RURAL MODULE - B

Chapter 12: SME FINANCE

What we will study?
*All about Definition SME FINANCE?
INTRODUCTION:
Micro, Small and Medium Enterprises are the backbone of
all economics and are a key source of economic growth,
dynamism and flexibility in economics like India.
They constitute the dominant form of business organization
accounting for a major share of enterprises and responsible
for job creation in a substantial manner.
MSMEs need low capital investment, in terms of per unit of
output.
They make use of natural resources and domestic skills to
cater to the domestic market.
The growth of the sector therefore helps in socio economic
upliftment as it generates employment opportunities for
untapped masses, living in urban and rural regions.
Recognizing the contribution and potential of the sector,
the definitions and coverage of the sector have been
broadened significantly under the MSMED Act which
recognized the concept of enterprise to include both
manufacturing and services sectors besides defining the
medium enterprises, Credit is an essential input for the
growth of this sector to facilitate them to expand their
operations, develop new products and invest in new
production facilities.
DEFINITION OF SME:
small-scale unit was initially defined as one, having original
investment in plant and machinery not exceeding1 crore.
Recognizing the need for larger investment in some of the
more important segments of SSI, the Government enhanced
this limit to 5 crores, for specified industries.
Subsequently, a separate category of medium enterprises
(MES) was defined as those units, having investment in
plant and machinery above the small-scale industry limit
and up to 10 crores (as recommended by the Working
Group on Flow of Credit to the SSI sector, headed by Shri A.
S. Ganguly).
The earlier definition of SSI, based on investment in plant
and machinery, excluded the rapidly-growing service sector.
In the past decade, the services sector contributed almost
half of the country's GDP.
The Working Group strongly recommended adoption of
turnover, as a measure for defining the SME sector.
The MSMED Act, passed by the Parliament on June 16, 2006
(effective from October 2, 2006), gave a clear definition of
Micro, Small and Medium Enterprises.
The word 'Industry' was changed to 'Enterprise' to give due
recognition to the service sector.
Also, the micro enterprises were brought under purview
and the medium enterprises were defined to facilitate
technology upgradation and graduation.
Enterprises were defined according to their level of
investments as per details given in the table.

Ceiling on Manufacturing Service

investment Enterprises (in Enterprises (in
plant and equipment)
machinery)
(a) Micro ₹ 25 Lakhs ₹ 10 Lakhs
(b) Small ₹ 5 Crores ₹ 2 Crores
(C) Medium ₹ 10 Crores ₹ 5 Crores

