Micro Small & Medium

Enterprises
The Government of India passed in June
2006 an act regarding the Micro , Small ,
and Medium Enterprises . The Micro , Small
and Medium Enterprise Development Act ,
2006 (MSMEDA )

The Act accomplishes many long -standing

goals of the government and stakeholders
in the MSME sector .
 Definition of MSME
• The Act decisively defines the MSMEs
by the level of by Plant and Machinery
(P&M ) investment.

• The categorization also makes

allowances for the inherently smaller
investments of Service enterprises.
• The new definition has expanded the P&M limits ; now
each enterprise level encompasses larger investments
than before . The new categorization is as follows :-
• Micro Manufacturing : P&M* Less than Rs 25 lacs
Micro Service : Equipments* Less than Rs10 lacs

Small Manufacturing : Less than Rs 5 crore

Small Service : Less than Rs 2 crore

Medium Manufacturing : Less than Rs 10 crore

Medium Service : Less than Rs 5 crore
*Original cost excluding Land and building and furniture,
fittings and such items, specifically excluded
Loans not exceeding Rs. 20.00 Lacs granted to Retail
Trade would henceforth be part of Small Service
Enterprise under MSME.
 CLASSIFICATION OF MSME
WITHIN THE PRIORITY SECTOR
• The Micro and Small Enterprises (manufacturing and
service) will be Classified under Priority Sector.
• The Micro and Small (Service) enterprises shall include
Small Road and Water Transport Operator, Small
Business, Professional and Self-employed Persons and all
other service enterprises. Retail Trade will not be
classified under Micro and Small enterprises (service
sector).
• Small Road and Water Transport Operator (SRWTO),
Small Business, Professional and Self Employed Persons
(PSEP) will be classified as per the original cost of
equipments either under Micro or Small Enterprises
(service) sector instead of earlier classification/ definition
of 10 vehicles incase of SRWTO and working capital
and /or Term loan limits incase of Small
Business/Professional and Self employed persons.
 CLASSIFICATION OF MSME
WITHIN THE PRIORITY SECTOR
• If the following Storage Units, registered as SSI
Unit/Micro or Small Enterprises, the loans
granted to such units may be classified as Small
Enterprises Sector : “Loans for construction
and running of storage
facilities(warehouse,market yards, godowns and
silos), including Cold Storage Units designed to
store agriculture produce/ products, irrespective
of location”.

• Lending to Medium Enterprises will not be

included under Priority Sector.
 Manufacturing Activities **
• Medical Equipment and Ayurvedic Product
• Composite unit of Bacon Processing and
Piggery Farm*
• Tobacco Processing
• Beedi/Cigarette manufacturing and other
tobacco Products
• Extraction of Agave Spirit from Agave juice ;
(imported medicinal plant ) extraction of Agave
• Manufacture of Bio-Fertilizer
* Piggery Farm without bacon processing as
this is a farming activity.
** The activity of “Bee-Keeping” being farming
allied activity.
 1. DIRECT FINANACE:

i. All loans granted to Small Enterprises including

Micro Enterprises (both Manufacturing and
Services) will be classified under Direct Finance
to Micro and Small Enterprises Sector.

ii. Khadi and Village Industries Sector (KVI):

All advances granted to units in the KVI sector, irrespective

of Sector their size of operation, location and amount of
original investment in Plant and Machinery, will be eligible
for consideration under the Sub Target (60 percent) of the
Small Enterprises segment within the Priority Sector.
 INDIRECT FINANCE
1. Indirect Finance to the Small (manufacturing as well as service)
Enterprises sector will include credit to:-
i. Persons involved in assisting the decentralized sector in the supply of
inputs to and marketing of outputs of artisans, village and cottage
industries.

ii. Advances to cooperatives of producers in the decentralized sector viz.,

artisans, village and cottage industries.

iii. Existing investments as on 31st March, 2007, made by banks in special

bonds issued by NABARD with the objective of financing exclusively non-
farm sector may be classified as Indirect fiancé to Small Enterprise sector
till the date of maturity of such bonds of March 31, 2010, whichever is
earlier. Investment in such special bonds made subsequent to March 31,
2007 will, however, not be eligible for such classification .

