MSME Lending Master Circular 2011: Key Updates

RBI/2011-12/83 RPCD.SME & NFS. BC. No. 09/06.02.31/2011-12 July 1, 2011 The Chairman/Managing Director/ Chief Executive Officer All Scheduled Commercial Banks (excluding Regional Rural Banks) Dear Sir Master Circular - Lending to Micro, Small & Medium Enterprises (MSME) Sector As you are aware, the Reserve Bank of India has, from time to time, issued a number of guidelines/instructions/directives to banks in the matters relating to lending to Micro, Small & Medium Enterprises Sector. To enable the banks to have current instructions at one place, a Master Circular incorporating the existing guidelines/instructions/directives on the subject has been prepared and is appended. This Master Circular consolidates the instructions issued by the RBI up to June 30, 2011, which are listed in the Appendix , to theextentthey deal with the MSME sector lending by commercial banks. 2.  Please acknowledge receipt. Yours faithfully (C.D. Srinivasan) Chief General Manager SECTION - I Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 The Government of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 on June 16, 2006 which was notified on October 2, 2006. With the enactment of MSMED Act 2006, the paradigm shift that has taken place is the inclusion of the services sector in the definition of Micro, Small & Medium enterprises, apart from extending the scope to medium enterprises. The MSMED Act, 2006 has modified the definition of micro, small and medium enterprises engaged in manufacturing or production and providing or rendering of services. The Reserve Bank has notified the changes to all scheduled commercial banks. Further, the definition, as per the Act, has been adopted for purposes of bank credit vide RBI circular ref. RPCD.PLNFS. BC.No.63/ 06.02.31/ 2006-07 dated April 4, 2007 . 1 Definition of Micro, Small and Medium Enterprises (a)  Enterprises engaged in the manufacture or production, processing or preservation of goods as specified below: (i) A micro enterprise is an enterprise where investment in plant and machinery does not exceed Rs. 25 lakh; (ii)  A small enterprise is an enterprise where the investment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore; and (iii) A medium enterprise is an enterprise where the investment in plant and machinery is more than Rs.5 crore but does not exceed Rs.10 crore. In case of the above enterprises, investment in plant and machinery is the original cost excluding land and building and the items specified by the Ministry of Small Scale Industries vide its notification No.S.O. 1722(E) dated October 5, 2006 ( Annex I ). (b) Enterprises engaged in providing or rendering of services and whose investment in equipment (original cost excluding land and building and furniture, fittings and other items not directly related to the service rendered or as may be notified under the MSMED Act, 2006) are specified below. (i) A micro enterprise is an enterprise where the investment in equipment does not exceed Rs. 10 lakh ; (ii)  A small enterprise is an enterprise where the investment in equipment is more than Rs.10 lakh but does not exceed Rs. 2 crore ; and (iii) A medium enterprise is an enterprise where the investment in equipment is more than Rs. 2 crore but does not exceed Rs. 5 crore . These will include small road & water transport operators, small business, retail trade, professional & self-employed persons and other service enterprises Lending by banks to medium enterprises will not be included for the purpose of reckoning of advances under the priority sector. (iv) Since the MSMED Act, 2006 does not provide for clubbing of investments of different enterprises set up by same person / company for the purpose of classification as Micro, Small and Medium enterprises, the Gazette Notification No. S.O.2 (E) dated January 1, 1993 on clubbing of investments of two or more enterprises under the same ownership for the purpose of classification of industrial undertakings as SSI has been rescinded vide GOI Notification No. S.O. 563 (E) dated February 27, 2009. 1.1  Khadi and Village Industries Sector (KVI) All advances granted to units in the KVI sector, irrespective of their size of operations, location and amount of original investment in plant and machinery will be covered under priority sector advances and will be eligible for consideration under the sub-target (60 per cent) of the micro enterprises segment within the MSE Sector. 1.2 Indirect Finance 1.2.1 Persons involved in assisting the decentralised sector in the supply of inputs and marketing of outputs of artisans, village and cottage industries. 1.2.2 Advances to cooperatives of producers in the decentralised sector viz. artisans, village and cottage industries. 