The Act provides for a statutory consultative mechanism, at

the national level, with wide representation of all sections
of stakeholders, particularly, the three classes of
enterprises, with a wide range of advisory functions, and an
Advisory Committee to assist the Board and the
Central/State Governments.
The other features include:
* Establishment of specific Funds for the promotion,
development and enhancing competitiveness of these
enterprises,
* Notification of schemes/programs for this purpose,
* Progressive credit policies and practices,
* Preference in Government procurements to products and
services of the micro and small enterprises,
* More effective mechanisms for mitigating the problems of
delayed payments to micro and small enterprises, and (vi)
simplification of the process of closure of business by all
three categories of enterprises.
GOI, in the year 2015, has carried out certain amendments
to the Micro, Small and Medium Enterprises Development
Act 2006 and the objectives of the amendments are to
(i) enhance the existing limit for investment in plant and
machinery considering changes in price index and cost of
inputs consistent with the emerging role of the MSMEs in
various Global Value Chains,
(ii) include in such classification, the micro or tiny
enterprises or the village enterprises, as part of medium
enterprises apart from small enterprises so as to enable the
aforesaid category of enterprises to avail the benefits and
become competitive, and
(iii) empower the Central Government to revise the existing
limit for investment, by notification, considering the
inflation and dynamic market situation.
GOI, during the year 2020, has revised the definition of
MSMEs.
The rationale for the revision put forward by the
government is two-fold:
(i) Low investment threshold for MSMEs is discouraging
them to grow, due to the fear of losing concessions and
benefits meant for the sector once the investment limit is
crossed, and
(ii) There have been long pending demands for a revision.
It is interesting to note that the definition revision was
introduced as one of the policy measures to address the
concerns of the MSME sector to mitigate the impact of the
Covid-19 pandemic.
According to the Government, the periodic definition
revision of MSMEs is justified on the following three
grounds:
(i) to take account of inflation,
(ii) to facilitatetechnologyup-gradation and modernization
of enterprises, and
(iii) to enable expansion of the scale of operations.
Government has notified on 1 June, 2020 that the following
criteria shall be followed for classification of micro, small
and medium enterprises with effect from 1 July, 2020.
(a) a micro enterprise, where the investment in Plant and
Machinery or Equipment does not exceed one crore rupees
and turnover does not exceed 5 crore rupees;
(b) a small enterprise, where the investment in Plant and
Machinery or Equipment does not exceed ten crore rupees
and turnover does not exceed 50 crore rupees;
(c) a medium enterprise, where the investment in Plant and
Machinery or Equipment does not exceed 50 crore rupees
and turnover does not exceed two hundred and 50 crore
rupees.
The term "village industries" has been redefined in
amended VIC, Act, 1956(amendment carried out in Y-2006)
as "any industry located in a rural area which produces any
goods or renders any service with or without the use of
power and in which the fixed capital investment per head of
artisan or worker does not exceed Rupees 1 lakh (Rupees 1
lakh and 50 thousand in case of village industry located in a
hilly area) or such other sum as may, by notification in the
Official Gazette, be specified from time to time by the
Central Government"
IMPORTANCE OF THE SECTOR TO THE INDIAN ECONOMY:
Micro, Small and Medium Enterprises (MSME) sector has
emerged as a highly vibrant and dynamic sector of the
Indian economy over the last five decades.
MSMEs not only play crucial role in providing large
employment opportunities at comparatively lower capital
cost than large industries but also help in industrialization
of rural and backward areas, thereby, reducing regional
imbalances, assuring more equitable distribution of national
income and wealth.
MSMEs are complementary to large industries ancillary
units and this sector contributes enormously to the socio-
economic development of The MSME sector is a nursery of
entrepreneurship, often driven by individual creativity and
innovation.
The MSME sector India is highly heterogeneous in terms of
the size of the enterprises, variety of products and services
produced and the levels of technology employed.
While one end of the MSME spectrum contains highly
innovative and high growth enterprises, more than 94% of
MSMEs are unregistered, with a large number established
in the informal or unorganized sector.
The Sector consisting of 36 million units, as of today,
provides employment to over 80 million persons.
The Sector through more than 6,000products with its
contributing to 45% of the total manufacturing output.
The production from this sector has contributed to 8% of
the country's GDP.
The MSME sector has the potential to spread industrial
growth across the country and can be a major partner in the
process of inclusive growth.
Sixth Economic Census (2013):
The highlights of the Sixth Economic Census (2013) in so far
as it relates to the profile of the establishments are as
under:
58.5 million establishments were found to be in operation,
of which, 34.8 million establishments(59.48%) were found
in rural areas and nearly 23.7million
establishments(40.52%) were found to be located in urban
areas.
Out of 58.5 million establishments, about 77.6%
establishments (45.36 million) were engaged in non-
agricultural activities (excluding public administration,
defence and compulsory social security activities) while the
remaining 22.4%establishments (13.13 million) were found