iv. Loans granted by banks to NBFCs for on lending to Small and Micro
enterprises (manufacturing as well as service).
 CALCULATION OF INVESTMENT
FOR PLANT & MACHINERY
• In case of MSME advances, if the branches are unable to assess
original investment criteria, a certificate with regard to investment
in plant and machinery / equipment should be obtained from a
Chartered Accountant.
• In calculating the value of plant and machinery for the
purpose of calculating investment limit, the original price
thereof, irrespective of whether the plant and machinery are new
or second hand shall be taken into account. In case the Branch is
unable to assess the original investment criteria, a certificate with
regard to investment in plant/machinery/equipment etc. would be
obtained from a Chartered Accountant.
• The investment in establishing of wind mill/s to generate
electricity for captive consumption or partly for captive
consumption and remaining power to sell to Electricity
Boards/others are to be included in the investment in plant and
machinery.
 Processing of Loan Application
Application Format:
• Revised Simplified Loan Application Form prescribed
by IBA alongwih check list and undertaking of the
applicant, will be applicable for Micro and Small
Enterprises (MSEs)
• For loan beyond Rs.25Lacs, branches may obtain
additional information from the borrower, as deemed
necessary, as incorporated in the checklist enclosed to
the loan application form.
• Loan Application Form (ADV-Comm) and Checklist
enclosed will be applicable for Medium Enterprises
only.
 Processing of Loan Application
• Fair Practice Code for Lenders Liabilities

• Before handing over the Application Forms to applicant,

the modification / addition as applicable under guidelines
on Fair Practice Code for Lender’s Liabilities will be
complied as under:
(a) Information regarding Processing Fee, Service
Charges, and Refund etc. will be annexed as a part of
application form.

(b) An undertaking to be obtained from the prospective

borrower while accepting application that he has been
briefed about and convinced about the charges, bank
will levy on pre/post sanction of the loan.
Processing of Loan Application

Issue of Acknowledgement of Loan

Applications :
Each branch will issue an
acknowledgement for loan applications
received from the borrowers towards
financing under this sector and maintain
the record of the same.
 Processing of Loan Application
• Disposal of Applications:
In case of Loans up to Rs.25000/- :
Within 2 weeks
In case of Loans above Rs.25000/- :
Within 4 Weeks
(Provided the loan applications are
complete in all respects and
accompanied by a 'check list' enclosed
to the application form)
 Processing of Loan Application
• Register of Receipt/Sanction/Rejection of Applications:
a. A register should be maintained at branch wherein the
date of receipt, sanction / disbursement ,rejection with
reasons , should be recorded. The register should be
made available to facilitate verification by the Bank’s
officials including Zonal Manager during visit to the
branch.
b.Branch Manager may reject application (except in
respect of SC/ST). In the case of proposals from SC/ST,
rejection should be done at a level higher than Branch
Manager.
c.The reason for rejection will be communicated to the
borrower in line with stipulation mentioned in the Fair
Practice Lenders Code.
Processing of Loan Application
• Photographs of Borrowers
While there is no objection to take photographs
of the borrowers, for the purpose of
identification, branches themselves should make
arrangements for the photographs and also bear
the cost of photographs of borrowers falling in
the category of Weaker Sections. It should also
be ensured that the procedure does not involve
any delay in loan disbursement.
 TYPES OF CREDIT FACILITIES
• The Bank may provide all types of funded and
non funded facilities to the borrower under this
sector viz, Term Loan, Cash Credit, Letter of
Credit, Bank guarantee, etc.
• A Composite Loan with maximum limit upto
Rs.1.00 crore may be considered by bank to
enable the Micro and Small Enterprises {both for
manufacturing and service sector} to avail of
their working capital and Term loan requirement
through Single Window.
 MARGIN
(A) FUNDED Minimum Margin
1. Upto Rs.25000 NIL
2. Above Rs.25000 25%
20% (Under Turnover
Method)
3. Margin on Book Debts 20-25%
Exports Bills backed by L/C NIL
confirmed by First Class Bank
(B) NON-FUNDED
Letter of Credit (DP) 5%
Letter of Credit (DA) 10%
Bank Guarantee 20%
Margin in case of Non Funded facility can be reduced upto 5% by the
GM(PSC) at HO and
below 5% by the Chairman and Managing Director or Executive
Director(in absence of C&MD).
 Security Aspects
1. No collateral or third party Guarantee for advances up to Rs.5.00
Lacs.

