Micro Small & Medium Micro Small & Medium EnterprisesEnterprises

The Government of India passed in June The Government of India passed in June 2006 an act regarding the Micro , Small , 2006 an act regarding the Micro , Small , and Medium Enterprises . The Micro , Small and Medium Enterprises . The Micro , Small and Medium Enterprise Development and Medium Enterprise Development Act ,2006 (MSMEDA )Act ,2006 (MSMEDA )

The Act accomplishes many long -standing The Act accomplishes many long -standing goals of the government and stakeholders goals of the government and stakeholders in the MSME sector .in the MSME sector .

Definition of MSMEDefinition of MSME

• The Act decisively defines the MSMEs by the level of by Plant and Machinery (P&M ) investment.

• The categorization also makes allowances for the inherently smaller investments of Service enterprises.

• The new definition has expanded the P&M limits ; now each enterprise level encompasses larger investments than before . The new categorization is as follows :-

• Micro Manufacturing : P&M* Less than Rs 25 lacs Micro Service : Equipments* Less than Rs10 lacs

Small Manufacturing : Less than Rs 5 crore Small Service : Less than Rs 2 crore

Medium Manufacturing : Less than Rs 10 crore Medium Service : Less than Rs 5 crore*Original cost excluding Land and building and furniture, fittings and such items, specifically excludedLoans not exceeding Rs. 20.00 Lacs granted to Retail Trade would henceforth be part of Small Service Enterprise under MSME.

CLASSIFICATION OF MSME CLASSIFICATION OF MSME WITHIN THE PRIORITY SECTORWITHIN THE PRIORITY SECTOR

• The Micro and Small Enterprises (manufacturing and service) will be Classified under Priority Sector.

• The Micro and Small (Service) enterprises shall include Small Road and Water Transport Operator, Small Business, Professional and Self-employed Persons and all other service enterprises. Retail Trade will not be classified under Micro and Small enterprises (service sector).

• Small Road and Water Transport Operator (SRWTO), Small Business, Professional and Self Employed Persons (PSEP) will be classified as per the original cost of equipments either under Micro or Small Enterprises (service) sector instead of earlier classification/ definition of 10 vehicles incase of SRWTO and working capital and /or Term loan limits incase of Small Business/Professional and Self employed persons.

CLASSIFICATION OF MSME CLASSIFICATION OF MSME WITHIN THE PRIORITY SECTORWITHIN THE PRIORITY SECTOR

• If the following Storage Units, registered as SSI Unit/Micro or Small Enterprises, the loans granted to such units may be classified as Small Enterprises Sector : “Loans for construction and running of storage facilities(warehouse,market yards, godowns and silos), including Cold Storage Units designed to store agriculture produce/ products, irrespective of location”.

• Lending to Medium Enterprises will not be included under Priority Sector.

Manufacturing Activities **Manufacturing Activities **• Medical Equipment and Ayurvedic Product• Composite unit of Bacon Processing and

Piggery Farm*• Tobacco Processing• Beedi/Cigarette manufacturing and other

tobacco Products• Extraction of Agave Spirit from Agave juice ;

(imported medicinal plant ) extraction of Agave• Manufacture of Bio-Fertilizer

* Piggery Farm without bacon processing as this is a farming activity. ** The activity of “Bee-Keeping” being farming allied activity.

1. DIRECT FINANACE:1. DIRECT FINANACE:

i. All loans granted to Small Enterprises including Micro Enterprises (both Manufacturing and Services) will be classified under Direct Finance to Micro and Small Enterprises Sector.

ii. Khadi and Village Industries Sector (KVI):

All advances granted to units in the KVI sector, irrespectiveof Sector their size of operation, location and amount oforiginal investment in Plant and Machinery, will be eligiblefor consideration under the Sub Target (60 percent) of theSmall Enterprises segment within the Priority Sector.

INDIRECT FINANCEINDIRECT FINANCE1. Indirect Finance to the Small (manufacturing as well as service)

Enterprises sector will include credit to:-i. Persons involved in assisting the decentralized sector in the supply of inputs to and marketing of outputs of artisans, village and cottage industries.

ii. Advances to cooperatives of producers in the decentralized sector viz., artisans, village and cottage industries.

iii. Existing investments as on 31st March, 2007, made by banks in special bonds issued by NABARD with the objective of financing exclusively non-farm sector may be classified as Indirect fiancé to Small Enterprise sector till the date of maturity of such bonds of March 31, 2010, whichever is earlier. Investment in such special bonds made subsequent to March 31, 2007 will, however, not be eligible for such classification .

iv. Loans granted by banks to NBFCs for on lending to Small and Micro enterprises (manufacturing as well as service).

