4. MSME

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CREDIT FLOW TO MSME SECTORA PRESENTATION BY ANIL KUMAR SINHAKEJRIWAL INSTITUTE OF MANAGEMENT AND DEVELOPMENT STUDIES, RANCHIBACKGROUNDMicro, Small and Medium Enterprises (MSME) Sector in IndiaA) 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 capitalFace 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 billsMSMED ACT, 2006Effective from 02.10.2006SPECIAL FEATURESA) CLASSIFICATION OF ENTERPRISESB) Filing of MemorandaC) Apex Consultative Body with Wide Representation of StakeholdersD) Promotional ProvisionsE) CREDIT FLOWF) Preference Procurement PoliciesG) Checking Delayed PaymentsH) Facilitating Closure of Business

FROM SSI TO MSME DEFINING THE NEW PARADIGMSo 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 SCENARIOCountryBased on Annual TurnoverBased on Labour ForceUSASmall Business$ 0.75 - 6 million (depending on type of business)Upto 1500 employeesGermanySmall Inds.Medium Inds.Upto 1 million Euro1 to 100 Million Euro9 employees10 to 499 employeesU.K.Small Inds.Medium Inds.Upto 5.6 Millionabove 5.6 - 22.8 MillionUpto 50 employees51 - 250 employeesChina Small Industry30 - 300 Million Yuan200-2000 employeesCLASSIFICATION OF ENTERPRISES AS PER NEW DEFINITIONS MANUFACTURING ENTERPRISESSERVICE ENTERPRISESBasisOriginal Investment in P&M Original Cost of EquipmentMicroNot Exceeding Rs. 25 lacNot Exceeding Rs. 10 lacSmallExceeding Rs. 25 lac, but not exceeding Rs. 5 crore

Exceeding Rs. 10 lac, but not exceeding Rs. 2 croreMediumExceeding Rs. 5 crore, but not exceeding Rs. 10 croreExceeding Rs. 2 crore, but not exceeding Rs. 5 croreDEFINITIONS (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 purchasedRetail Trade: With credit limits not exceeding Rs. 10 lacSmall Business: Whose original cost price of the equipment used for the purpose of the business does not exceed Rs. 20 lacProfessional & 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 Rs. 15 lac with a sub-ceiling of Rs. 3 lac for working capital requirements CREDIT FLOWThe 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 ensureA) Smooth credit flow to this SectorB) Minimising sickness among themC) Ensuring enhancement of their competitivenessSTEPS TAKEN BY RBIA) Fixation of targets/sub-targets as per new definitionB) Outreach of formal credit: Opening of new accountsC) Nursing the sick units back to health : Debt Restructuring MechanismD) FACILITATIVE MEASURESE) Encouragement of CGTSI schemeF) Cluster based approachG) Setting up of watchdogs: Monitoring & Review

FIXATION OF TARGETS/SUB-TARGETS AS PER NEW DEFINITIONBanks lending to Micro & Small Enterprises (MSE) will be included under Priority Sector40% of Priority Sector Credit should come from MSE sector40% 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 lacThus, 60% of MSE should go to Micro Enterprises & 40% of MSE should go to Small EnterprisesFACILITATIVE MEASURESRBI instructed all banks to formulate comprehensive and more liberal policy for MSME financing taking into account following guidelines as indicative minimum1. Disposal of applications2. Collaterals3. Composite loan4. Specialised financing branches5. Norms for computation of limits

PROCESSING OF APPLICATIONS Maintenance of loan application register Issue of Acknowledgement of Loan ApplicationsRejection 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 their working capital and term loan requirement through Single Window

SECURITY ASPECTS1. 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 CGTSI3. 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 borrowerAB-1 1.25:1 AB-2 1.5:1 AB-3 1.75:1 Others 2.00:1

MARGIN1. 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 Non-fund 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 PERCEPTIONNevertheless, 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 borrowers

CREDIT RISK FRAMEWORK FOR MSMEUpto Rs. 10 lacCRG01Above Rs. 10 lac to below Rs. 1 croreCRG02 (Existing)CRG04 (New)Rs. 1 crore and above to less than Rs. 5 croreCRG7A (Existing)CRG7B (New)Rs. 5 crore & aboveRAM module (if available), otherwise CRG7A or 7B, as the case may beMETHODOLOGY 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 continue.

TERM LOAN FINANCECash 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 Tenure etc. will be in line with the Banks lending policy.

STAND BY CREDIT FACILITYTo 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 FACILITYTo 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 Enterprises.MSME charter to be displayed for wider publicity

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 commensurate with the Sales turnover of the unit

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 e) Review of the accounts OTHER ISSUES Submission Of Stocks & Book-debts StatementsInsurance Discretionary Powers Rehabilitation of Sick Units PricingBank Charges

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