2. In case of good track record of the borrower, Collateral Security

and or third party guarantee may be waived beyond Rs. 5.00
Lacs but up to Rs.100.00 Lacs, where guarantee cover of 75%
upto Rs.50.00 lacs and 50% thereafter, of the amount of default
is available from CGTMSE. The Guarantee Coverage has
increased to 85% of credit facility upto Rs.5 Lacs sanctioned to
Micro Enterprises w.e.f. 02.01.2009. Women Entrepreneurs/
units located in North East Region, including Sikkim (Other than
Micro enterprises) will be eligible for coverage of 80% upto
Rs.50.00 lacs instead of 75% in other cases.

The CGTMSE Commission/ Annual fee will be borne by the

Borrower.
 Security Aspects
• In case of Loan up to Rs.25000.00, minimum asset coverage
ratio would be 1:1. However, in case of schematic
lending/specified scheme, the guidelines as applicable will be
complied with.
• In case of Loan above 25000, a minimum asset coverage ratio
must be 1.1:1 (excluding Margin stipulated).
• In case of loan accounts not covered under CGTMSE scheme
i.e. above Rs.100 lac, it may be explored as far as practicable
that the credit facilities/loans extended, are supported by
collaterals in the form of liquid securities or fixed assets,
immovable properties, based on the credit risks perception of
the borrower. However, 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 on obtaining collateral security /third party guarantee.
 Risk Rating
• Exposure-wise rating modules for SMEs are
as follows :-
Credit Exposure Rating Module
Up to Rs.10.00 Lacs CRG-1
(Existing & New Units )
Above Rs.10.00 Lacs up
to Rs.1.00 Cr :-
Existing Unit CRG-2
New Unit CRG-4
Above Rs.1.00 Cr to less
than Rs.5.00 Cr :-
Existing Unit CRG-7A
New Unit CRG-7B
Rs.5.00 Cr & above Risk
(Existing & New Units) Assessment
Module
(RAM –CRISIL)
In case RAM module is
not operationalised :-
Existing Unit CRG-7A
New Unit CRG-7B
 Methodology for calculation of
Bank Finance
Working Capital Finance:

• Working capital credit limits to Micro, Small and Medium

Enterprises in individual cases up to Rs.5.00 Crore (Manufacturing
sector) and upto Rs.2.00 Crore (Service sector) will be computed as
per existing guidelines on the basis of minimum 20% of projected
annual turnover. However in case 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.

• ii) For assessment of the working capital requirement for borrowers

falling within the band of above Rs.5.00 crores and below
Rs.10.00Crore (Manufacturing Sector) and above Rs.2.00 Crore and
below Rs.10.00 Crore (Service Sector) the traditional method of
computing MPBF as per second method of lending will continue. If
any of the borrower falling in this band intends to shift to cash
budget system, the same may be accepted.
 Methodology for calculation of
Bank Finance
Working Capital Finance:

• For borrowers having working capital limit of

Rs.10.00 crores and above, Cash Budget
System will be applicable.. However, if a
borrower is desirous to continue with the existing
MPBF system the Bank may accept the request.
If any of the borrowers falling in this band
intends to shift to cash budget system, the same
may be accepted.
 Methodology for calculation of
Bank Finance
• Drawing Power :
• Book Debts upto Six Months may be treated as
Current Asset, for the purpose of computation of
permissible bank finance and drawing power
calculation. All Book Debts more than 180 days
are to be treated as Non-Current Assets. As
regards age of the book debts, a certificate
preferably from a Chartered Accountant to be
obtained.
 Methodology for calculation of
Bank Finance
• Term Loan Finance:
The technical feasibility and economic, financial,
commercial viability, managerial competence,
environment viability and bank-ability of the
proposal with reference to risk will be assessed.
• Debt Equity Ratio
In case of term loan, Debt Equity Ratio (DER)
should not normally be above 3:1.However, in
case of capital intensive industries, the same
may be considered upto 5.00:1.
 Methodology for calculation of
Bank Finance
• DSCR/Average DSCR
In case of Term Loan, minimum Average
DSCR of 1.30:1 will be considered as
reasonable requirement for any new
project/expansion project.
• Other Benchmarks
Other benchmark financial ratios like
Current Ratios, Tenure etc. will be in line
with the Bank’s domestic lending policy.
 Mode of Disbursement of Loan

