Kamal Patencha

Baroda Academy Rajkot

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MSME classification as per ACT

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 New Definition of MSMEs- Conditions
• Revised MSME Classification is applicable w.e.f. July 1, 2020
• Export Turnover shall be excluded for the purposes of classification.
• Information as regards turnover and exports turnover for an enterprise shall be linked to the IT Act,
CGST Act and GSTIN
• All units with GSTIN listed against the same PAN shall be collectively treated as one enterprise
• The value of plant and Machinery or Equipment for all the enterprises shall mean the Written Down
Value (WDV) as at the end of the Financial Year.
• If the enterprise is a new one without any ITR, the purchase (Invoice) value of the plant and
machinery or equipment, whether purchased first hand or second hand, shall be taken into account
excluding Goods and Services Tax (GST), on self-disclosure basis.
• Any New Loan sanctioned on or after 01.07.2020 shall be classified as MSME only after obtaining
the Udyam Registration Certificate on https://udyamregistration.gov.in and entered in Finacle at
INVESTO menu. (Ref- BCC:BR:1l3/118 dt 02.03.2021).
• Any number of activities including manufacturing or services or both may be specified or added in
one Registration.
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3
 New Definition of MSMEs- Classification
• Any request for change in category, due to revised definition, (i.e.) Medium to Small, Micro or vice
versa shall be backed by Udyam Registration Certificate.
• If an enterprises crosses the ceiling limits specified for its present category in either of the two
criteria of investment or turnover, it will cease to exist in that category and be placed in the next
higher category but no enterprise shall be placed in the lower category unless it goes below the
ceiling limits specified for its present category in both the criteria of investment as well as
turnover.

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 New Definition of MSMEs- Classification
• Now as per our bank’s circular no.- BCC:BR:113:406 dated 08.07.2021, Ministry of Micro,
Small and Medium Enterprises, vide Office Memorandum (OM) No. 5/2(2)/2021-
E/P&G/Policy dated July 2, 2021, has advised to include Retail and Wholesale Trade as
MSMEs for the limited purpose of Priority Sector Lending and they would be allowed to
be registered on Udyam Registration Portal for the following NIC Codes and activities
mentioned against them:
NIC Codes Activities
45 Wholesale and retail trade and repair of motor vehicles and motorcycles
46 Wholesale trade except of motor vehicles and motorcycles
47 Retail trade except of motor vehicles and motorcycles

• All the borrowers engaged in Trading activities as above, to register themselves on

'Udyam Registration Portal' at the earliest.
• Further, the copies of certificates shall be obtained and the details shall be entered in
INVESTO menu in Finacle. Kamal Patencha 5
Classification as per MSMED Act- 2006...?
If a unit is having investment of Rs. 0.80 Cr. and T/O of Rs. 4.00 Cr. than the unit
will be classified as?
Micro Enterprises

If a unit is having investment of Rs. 0.95 Cr. and T/O of Rs. 7.50 Cr. than the unit
will be classified as?
Small Enterprises

If a unit is having investment of Rs. 12.00 Cr. and T/O of Rs. 47.50 Cr. than the
unit will be classified as?
Medium Enterprises

If a unit is having investment of Rs. 55.00 Cr. and T/O of Rs. 240.00 Cr. than the
unit will be classified as? Kamal Patencha 6
Understanding the Profit and Loss
account

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Profit & Loss Account
1. Net Income
2. Cost of Sales = Purchases + Direct
Expenses like power, labour,
carriage + change of stock
3. Gross Profit = Sales - COGS
4. Operating Profit = Operating
Revenue - Cost of Goods Sold
(COGS) – operating Expanses -
Depreciation
5. Net Profit = Operating Profit –
Interest - Tax

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Cost of production
• Cost of production refers to the total cost incurred by a business to
produce a specific quantity of a product or offer a service. Production
costs may include things such as labor, raw materials, or consumable
supplies.