to be engaged in agricultural activities (excluding crop
production and plantation).
Over an intervening period of about 8 years between the
Fifth Economic Census and the Sixth Economic Census, the
total number of establishments in the country increased
from 41.25 million in 2005(EC-2005) to 58.5 million in
2013(EC-2013), registering a growth of 41.79 per cent during
the period.
The growth was 38.37% in rural areas and 47.13% in urban
areas.
During the period between the two Economic Censuses
(2005 and 2013), non-agricultural establishments grew the
rate of 28.97 per cent, while agricultural
establishmentsgrew at the rate of 115.98%.
Out of the total establishments, 22.6%belong to primary
sector of which agriculture sector constitutes 22.45%,
mining and quarrying constitutes 0.15%.
Secondary sector accounted for 19.72% (including
construction which contributes 1.66 per cent) and tertiary
sector accounted for 57.68%.
41.97 million (71.74 per cent) were Own Account
Establishments (i.e., establishments without any hired
worker) and the remaining 16.53 million (28.26%) were
establishments with at least one hired worker.
Own Account Establishments grew at the rate of
56.02%while the growth of establishments with hired
workers was 15.11%since 2005.
Out of 58.50 million establishments, around 96.4%
establishments were under private ownership and
remaining 3.6% establishments reported their ownership as
Government or PSU.
Proprietary establishments accounted for 89.39%
More than one third (36.19 per cent) of all the
establishments in the country were home-based
establishments i.e., inside household.
Another 18.44% establishments were operating from
outside household without fixed structure, and the
remaining 45.37%establishments were operating from
outside households with fixed structure.
Majority of the establishments (93.0%) were perennial in
nature.
Around 5.9%of the establishments were seasonal and
remaining 1.1 per cent of the establishments were casual.
Uttar Pradesh, Maharashtra, West Bengal, Tamil Nadu and
Andhra Pradesh together accounted for about 50% of the
total number of establishments in the country.
Livestock was the major economic activity (86.74%) of
agricultural sector.
Retail Trade (35.41%) followed by Manufacturing (22.77%)
were the dominant ones within the non-agricultural sector.
89.39%of the establishments were owned by proprietors.
Among the proprietary establishments, 15.4%were owned
by females.
Manufacturing sector was the largest employer providing
employment to 30.3 million (23.1%) persons.
This was followed by retail trade employing 27.19 million
persons (20.7%) and livestock sector employing 19.4 million
persons (14.8%).
Distribution of establishments by size class of employment
reveals that around 55.86 million establishments (95.50%)
were having 1-5 workers, around 1.83 million
establishments (3.13%) were having 6-9 workers, while 0.8
million establishments (1.37%) employed 10 or more
workers.
Overall average employment per establishment in Sixth EC
was 2.24, as against 2.30 in Fifth EC.
Average employment per establishment in Sixth EC was
1.39 for Own Account Establishments and 4.42 in case of
establishments with at least one hired worker.
ARRANGEMENTS FOR PROVISION OF CREDIT TO THE MSME
SECTOR:
Funding small and medium-sized enterprises is a major
function of the general business finance market.
Business finance refers to the funds and monetary support
required by an entrepreneur for carrying out the various
activities relating to his/her business organization.
It is needed at every stage of a business life cycle.
For instance, in starting a business, it is essential for
acquiring fixed assets, such as land, building, plant and
machinery, and for meeting the day-to-day expenses
(working capital) in the form of payment of wages and
salaries, purchasing raw materials and such other activities.
In order to successfully operate and expand the business,
funds are necessary for promoting and marketing the
product, distributing it to the prospective consumers as well
as for managing the firm's human resource base.
Further, in the changing business environment, marked by
increasing competition, additional funds are desirable for
modernization and upgradation of the business unit at
periodic interval.
Major portion of the credit requirements of MSME sector
are met by banks and credit agencies (Commercial Banks,
Cooperative Banks, Regional Rural Banks, Small Finance
Banks).
Further a wide variety of financial institutions established at
the State Level such as State Financial Corporations, State
Industrial Investment Corporations, etc., also meet a major
role in providing credit to the sector.
Nonbanking financial companies are another group of
institutions which perform financial intermediation in
various forms, like accepting deposits, making loans and
advances to the MSME sector besides engaging in leasing
and hire purchase.
Venture capital companies are also engaged in funding the
formation of small and medium enterprises in their early
stages of development.
Development Banks and Specialized financial institutions
(SIDBI and NABARD) provide refinance to the credit
institutions in augmenting the credit flow to the sector
besides engaging themselves in various promotional role for
the development of the sector.
Given this financial set up, the Central and the State
Governments have been making all out efforts for meeting
the financial requirements of the entrepreneurs by
implementing various schemes to give a boost to the sector.
While RBI has provided a number of policy directions to
banks to augment the credit flow to the MSME sector, GOI
have taken a number of initiatives for the promotion of the
sector.
All these measures have contributed to the increased
growth of bank credit to the MSME sector as may be seen
from the data given in the table presented below:

Number of Outstanding
accounts (In (Amount in crores
Lakhs) of rupees)
Micro Enterprises
2020-21 387.93 8,21,027
2021-22* 239.81 8,87,800
Small Enterprises
2020-21 27.82 6,62,998
2021-22* 22.07 7,25,822
Medium
Enterprises
2020-21 4.44 2,99,898
2021-22* 3.23 4,09,011
Total MSMEs
2020-21 420.19 17,83,924
2021-22* 265.10# 20,22,634

*Data is provisional
#There is significant decrease in number of accounts due to
mandatory registration on Udyam Portal under new MSME
definition Source:
RBI Annual Report 2021--22
APPRAISAL OF MSME LOAN PROPOSALS - TECHNIQUES AND
REQUIREMENT ASSESSMENT OF PROJECTS FOR TERM
LOANS:
Credit Department/Credit Officers need to examine the
profile of the units/industries to be financed, the
credentials of the entrepreneurs/units to be financed, their
financials and efficiency, for ensuring quality in the loan
portfolio.
The lenders need to examine the following general aspects
of the enterprise to be financed for taking credit decisions.
First and foremost, the bankers should know the type of
industry/activity which the enterprise is pursuing/intending
to pursue.
Whether the industrial activity pursued/intended to be
pursued belongs to the category of growing industrial
activity, as per the prevailing policies of the government.
Industries in the "Sun rise" sector are likely to hold them in
good stead in the future, in terms of employment
generation and business growth and hence they should be
preferred rather than those which have dim long term
prospects.
Whether the enterprise belongs to the concentrated
industry group and scope exists for higher profitability.
Whether there is scope for reducing the customer
concentration, so as to diversify and increase the customer
base to have sustained growth, need to be seen.
On the contrary, when a business is overly-reliant on a small
group of customers or clients, its revenue will be highly
sensitive.
The strategies intended to be followed by the enterprise for
market penetration, product development, market
expansion and diversification need to be understood.
The banks should examine the vintage proof or
continuation proof, which includes year of establishment,
registration, trade licence, sales tax certificates, cash flow
statements, etc.
This will help the banks to understand the standing of the
company.
The banks should also verify the identify the
identify/address proof of the founders/entrepreneurs/
proprietor/partners of the enterprise, apart from examining
their bank statements, for the last 6 months, so as to
establish their credentials.
The class of enterprise to which the enterprise belongs to,
need to be examined.
Whether the enterprise is registered as an individual
enterprise or registered as an enterprise with group of
individuals, partnership, private limited company, etc.
need to be ascertained and whether the legal formalities
connected with the registration/incorporation have been
completed adhering to all the guidelines relevant for the
enterprise.
The bankers need to ascertain as to whether the
unit/enterprise have designed definite plans in relation to
the products and services offered by it, by examining the
following specific issues/ aspects:
Products or services that the enterprise is offering or
planning to offer-whether they are matching with the
market requirement
How the enterprise is pricing/intending to price the
products and services
Comparison of the products or services offered by the
enterprise vis a vis those offered by the competitors
Sales plan/forecast prepared by the enterprise and whether
they are achievable, given the capacity of the enterprise
Whether the enterprise need to address any issues relating
to intellectual property, such as trademarks, or legal issues
Future products or services that the enterprise is intending
to offer and the plan/strategies evolved for the purpose
Whether the enterprise will be going for any innovative
offering-In other words, is there any plan to launch any new
and improved products or services by the enterprise, which
can lead to higher revenue or making an existing process
more efficient, or solving a current business problem (both
of which cut down on costs and save time).
As the key element of innovation would drive the revenue
of the company, this aspect needs to be examined, with
reference to the plan and the capability of the
entrepreneur/partners in business for pursuing such
innovative offering.
Project Approach for Lending and Appraisal Techniques:
Project approach can be applied for financing small as well
as large investments.
It is a flexible approach to development, wherein, each
project' is considered to be an independent unit, having its
own costs and benefits.
Careful project preparation and analysis are important for
efficient use of financial resources.
In the liberalized environment and in the wake of financial
sector reforms, the importance of project approach has
further increased.
While the aspects of project formulation and project cycle
are discussed in the next chapter in detail, the essential
features of the methods adopted in appraisal viz.,
discounted cash flow techniques for arriving at the viability
parameters such as Net Present Value (NPV), Benefit Cost
Ratio (BCR), and Internal Rate of Return (IRR) are discussed
in the ensuing paragraphs
Investment and Cash Flow Concept:
The primary aim of financial analysis is to determine
whether the project satisfies the investment criteria of
generating acceptable level of profitability.
The project should be able to service the debt and ensure
expected returns to the investor.
aspects which are examined while conducting financial
appraisal are investment outlay, means of financing,
projected financial statements, viability and profitability,
breakeven point analysis, sensitivity analysis and risk
analysis.
Cash flow statement is the basis for financial analysis.
Generally, in the initial period, there would be a negative
cash flow, because of investment in capital assets, but after
the project takes off, the cash flow becomes positive, due to
the increased income.
During the operational phase, there would be inflow from
the business, which contributes to positive cash flow.
The period from the start of the project till it is would up is
known as project life and the same would vary from project
to project.
Generally, the projects with more than 15 years life are
analyzed for financial cost and benefits for 15 years only, as
the benefits accruing after that have a negligible present
value.
Discounted Cash Flow Technique:
A project normally having long life, the cash flow spans over
a long period.
Since the value of money will not be the same in all the
years, the cash flow of all future years cannot be treated
equally.
The difference in the 'value' of money arises mainly due to
its capacity to earn if it is invested today.
This is known as 'time value of money' and is an important
concept in financial appraisal of projects.
Time value of money is estimated by 'discounting' the
future cash flows to their present value.
One can 'reduce' future benefits and cost streams to their
present worth' or 'present value' with the technique called
discounted cash flow technique.
This is simplified by finding discount factors which is
computed by following formula:
𝟏
d=
(𝟏+𝒏)𝒏

Where d is the discount factor for Re 1; r is the rate of

interest and n is the period which could be number of years
or months.
Thus, the discount factor at 10% per annum after one year
will be
𝟏 𝟏
d= = =0.909
(𝟏+𝟎.𝟏𝟎) 𝟏.𝟏

This discount factor of 0.909 means that Re. I which going to

be received after one year will have its ‘Present value’ as
Re.0.909 today.
This computation can be done by using discount tables.
Estimation of an Appropriate Discount Rate:
The discount rate to be used in project analysis has to be
based on opportunity cost or the weighted cost of
borrowing.
Thus, the discount rate should generate resources in future
at a rate that will allow repayment of all borrowed funds
and also a reasonable and acceptable rate of return to the
entrepreneur.
The discount rate can be of two types-real and nominal.
The real discount rate could be expressed as the discount
rate after adjusting inflation rate.
Thus, the real rate of discount where i is the nominal rate
and p is the annual average increase of prices.
In Indian conditions, in general, for agricultural and rural
development projects a rate of 15% was considered
appropriate and was advised for computing Net Present
Value (NPV) and Benefit Cost Ratio (BCR).
Measures of Financial Viability - NPV, BCR, IRR and DSCR:
Financial viability is measured by net present value, benefit
cost ratio, internal rate of return and debt service coverage
ratios.
(a) Net Present Value (NPV) representing wealth creation by
the Project, is calculated by taking the discounted sum of
the stream of cash flows during the project life.
In symbolic terms we can express NPV of a project as under:
𝐂𝟏 𝐂𝟐 𝐂𝐧
NPV = (𝟏+𝒓) + + …….. (𝟏+𝒓)𝒏 - Investment cost
(𝟏+𝒓)𝟐

where C=Cash
flows for different periods; r = discount
and n is the number of years.
Investment costs here refers to the initial investment.
In other words, NPV represents the difference between the
present value of the cost and benefit streams.
A project is considered viable, if the NPV is positive, at a
given discount rate and vice versa.
two or more mutually exclusive projects are being
appraised, the project with the highest NPV should be
selected.
Among the discounted techniques, NPV is considered the
most important parameter for assessing viability.

