CREDIT FLOW TO

MSME SECTOR
A PRESENTATION
BY
ANIL KUMAR SINHA
KEJRIWAL INSTITUTE OF
MANAGEMENT AND DEVELOPMENT
STUDIES, RANCHI

BACKGROUND

Micro, Small and Medium

Enterprises (MSME) Sector in India
A) Produces about 8000 items,
B) Contributes around 40% of
industrial output,
C) Contributes to almost 50% of
Indias total exports
D) Creates around 50% jobs in
manufacturing industry and
E) Offers the largest employment
opportunity after agriculture
sector.

CHALLENGES FACED BY THE

SECTOR
Inadequate access to finance
Lacks access to private equity and
venture capital
Face fragmented markets
Lack easy access to inter-state and
international market.
Access to technology and product
innovations are also limited.
Lack of awareness
Face considerable delays in the
settlement of dues / payment of
bills

MSMED ACT, 2006

Effective from 02.10.2006

SPECIAL FEATURES
A) CLASSIFICATION OF ENTERPRISES
B) Filing of Memoranda
C) Apex Consultative Body with Wide
Representation of Stakeholders
D) Promotional Provisions
E) CREDIT FLOW
F) Preference Procurement Policies
G) Checking Delayed Payments
H) Facilitating Closure of Business

FROM SSI TO MSME

DEFINING THE NEW
PARADIGM

So far the Govt. policy and RBIs

credit policy have concentrated on
manufacturing units under the
small scale sector.
Lowering of trade barriers across
the globe has increased the
minimum viable scale of
enterprises.
Size of unit and technology
employed for firms to be globally
competitive is now of higher order.

SME DEFINITION - WORLD

SCENARIO
Country

Based on Annual
Turnover

Based on Labour
Force

USA
Small
Business

$ 0.75 - 6 million
(depending on type
of business)

Upto 1500
employees

Germany
Small Inds.
Medium
Inds.

Upto 1 million Euro 9 employees

1 to 100 Million
10 to 499 employees
Euro

U.K.
Small Inds.
Medium
Inds.

Upto 5.6 Million

above 5.6 - 22.8
Million

Upto 50 employees
51 - 250 employees

China
Small
Industry

30 - 300 Million
Yuan

200-2000 employees

CLASSIFICATION OF
ENTERPRISES AS PER NEW
DEFINITIONS
Basis
Micro
Small

MANUFACTURING
ENTERPRISES
Original
Investment in P&M
Not Exceeding Rs.
25 lac
Exceeding Rs. 25
lac, but not
exceeding Rs. 5
crore

Mediu Exceeding Rs. 5

m
crore, but not

SERVICE
ENTERPRISES
Original Cost of
Equipment
Not Exceeding
Rs. 10 lac
Exceeding Rs. 10
lac, but not
exceeding Rs. 2
crore
Exceeding Rs. 2
crore, but not

DEFINITIONS (CONTD.)

UNDER MICRO AND SMALL SERVICE

ENTERPRISES FOLLOWING SECTORS HAVE
BEEN ADDITIONALLY INCLUDED

Small Road & Water Transport Operators:

Owning a fleet of vehicles not exceeding ten
vehicles, including the one proposed to be
purchased
Retail Trade: With credit limits not exceeding
Rs. 10 lac
Small Business: Whose original cost price of
the equipment used for the purpose of the
business does not exceed Rs. 20 lac
Professional & Self Employed: Whose
borrowing limits do not exceed Rs. 10 lac of
which not more than Rs. 2 lac should be for
working capital except in case of
professionally qualified medical practitioners
setting up practice in semi urban & rural
areas, the borrowing limits should not exceed

CREDIT FLOW

The policies and practices in

respect to credit flow to the
MSMEs shall be progressive .
As per MSMED Act, 2006, Govt.
of India expects RBI to ensure
A) Smooth credit flow to this
Sector
B) Minimising sickness among
them
C) Ensuring enhancement of
their competitiveness

STEPS TAKEN BY RBI

A) Fixation of targets/sub-targets as
per new definition
B) Outreach of formal credit: Opening
of new accounts
C) Nursing the sick units back to
health : Debt Restructuring
Mechanism
D) FACILITATIVE MEASURES
E) Encouragement of CGTSI scheme
F) Cluster based approach
G) Setting up of watchdogs:
Monitoring & Review

FIXATION OF TARGETS/SUBTARGETS AS PER NEW

DEFINITION

Banks lending to Micro & Small Enterprises

(MSE) will be included under Priority Sector
40% of Priority Sector Credit should come
from MSE sector
40% MSE should go to Micro Enterprises
(Manufacturing) having investment in P&M
upto Rs. 5 lac & Micro Enterprises
(Services) having investment in P&M upto
Rs. 2 lac
20% MSE should go to Micro Enterprises
(Manufacturing) having investment in P&M
above Rs. 5 lac to Rs. 25 lac & Micro
Enterprises (Services) having investment in
P&M above Rs. 2 lac to Rs. 10 lac

