Micro Small

1
Micro Small Medium Enterprises

• The Government of India passed in June 2006
  an act regarding the Micro , Small , and
  Medium Enterprises . The Micro , Small and
  Medium Enterprise Development Act ,2006 (MSMEDA
  )
• The Act accomplishes many long -standing
  goals of the government and stakeholders in the
  MSME sector .

2
Definition of MSME

• The Act decisively defines the MSMEs by
  the level of by Plant and Machinery (PM )
  investment.
• The categorization also makes allowances for
  the inherently smaller investments of
  Service enterprises.

3

• The new definition has expanded the PM limits
  now each enterprise level encompasses larger
  investments than before . The new categorization
  is as follows -
• Micro Manufacturing PM 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
  excluded
• Loans not exceeding Rs. 20.00 Lacs granted to
  Retail Trade would henceforth be part of Small
  Service Enterprise under MSME.

4
CLASSIFICATION OF MSME WITHIN 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.

5
CLASSIFICATION OF MSME WITHIN 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.

6
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.

7
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,
  irrespective
• of Sector their size of operation, location and
  amount of
• original investment in Plant and Machinery, will
  be eligible
• for consideration under the Sub Target (60
  percent) of the
• Small Enterprises segment within the Priority
  Sector.

8
INDIRECT FINANCE

• 1. 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).

9
CALCULATION OF INVESTMENT FOR 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.

10
Processing 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.

11
Processing 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 Lenders 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.

12
Processing 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.

13
Processing of Loan Application

• Disposal of Applications
• In case of Loans up to Rs.25000/- Within 2
  weeks
• In 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)

14
Processing 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
  Banks 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.

15
Processing 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.

16
TYPES 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.

17
MARGIN
18
Security 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.

19
Security Aspects

• In case of Loan up to Rs.25000.00, minimum asset
  coverage ratio would be 11. 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 1.11 (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.

20
Risk Rating

• Exposure-wise rating modules for SMEs are as
  follows -

21
Methodology for calculation of Bank 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.

22
Methodology for calculation of Bank 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.

23
Methodology for calculation of Bank 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.

24
Methodology for calculation of Bank 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 Ratio
• In case of term loan, Debt Equity Ratio (DER)
  should not normally be above 31.However, in case
  of capital intensive industries, the same may be
  considered upto 5.001.

25
Methodology for calculation of Bank Finance

• DSCR/Average DSCR
• In case of Term Loan, minimum Average DSCR of
  1.301 will be considered as reasonable
  requirement for any new project/expansion
  project.
• Other Benchmarks
• Other benchmark financial ratios like Current
  Ratios, Tenure etc. will be in line with the
  Banks domestic lending policy.

26
Mode 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.

27
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.

28

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

29
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.

30
DEBT RESTRUCTURING

• The Banks 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.

31
ADHOC WORKING CAPITAL 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

32
EXCESS DRAWING

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

33
OPERATIONAL GUIDELINES FOR ADHOC FACILITIES FOR
MSME 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 .