Benefit Cost Ratio (BCR):

BCR is the ratio of discounted value of benefit and
discounted value of cost.
It can be expressed as under:

𝐒𝐮𝐦𝐦𝐚𝐭𝐢𝐨𝐧 𝐨𝐟 𝐝𝐢𝐬𝐜𝐨𝐮𝐧𝐭𝐞𝐝 𝐯𝐚𝐥𝐮𝐞 𝐨𝐟 𝐛𝐞𝐧𝐞𝐟𝐢𝐭𝐬

BCR =
𝐒𝐮𝐦𝐦𝐚𝐭𝐢𝐨𝐧 𝐨𝐟 𝐝𝐢𝐬𝐜𝐨𝐮𝐧𝐭𝐞𝐝 𝐯𝐚𝐥𝐮𝐞 𝐨𝐟 𝐜𝐨𝐬𝐭𝐬

The project is viable when BCR is one or more than one and
is unviable when it is less than one.
Internal Rate of Return (IRR):
IRR represents the returns internally generated by the
project.
This is also the rate which makes the net present value
equal to 0.
The calculation of IRR is a process of trial and error.
Normally, the process starts with the minimum discount
rate and as the discount rate is increased the NPV will come
down and becomes 0 or negative.
If NPV is positive at one rate and negative at the immediate
next rate (for example if NPV is positive at 20% discount
rate and is negative at 25%), 'Interpolation Method' could
be used for finding out the exact IRR by the following
formula.
[𝐋+ (𝐇 −𝐋) ∗ 𝐍𝐏𝐕 𝐚𝐭 𝐋]
Exact IRR by interpolation method = [(𝐍𝐏𝐕 𝐚𝐭 𝐋)−(𝐍𝐏𝐕 𝐚𝐭 𝐇)]

Where, IRR = Internal Rate of Return;

L = Lower discount rate
where NPV was positive;
H Higher discount rate at which NPV was negative.
The project is considered viable if the IRR is more than the
acceptable rate for the entrepreneur which could be the
opportunity cost for his funds.
In case of agricultural and rural development projects
generally the prescribed IRR for viability is 15% in India and
other developing countries.
Debt Service Coverage Ratio:
Debt Service Coverage Ratio (DSCR) is a crucial ratio to
assess 'Bankability of Projects.'
As the name indicates, this ratio gives an indication of the
debt service capabilities of the project.
It can be computed as under:

𝐏𝐀𝐓+𝐃+𝐈
DSCR = 𝐈+𝐋
Where PAT is profit after tax, D is the depreciation, I is the
interest on long term loans and L is the principal instalment.
DSCR could be estimated for each year separately for the
project life or could be estimated for the entire project life
(by summation of the figures).
In the latter case it is called average DSCR.
Normally, ratio between 1.5 and 2 is considered reasonable.
When it is more than 2, the repayment period of loans
should be reduced and when it is less than 1.5 then amount
of loan repayment period should be reduced.
A debt service coverage ratio of 2 indicates basically that
50% of the cash inflow is being used for repayment of loan.
Sensitivity Analysis, Scenario Analysis and Risk Analysis:
Sensitivity Analysis:
Projects are sensitive to fluctuation in values of critical
variables like costs of inputs and prices of outputs.
It is important to examine as to how sensitive is the project
to fluctuations in the values of these variables, because the
basic assumptions taken for projections of balance sheet,
cash flow statements for future years have an element of
uncertainty.
Different projects may, however, get affected differently
from changes in the assumption of cost and return items.
Sensitivity analysis helps us in finding out that how sensitive
is the project to these fluctuations.
Sensitivity analysis involves identification of crucial variable
relating to costs and returns, specification of alternative
values of the crucial variables and re-computation of the
NPV and IRR, by using the alternative values.
A project, which is highly sensitive to even small
fluctuations in cost and price, is a risky project for financing.
Scenario Analysis:
Scenario analysis is the process of examining and evaluating
possible events or scenarios that would take place in the
future and predicting the various feasible results or possible
outcomes.
In financial modeling, the process is typically used to
estimate changes in the value of a business or cash flow,
especially when there are potentially favourable and
unfavourable events that could impact the project
Risk Analysis:
Even though through sensitivity analysis and scenario
analysis techniques, some of the uncertainties in the project
are taken care, both these types of analysis have limitation
in as much as they have deterministic values for the
variables.
In a significant improvement over these methods, under risk
analysis, probabilistic analysis is done by identification of
key risk variables, finding out values of each risk variable,
assigning probabilities for each value to each of the risk
variables, using these values for risk analysis and finding out
the probability of negative outcome of the project, i.e.,
what is the probability that the NPV of the project will be
negative.
The risk analysis adds valuable information to the project
analysis and it is an important tool in this respect but to
take up investment or not depends on the risk-taking
capacity of the entrepreneur which will vary from person to
person.
Economic Appraisal:
objective of economic appraisal is to examine the project
from the entire economy's point of view to determine
whether the project will improve the economic welfare of
the country.
Economic appraisal is traditionally not conducted in banks
or financial institutions.
It is generally conducted by agencies like the World Bank
and the development agencies of the Government for the
projects having huge investment and profound implication
for the economy.
Examples of the projects where economic analysis is
conducted are big dams, forestry projects and big industrial
projects.
Social/distributive Appraisal:
For an analysis of a project to be complete, it should include
not only the financial and economic but also social
appraisal.
The social analysis consists of two parts: measurement of
the distribution of the income due to the project and
identification of the impact on the basic needs' objectives of
the society.
The steps involved in social appraisal are conducting
financial analysis, economic analysis and appraisal of
distributional effect of the net benefits (externalities) of the
project.
Here, the affected parties like farmers, dealers of the goods,
existing operators and Government are to be identified.
One party (like farmers whose lands will be irrigated in the
case of a dam) is a gainer but the other (like those who are
displaced due to the dam) is a loser.
After social and distributive analysis, it may emerge that a
project is financially unviable but socially and economically
is viable.
In such situations, the decisions to undertake the project
would depend upon the goals of the Government.
If the Government believes that the positive externalities
are worth the negative financial cash flow, it may decide to
implement the project.
Aspects:
Developing countries including India are now becoming
increasingly aware of the urgency to integrate
environmental concerns into their project formulations and
appraisal.
This has led to the increased importance being attached to
the environmental aspects in the projects and now most of
the banks and financial institutions insist on what is known
as Environmental Impact Assessment (EIA).
The essence of EIA is a prediction of the consequences to
the natural environment from development projects.
The emphasis in EIA is on those consequences of the
projects which are relatively well known and
whose magnitudes can be easily estimated.
Conditional, uncertain or probabilistic aspects of the
impacts are not considered.
Another elaborate analysis called Environmental Risk
Assessment (ERA) is used to differentiate a new and
additional analysis in which the probabilistic element is
explicitly addressed.
In India, the consciousness has already come at the policy
level.
A separate ministry has been formed and Environment
(Protection) Act, 1986 was enacted by GOI.
Further, the Central Pollution Control Board (CPCB) has
been formed for ensuring proper implementation of the
provisions of the Act.
Most of the industries are covered by the Act and therefore
such industries have to seek clearance not only before
setting up of industries but also on a regular basis from the
state level PCBs.
State level PCBs implement the standards set by CPCB.
RBI has directed the banks not to extend certain credit
facilities to the industries which have deleterious effects on
the environment.
Thus, the environmental aspects of the projects are
becoming very important in project appraisal.