FACILITATIVE MEASURES

RBI instructed all banks to

formulate comprehensive and
more liberal policy for MSME
financing taking into account
following guidelines as indicative
minimum
1. Disposal of applications
2. Collaterals
3. Composite loan
4. Specialised financing branches
5. Norms for computation of

PROCESSING OF
APPLICATIONS

Maintenance of loan application register

Issue of Acknowledgement of Loan
Applications
Rejection of applications or reduction of
limit should not be done without the
approval of the next higher authority with
full details.
Disposal of Applications :
a) Loans up to Rs.25000.00 : Within 2
weeks b) Loans above Rs.25000.00 : Within
4 Weeks ; Provided the loan applications are
complete in all respects and accompanied by
a 'check list'.
Photographs of Borrowers : Free of cost for
weaker section
Composite Loan: Upto Rs. 1 crore to avail of

SECURITY ASPECTS

1. No collateral for advances up to Rs.5.00

Lac
2. In case of good track record of the
borrower it may be waived beyond Rs 5.00
Lac but up to Rs.25.00 Lac, if covered under
CGTSI
3. Up to Rs.25000.00, minimum asset
coverage ratio would be 1:1
4. Up to Rs.10.00 Lacs, a minimum asset
coverage ratio must be 1.25:1
5. Where CGTSI 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 1.25:1
AB-2 1.5:1
AB-3 1.75:1

MARGIN

1. Margin in case of funded Limit:

Up to Rs.25000.00: Nil
Rs.25000.00 to up to Rs.5.00 crore : 20%
Rs.5.00 crore and above : 25% (In case of
Loan to AB-1 borrower it may be 20%)

2. Margin in case of Non-funded Limit

The minimum Cash margin in case of Nonfund facility will be 15%.
However, it can be reduced up to 5% by the
General Manager (Credit) at Head Office
and further below that the CMD/ED is
authorized to reduce the margin.

RISKS PERCEPTION

Nevertheless, 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 for,
as in certain priority sector credit
or Government sponsored schemes.
Bank has entered into MOU with
SMERA & CRISIL for rating of SME

CREDIT RISK
FRAMEWORK FOR MSME
Upto Rs. 10 lac
Above Rs. 10 lac to
below Rs. 1 crore
Rs. 1 crore and
above to less than
Rs. 5 crore
Rs. 5 crore & above

CRG01
CRG02 (Existing)
CRG04 (New)
CRG7A (Existing)
CRG7B (New)
RAM module (if
available),
otherwise CRG7A
or 7B, as the case
may be

METHODOLOGY FOR
CALCULATION OF BANK
FINANCE

Working capital credit limit up to

Rs. 5.00 crore will be computed on
the basis of minimum 20% of
estimated annual turnover
(Turnover method).
Incase 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.
For working capital requirement
above Rs.5.00 crore, traditional
method of computing MPBF as per
second method of lending will

TERM LOAN FINANCE

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 Current Ratios, DSCR and

STAND BY CREDIT FACILITY

To meet the requests emanating
from the borrowers for drawings
over and above the regular
sanctioned limits for short periods
to over come problems faced due to
factors such as bunching of orders,
mismatches in cash flow, to make
price competitive over competitors
etc

SHORT TERM LOAN FACILITY

To meet temporary shortfall /
mismatch in liquidity, for meeting
genuine business requirements only

NON-FUND LIMIT

Non-fund limit may be

sanctioned as per need based
requirements of the borrower
within the ambit of the banks
guidelines in this regard.

Proposals for non-fund facilities

should be dealt with same
diligence as in case of funded
limits.

REVIEW OF PORTFOLIO

MSME Cell has been created under

Priority Sector Credit Department,
Head Office for giving focused
attention
At the Zonal office level, identified
nodal officers to act as coordinating
officer to monitor the functioning,
review and the progress in MSME
financing and to coordinate with other
banks/financial institutions and the
State Government in removing
bottlenecks,
Existing SSI financing branches have
been permitted to finance Medium

MONITORING &
SUPERVISION

For limit of Rs.10.00 lac and

above, audited P/L a/c and
Balance sheet, have to be
obtained.
For limits below Rs.10.00 lac, no
audited accounts are required
but un-audited financial
statement will be obtained
Sales tax returns/ Income tax
returns or other documentary
evidence to be obtained to
ascertain that the same is

REPORTING

Sending of MDA/ZMDA statements.

Submission of Credit Monitoring
Reports (E1, E2 & E3)
Zonal Office will closely monitor the
accounts in terms of Banks
guidelines and will ensure that :
a) Compliance of the terms and
conditions
b) Completion of all documentation
formalities
c) Mortgage is properly created
and/or the liquid securities are duly
transferred/assigned in favour of
the Bank before release of fund.
d) Proper follow up/record of field
visit

OTHER ISSUES

Submission Of Stocks & Bookdebts Statements

Insurance
Discretionary Powers
Rehabilitation of Sick Units
Pricing
Bank Charges

THANKS A LOT
ANY QUESTION
PLEASE