1.2.3 Loans granted by banks to Micro Finance Institutions on, or after, April 1, 2011 for on-lending to micro and small enterprises (manufacturing as well as services) subject to the compliance of guidelines specified in Master Circular RPCD. CO. Plan. BC. 10/04.09.01/ 2011-12 dated July 1, 2011 on 'Lending to Priority Sector'. SECTION - II Certain types of funds deployment eligible as priority sector advances 2.1 Investments 2.1.1 Securitised Assets Investments made by banks in securitised assets, representing loans to various categories of priority sector, shall be eligible for classification under respective categories of priority sector (direct or indirect) depending on the underlying assets, provided the securitised assets are originated by banks and financial institutions and fulfill the Reserve Bank of India guidelines on securitisation. This would mean that the bank's investments in the above categories of securitised assets shall be eligible for classification under the respective categories of priority sector only if the securitised advances were eligible  to be classified as priority sector advances before their securitisation. 2.1.2 Outright purchases of any loan asset eligible to be categorised under priority sector, shall be eligible for classification under the respective categories of priority sector (direct or indirect), provided the loans purchased are eligible to be categorised under priority sector; the loan assets are purchased (after due diligence and at fair value) from banks and financial institutions, without any recourse to the seller; and the eligible loan assets are not disposed of, other than by way of repayment, within a period of six months from the date of purchase. 2.1.3 Investments by banks in Inter Bank Participation Certificates (IBPCs), on a risk sharing basis, shall be eligible for classification under respective categories of priority sector, provided the underlying assets are eligible to be categorised under the respective categories of priority sector and are held for at least 180 days from the date of investment. 2.2 Scheme of Small Enterprises Financial Centres (SEFCs): As per announcement made by the Governor in the Annual Policy Statement 2005-06, a scheme for strategic alliance between branches of banks and SIDBI located in clusters, named as “Small Enterprises Financial Centres” has been formulated in consultation with the Ministry of SSI and Banking Division, Ministry of Finance, Government of India, SIDBI, IBA and select banks and circulated to all scheduled commercial banks on May 20,  2005 for implementation. SIDBI has so far executed MoU with 15 banks so far (Bank of India, UCO Bank, YES Bank, Bank of Baroda, Oriental Bank of Commerce, Punjab National Bank, Dena Bank, Andhra Bank, Indian Bank, Corporation Bank, IDBI Bank, Indian Overseas Bank, Union Bank of India, State Bank of India and Federal Bank). List of MSME  clusters covered by existing SIDBI branches is furnised in Annex II . SECTION - III Targets for priority sector lending by Domestic Commercial Banks 3.1 Targets for Domestic Commercial Banks 3.1.1 The domestic commercial banks are expected to enlarge credit to priority sector and ensure that priority sector advances (which include the micro and small enterprises (MSE) sector) constitute 40 per cent of Adjusted Net Bank Credit (ANBC) or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher. 3.1.2 In terms of the recommendations of the Prime Minister’s Task Force on MSMEs, banks are advised to achieve a 20 per cent year-on-year growth in credit to micro and small enterprises and a 10 per cent annual growth in the number of micro enterprise accounts. 3.1.3 In order to ensure that sufficient credit is available to micro enterprises within the MSE sector, banks should ensure that: (a)  40 per cent of the total advances to MSE sector should go to micro (manufacturing) enterprises having investment in plant and machinery up to Rs. 5 lakh and micro (service) enterprises having investment in equipment up to Rs. 2 lakh;  (b)  20 per cent of the total advances to MSE sector should go to micro (manufacturing) enterprises with investment in plant and machinery above Rs. 5 lakh and up to Rs. 25 lakh, and micro (service) enterprises with investment in equipment above Rs. 2 lakh and up to Rs. 10 lakh. Thus, 60 per cent of MSE advances should go to the micro enterprises. (c)  While banks are advised to achieve the 60% target as above, in terms of the recommendations of the Prime Minister’s Task Force, the allocation of 60% of the MSE advances to the micro enterprises is to be achieved in stages viz. 50% in the year 2010-11, 55% in the year 2011-12 and 60% in the year 2012-13. 