What changed
RBI issued a Master Circular consolidating all existing instructions on lending to the Small Scale Industries (SSI) sector up to February 28, 2005. It formalized definitions for SSI units (investment up to Rs 1 crore, enhanced to Rs 5 crore for specified items: hosiery, hand tools, drugs pharmaceuticals, stationery items, sports goods), ancillary units, tiny enterprises (up to Rs 25 lakh), and Small Scale Service & Business Enterprises (SSSBEs) (up to Rs 10 lakh in fixed assets excluding land and building). It also clarified that investments in special bonds issued by SFCs/SIDCs, SIDBI, and NSIC made on or after April 1, 2005, would not qualify as priority sector lending, with existing investments losing eligibility from April 1, 2006.
What it means for you
Banks must use the updated SSI classification thresholds (Rs 1 crore for most SSIs, Rs 5 crore for specified items) for priority sector lending reporting. The circular tightens priority sector eligibility for bonds issued by development finance institutions, phasing out such investments from April 2006. Lenders need to review their SSI loan portfolios to ensure compliance with the consolidated definitions and indirect finance categories.
What you must do
- Update internal lending policies to reflect the SSI investment limits: Rs 1 crore (general), enhanced to Rs 5 crore for specified items (hosiery, hand tools, drugs pharmaceuticals, stationery items, sports goods), Rs 25 lakh (tiny enterprises), and Rs 10 lakh in fixed assets excluding land and building (SSSBEs).
- Reclassify existing SSI loans and indirect finance (e.g., special bonds to SFCs/SIDBI/NSIC) to align with priority sector eligibility rules, noting the April 2005/2006 cutoffs.
- Train credit officers on the illustrative lists of eligible and ineligible SSSBE activities provided in the circular's annexures.
- Acknowledge receipt of this Master Circular as requested by RBI.
Who it affects
All scheduled commercial banks including RRBs and LABs, Banks with SSI lending portfolios, Banks investing in special bonds of SFCs, SIDCs, SIDBI, NSIC, and NABARD for non-farm sector
What is the investment limit for a unit to be classified as a Small Scale Industry (SSI)?
For most SSI units, the investment in plant and machinery (original cost) must not exceed Rs 1 crore. For specified items like hosiery, hand tools, drugs, pharmaceuticals, stationery, and sports goods, the limit is Rs 5 crore.
Are investments in bonds issued by SIDBI or SFCs still eligible for priority sector classification?
Investments made on or after April 1, 2005, in bonds of SFCs/SIDCs, SIDBI, and NSIC are not eligible for priority sector lending. Investments made up to March 31, 2005, will lose eligibility from April 1, 2006.
What qualifies as indirect finance to the SSI sector?
Indirect finance includes credit to agencies supplying inputs/marketing outputs of artisans, government corporations funding weaker sections, advances to handloom co-operatives, term loans to SIDCs/SFCs, credit to KVIC, rediscounting of SSI bills by SIDBI/SFCs, and subscription to bonds of SIDBI, SFCs, SIDCs, NSIC, and NABARD (non-farm sector).