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Cost of Goods Sold (COGS)
• The cost of sales is the accumulated total of all costs used to create a
product or service, which has been sold. The cost of sales is a key part
of the performance metrics of a company, since it measures the
ability of an entity to design, source, and manufacture goods at a
reasonable cost. The term is most commonly used by retailers. A
manufacturer is more likely to use the term cost of goods sold. The
cost of sales line item appears near the top of the income statement,
as a subtraction from net sales. The result of this calculation is the
gross margin earned by the reporting entity.
• It Means Cost of Goods Sold (COGS) and Cost of Sales are same thing.

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Operating Profit
• Operating Profit – Profits a company generates from its core business
functions.
• Operating Profit = Revenue - Cost of Goods Sold (COGS) - Operating
Expenses - Depreciation & Amortization
It is good indicator of how well it is being managed and how risky it is.
Highly variable operating margins form previous years trends are a
prime indicator of business risk.
• Gross Profit = Sales - COGS

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• Deprecation :- Non cash expanse
• Straight Line Method (SLM)
• Written Down Value (WDV)

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Balance Sheet

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Balance Sheet

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LIABILITIES & ASSETS
• Long Term Liabilities :-

TERM LOANS
DEBENTURES
UNSECURED LOANS
PUBLIC DEPOSITS, MATURING AFTER 12 MONTHS.

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LIABILITIES & ASSETS
• Short Term or Current Liabilities :-

SUNDRY CREDITORS
BILLS PAYBALE
INSTALMENTS OF TL PAYABLE IN 12 MNTHS
STATUTORY LIABILITIES
PROVISIONS
BANK BORROWINGS

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LIABILITIES & ASSETS
• Long Term or Fixed Assets:-

L & B
P & M
F & F
VEHICLES
FURNITURE

CONCEPT OF REVALUATION RESERVE- Revaluation Reserves is increase or

decrease the carrying value of the asset-based on estimates of its fair value
not Book value.Revaluation reserve is a non-cash reserve
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LIABILITIES & ASSETS
• Short Term or Current Assets:-

STOCK

RECEIVABLES

CASH & BB

PREPAID EXPENSES

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LIABILITIES (SOURCES)
• TERM LIABILITIES

• CURRENT LIABILITIES

• CONTINGENT LIABILITY

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ASSETS (USES)
• CURRENT ASSETS

• FIXED ASSETS

• NON CURRENT ASSETS

• INTANGIBLE ASSETS

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Off Balance Sheet Items
• Contingent Liabilities / Assets
• Acceptances / Endorsements of Bill on behalf of
• constituents. (Bills Purchased / Discounted)
• Liabilities in respect of Letters of Credit / Bank
• Guarantees.

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Ratio Analysis:
• Ratio has prime importance in the analysis and
interpretation of balance sheet and Profit and Loss
Account.
• Comparison can be made vertically or horizontally. Bank is
interested in certain key ratios. They fall under three main
groups.
• Liquidity Ratios
• Solvency Ratios
• Efficiency Ratios
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Liquidity Ratios:
Current Ratio = Current Assets
Current liability
It is the barometer of short term liquidity of the company. In other words, the
working capital resources position is reflected in current ratio So higher
the ratio, better the liquidity.
Slip back or fall in current ratio would generally indicate diversion of short term
funds (either for acquisition of fixed assets or for outside investment) or cash
loss. Hence, any adverse trend in current ratio should be carefully examined.
( SME- Micro & small: 1.17:1 ,ME- 1.20:1 & Expanded category- 1.33:1 )

Acid Test or Quick Ratio = Current Assets- Stock

Current liability – Bank Borrowing

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Solvency Ratios

• Solvency Ratios: = Net Tangible Assets

Total outside liability
This ratio measures the ability of the concern to repay all
external debts or outside liabilities out of its own assets on a long
term basis.
Net tangible assets mean total assets of the concern less all
intangible and fictitious assets(FA+CA-IA).
Total outside liabilities mean total liabilities of the concern other
than its net worth. Ideally this ratio should be more than 1.
Larger the ratio, better is the solvency of the unit.
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Efficiency Ratios:
• Efficiency of a concern is measured by its earning capacity or
profitability. The ultimate test of efficiency is return on
investment.
• Various efficiency ratios may be grouped under the
following three heads:-

