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Specialised SME Branches All the then-existing Specialised SSI Branches at 32 Centers were redesignated as SME Branches as per Board Approval dated 30/06/2005 with a view to increase the credit flow to SME segment in these Centers by giving a special thrust on marketing. Further, 20 additional general banking branches have been re-designated as SME branches with thrust on SME lending. The number of SME branches as of now is 50 after delisting 2 branches from the original list of 32 branches and addition of 20 branches as mentioned hereinabove. 4. SME Cells at Zonal Offices Specialised SME Credit Cells have been set up at Zonal Offices in all key centres having good potential for SME advances, with the following functions:

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Processing of all proposals where the limits are beyond the Branch Managers delegated authority. Branches would forward all related papers for an evaluation at SME Cell with their recommendations. Branches should own responsibility for the borrowers credentials and activity and ensure existing procedures/processes to continue if proposal falls within the Branch Managers Delegated Authority; Branches would be free from processing of such proposals and sanction formalities and be responsible only for obtention of security documents from the borrower and for perfection of other securities as well as monitoring of the units operations. Proposals processed by the Cell would be dealt directly at the Zonal Office, without any intervening authority; Turnaround time would thus be reduced, ensuring that stipulated time schedules are strictly followed by bothBranches and SME Cell; The critical parameter for measuring the Cells performance would be the reduced Turnaround time and SME business growth with the introduction of the centralised processing at the SME Cell.

5. Credit Thrust In terms of the extant RBI Guidelines credit is made available to all segments of the SSI sector, as under:

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40% of the total credit to small scale industry goes to Village Industries, Artisans, and Tiny Industries with investment in plant and machinery up to Rs.5 lakhs, 20% of the total credit goes to SSI units with investment in plant and machinery between Rs.5 lakhs and Rs.25 lakhs and The remaining 40% goes to SSI units with investments in Plant and Machinery exceeding Rs.25 lakhs.

Since the investment criteria has undergone a revision under MSMED Act, some of the erstwhile Medium Enterprises would be shifted to Small Enterprises(Manufacturing) and scope of the latter (former SSI) has increased whereas in case of Tiny sector now called Micro Enterprises, the investment in Plant & Machinery/Equipment has

remained the same (i.e. up to Rs.5 lakhs and Rs.25 Lakhs in both the segments. In tune with RBI Directives to increase the outreach of formal credit to the SME sector, our semi-urban and Urban branches were advised to make concerted efforts to provide credit cover on an average every year to at least 5 new micro/small/medium enterprises each. 6. Cluster-Based Lending Approach Cluster based approach for financing SMEs is expected to result in less transaction costs, and risk mitigation, besides providing an appropriate scale for improvement in infrastructure. Of the 388 UNIDO-identified clusters for intensive development, 61 clusters were identified for active financing by us at centres where we are already represented. Besides these 61 identified clusters, Bank will also formulate any other schemes under the cluster approach such as ginning mills (Ahmedabad), Carpet Weaving (Varanasi), Ganesh Idols (Raigad Thane), etc. The SME branches would also have adequate operational flexibility to extend finance/render other services to other sectors/borrowers. SIDBI has already initiated the process of establishing Small Enterprises Financial Centres (SEFCs) in select clusters. Risk profiles of each cluster will be studied by a professional credit rating agency and such risk profile reports when made available to Bank(s) would enable us to consider adoption of the cluster for comprehensive credit saturation. 7. Credit Tenure The Banks Term Loan exposure to SME sector would generally have a 7-10 year maturity. 8. Credit Acquisition Apart from direct/primary credit acquisition, we may also consider take-over of advance accounts from other Banks/FIs if the following minimum financial parameters and conditions are complied with:

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Accounts should be eligible for a credit rating of minimum AA as per our credit rating model treating the account as a new one. The accounts to be taken over should be standard accounts with the existing Bank. The firm/company continuously registering increasing trend in sales volume and making cash profit for at least last three years. Maximum debt equity ratio of 3:1 in the case of Medium Enterprises, and Small Enterprises enjoying working capital limits over Rs.5.00 Crores and 4:1 in the case of Tiny Enterprises, and Small Enterprises enjoying working capital limits up to Rs.5.00 Crores. While a benchmark Current Ratio at 1.33:1 is always desirable, it is felt that some relaxations need to be made in this regard in case of SMEs. They may be permitted to maintain a minimum current ratio 1:1 as against 1.25133:1,, stipulated for others. Deviations from this range to be allowed only by an authority one level higher than the sanctioning authority. Minimum Interest Service Coverage Ratio (ISCR) of 1.50:1

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as against 1.75:1 prescribed normally. If Term Loan is also proposed to be taken over, the minimum Debt:Service Coverage Ratio (DSCR) should be 1.25. The Asset Coverage Ratio should not be less than 1.50.