3.2 Targets for Foreign Banks 3.2.1 Foreign banks are expected to enlarge credit to priority sector and ensure that priority sector advances (which includes the MSE sector) constitute 32 per cent of Adjusted Net Bank Credit (ANBC) or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher. 3.2.2 Within the overall target of 32 per cent to be achieved by foreign banks, the advances to MSE sector should not be less than 10 per cent of the adjusted net bank credit (ANBC) or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher. 3.2.3 In terms of the recommendations of the Prime Minister’s Task Force on MSMEs, banks are advised to achieve a 20 per cent year-on-year growth in credit to micro and small enterprises and a 10 per cent annual growth in the number of micro enterprise accounts. 3.2.4 In order to ensure that sufficient credit is available to micro enterprises within the MSE sector, banks should ensure that: (a)  40 per cent of the total advances to MSE sector should go to micro (manufacturing) enterprises having investment in plant and machinery up to Rs. 5 lakh and micro (service) enterprises having investment in equipment up to Rs. 2 lakh;  (b)  20 per cent of the total advances to MSE sector should go to micro (manufacturing) enterprises with investment in plant and machinery above Rs. 5 lakh and up to Rs. 25 lakh, and micro (service) enterprises with investment in equipment above Rs. 2 lakh and up to Rs. 10 lakh. Thus, 60 per cent of MSE advances should go to the micro enterprises. (c)  While banks are advised to achieve the 60% target as above, in terms of the recommendations of the Prime Minister’s Task Force the allocation of 60% of the MSE advances to the micro enterprises is to be achieved in stages viz. 50% in the year 2010-11, 55% in the year 2011-12 and 60% in the year 2012-13. 3.3 Deposit by Foreign Banks with SIDBI or Funds with other Financial Institutions, as specified by the Reserve Bank 3.3.1 The foreign banks having shortfall in lending to stipulated priority sector lending target / sub-targets will be required to contribute to Funds to be set up with Small Industries Development Bank of India (SIDBI) or with other Financial Institutions, for such other purpose as may be stipulated by Reserve Bank of India from time to time. 3.3.2 For the purpose of such allocation, the achievement level of priority sector lending as on the last reporting Friday of March of the immediately preceding financial year will be taken into account (i.e. For allocation in Funds with SIDBI or any other Financial Institutions in the year 2011-12, the achievement level of priority sector lending target / sub-targets as on the last reporting Friday of March 2011 will be taken into account). 3.3.3 The corpus of Funds shall be decided by Government of India / Reserve Bank of India on a year-to-year basis. The tenor of the deposits shall be for a period of three years or as decided by Reserve Bank from time to time. The contribution required to be made by foreign banks would not be more than the amount of shortfall in priority sector lending target / sub-targets of the foreign banks. 3.3.4 The concerned foreign banks will be called upon by SIDBI / or such other Financial Institutions may be decided by Reserve Bank, as and when funds are required by them, after giving one month's notice. 3.3.5 The interest rates on foreign banks' contribution, period of deposits, etc. shall be fixed by Reserve Bank of India from time to time. 3.4 Non-achievement of priority sector targets and sub-targets will be taken into account while granting regulatory clearances/approvals for various purposes. [ANBC or credit equivalent of Off-Balance Sheet Exposures (as defined by Department of Banking Operations and Development of Reserve Bank of India from time to time) will be computed with reference to the outstanding as on March 31 of the previous year. For this purpose, outstanding FCNR (B) and NRNR deposits balances will no longer be deducted for computation of ANBC for priority sector lending purposes. For the purpose of priority sector lending, ANBC denotes NBC plus investments made by banks in non-SLR bonds held in HTM category. Investments made by banks in the Recapitalization Bonds floated by Government of India will not be taken into account for the purpose of calculation of ANBC. Existing and fresh investments, by banks in non-SLR bonds held in HTM category will be taken into account for the purpose. Deposits placed by banks with NABARD/SIDBI, as the case may be, in lieu of non-achievement of priority sector lending targets/sub-targets, though shown under Schedule 8 – 'Investments' in the Balance Sheet at item I (vi) – 'Others', will not be treated as investment in non-SLR bonds held under HTM category. For the purpose of calculation of credit equivalent of off-balance sheet exposures, banks may use current exposure method. Inter-bank exposures will not be taken into account for the purpose of priority sector lending targets/sub-targets.] SECTION - IV Common Guidelines / Instructions for Lending to MSME Sector 4.1 Disposal of Applications All loan applications for MSE units upto a credit limit of Rs. 25,000/- should be disposed of within 2 weeks and those upto Rs. 5 lakh within 4 weeks provided , the loan applications are complete in all respects and accompanied by a " check list". 