Financial Management Ratios

Material Management Ratios
Profitability/Operational Ratios

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 Financial Management Ratios

• Financial Management Ratios:- These ratios indicate the efficiency

of financial management of the concern. This is measure by
following ratios:-
a) Debt-Equity Ratio: Total Term Liabilities /Tangible Net Worth (3:1)
b) Debt-Equity Ratio: Total Outside Liabilities /Tangible Net Worth(4.5:1)

It shows borrowing of firm / company against his own fund in business.

It also called leverage ratio means how many times a firm/company
could take loan against borrowing.

 What is TOL, TTL & TNW

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 Efficiency Ratios: Financial Management Ratios
B) Fixed Assets Coverage Ratio: Net Fixed Assets/Long or Medium Term Debts
This should be more than 1.

C) Debtors Turnover Ratio: Outstanding Debtors x 365 /Credit Sales

• Financial resources of the concern are made available to outsiders. The larger the
amount outstanding means extending more credit funds to other and vice versa. The
Lower the ratio (in days), the more efficient Debtors Turnover Ratio.

D) Creditors Turnover Ratio: Outstanding Creditors x 365 / Credit Purchases

• When a concern is facing financial problem, there is a tendency to postpone payment to
creditors. Hence increase in creditors turnover may not be good sign. The Lower the ratio
(in days), the more efficient Creditors Turnover Ratio.

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 Efficiency Ratios: Material Management Ratios

• Material Management Ratios:- The basic ratio falling

under this head is Inventory Turnover Ratio. Inventory
means raw materials, stores, stocks-in-process and
finished goods.

• Inventory Turnover Ratio = Inventory x 365 /Cost of

Goods Sold

• The Lower the ratio, the more efficient is the inventory

management.
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 Material Management Ratios

• Raw Material = RM on Hand ×365

RM Consumed during the Year
• Process stock turnover = SIP×365
Cost of production
• FG turnover Ratio = FG on Hand×365
Cost of goods sold
• Stores & Spare turnover =Stores & spare×365
Stores & spares consumed

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 Efficiency Ratios: Material Management Ratios

• Assets Turnover Ratio = Sales / Net Operating Assets

• This shows how efficiently the assets are employed in the

business.
• Net operating assets mean all fixed, non-current and current
assets excluding intangible and fictitious assets
• It should show the increasing trend over a period of time.

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Efficiency Ratio: Profitability Ratio
 Profitability/Operational Ratios: The earning capacity of a
concern can be measured by these ratios :-

• Gross Profit Margin = Gross Profit×100

Net sales

• Net Profit Margin = Net Profit×100

Net sales

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Efficiency Ratio: Profitability Ratio
• Return on Investment (ROI) = EBIT / Net Operating Assets
(NOA)

• E B I T denotes Earnings before interest and tax

• Net operating assets include all fixed, non-current and
current assets.
• The management is interested to ascertain the rate of return
on investment (ROI) the benefit received from
an investment.
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• DSCR (for Term loan) = PAT+ Depreciation + INTT on T/L
INTT on TL + TL Installment
• Min Average DSCR 1.75:1, Min any year 1.25:1
• Ability of a concern to service its term liabilities can be
gauged from this ratio. A ratio of 1.75 would indicate the
firm/company internal generation of funds would be 1.75
times of its commitments i.e. term loan obligations and
interest.