CALCULATION OF INVESTMENT CALCULATION OF INVESTMENT FOR PLANT & MACHINERYFOR PLANT & MACHINERY

• In case of MSME advances, if the branches are unable to assess original investment criteria, a certificate with regard to investment in plant and machinery / equipment should be obtained from a Chartered Accountant.

• In calculating the value of plant and machinery for the purpose of calculating investment limit, the original price thereof, irrespective of whether the plant and machinery are new or second hand shall be taken into account. In case the Branch is unable to assess the original investment criteria, a certificate with regard to investment in plant/machinery/equipment etc. would be obtained from a Chartered Accountant.

• The investment in establishing of wind mill/s to generate electricity for captive consumption or partly for captive consumption and remaining power to sell to Electricity Boards/others are to be included in the investment in plant and machinery.

Processing of Loan ApplicationProcessing of Loan Application

Application Format: • Revised Simplified Loan Application Form prescribed

by IBA alongwih check list and undertaking of the applicant, will be applicable for Micro and Small Enterprises (MSEs)

• For loan beyond Rs.25Lacs, branches may obtain additional information from the borrower, as deemed necessary, as incorporated in the checklist enclosed to the loan application form.

• Loan Application Form (ADV-Comm) and Checklist enclosed will be applicable for Medium Enterprises only.

Processing of Loan ApplicationProcessing of Loan Application

• Fair Practice Code for Lenders Liabilities

• Before handing over the Application Forms to applicant, the modification / addition as applicable under guidelines on Fair Practice Code for Lender’s Liabilities will be complied as under: (a) Information regarding Processing Fee, Service Charges, and Refund etc. will be annexed as a part of application form.

(b) An undertaking to be obtained from the prospective borrower while accepting application that he has been briefed about and convinced about the charges, bank will levy on pre/post sanction of the loan.

Processing of Loan ApplicationProcessing of Loan Application

Issue of Acknowledgement of Loan Applications :

Each branch will issue an acknowledgement for loan applications received from the borrowers towards financing under this sector and maintain the record of the same.

Processing of Loan ApplicationProcessing of Loan Application

• Disposal of Applications: In case of Loans up to Rs.25000/- : Within 2 weeksIn case of Loans above Rs.25000/-: Within 4 Weeks(Provided the loan applications are complete in all respects and accompanied by a 'check list' enclosed to the application form)

Processing of Loan ApplicationProcessing of Loan Application

• Register of Receipt/Sanction/Rejection of Applications:

a. A register should be maintained at branch wherein the date of receipt, sanction / disbursement ,rejection with reasons , should be recorded. The register should be made available to facilitate verification by the Bank’s officials including Zonal Manager during visit to the branch. b.Branch Manager may reject application (except in respect of SC/ST). In the case of proposals from SC/ST, rejection should be done at a level higher than Branch Manager. c.The reason for rejection will be communicated to the borrower in line with stipulation mentioned in the Fair Practice Lenders Code.

Processing of Loan ApplicationProcessing of Loan Application

• Photographs of Borrowers

While there is no objection to take photographs of the borrowers, for the purpose of identification, branches themselves should make arrangements for the photographs and also bear the cost of photographs of borrowers falling in the category of Weaker Sections. It should also be ensured that the procedure does not involve any delay in loan disbursement.

TYPES OF CREDIT FACILITIESTYPES OF CREDIT FACILITIES

• The Bank may provide all types of funded and non funded facilities to the borrower under this sector viz, Term Loan, Cash Credit, Letter of Credit, Bank guarantee, etc.

• A Composite Loan with maximum limit upto Rs.1.00 crore may be considered by bank to enable the Micro and Small Enterprises {both for manufacturing and service sector} to avail of their working capital and Term loan requirement through Single Window.