Sanction Procedures:
The Credit officers should use the standard formats
prescribed by the Credit Department/Head Office for
recording the opinion reports/appraisal notes so that they
would not miss out any item while appraising the loan
proposals.
In respect of borrowers/borrowing units who are enjoying
aggregate fund based working capital limit up to 5.00 crore
from the ban, the turnover method is generally followed for
sanction credit limits to them.
In turn over method working capital requirement is
computed based on the projected turn over taking into
account the previous year turn over or the average of the
previous three years turnover.
For all other borrowers enjoying fund based working limit
over 5.00 crore, the banks generally follow the MPBF (2nd
method of lending) system of assessment of working capital
requirement.
For assessment under 2nd method, project build-up of
current assets and build-up of current liabilities are to be
worked out to find the working capital gap.
As part of the working capital finance the bank can also
sanction bill discounting limits to the borrowing units within
the overall working capital limit, assessed as per bank's
policies.
Further, in order to boost the secured business, the bank
may also encourage discounting of bills backed by LC, where
the exposure is against LC issuing banks, keeping in view the
guidelines issued by RBI in this regard.
The banks which are considering non fund facilities such as
Letter of Credit and issue of guarantee shall follow the
guidelines issued by RBI for such business within the overall
limit assessed by the bank for such exposure taking into
account the financials of the borrowing units.
The banks shall set out the terms and conditions clearly in
the sanction letters issued to the borrowing unit and
receive a confirmation/acknowledgement in writing from
the authorized persons of the unit to abide by the terms
and conditions set out in the sanction letter.
This would form part of the documents executed by the unit
for availing the credit facilities.
Follow up/monitoring and Review:
Periodical visits/inspection shall be undertaken to ensure
that the borrowing units maintain necessary stocks against
which cash credit hypothecation limits are considered.
The field officers of the bank shall also undertake the
production/sales performance of the units so as to ensure
that the activities of the units are in accordance with the
plans envisaged at the time of sanction of the loans.
Any warnin signals should be brought to the notice of the
branch manager/branch head for pursuing appropriate
corrective measures in order to ensure the safety of the
advance.
SIDBI's ASSISTANCE TO THE MSME SECTOR AND ITS
DEVELOPMENT ROLE:
SIDBI has taken a number of steps to support MSME sector
as under.
These are discussed that the following paragraphs:
Micro and Small Enterprises Refinance Scheme (MSERS):
Refinance Assistance to credit agencies:
Under this scheme, SIDBI provides assistance, by way of
refinance to Scheduled Banks (including State Co-operative
Banks, CroesCreyssivetanke Private Sector Banks, Foreign
Banks, etc.) and select Financial Institutions, provided that
they h in operation for a period of 3 years, that they had
earned profit during the previous 2 years that they have
sizeable outstanding portfolio financial assistance to micro
and small enterprises and that they have strong
fundamentals based on last audited balance sheet (viz. net
worth of not less than 5, capital to risk weighted assets
(CRAR) of not less than 9% and the level of net NPAs not
exceeding 10%).
The outstanding portfolio excluding the NPA accounts and
those accounts wherein Gelour in the payment of interest
or principal has already occurred and continues will only be
unsilvers assistance under the scheme.
The assistance under the scheme will also be subject to the
exposite limit fixed by SIDBI for each bank.
The entire loan is generally required to be drawn within 3
days from the date of sanction.
The refinance is generally repayable within a period of 6
months to 5 years.
The banks availing refinance shall hold in trust, all the
securities including fixed assets, proceeds feet book debts,
receivables, actionable claims, assignments, bills of
exchange, etc.
obtained to be obtained as security, in respect of financial
assistance made available to micro and small enterprises for
which the refinance support has been extended by SIDBI.
Before actual disbursement of loan by SIDBI, the batio will
have to furnish a statement indicating the list of micro and
small enterprises constitutes and a declaration that the list
excludes the NPA accounts and those accounts wherein
default in the payment of interest or principal has already
occurred and continues.
SIDBI Make in India Fund:
The objective of setting up the 'SIDBI make in India' fund is
to make MSMEs, a world class manufacturing hub, with
focus on 25 sectors of the economy.
Under this fund, concessional finance is provided to
identified sectors.
SIDBI has created 10,000 crores 'SIDBI Make in India Soft
Loan Fund for Micro Small and Medium Enterprises (SMILE)'
to make available soft loan to MSMEs in the n of quasi
equity to meet the required debt equity ratio and term loan
on relatively soft terms for establishment of new MSMEs
and also for pursuing opportunities for growth of existing
MSMEs.
Under the stat India program, to help MSME startups SIDBI
has created 2000 crore "India Aspiration Fund" to be
utilized as 'Fund of Funds' for making investments in
venture capital funds (VCF) which would in that make
investments in MSMEs to the extent of twice the
commitment of SIDBI or 50% of the corpus of VCF
whichever is higher.
Promotion of MUDRA as a fully owned subsidiary:
GOI launched a flagship scheme called Prime Minister
Mudra Yojana (PMMY) on 8 April 2015 to extend affordable
loans to the non-corporate, non-farm micro and small
enterprises to cater to their funding needs.
One of the major aims of MUDRA loans was to bring the
target audience into the formal financial fold.
Micro Units Development and Refinance Agency Limited
(MUDRA) has been created as a refinancing institution,
providing loans up to 10 lakhs maximum to the eligible
enterprises, through the Commercial Banks, RRBS,
Cooperative Banks, NBFCs and MFIS.
MUDRA is a wholly owned subsidiary of SIDBI as a refinance
company with an authorized capital of 1000 crores and a
paid-up capital of 750 crores.
The mission statement of Pradhan Mantri Mudra Loan is to
create an inclusive value based entrepreneurial culture
which is sustainable in partnership with financial
institutions in achieving financial security and success.
The key benefits of MUDRA loan:
* Micro and small enterprises engaged in income
generation are the prime target for extension of loan