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 LIABILITIES ASSETS
Capital + Reserves 355 Net Fixed Assets 265
P&L Credit Balance 7 Cash 1
Loan from SFC 100 Receivables 125
Bank Overdraft 38 Stocks 128
Creditors 26 Prepaid Expenses 1
Provision for Tax 9 Intangible Assets 30
Proposed Dividend 15
----- -----
550 550
(a) Current Ratio
(b) Quick Ratio
(c) Debt Equity Ratio (TOL/TNW)
(d) Debt Equity Ratio (TTL/TNW)
(e)Working Capital Gap
(f) Net Working Capital
(g) Debtors Turnover Ratio (assume gross credit sales
as Rs.1500 lacs)

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Answers
(a) Current Ratio (1+125+128+1)/ (38+26+9+15) = 255/88 = 2.90:1

(b) Quick Ratio (125 + 1) / 88 = 1.43 : 1

(c) Debt Equity Ratio (Total Liab/Tangible NW) = (188/362-30) =188/332 = 0.57 : 1
(TOL/TNW)
(d) Debt Equity Ratio (Total Term Liab/Tangible NW) = (100/362-30) =100/332 =
(TTL/TNW) 0.30 : 1

(e)Working Capital Gap CA-CL without Bank Fin. = 255 – 50 = 205

(f) Net Working Capital CA-CL including Bank Fin. = 255-88 = 167

(g) Debtors Turnover Ratio (Debtors/Gross Credit Sales)x 365 = (125/1500)x365 = 30 days
(assume gross credit sales as
Rs.1500 lacs)

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Guidelines of Global
Credit Exposure
Management Policy

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Efficiency Ratio: Profitability Ratio
Modified DSCR

• By adjusting numerator, with “incremental NWC”.

• (PAT + depr. + Annual lease rentals + other non cash items –

incremental NWC) / (total debt service)

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Takeover of MSME Accounts

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 Takeover of Loan Accounts:
 Accounts of profit-making (i.e. net profit before tax) concerns as per last two audited balance sheets should
only be considered
 Accounts with existing lenders should be under the category of “Standard Assets” and should not have
been classified under SMA-1 / SMA-2 during the last one year as per the latest CRILC report.
 Bank should obtain necessary credit information from the transferor bank as per the format prescribed on
“Lending under Consortium Arrangement/Multiple Banking Arrangements” and / or Latest statement of
account of the existing banks for preceding 6 -12 months is to be obtained and verified to assess the quality
of operations with the existing bankers.
 Besides obtaining Credit Report from the existing lenders, Branches to make discrete inquiries with people
in the similar line of activity / buyers / suppliers and their view about the prospective borrower's
credentials, financial soundness, integrity, reputation and capability (amount proposed to be taken over)
must be obtained. A confirmation to this effect must form a part of comments in the takeover proposals.

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 Takeover of Loan Accounts:
External Rating in respect of credit proposal with exposure above Rs.50crores by approved credit
rating agencies should not be below BBB & equivalent.
There should be tangible security available to cover the advances to be taken over and the
underlying assets should be distinctly identifiable.
Securities to be revalued at the time of takeover of account as per the extant guidelines.
For Term Loan / Project Finance, the project should not be in the implementation phase at the
time of takeover of the loan. In other words, it should have commenced commercial production.
The remaining repayment period shall not be extended beyond the original repayment period
permitted by the erstwhile lender, as it amounts to restructuring of account. However, this
provision will not be applicable in respect of refinance of loans as allowed by the RBI.
Take-over accounts are to be rated as under Investment Grade.
There should not have been any rescheduling / restructuring in the account during last two years.

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Authorities to Takeover of Loan Accounts:
1. No credit facility should be taken over by the Bank from any other bank where any of the Bank's
Executive Director or Managing Director & CEO had worked earlier. In case any such account is
proposed to be taken over, the proposal will be required to be put up to the Management Committee
of the Board (MCB) with specific reasons justifying the need for taking over the account and put up to
the Board for noting.
In such case of takeover of Retail Loans, the proposal will required to be put up to the Executive
Director with specific reasons justifying the need for staking over the account and such sanctions are
to be reported to the MCB in the next immediate meeting scheduled.
1. For takeover of Corporate & MSME Accounts, for authorities upto Scale-III, Prior approval of next
higher authority i.e. Regional Manager is required.
2. In case of takeover of Retail Loan accounts, no prior clearance is required from Regional/ Zonal Head/
BCC.
3. In case of takeover of agriculture finance to individual farmers with aggregate limit up to Rs. 10.00
lacs, no prior approval is required. For authorities below the rank of Chief Manager, prior approval of
next higher authority is required.
4. For takeover proposals falling in the DLP of Chief Manager and above, no prior approval is required,
provided takeover norms are complied with and decision is taken by the Competent Authority.

