RBI Circular on Policy Package for Stepping up Credit to SME Sector (2005)

RBI/2005-06/131 RPCD.PLNFS. BC.No.31/ 06.02.31/ 2005-06 August 19, 2005 The Chairman/Managing Director All Public Sector Banks Dear Sir, Policy Package for Stepping up Credit to Small and Medium Enterprises --Announcements made by the Union Finance Minister The Hon'ble Finance Minister, Government of India has announced certain measures in the Parliament on August 10, 2005 for stepping up credit to small and medium enterprises (copy of the policy package enclosed), which are required to be implemented by all public sector banks. Accordingly, banks may take action as under: Measures for improving credit flow to the sector: 2. At present, a small scale industrial unit is an industrial undertaking in which investment in plant and machinery, does not exceed Rs.1 crore except in respect of certain specified items under hosiery, hand tools, drugs and pharmaceuticals, stationery items and sports goods where this investment limit has been enhanced to Rs.5 crore. A comprehensive legislation which would enable the paradigm shift from small scale industry to small and medium enterprises is under consideration of Parliament. Pending enactment of the above legislation, current SSI/tiny industries definition may continue. Units with investment in plant and machinery in excess of SSI limit and up to Rs.10 crore may be treated as Medium Enterprises (ME). Only SSI financing will be included in Priority Sector . 3. All banks may fix self-targets for financing to SME sector so as to reflect a higher disbursement over the immediately preceding year, while the sub-targets for financing tiny units and smaller units to the extent of 40% and 20% respectively may continue. Banks may arrange to compile data on outstanding credit to SME sector as on March 31, 2005 as per new definition and also showing the break up separately for tiny, small and medium enterprises. 4. Banks may initiate necessary steps to rationalize the cost of loans to SME sector by adopting a transparent rating system with cost of credit being linked to the credit rating of enterprise. SIDBI has developed a Credit Appraisal & Rating Tool (CART) as well as a Risk Assessment Model (RAM) and a comprehensive rating model for risk assessment of proposals for SMEs. The banks may consider to take advantage of these models as appropriate and reduce their transaction costs. The National Small Industries Corporation has recently introduced a Credit Rating Scheme for encouraging SSI units to get themselves credit rated by reputed credit rating agencies. Banks may consider these ratings as per availability and wherever appropriate structure their rates of interest depending on the ratings assigned to the borrowing SME units. SIDBI in association with Credit Information Bureau (India) Ltd. is initiating necessary steps to set up a credit rating agency expeditiously. 5. In order to increase the outreach of formal credit to the SME sector, all banks, including Regional Rural Banks may make concerted efforts to provide credit cover on an average to at least 5 new small/medium enterprises at each of their semi urban/urban branches per year. 6. Reserve Bank had issued a master circular on lending to SSI sector vide circular RPCD.PLNFS.BC.No.03/06.02.31/2005-06 dated July 1, 2005 incorporating instructions on the time to be taken for disposing of loan applications of SSI units, the limit up to which banks are obliged to grant collateral-free loans, etc. Based on the above guidelines, the Boards of banks may formulate a comprehensive and more liberal policies than the existing policies in respect of loans to SME sector. Till the banks formulate such a policy, the current instructions of Reserve Bank will be applicable to advances granted/to be granted by banks to SME units. 7. Cluster based approach for financing SME sector offers possibilities of reduction in transaction costs, mitigation of risk and also provide an appropriate scale for improvement in infrastructure. About 388 clusters have already been identified. In view of the benefits accruing on account of cluster based approach for financing SME sector, banks may treat it as a thrust area and increasingly adopt the same for SME financing. SIDBI in association with Indian Banks’ Association will initiate necessary steps to collect and pool common data on risks in each identified clusters and develop an IT-enabled application, appraisal and monitoring system for small (including tiny) enterprises. It is expected that this measure will help in reducing transaction costs as well as improve credit flow to the small and tiny enterprises in the clusters. To broaden the financing options for infrastructure development in clusters through public private partnership, SIDBI will formulate a scheme in consultation with the stakeholders. In the meantime, SIDBI has already initiated the process of establishing Small Enterprises Financial Centres (SEFCs) in select clusters. Risk profile of each cluster will be studied by professional credit rating agency and such risk profile reports will be made available to commercial banks. Each lead bank of a district may consider adoption of at least one cluster. 8. A debt restructuring mechanism for nursing of sick units in SME sector and a One Time Settlement (OTS) Scheme for small scale NPA accounts in the books of the banks as on March 31, 2004 are being introduced. Necessary circulars are being issued in this regard separately. Monitoring and Review Mechanism a. The existing institutional arrangements for review of credit to SSI sector like the Standing Advisory Committee in Reserve Bank and cells at the bank head office level as also at important regional centres will review periodically flow of credit to SME, including tiny sector as whole. b. At the Regional offices, the Reserve Bank is constituting empowered committees with the Regional Director of the Reserve Bank as the Chairman to review the progress in SME financing and rehabilitation of sick SSI and ME units and to coordinate with other banks/financial institutions and the state government in removing bottlenecks, if any, to ensure smooth flow of credit to the sector. These Regional level committees may decide the need to have similar committees at cluster/district levels. c. The banks may ensure specialized SME branches in identified clusters/centres with preponderance of Medium Enterprises to enable the SME entrepreneurs to have easy access to the bank credit and to equip bank personnel to develop requisite expertise. The existing specialised SSI branches may be also be redesignated as SME branches. Though the core competence will be utilized for extending finance and other services to SME sector, they will have operational flexibility to extend finance/render other services to other sectors/borrowers. d . For wider dissemination and easy accessibility, the policy guidelines formulated by Boards of banks as well as instructions/guidelines issued by Reserve Bank may be displayed on the respective web sites of banks as well as web site of SIDBI. The banks may also prominently display all the facilities/schemes offered by them to small entrepreneurs at each of their branches. 10. The above instructions and the guidelines to be formulated by your Board of Directors may please be advised to your controlling offices and branches for immediate implementation. 11. Boards of banks may review the progress in achieving the self-set targets as also financing of SME accounts (including tiny sector) on a quarterly basis to ensure that the required emphasis at the highest forum of the banks is given to this sector. 12. Please acknowledge receipt. Yours faithfully, (G.Srinivasan) Chief General Manager Policy Package for stepping up credit to Small and Medium Enterprises The small-scale industries (SSI) produce about 8000 products, contribute 40% of the industrial output and offer the largest employment after agriculture. The sector, therefore, presents an opportunity to the nation to harness local competitive advantages for achieving global dominance. In recognition of these aspects, the National Common Minimum Programme makes the following declarations for accelerating the development of small-scale sector. "Household and artisanal manufacturing will be given greater technological, investment and marketing support. Small–scale industry will be freed from Inspector Raj and given full credit, technological and marketing support. Infrastructure upgradation in major industrial clusters will receive urgent attention."

Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2005-06/131 · issued 19 Aug 2005. The plain-English explanation above is BankPulse’s own independent summary.

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