MARGINMARGIN (A) FUNDED Minimum Margin

1. Upto Rs.25000 2. Above Rs.25000

NIL 25% 20% (Under Turnover Method)

3. Margin on Book Debts 20-25% Exports Bills backed by L/C

confirmed by First Class Bank NIL

(B) NON-FUNDED Letter of Credit (DP) 5% Letter of Credit (DA) 10% Bank Guarantee 20%

Margin in case of Non Funded facility can be reduced upto 5% by the GM(PSC) at HO and below 5% by the Chairman and Managing Director or Executive Director(in absence of C&MD).

Security AspectsSecurity Aspects 1. No collateral or third party Guarantee for advances up to

Rs.5.00 Lacs.

2. In case of good track record of the borrower, Collateral Security and or third party guarantee may be waived beyond Rs. 5.00 Lacs but up to Rs.100.00 Lacs, where guarantee cover of 75% upto Rs.50.00 lacs and 50% thereafter, of the amount of default is available from CGTMSE. The Guarantee Coverage has increased to 85% of credit facility upto Rs.5 Lacs sanctioned to Micro Enterprises w.e.f. 02.01.2009. Women Entrepreneurs/ units located in North East Region, including Sikkim (Other than Micro enterprises) will be eligible for coverage of 80% upto Rs.50.00 lacs instead of 75% in other cases.

The CGTMSE Commission/ Annual fee will be borne by the Borrower.

Security AspectsSecurity Aspects

• In case of Loan up to Rs.25000.00, minimum asset coverage ratio would be 1:1. However, in case of schematic lending/specified scheme, the guidelines as applicable will be complied with.

• In case of Loan above 25000, a minimum asset coverage ratio must be 1.1:1 (excluding Margin stipulated).

• In case of loan accounts not covered under CGTMSE scheme i.e. above Rs.100 lac, it may be explored as far as practicable that the credit facilities/loans extended, are supported by collaterals in the form of liquid securities or fixed assets, immovable properties, based on the credit risks perception of the borrower. However, availability of collateral security shall not be the mere criterion for arriving at credit decision.

• Collateral security shall not be insisted upon in those cases where the RBI directives specifically advised the banks not to insist on obtaining collateral security /third party guarantee.

Risk RatingRisk Rating• Exposure-wise rating modules for SMEs are

as follows :- Credit Exposure Rating Module Up to Rs.10.00 Lacs (Existing & New Units )

CRG-1

Above Rs.10.00 Lacs up to Rs.1.00 Cr :-

Existing Unit CRG-2 New Unit CRG-4 Above Rs.1.00 Cr to less than Rs.5.00 Cr :-

Existing Unit CRG-7A New Unit CRG-7B

Rs.5.00 Cr & above (Existing & New Units)

Risk Assessment Module (RAM –CRISIL)

In case RAM module is not operationalised :-

Existing Unit CRG-7A

New Unit CRG-7B

Methodology for calculation of Methodology for calculation of Bank FinanceBank Finance

Working Capital Finance:

• Working capital credit limits to Micro, Small and Medium Enterprises in individual cases up to Rs.5.00 Crore (Manufacturing sector) and upto Rs.2.00 Crore (Service sector) will be computed as per existing guidelines on the basis of minimum 20% of projected annual turnover. However in case of borrower applying for working capital limit higher or lower than the working capital computed on the basis of turnover method shall be assessed as per actual requirement.

• ii) For assessment of the working capital requirement for borrowers falling within the band of above Rs.5.00 crores and below Rs.10.00Crore (Manufacturing Sector) and above Rs.2.00 Crore and below Rs.10.00 Crore (Service Sector) the traditional method of computing MPBF as per second method of lending will continue. If any of the borrower falling in this band intends to shift to cash budget system, the same may be accepted.

Methodology for calculation of Methodology for calculation of Bank FinanceBank Finance

Working Capital Finance:

• For borrowers having working capital limit of Rs.10.00 crores and above, Cash Budget System will be applicable.. However, if a borrower is desirous to continue with the existing MPBF system the Bank may accept the request. If any of the borrowers falling in this band intends to shift to cash budget system, the same may be accepted.

Methodology for calculation of Methodology for calculation of Bank FinanceBank Finance

• Drawing Power :• Book Debts upto Six Months may be treated as

Current Asset, for the purpose of computation of permissible bank finance and drawing power calculation. All Book Debts more than 180 days are to be treated as Non-Current Assets. As regards age of the book debts, a certificate preferably from a Chartered Accountant to be obtained.