• The disbursement of the loan amount for

Plant and Machinery, Equipment and other
fixed assets will be made in favour of the
supplier through Demand Draft/Banker
Cheque. Branches will continue to ensure
the end use verification on
monthly/quarterly basis.
 Repayment Schedule
• Repayment schedule should be fixed taking into
account the sustenance requirements, surplus
generating capacity, the break-even point, the
life of the asset, etc., and not in an “ad hoc”
manner.
• Moratorium period depending on requirement of
the project will be considered.
• Moratorium period may be extended by further
six months where project implementation has
been delayed for reasons whatsoever beyond
control of the borrower.
• COMPOSITE TERM LOANS
A composite loan with maximum limit upto
Rs.1.00 crore may be considered by bank to
enable the Micro and Small Enterprises (both
for manufacturing and service sector) to avail
of their working capital and Term loan
requirement through Single Window.
• NON-FUNDED LIMIT :
The non-fund limit may be sanctioned as per
need based requirements of the borrower within
the ambit of the bank’s guidelines in this regard.
The proposals for non-fund facilities should be
dealt with same diligence as in case of funded
limits.
 REVIEW OF SME PORTFOLIO:
• At the Zonal office level, Chief Manager (Credit)/ Senior Manager
identified as nodal officers will act as coordinating officer to monitor the
functioning, review and the progress in SME financing and to coordinate
with other banks/financial institutions and the State Government
removing bottlenecks, if any, to ensure smooth flow of credit to the
sector.

• SME financing branches (erstwhile SSIFBs) have be permitted to

finance Medium Enterprises also. Further, bank may explore the
possibility of opening more branches to cater the specialized
requirement to this segment.

• The Zonal office will give due importance for financing in the identified
special credit delivery branches and branches situated near to clusters.

• Review of progress on MSME lending will be placed before the Board

on quarterly basis.
 DEBT RESTRUCTURING
• The Bank’s policy of Debt Structuring
Policy will be applicable for SME as per
Instruction Circular No.10285
/CPRMD/2008-09 dated 19.12.2008 will
be applicable , in respect of debt
restructuring of SMEs.
 ADHOC WORKING CAPITAL
DEMAND LOAN :
(a) Under stimulus package, the need based Adhoc
Working Capital Demand Loans maximum up to 20% of
the existing fund based limits in respect of units having
overall fund based credit facility up to Rs.10.00 Crore
may be given, which will be repayable in one year with a
provision of maximum period of six months during which
interest will have to be serviced.

(b) In this regard borrower may avail only one of the

under noted facilities at a time:
• i) Adhoc Facility
• ii) Adhoc Working Capital Demand Loan
 EXCESS DRAWING
• Besides Adhoc Facility / Adhoc
Working Capital Demand Loan, excess
drawing may be allowed in terms of
provisions contained in the Bank’s
Discretionary Authority (Lending
Power)/ Lending Policy, on merits ,
considering exigencies of the case.
 OPERATIONAL GUIDELINES
FOR ADHOC FACILITIES FOR
MSME BORROWERS
• As per extant MSME Policy, Discretionary
Authority for Adhoc sanction to MSME
Borrowers have been provided from Scale-II
onwards, which has to be extended within
20% of 20% of sanctioned limits or the
prescribed amount under Discretionary
Authority in case of AB-1 and AB-2 rated
Accounts and 10% of sanctioned limit or the
prescribed amount under each scale,
whichever is less in case of accounts with
Risk Grading with AB-3 to AB-7 .