4.2 Collateral Banks are mandated not to accept collateral security in the case of loans upto Rs.10 lakh extended to units in the MSE sector. Banks are also advised to extend collateral-free loans upto Rs. 10 lakh to all units financed under the Prime Minister Employment Generation Programme of KVIC. Banks may, on the basis of good track record and financial position of the MSE units, increase the limit of dispensation of collateral requirement for loans up to Rs.25 lakh (with the approval of the appropriate authority). Banks are advised to strongly encourage their branch level functionaries to avail of the Credit Guarantee Scheme cover, including making performance in this regard a criterion in the evaluation of their field staff. 4.3 Composite loan A composite loan limit of Rs.1 crore can be sanctioned by banks to enable the MSE entrepreneurs to avail of their working capital and term loan requirement through Single Window. 4.4 Specialised MSME branches Public sector banks have been advised to open at least one specialised branch in each district. Further, banks have been permitted to categorise their MSME general banking branches having 60% or more of their advances to MSME sector in order to encourage them to open more specialised MSME branches for providing better service to this sector as a whole. As per the policy package announced by the Government of India for stepping up credit to MSME sector, the public sector banks will ensure specialized MSME branches in identified clusters/centres with preponderance of small enterprises to enable the entrepreneurs to have easy access to the bank credit and to equip bank personnel to develop requisite expertise. The existing specialised SSI branches may  also be redesignated as MSME branches. Though their core competence will be utilized for extending finance and other services to MSME sector, they will have operational flexibility to extend finance/render other services to other sectors/borrowers. 4.5  Delayed Payment Under the Amendment Act, 1998 of Interest on Delayed Payment to Small Scale and Ancillary Industrial Undertakings, penal provisions have been incorporated to take care of delayed payments to MSME units. After the enactment of the Micro, Small and Medium Enterprises Development (MSMED), Act 2006, the existing provisions of the Interest on Delayed Payment Act, 1998 to Small Scale and Ancillary Industrial Undertakings, have been strengthened as under: (i) In case the buyer to make payment on or before the date agreed on between him and the supplier in writing or, in case of no agreement before the appointed day. The agreement between seller and buyer shall not exceed more than 45 days. (ii)   In case the buyer fails to make payment of the amount to the supplier, he shall be liable to pay compound interest with monthly rests to the supplier on the amount from the appointed day or, on the date agreed on, at three times of the Bank Rate notified by Reserve Bank. (iii) For any goods supplied or services rendered by the supplier, the buyer shall be liable to pay the interest as advised a (ii) above. (iv) In case of dispute with regard to any amount due, a reference shall be made to the Micro and Small Enterprises Facilitation Council, constituted by the respective State Government. Further, banks have been advised to fix sub-limits within the overall working capital limits to the large borrowers specifically for meeting the payment obligation in respect of purchases from MSMEs. 4.6  Guidelines on rehabilitation of sick SSI (now MSE) units (based on Kohli Working Group recommendations) As per the definition, a unit is considered as sick when any of the borrowal account of the unit remains substandard for more than 6 months or there is erosion in the net worth due to accumulated cash losses to the extent of 50% of its net worth during the previous accounting year and the unit has been in commercial production for at least two years.  The criteria will enable banks to detect sickness at an early stage and facilitate corrective action for revival of the unit.  As per the guidelines, the rehabilitation package should be fully implemented within six months from the date the unit is declared as potentially viable/viable.  During this six months period of identifying and implementing rehabilitation package banks/FIs are required to do “holding operation” which will allow the sick unit to draw funds from the cash credit account at least to the extent of deposit of sale proceeds Following are broad parameters for grant of relief and concessions for revival of potentially viable sick SSI units: (i)

Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2011-12/83 · issued 01 Jul 2011. The plain-English explanation above is BankPulse’s own independent summary.

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