain targets have been prescribed for banks for lending to the Micro and Small enterprise (MSE) sector. In terms of the recommendations of the Prime Minister’s Task Force on MSMEs (Chairman: Shri T.K.A. Nair, Principal Secretary), banks have been advised to achieve a 20 per cent year-on-year growth in credit to micro and small enterprises, a 10 per cent annual growth in the number of micro enterprise accounts and 60 percent of total lending to MSE sector as on corresponding quarter of the previous year to Micro enterprises.
Q.5. Are there specialized bank branches for lending to the MSMEs?
A.5. 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/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. 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.
Q.6. How many such specialized branches for lending to MSMEs are there?
A.6. As reported by Scheduled Commercial Banks (SCBs), on March 2017, there are 2998 specialized MSME branches.
Q.7. How do banks assess the working capital requirements of borrowers?
A.7. 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 (Refer circular RPCD.SME & NFS.BC.No.102/06.04.01/2008-09 dated May 4, 2009). 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.5 crore.
Q.8. Is there any provision for grant of composite loans by banks?
A.8. A composite loan limit of Rs.1 crore can be sanctioned by banks to enable the MSME entrepreneurs to avail of their working capital and term loan requirement through Single Window in terms of our Master Direction on lending to the MSME sector dated July 24, 2017. All scheduled commercial banks were advised by our circular RPCD.SME&NFS. BC.No.102/06.04.01/2008-09 on May 4, 2009 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.
Q.9. What is Cluster financing?
A.9. 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.
The banks have, therefore, been advised to treat it as a thrust area and increasingly adopt the same for SME financing. United Nations Industrial Development Organisation (UNIDO) has identified 388 clusters spread over 21 states in various parts of the country. The Ministry of Micro, Small and Medium Enterprises has also 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, banks have been advised to take appropriate measures to improve the credit flow to the identified clusters.
Banks have also been advised that they should open more MSE focussed branch offices at different MSE clusters which can also act as counselling centres for MSEs. Each lead bank of the district may adopt at least one cluster (Refer circular RPCD.SME & NFS.No.BC.90/06.02.31/2009-10 dated June 29, 2010)
Q.10. What are the RBI guidelines on interest rates for loans disbursed by the commercial banks?
A.10. As part of the financial sector liberalisation, all credit related matters of banks including charging of interest have been deregulated by RBI and are governed by the banks' own lending policies. With a view to improve transparency in the methodology followed by banks for determining interest rates on advances and the efficiency of monetary policy transmission, from April 1, 2016, banks are required to sanction all their advances with reference to the Marginal cost of fund based lending rates (MCLR). In no case the interest rates on advances shall fall below MCLR. However, loans sanctioned under the Base rate/BPLR regime shall continue till the maturity or renewal. Banks shall have to provide an option to the customers to switch to the MCLR from Base rate/BPLR and this should not be treated as a foreclosure of existing facility.
Q.11. Can the MSE borrowers get collateral free loans from banks?
Q.12. What is the Credit Guarantee Fund Trust Scheme for MSEs?
A.12. 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, failing 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. 200 lakh which have 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. For more details you may visit www.cgtmse.in.
Q.13. Is credit rating mandatory for the MSE borrowers?
A.13. 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.
Q.14. Why is credit rating of the MSME borrowers necessary?
A.14. With a view to facilitating credit flow to the MSME sector and enhancing the comfort-level of the lending institutions, the credit rating of MSME units 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 MSME units.
Q.15. What are the guidelines for delayed payment of dues to the MSE borrowers?
A.15. With the enactment of the Micro, Small and Medium Enterprises Development (MSMED), Act 2006, for the goods and services supplied by the MSME units, payments have to be made by the buyers as under:
(i) The buyer is 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) If 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 corporates pay off such dues before the ‘appointed day’ /agreed date by using the balance available in the sub-limit so created. In this regard the relevant circular is circular IECD/5/08.12.01/2000-01 dated October 16, 2000 (reiterated on May 30, 2003, vide circular No. IECD.No.20/08.12.01/2002-03) available on our website.
Q.16. What is debt restructuring of advances?
A.16. A viable/potentially viable unit may apply for a debt restructuring if it shows early stage of sickness. 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 harmonises the prudential norms over all categories of debt restructuring mechanisms (other than those restructured on account of natural calamities). The relevant circulars in this regard are circular DBOD.BP.BC.No.34/21.04.132/2005-06 dated September 8, 2005and circular DBOD.No.BP.BC.37/21.04.132/2008-09 dated August 27, 2008 which are available on our website www.rbi.org.in.
Q.17. How can a bank or creditor identify incipient stress in MSME account?
Before a loan account of a Micro, Small and Medium Enterprise turns into a Non-Performing Asset (NPA), banks or creditors should identify incipient stress in the account by creating three sub-categories under the Special Mention Account (SMA) category as given in the Table below:
Basis for classification
Principal or interest payment not overdue for more than 30 days but account showing signs of incipient stress
Principal or interest payment overdue between 31-60 days
Principal or interest payment overdue between 61-90 days
Q.18.What are the salient features of the guidelines on ‘Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises (MSMEs)’?