9. Credit Appraisal Although same appraisal norms cannot be uniformly applied to Micro, Small and Medium Enterprises, broadly the appraisal would involve: Proper identification of the Proponent(s) and his/her/their antecedents in accordance with KYC Norms/Guidelines, the proponents experience, educational and social background, technical/ professional competence, integrity, initiatives, etc,.

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Checking out for Wilful Defaulters List of RBI, Specific Approval List (SAL) of ECGC etc,. The acceptability of the product manufactured, its popularity/market demand, market competitors. Evaluation of State and Central Govt. Policies (enabling environment) with specific reference to the Enterprise in question, Environmental stipulations, Availability of necessary infrastructure-roads, power, labour, raw material and markets. Techno-economic Appraisal of units where it is felt absolutely necessary by the Zonal Managers. Project Cost, the Proponents own financial contribution, projections for three years, and other important parameters which would include the BEP, liquidity, solvency, and profitability ratios, etc,.

10. Working Capital Assessment For working capital limits up to Rs.5 Crores , Turnover Method would be applicable as mandated under Nayak Committee Recommendations for financing working capital needs of the SMEs @ 20% of the projected turnover based on the assumption of a three month operating cycle. It is abundantly clarified that this 20% is the minimum WC limit to be sanctioned even if the proponents operating cycle is shorter than 3 months. Branches should, however, ensure to restrict the drawings in such cases to actual drawing power. MPBF method may be resorted in specific cases with longer operating cycle. Branches should obtain and scrutinise latest audited financials of the constituent in all cases of WC limits above Rs.10 lakhs. In case of provisional balance sheets it should be ensured that in the audited financials, the variation is not beyond +/- 5%. The next years sales projections made by the borrower, however, would have to be corroborated by the trend in sales over 2 years, last year actual sales through verification of the following indicative parameters (besides the financial data submitted by the borrower):

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Sales Ledger/Sales Turnover. Credit Summation in the account. Sales Memos or Invoices/Delivery Challans. Sales Tax Paid/Turnover Tax/Excise Register, as applicable, Electricity Bills wherever applicable. Orders on hand/expected orders. Installed capacity vis--vis the projections.

Overall market trend etc,.

Such projections should be within reasonable limits say 25% over last years sales. However, in exceptional cases deviations from this may be allowed if supported by LCs/Firm orders on hand etc,. 10.1.Current Ratio: While a benchmark Current Ratio at 1.33:1 is always desirable, it is felt that some relaxations need to be made in this regard in case of SMEs. They may be permitted to maintain a minimum current ratio 1:1 as against 1.25-133:1, stipulated for others. Deviations from this range to be permitted by an authority one level higher than the sanctioning authority. Classification of Current Assets and Current Liabilities under MPBF method would be based on extant RBI/Bank guidelines. 10.2. Debt:Equity Ratio: The following may be accepted as the benchmark in this regard:

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W/C Limits up to Rs.5 Crores to Micro & Small Enterprises:4:1. W/C Limits over Rs.5 Crores to Micro & Small Enterprises: 3:1. W/C Limits to Medium Enterprises: 3:1.

11. Credit Rating Model Govt./RBI had advised that Banks may initiate necessary steps to rationalise the cost of loans to SME sector by adopting a transparent rating system with cost of credit being linked to the credit rating of enterprise. The Banks Board had already approved on 04/02/2005 adoption of the following credit risk models, developed by ICRA. The entry level requirements prescribed in this new model would be applicable:

a) Large Corporate Model (Domestic/ECBs/Syndicated Loans) (Fund/Non-Fund-Based limits of Rs.500 Lakhs and above or Turnover Rs.5000 Lakhs); b) Mid-segment Model (Fund/ Non-Fund-Based limits of Rs.100 Lakhs and above but not exceeding Rs.500 Lakhs and Turnover below Rs.5000 Lakhs); c) SBS/SSI Model (Fund/ Non-Fund-Based limits of Rs.10 Lakhs and above but not exceeding Rs.100 Lakhs) scoring model);
The Bank had already adopted rating models a & c above. The model for amounts between Rs.1 Crore and Rs.5 Crores is under the process of rollout. The ratings given by reputed Credit Rating agencies such as SMERA, CRISIL etc, which have been approved by the National Small Industries Corporation, are also considered for granting concessions in the interest rates, in tune with such credit ratings, based on parameters such as turnover, market position, operating efficiency, existing financial position, and management evaluation.