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Maximum Aggregate Exposure per borrower:

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Turn Around Time (TAT)
Time line as per as per for MSME Loans as per Code of commitment to SMEs:

Maximum disposal period on receipt of

Loan Limit up to
loan applications complete in all the
respects and duly accompanied by a
check list
Up toRs.5 Lacs One week
Above Rs. 5/- Lacs and up to Rs.25.00 Lacs 10 working days
above Rs. 25/- lacs 15 working days
Within 14 days if no TEV required
At SMELF
21 days if TEV is required

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TEV Study

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TEV Study:
Techno Economic Viability Study [TEV Study]: Appraisal of technological
parameters of a project and its impact on the financial viability of project.

• No TEV study may be insisted upon for project cost up to Rs. 25 crore.
• For projects above Rs. 25 crore and upto Rs. 100 crore, the TEV Study should be carried
out by the Bank’s Technical Officer posted in the Zone concerned or by an empanelled
consultant.
• For projects above Rs. 100.00 crore, the TEV Study should be carried out by the Bank’s
Technical Officer/s posted in Project Finance Division at BCC.
• For Residential projects under real estate, TEV study carried out by the empanelled
consultants may be accepted(irrespective of project cost).
• For project cost above Rs. 25 crores but not exceeding Rs 50 crores, COCC-CGM may
waive TEV study in the account and proposals with the project cost of Rs. 50.00 crores
and above, COCC-ED & above may waive TEV Study depending upon the merits of the
case.
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Activity Clearance

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Activity Clearance: Category A:
Any fresh / increase in exposure irrespective of the quantum of proposed exposure in case of following
activities/ industries, will be subject to Activity Clearance from COCC-CGM for proposals falling within the DLP
up to and including COCC-GM. Above that no activity clearance is required.
I. Leasing, Hire-Purchase, Non-Banking Finance Companies (other than Central/ State Government-owned
NBFCs),
II. Capital Market (other than advances against shares to individuals)
III. Financing of Film-making–(Sanctioning authority rests with COCC-ED and above
IV. Bridge Loan.
V. Financing of Educational Institute (Above Rs.5.00 crore)
VI. Aviation
VII. Infrastructure-Power, Roads & Telecom
VIII. Securitization / Through Deed of Assignment.
IX. Gems & Jewellery and Diamond Industry(Above Rs. 2 crore)
X. Commercial Real Estate for construction of Malls
XI. Advances to co-operative banks
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Activity Clearance: Category B:
In respect of following activities, the activity clearance may be accorded by ZOCC-
GM for proposals falling up to the power of ZOCC-GM. Above that no activity
clearance is required.
I. Plantation (excluding tea, coffee and rubber plantations, common horticulture crops,
Jatropha, spices, medicinal plants, essential oils/ Aromatic plants),
II. Manufacturing & Trading of Liquor
III. Vegetable Oil, Vanaspati
IV. Cinema Halls, Theatres/ Auditoriums/ Amusement Parks, Marriage Halls/
Kalyanamandapams)
V. Educational Institutions (for proposal up to Rs. 5.00 Crs)
VI. IT & ITES
VII. Advances to Hotels/ Resorts
VIII. Real Estate (other than construction of malls) for Commercial Activities but excluding
Retail Loans, Priority Sector Advances.
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Activity Clearance: Common Guidelines
• Any adhoc request related to activities in which activity clearance is required, Sanctioning
Authority may consider under their respective DLP.
• In case of Retail Loans, activity clearance is not required for Home Loan, Auto Loan,
Personal Loan etc. even though prospective borrower is engaged in the activities,
requiring Activity Clearance.
• In respect of Mortgage Loan to non-individuals, activity clearance needs to be obtained
where the Borrower is engaged in these activities, requiring Activity Clearance.
• Financing against 100% cash collateral will not require Activity Clearance.
• In case of loan to MSME, no activity clearance is required where proposal is under
Specific Scheme for the activities mentioned above.
• Fresh sanction of any credit facility, whether FB or NFB including Guarantees and
Temporary Overdrafts, are not to be sanctioned to any Co-operative Bank. In
exceptionally meritorious cases, irrespective of the amount may be sent to the Corporate
& Institutional Credit Dept., BCC, Mumbai.
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Agreement In Principle (AIP)
• AIP is required in respect of fresh proposals with external credit rating below “A” and
falling beyond the ZOCC-GM powers.

