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CASE STUDY - MSMEs likely to

get 6 % of net bank credit

BY – Group 05
Priority Sector Lending

Percentage to be lent to certain sectors, which
in RBI's perception would not have had
access to organized lending market or could
not afford to pay the interest at the
commercial rate

Categories
 Agriculture
Small Enterprise
Retail Trade
Micro Credit
Education & Housing Loans

NSIC – Rating Fee
Turnover Fee to be reimbursed by
Ministry of MSME
Up to Rs.50 lacs 75% of the fee charged by the
rating agency subject to a
ceiling of Rs.25, 000/-

Above Rs.50 lacs to 75% of the fee charged by the


Rs. 200 lacs rating agency subject to a
ceiling of Rs.30, 000/-

Above Rs.200 lacs 75% of the fee charged by the


rating agency subject to a
ceiling of Rs.40, 000/-
Challenges
Inadequate access to finance

Face fragmented markets


Lack easy access to inter-state and


international markets

Lack of awareness of global best practices


SMEs face considerable delays in the


settlement of dues/payment
Reserve Bank
Guidelines
 Every Bank is required to set up its own policies
for providing monetary assistance to the SME

 Banks should start taking important steps for
rationalizing the cost of loans granted to the SME
sector. They should adopt a transparent rating system

 All banks including regional and rural banks are
required to take up concrete steps for providing
credit facilities to an average of at least 5 MSME's

 Reserve Bank has issued a notification to
all banks for detailing out their
procedures of disposition of loan
applications of MSME's

 Reserve Bank has made special arrangements
in institution for analyzing credit
requirements of such units

Common Guidelines
Disposal of Applications

Collaterals

Composite loan

Specialized SSI/SME branches

Focus
Priority sectors like agriculture, education
health and also MSME, get 40% of a year’s
total bank lending – agriculture being 18%

MSMEs employ 42 million people and contribute
9% of country’s GDP and 40% of exports

If 12% proposal, MSMEs could have some relief -
NCEUS has suggested a breakup of 5% for
small enterprises, 3% for medium enterprises
and the rest for micro firms

The ministry concerned also recommended a 15%
target for lending to MSMEs



 Thesetalks between RBI, the finance minister and the
MSME ministry remained uncertain.

 Treating MSMEs at par with the farm sector, the
commission has also recommended bringing down of the
interest rates on loans to 7% from more than 13% at
present

 Under Basel II norms, the reserve, which banks keep need
to be high in case they lend to unrated organizations

 The RBI should revise the definition of NPAs, to permit
any defaults up to 180-270 days by way of overdue
payments should not be treated as NPAs

 The reliance on outside rating agencies is not
sufficient, internal rating of the borrower needs to
be undertaken

 The present system of credit rating needs to be revised
in order to meet the interests of banks, borrowers and
investors
Credit Rating
 Salient Features
 Benefits to SMEs

 Benefits to Banks

 Industry perception

Basel II
 Purpose of Basel II Accords

 Credit Rating is Compulsory for MSME

 Reduction of Capital flows to MSME

 Credit Rating Alone is Not Sufficient for Safety

 Basel II is Unfair to MSME Sector

 Ratings of Banks is also Important

 More Experience is Required to Become Successful

Recent issues
 MSMEs should be provided with enhanced working
capital support from the banks, by way of
enhancement of cash credit limits and overdraft
facilities, by atleast 15 percent, in each
category

 Consider higher working capital ratios with reduced
margins from the industry

 RBI should revise the definition of NPAs for MSME




Government could urgently come out with
possibility to offer differential rate of
interest for MSMEs

Banks could be encouraged to provide
working capital term loans for a period
of 12-18 months to enable the Industry to
go through this transition period

Thank you !!