MSME

MSME sector gained top priority now a days Specially after economic
recession and slowdown govt. is pursuing lending to this sector and RBI is also
guiding banks to lend this sector ,But lending to this sector is nothing new, only
classification is changed MSME is not a new sector for lending . earlier we lend in
Small road and transport operator , Small scale industries , small business,
professional and self employed sectors now all these sectors are merged and
termed as MSME sector.
Basis of classification of MSME sector is as under—

MANUFACTURING SERVICE ENTERPRISES

ENTERPRISES
Basis Original Investment in Original Cost of Equipment
P&M

Micro Not Exceeding Rs. 25 Not Exceeding Rs. 10 lac

lac
Small Exceeding Rs. 25 lac, Exceeding Rs. 10 lac, but not
but not exceeding Rs. 5 exceeding Rs. 2 crore
crore
Mediu Exceeding Rs. 5 crore, Exceeding Rs. 2 crore, but not
m but not exceeding Rs. exceeding Rs. 5 crore
10 crore

Since MSME sector is playing a vital role in the economy of the

country, Govt. wants its growth at a faster pace through the support of
financial institutions. And for this purpose it came out with fresh
guidelines in 2005 as special package for MSME and introduced
following important steps to boost growth of MSME Sector --
1. Define Micro, Small and Medium enterprises
2. PSBs to fix their own target - Min 20% growth every year
so that outstanding is doubled every five years.
3. Doubling of Credit flow from 67,600 cr in 2004-05 to 135,200
cr by 2009-10
4. PSBs to introduce a transparent rating System
5. SIDBI, in association with IBA have developed an IT enabled
software programme for application appraisal and
monitoring for Small Clusters known as CART
 6. Each branch to finance at least five new Tiny, S M & E at Semi-
Urban and Urban branches every year.
7. Nursing of Sick units through Debt Restructuring.
8. CGTSME –This scheme is modified and its scope widened.
9. Cluster based approach to be adopted for robust growth of this
sector.
10. Setting up of watchdogs-RBI, Banks to monitor Credit flow to
SME.
Based on these guidelines Govt. came out with an Act. Known as
MSMED Act.2006—
which is Effective from 02.10.2006
SPECIAL FEATURES of MSMED Act.2006--
A) classification of enterprises—MSME has been properly defined
(As above)
B) Promotional Provisions –In various promotional activities i.e. trade
fair etc. there will be some reservation of stalls for MSME Sector to
display their products.
C) Preference Procurement Policies—Public sector undertakings will
give preference to the products produced by MSME sector if other
aspects are same.
D) Checking Delayed Payments—If Public sector undertaking
procure some goods from MSME Entrepreneur the payment will be
made within 30 days otherwise interest has to be paid for delayed period.

RBI has taken following steps For smooth credit flow to this sector in
the recent past –
a) Fixation of targets/sub-targets as per new definition.
b) Outreach of formal credit: Opening of new accounts.
c) Nursing the sick units :- Debt Restructuring Mechanism.
d) Facilitative measures.
e) Encouragement of CGTMSE scheme.
f) Cluster based approach.
g) Setting up of watchdogs: Monitoring & Review
RBI instructed all banks to formulate a comprehensive and
more liberal policy for MSME financing taking into account following
guidelines as indicative minimum:-
1. Disposal of applications within 2 or 4 week as applicable.
2. loan application register is to be maintained at branches.
3. Issue of Acknowledgement of Loan Applications
 4. Rejection of applications not to be done without the approval of
the next higher authority
5. Photo of Borrowers : Free of cost for weaker section
6. Collaterals are not require up to 100 lac.
7. Composite loan up to 100 lac through single window.
8. Specialised financing branches renames as SME branches.
9. Norms for computation of limits up to 5.00 crore working capital
by turnover method.
10.Where CGTMSE guarantee coverage has not been taken, Security
coverage in case of loan above Rs.10.00 Lac will be based on the
Risk Rating status of the borrower
AB-1 à 1.25:1
AB-2 à 1.50:1
AB-3 à 1.75:1
Others à 2.00:1

METHODOLOGY FOR CALCULATION OF BANK FINANCE-

• W C limit up to Rs. 5.00 crore to be computed on the basis of min
20% of estimated annual turnover ( T/O method ),

• Incase of borrower applying for W C limit higher or lower than

the W C computed as above, shall be assessed as per actual
requirement,

• For W C requirement above Rs.5.00 crore, traditional method of

computing MPBF as per 2nd method of lending to continue.

TERM LOAN FINANCE—Some important points—

• Cash flow statement will be required from the clients, seeking

fresh term loan.
• Actual availability of cash is considered towards repayment of
the term loan.
• Apart from computing DSCR, it is suggested to observe the
expected cash surplus
• Projected closing cash balance at the end of each year must be at
least 50% of proposed repayment of installment of term
liabilities for the respective year.
 • Other bench mark financial ratios like C/R, DSCR and Tenure
etc. will be in line with the Bank’s lending policy.

Important Circulars related to MSME Sector—(for further reference )

• 8871 10.09.05 Stepping up of Credit Flow to SME
• 8922 24.10.05 Special RBI OTS Scheme for NPA under SME
• 8929 26.10.05 Bank’s Policy on SME
• 8940 03.11.05 Restructuring mechanism
• 8998 24.12.05 SMERA rating, revised fee structure
• 9112 01.04.06 MoU with SMERA for SME rating
• 9274 18.08.06 Revision of intt rates–linking with Credit rating
• 9369 09.11.06 Special OTS Scheme under SME
• 9373 13.11.06 One time ext. of time period for claim lodgment
• 9616 02.06.07 MoU with CRISIL for rating
• 10304 01.01.2009 Ensuring liquidity support to MSEs
• 10311 07.01.2009 Inclusion of investment in wind mills in P&M
• 10334 21.01.2009 CGTMSE Modifications in Lock in period
• 10369 19.02.2009 CGTMSE Modifications in the scheme