• Authority to issue AIP:

• For proposals falling under discretionary lending powers of COCC-CGM, AIP will be
accorded by respective Corporate/ CGM/ Credit Vertical Head not below the rank of
General Manager.
• For proposals falling within the DLP of COCC-ED, AIP will be accorded by respective ED.
• For proposals falling under discretionary lending power of CACB and MCB, AIP will be
accorded by respective ED and MD & CEO.

Branch may or may not carry internal rating as it is not a necessary requirement for
AIP/Activity clearance.

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Legal Entity Identifier (LEI) Code - Exposure of Rs.5 Cr & above
• LEI shall be mandatorily obtained from all borrowers of our Bank having aggregate exposure of Rs.5 Cr and
above from entire banking system.
• LEI is a 20-digit unique code to identify parties to financial transactions world wide.
• In India, LEI code is provided by Legal Entity Identifier India Ltd (LEIIL) at https://www.ccilindia-lei.co.in.
• Branches to contact all the borrowers having aggregate exposure of Rs.5 Cr and above from entire banking
system and obtain the LEI number.
• LEI Number thus obtained shall be entered in CBS at "ABAIM" Menu. For detailed job card please refer
circular no BCC/CIC/DFB/111/04 dated 31.01.2019.
• No new account (except individuals/ Government), where the aggregate exposure of the borrower is Rs.5 Cr
and above, be allowed to be opened in the CBS, unless there is a valid LEI number entered in the CBS.
• Disbursements/ increase in limits/ restructuring to be allowed for eligible borrowers in CBS (except
individuals/Government) only if valid LEI is already available in thesystem.
• LEI number to be made part of Credit Audit/ Loan Review Mechanism of eligible accounts and audit not to
be closed unless LEI number is made available/ held on record.

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Inspection Guidelines

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Periodic Valuation:
• In case of General advances valuation of property is to be carried out once in 3 years by the Bank’s
empanelled valuer, irrespective of classification of account.
• In case of Home Loans and other Home Loan variants, if the account is regular and classified as standard
asset, the condition of valuation of the properties once in three years will not be applicable.
• Process for the same to be initiated immediately after completion of two and half years i.e. after 30
months from the date of last valuation. (BCC:BR:112:365 Date: 23.06.2020)

Substitution of Securities:
• In case the value of substituting security is either equivalent to or more than the security to be
substituted, respective sanctioning authority can consider security substitution with adequate due
diligence on the proposed security/ies up to COCC-CGM level sanctions and for a sanction above the
level of COCC-CGM, COCC-ED will be the competent authority.
• In case of dilution of security/ies in respect of sanctions up to COCC-CGM, the matter should be referred
to the next higher authority. COCC-ED/CACB /MCB shall have full powers on this issue in respect of
proposals falling within their respective DLP.

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Asset Verification
INTERNAL RATING Frequency of Asset
Verification
For Working Capital
Finance BOB-1, BOB-2, BOB-3 Quarterly
BOB-4, BOB-5 Once in -2- months
BOB-6 and below Monthly
Fixed Assets Half Yearly

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