12. Pricing: Risk of Default in the SME sector is spread amongst a wider base of borrowers and therefore the pricing would be linked to the Credit Rating of the constituent considering also the RBI directives from time to time. In view of the severe competition in the market, interest rates offered at times may have to be lower than the rate arrived at reckoning the borrowers credit rating. Taking into view the overall value of the account and the attendant ancillary benefits available to the Bank, the Chairman & Managing Director/Executive Director may, within the authority ceded at Board 13.07.2004, grant authority to Zonal Manager and above, to approve interest concessions, subject to informing ALCO. 13. Exposure Norms: Banks extant exposure norms would be applicable. Accordingly, the Banks exposure is not to exceed :

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15% of Banks Capital Funds to Individual Borrowers including PSUs. (20% in case of exposures to Infrastructure Lending). 40% of Banks Capital Funds to Group Borrowers (50% in case the additional exposure of 10% is on account of Infrastructure projects, i.e. Power, Telecommunications, Roads Ports etc)

14. Collateral Security and Margin Norms: Credit facilities extended to a single Micro & Small Enterprises, Borrower (i.e. erstwhile SSI), either by way of Term Loan or Working Capital or both, without any collateral security or third party guarantee, will be covered, if eligible, under SIDBIs Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) Scheme . A composite limit of Rs.1 Crore will be considered by branches to meet working capital and term loan requirements of MSME Units. As per extant RBI guidelines, Micro & Small Enterprises with limits up to Rs.5 Lakhs (i.e. erstwhile Tiny and SSI) may be sanctioned credit facilities without any collateral security. For customers with good track record, this waiver of collateral security may be for limits up to Rs.100 Lakhs, provided CGTMSE cover is available. However, the issue of collateral security would be addressed on a case-specific basis. CGFMSE charges one-time Joining fee of 1.50% and Annual Service fee of 0.75% of the sanctioned limits with credit facilities up to Rs 100 Lakhs. This fee has now been reduced to 1% and 0.5% respectively in respect of credit limits upto Rs.5 lakhs. In terms of Board Approvals dated 29/07/2004, the Bank had already decided to absorb 50% of the one-time guarantee fee to its Profit & Loss Account (i.e.0..75%) for limits up to Rs 50 lakhs, with a view to mitigate the burden on the borrowers and encourage them to take the guarantee cover under CGTMSE scheme Margin requirements, which normally are 25%, would vary depending on the nature of the special Schemes. 15. Time Norms for Disposal of Applications:

With the switchover to the simple Turnover Method for all advances in the SME segment up to Rs.5 Crores, the time for processing of the applications and sanction has to be curtailed as under (from the date of submission of complete papers by the borrower): Limits Up to and including Rs.25,000/= Over Rs.25,000/= and up to Rs.10 Lakhs Over Rs.10 Lakhs up to Rs.5 Crores Over Rs.5 Crores Time Limit Not Exceeding 4 Business Days. 8 Business Days. 12 Business Days. 20 Business Days.



RECENT HISTORY OF INDIAN BANKING Indian banking system, over the years has gone through various phases after establishment of Reserve Bank of India in 1935 during the British rule, to function as Central Bank of the country. Earlier to creation of RBI, the central bank functions were being looked after by the Imperial Bank of India. With the 5-year plan having acquired an important place after the independence, the Govt. felt that the private banks may not extend the kind of cooperation in providing credit support, the economy may need. In 1954 the All India Rural Credit Survey Committee submitted its report recommending creation of a strong, integrated, State-sponsored, State-partnered commercial banking institution with an effective machinery of branches spread all over the country. The recommendations of this committee led to establishment of first Public Sector Bank in the name of State Bank of India on July 01, 1955 by acquiring the substantial part of share capital by RBI, of the then Imperial Bank of India. Similarly during 1956-59, as a result of re-organisation of princely States, the associate banks came into fold of public sector banking. Another evaluation of the banking in India was undertaken during 1966 as the private banks were still not extending the required support in the form of credit disbursal, more particularly to the unorganised sector. Each leading industrial house in the country at that time was closely associated with the promotion and control of one or more banking companies. The bulk of the deposits collected, were being deployed in organised sectors of industry and trade, while the farmers, small entrepreneurs, transporters , professionals and self-employed had to depend on money lenders who used to exploit them by charging higher interest rates. In February 1966, a Scheme of Social Control was set-up whose main function was to periodically assess the demand for bank credit from various sectors of the economy to determine the priorities for grant of loans and advances so as to ensure optimum and efficient utilisation of resources. The scheme however, did not provide any remedy. Though a no. of branches were opened in rural area but the lending activities of the private banks were not oriented towards meeting the credit requirements of the priority/weaker sectors. On July 19, 1969, the Govt. promulgated Banking Companies (Acquisition and