Methodology for calculation of Methodology for calculation of Bank FinanceBank Finance

• Term Loan Finance:The technical feasibility and economic, financial, commercial viability, managerial competence, environment viability and bank-ability of the proposal with reference to risk will be assessed.

• Debt Equity RatioIn case of term loan, Debt Equity Ratio (DER) should not normally be above 3:1.However, in case of capital intensive industries, the same may be considered upto 5.00:1.

Methodology for calculation of Methodology for calculation of Bank FinanceBank Finance

• DSCR/Average DSCRIn case of Term Loan, minimum Average DSCR of 1.30:1 will be considered as reasonable requirement for any new project/expansion project.

• Other BenchmarksOther benchmark financial ratios like Current Ratios, Tenure etc. will be in line with the Bank’s domestic lending policy.

Mode of Disbursement of LoanMode of Disbursement of Loan

• The disbursement of the loan amount for Plant and Machinery, Equipment and other fixed assets will be made in favour of the supplier through Demand Draft/Banker Cheque. Branches will continue to ensure the end use verification on monthly/quarterly basis.

Repayment Schedule Repayment Schedule • Repayment schedule should be fixed taking into

account the sustenance requirements, surplus generating capacity, the break-even point, the life of the asset, etc., and not in an “ad hoc” manner.

• Moratorium period depending on requirement of the project will be considered.

• Moratorium period may be extended by further six months where project implementation has been delayed for reasons whatsoever beyond control of the borrower.

• COMPOSITE TERM LOANSA composite loan with maximum limit upto Rs.1.00 crore may be considered by bank to enable the Micro and Small Enterprises (both for manufacturing and service sector) to avail of their working capital and Term loan requirement through Single Window.

• NON-FUNDED LIMIT :The non-fund limit may be sanctioned as per need based requirements of the borrower within the ambit of the bank’s guidelines in this regard. The proposals for non-fund facilities should be dealt with same diligence as in case of funded limits.

REVIEW OF SME PORTFOLIO:REVIEW OF SME PORTFOLIO:

• At the Zonal office level, Chief Manager (Credit)/ Senior Manager identified as nodal officers will act as coordinating officer to monitor the functioning, review and the progress in SME financing and to coordinate with other banks/financial institutions and the State Government removing bottlenecks, if any, to ensure smooth flow of credit to the sector.

• SME financing branches (erstwhile SSIFBs) have be permitted to

finance Medium Enterprises also. Further, bank may explore the possibility of opening more branches to cater the specialized requirement to this segment.

• The Zonal office will give due importance for financing in the identified special credit delivery branches and branches situated near to clusters.

• Review of progress on MSME lending will be placed before the Board on quarterly basis.

DEBT RESTRUCTURINGDEBT RESTRUCTURING

• The Bank’s policy of Debt Structuring Policy will be applicable for SME as per Instruction Circular No.10285 /CPRMD/2008-09 dated 19.12.2008 will be applicable , in respect of debt restructuring of SMEs.

ADHOC WORKING CAPITAL ADHOC WORKING CAPITAL DEMAND LOAN :DEMAND LOAN :

(a) Under stimulus package, the need based Adhoc Working Capital Demand Loans maximum up to 20% of the existing fund based limits in respect of units having overall fund based credit facility up to Rs.10.00 Crore may be given, which will be repayable in one year with a provision of maximum period of six months during which interest will have to be serviced.

(b) In this regard borrower may avail only one of the under noted facilities at a time:

• i) Adhoc Facility • ii) Adhoc Working Capital Demand Loan

EXCESS DRAWINGEXCESS DRAWING

• Besides Adhoc Facility / Adhoc Working Capital Demand Loan, excess drawing may be allowed in terms of provisions contained in the Bank’s Discretionary Authority (Lending Power)/ Lending Policy, on merits , considering exigencies of the case.

OPERATIONAL GUIDELINES OPERATIONAL GUIDELINES FOR ADHOC FACILITIES FOR FOR ADHOC FACILITIES FOR

MSME BORROWERSMSME BORROWERS• As per extant MSME Policy, Discretionary

Authority for Adhoc sanction to MSME Borrowers have been provided from Scale-II onwards, which has to be extended within 20% of 20% of sanctioned limits or the prescribed amount under Discretionary Authority in case of AB-1 and AB-2 rated Accounts and 10% of sanctioned limit or the prescribed amount under each scale, whichever is less in case of accounts with Risk Grading with AB-3 to AB-7 .