A.18 The salient features of the Framework are as under:
i) Before a loan account of an MSME turns into a Non-Performing Asset (NPA), banks or creditors should identify incipient stress in the account by creating three sub-categories under the Special Mention Account (SMA) category as given in the Framework.
ii) Any MSME borrower may also 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.
Q. 19. On which accounts are the provisions of the above Framework applicable?
A. 19. The provisions made in this framework shall be applicable to MSMEs having loan limits up to Rs.25 crore, including accounts under consortium or multiple banking arrangement (MBA).
Q.20. How does the committee resolve the stress in the accounts under the Framework?
A. 20. The Committee may explore various options to resolve the stress in the account. The Committee shall not endeavour to encourage a particular resolution option and may decide the CAP as per the specific requirements and position of each case. The options under CAP by the Committee may include:
Q.22. Apart from the loans and other banking facilities, do the banks provide any guidance to MSE entrepreneurs?
A.22. Yes, banks provide following services to the MSE entrepreneurs:
(i) Rural Self Employment Training Institutes (RSETIs)
At the initiative of the Ministry of Rural Development (MoRD), Rural Self Employment Training Institutes (RSETIs) have been set up by various banks all over the country. These RSETIs are managed by banks with active co-operation from the Government of India and State Governments. RSETIs conduct various short duration (ranging preferably from 1 to 6 weeks) skill upgradation programmes to help the existing entrepreneurs compete in this ever-changing global market. RSETIs ensure that a list of candidates trained by them is sent to all bank branches of the area and co-ordinate with them for grant of financial assistance under any Govt. sponsored scheme or direct lending.
(ii) Financial Literacy and consultancy support:
Banks have been advised to 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. Through these FLCs, banks provide assistance to the MSE entrepreneurs in regard to financial literacy, operational skills, including accounting and finance, business planning etc. (Refer circular RPCD.MSME & NFS.BC.No.20/06.02.31/2012-13 dated August 1, 2012)
Further, with a view to providing a guide for the new entrepreneurs in this sector, a booklet titled “Nurturing Dreams, Empowering Enterprises – Financing needs of Micro and Small Enterprises – A guide” has been launched on August 6, 2013 by the Reserve Bank. The booklet has been placed on our website www.rbi.org.in under the following path & URL:
Q.23. What is the role of Banking Codes and Standard Board of India (BCSBI) for MSEs?
A.23. The Banking Codes and Standards Board of India (BCSBI) has formulated a Code of Bank's Commitment to Micro and Small Enterprises. The Code 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 MSEs and explains how banks are expected to deal with MSEs for their day to-day operations and in times of financial difficulty. The Code may be accessed on the website of BCSBI www.bcsbi.org.in.
Q. 24. Is there a guideline for facilitating timely and adequate credit flow during ‘Life Cycle’ of MSEs?
A.24. Yes, guidelines on ‘Streamlining flow of credit to Micro and Small Enterprises (MSEs) for facilitating timely and adequate credit flow during their ‘Life Cycle’ were issued to Scheduled Commercial Banks (SCBs) vide our circular FIDD.MSME & NFS.BC.No.60/06.02.31/2015-16 dated August 25, 2015.
Q.25. What are the salient features of the guidelines on ‘Streamlining flow of credit to Micro and Small Enterprises (MSEs) for facilitating timely and adequate credit flow during their ‘Life Cycle’?
A. 25. In terms of the captioned guidelines, banks have been advised to review and tune their existing lending policies to the MSE sector by incorporating therein the following provisions so as to facilitate timely and adequate availability of credit to viable MSE borrowers especially during the need of funds in unforeseen circumstances:
i) To extend standby credit facility in case of term loans
ii) Additional working capital to meet with emergent needs of MSE units
iii) Mid-term review of the regular working capital limits, where banks are convinced that changes in the demand pattern of MSE borrowers require increasing the existing credit limits of the MSEs, every year based on the actual sales of the previous year.
iv) Timelines for Credit Decisions
Q.26. What is Trade Receivables Discounting System (TReDS)?
A. 26. The objective of TReDS is to create Electronic Bill Factoring Exchanges which could electronically accept and settle bills so that MSMEs could encash their receivables without delay. This will not only give them greater access to finance but will also put greater discipline on corporates to pay their dues on time. For more details you may refer to RBI guidelines for setting up and operating TReDS on https://www.rbi.org.in/Scripts/FS_PressRelease.aspx?prid=32664&fn=9.
Q.27. What is the Certified Credit Counsellors (CCC) Scheme?
A.27 In terms of announcement in para 48 of First Bi-monthly Monetary Policy Statement, 2016-17, Reserve Bank laid down a framework for accreditation of credit counsellors which was shared with SIDBI for laying down operational guidelines. Accordingly, the scheme was launched by SIDBI in July 2017. As per the scheme, Certified Credit Counsellors are institutions or individuals registered with SIDBI who shall assist MSMEs in preparing project reports in a professional manner which would, in turn, help banks make more informed credit decisions.
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