What changed
RBI issued a policy package following the Finance Minister's August 10, 2005 parliamentary announcements to step up credit to small and medium enterprises. It defined medium enterprises as units with plant and machinery investment exceeding the SSI limit (Rs.1 crore or Rs.5 crore for specified items) and up to Rs.10 crore, while retaining the existing SSI definition pending new legislation. Banks must set self-targets for higher SME disbursement year-on-year, with sub-targets of 40% for tiny and 20% for smaller units continuing.
What it means for you
Banks must now actively expand SME lending by adopting transparent rating systems linked to interest rates, using SIDBI's CART and RAM models to reduce transaction costs. The cluster-based approach is a thrust area to lower risk and improve infrastructure. Banks need to compile separate data on tiny, small, and medium enterprise credit as of March 31, 2005, and ensure each semi-urban/urban branch adds at least 5 new SME accounts annually.
What you must do
- Set annual self-targets for SME credit growth higher than the previous year, maintaining 40% sub-target for tiny units and 20% for smaller units.
- Adopt transparent credit rating systems (e.g., SIDBI's CART/RAM or NSIC's scheme) and link interest rates to borrower ratings.
- Ensure each semi-urban/urban branch provides credit to at least 5 new small/medium enterprises per year.
- Compile outstanding credit data to SME sector as on March 31, 2005, with separate breakups for tiny, small, and medium enterprises.
- Formulate a comprehensive, liberal board-approved policy for SME loans, and adopt cluster-based financing as a thrust area.
Who it affects
All private sector banks, All foreign banks, All Regional Rural Banks and Local Area Banks, Small and Medium Enterprises (SMEs), SIDBI and NSIC
What is the new definition of a medium enterprise under this circular?
Pending new legislation, units with investment in plant and machinery exceeding the SSI limit of Rs.1 crore (or Rs.5 crore for specified items) and up to Rs.10 crore are treated as Medium Enterprises. Only SSI financing counts as priority sector lending.
How should banks set interest rates for SME loans?
Banks must 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), or ratings from NSIC's Credit Rating Scheme, to structure interest rates accordingly.
What is the minimum outreach requirement for branches?
All banks, including RRBs, must ensure that each semi-urban/urban branch provides credit cover to at least 5 new small or medium enterprises per year on average.