Transfer of Undertakings) Ordinance 1969 to acquire 14 bigger commercial bank with paid up capital of Rs.28.50 cr, deposits of Rs.2629 cr, loans of Rs.1813 cr and with 4134 branches accounting for 80% of advances. Subsequently in 1980, 6 more banks were nationalised which brought 91% of the deposits and 84% of the advances in Public Sector Banking. During December 1969, RBI introduced the Lead Bank Scheme on the recommendations of FK Nariman Committee. Meanwhile, during 1962 Deposit Insurance Corporation was established to provide insurance cover to the depositors. In the post-nationalisation period, there was substantial increase in the no. of branches opened in rural/semi-urban centres bringing down the population per bank branch to 12000 appx. During 1976, RRBs were established (on the recommendations of M. Narasimham Committee report) under the sponsorship and support of public sector banks as the 3rd component of multi-agency credit system for agriculture and rural development. The Service Area Approach was introduced during 1989. While the 1970s and 1980s saw the high growth rate of branch banking net-work, the consolidation phase started in late 80s and more particularly during early 90s, with the submission of report by the Narasimham Committee on Reforms in Financial Services Sector during 1991. In these five decades since independence, banking in India has evolved through four distinct phases: Foundation phase can be considered to cover 1950s and 1960s till the nationalisation of banks in 1969. The focus during this period was to lay the foundation for a sound banking system in the country. As a result the phase witnessed the development of neces sary legislative framework for facilitating reorganisation and consolidation of the banking system, for meeting the requirement of Indian economy. A major development was transformation of Imperial Bank of India into State Bank of India in 1955 and nationalisation of 14 major private banks during 1969. Expansion phase had begun in mid-60s but gained momentum after nationalisation of banks and continued till 1984. A determined effort was made to make banking facilities available to the masses. Branch network of the banks was widened at a very fast pace covering the rural and semi-urban population, which had no access to banking hitherto. Most importantly, credit flows were guided towards the priority sectors. However this weakened the lines of supervision and affected the quality of assets of banks and pressurized their profitability and brought competitive efficiency of the system at a low ebb. Consolidation phase: The phase started in 1985 when a series of policy initiatives were taken by RBI which saw marked slowdown in the branch expansion. Attention was paid to improving house-keeping, customer service, credit management, staff productivity and profitability of banks. Measures were also taken to reduce the structural constraints that obstructed the growth of money market. Reforms phase The macro-economic crisis faced by the country in 1991 paved the way for extensive financial sector reforms which brought deregulation of interest rates, more competition, technological changes, prudential guidelines on asset classification and income recognition, capital adequacy, autonomy packages etc.

BANK NATIONALISATION & PUBLIC SECTOR BANKING Organised banking in India is more than two centuries old. Till 1935 all the banks were in private sector and were set up by individuals and/or industrial houses which collected deposits from individuals and used them for their own purposes. In the absence of any regulatory framework, these private owners of banks were at liberty to use the funds in any manner, they deemed appropriate and resultantly, the bank failures were frequent. Move towards State ownership of banks started with the nationalisation of RBI and passing of Banking Companies Act 1949. On the recommendations of All India Rural Credit Survey Committee, SBI Act was enacted in 1955 and Imperial Bank of India was transferred to SBI. Similarly, the conversion of 8 State-owned banks (State Bank of Bikaner and State Bank of Jaipur were two separate banks earlier and merged) into subsidiaries (now associates) of SBI during 1959 took place. During 1968 the scheme of social control was introduced, which was closely followed by nationalisation of 14 major banks in 1969 and another six in 1980. Keeping in view the objectives of nationalisation, PSBs undertook expansion of reach and services. Resultantly the number of branches increased 7 fold (from 8321 to more than 60000 out of which 58% in rural areas) and no. of people served per branch office came down from 65000 in 1969 to 10000. Much of this expansion has taken place in rural and semi-urban areas. The expansion is significant in terms of geographical distribution. States neglected by private banks before 1969 have a vast network of public sector banks. The PSBs including RRBs, acount for 93% of bank offices and 87% of banking system deposits.