What changed
RBI issued a circular on August 19, 2005, implementing the Finance Minister's August 10, 2005 announcements to step up credit to small and medium enterprises. It redefined Medium Enterprises as units with plant and machinery investment between the SSI limit (Rs.1 crore, or Rs.5 crore for specified items) and Rs.10 crore, while keeping the existing SSI/tiny definition until a new law is passed. Banks must set self-targets for higher SME disbursements, maintain sub-targets for tiny (40%) and smaller units (20%), and compile data as per the new definition.
What it means for you
Banks must now actively expand SME lending with clear targets and data tracking, linking interest rates to credit ratings to rationalize costs. The cluster-based approach and requirement to add 5 new SME accounts per branch annually will increase operational focus on this sector. This may improve credit flow but requires banks to adopt new rating tools like SIDBI's CART/RAM and adjust internal policies for collateral-free loans and faster processing.
What you must do
- Fix self-targets for SME financing with higher disbursement than previous year, maintaining 40% sub-target for tiny and 20% for smaller units.
- Compile outstanding credit data to SME sector as on March 31, 2005, with separate break-up for tiny, small, and medium enterprises.
- Adopt transparent rating systems (e.g., SIDBI's CART/RAM) and link interest rates to credit ratings to rationalize loan costs.
- Ensure each semi-urban/urban branch provides credit cover to at least 5 new small/medium enterprises per year.
- Formulate a comprehensive, liberal SME loan policy based on existing RBI instructions, pending which current instructions apply.
Who it affects
All public sector banks, Regional Rural Banks (for the 5 new enterprises target), Small and Medium Enterprises (SMEs), Tiny and small industrial units
What is the new definition of Medium Enterprises under this circular?
Units with investment in plant and machinery exceeding the SSI limit (Rs.1 crore, or Rs.5 crore for specified items) and up to Rs.10 crore are treated as Medium Enterprises. The existing SSI/tiny definition continues until a new law is passed.
How should banks set interest rates for SME loans?
Banks should adopt a transparent rating system, linking the cost of credit to the enterprise's credit rating. They can use SIDBI's Credit Appraisal & Rating Tool (CART) or Risk Assessment Model (RAM), and consider ratings from the National Small Industries Corporation's Credit Rating Scheme.
What is the branch-level target for SME lending?
All banks, including Regional Rural Banks, must provide credit cover to at least 5 new small/medium enterprises at each of their semi-urban/urban branches per year.