facilities.
* The borrowers are not required to provide any collateral
or security to avail of Mudra Loan.
* There are no processing charges for availing of the loan.
* The loans are provided for the funded and non-funded
category, inducing an element of flexibility in the usage of
funds.
* The loans can be in the form of term loans, overdraft
facility, letters of credit or bank guarantees, thus catering to
a wide array of requirements.
* The Mudra loan scheme does not prescribe any minimum
amount.
The total amount disbursed under the PMMY up to
November 2021 stood at 16.50 lakh crores, of which, 7.21
lakh crores have been disbursed under Shishu, 5.44 lakh
crores under Kishor and ₹ 3.85 lakh crores under Tarun.
In all 32.12 crore borrowers have benefited far.
Apart from being partner in the Credit Guarantee Fund
Trust for Micro and Small Enterprises (CGTMSE) for
launching Credit Guarantee for strengthening the credit
delivery system to the MSE sector (the details of which are
discussed separately), SIDBI has established the following
associate institutions for the growth and development of
the SME sector.
India SME Technology Services Ltd (ISTSL):
India SME Technology Services Ltd.
(ISTSL) provides a platform where Micro, Small and Medium
Enterprises (MSMEs) can tap opportunities at the global
level, for acquisition of new and emerging technology or
establish business collaboration.
SME Rating Agency of India Ltd (SMERA):
SMERA is the country's first Rating agency that focuses
primarily on the Indian Micro, Small and Medium Enterprise
(MSME) segment.
Its primary objective is to provide ratings that are
comprehensive, transparent and reliable, which would
facilitate greater and easier flow of credit from the banking
sector to MSMEs.
India SME Asset Reconstruction Company Ltd.:
ISARC is the country's first ARC supported by a large
number of public sector banks and undertakings with the
focus of speedier resolution of NPAS in the MSME sector.
ISARC endeavours to unlock the idle NPA assets for
productive purposes which would facilitate greater and
easier flow of credit from the banking sector to the MSMEs.
SIDBI Trustee Company Limited (STCL):
SIDBI Trustee Company Limited SIDBI Trustee Company
Limited (STCL) was set up by SIDBI on July 19, 1999, to act as
Trustee of National Venture Fund for Software &
Technology Industry (NFSIT), SME Growth Fund (SGF) and
India Opportunities Fund (IOF).
The company has appointed SIDBI Venture Capital Limited
(SVCL) to act as the Investment Manager to NFSIT, SGF &
IOF
Receivables Exchange of India Ltd (RXIL):
Receivables Exchange of India Ltd (RXIL) was set up on
February 25, 2016 as a joint venture of Small Industries
Development Bank of India (SIDBI) and National Stock
Exchange of India Limited (NSE), with an objective to
operate India's First Trade Receivables Discounting System
(TReDS)- an online platform for financing of receivables of
Micro, Small & Medium Enterprises.
RXIL commenced operations on January 09, 2017.
The main objective is to address the critical needs of MSMEs
i.e., promptly finance trade receivables and financing their
trade receivables based on Buyers credit rating.
Also, it is without recourse to MSME Vendor.
The Trends Platform of RXIL is expected to be a catalyst in
the growth of MSMEs by bringing in transparency in the
business eco-system and addressing the issue of delayed
payments for MSMEs.
SIDBI Venture Capital Limited (SVCL):
SIDBI Venture Capital Limited (SVCL), incorporated in 1999,
is an investment management company and a wholly
owned subsidiary of SIDBI.
Over the years, the SVCL has managed funds focused on
different themes including Startups/ early-stage technology
businesses, manufacturing SMEs, service entities, Agri-
businesses, financial inclusion companies, etc.
However, the common string in all investments has been
the focus to identify strong and ethical leadership teams
capable of executing innovation-based business models or
robust scalable businesses.
POLICY PRESCRIPTIONS OF RBI FOR THE GROWTH OF MSME
SECTOR:
Banks' lending to the Micro, Small and Medium enterprises
as under is eligible to be reckoned for priority sector
advances as under:
MSMEs engaged in the manufacture or production of goods
to any industry specified in the first schedule to the
industries (Development and Regulation) Act, 1951 and as
notified by the Government from time to time is reckoned
for priority sector advances.
MSMEs engaged in providing or rendering of services and
defined in terms of investment in equipment under the
MSMED Act, 2006.
As per the extant policy, banks are required to achieve a
20% year-on-year growth in credit to micro and small
enterprises, a 10% annual growth in the number of micro
enterprise accounts and 60% of total lending to MSE sector
as on corresponding quarter of the previous year to Micro
enterprises.
Public sector banks have been advised to open at least one
specialized branch in each district.
The banks have been permitted to categorize their MSME
general banking branches having 60% or more of their
advances to MSME sector, as specialized 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.
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.
There are more than 3000 specialized MSME branches are
functioning in the country.
The banks have been advised to put in place loan policies
governing extension of credit facilities for the MSE sector,
duly approved by their Board of Directors.
Banks have also been advised to sanction limits after proper
appraisal of the genuine working capital requirements of
the borrowers keeping in mind their business cycle and
short-term credit requirement.
As per Nayak Committee Report, working capital limits to
SSI units is computed on the basis of minimum 20% of their
estimated turnover up to credit limit of 5 crore.
A composite loan limit of 1 crore can be sanctioned by
banks to enable the MSME entrepreneurs to avail of their
working capital and term loan requirement through Single
Window in terms of RBI's Master Direction dated 24 July,
2017 on lending to the MSME sector.
All scheduled commercial banks were advised that the
banks which have sanctioned term loan singly or jointly
must also sanction working capital (WC) limit singly (or
jointly, in the ratio of term loan) to avoid delay in
commencement of commercial production thereby ensuring
that there are no cases where term loan has been
sanctioned and working capital facilities are yet to be
sanctioned.
Cluster based approach to lending has been suggested for
adoption in order to provide a full-service approach to cater
to the diverse needs of the MSE sector which may be
achieved through extending banking services to recognized
MSE clusters.
A cluster-based approach may be more beneficial:
(a) in dealing with well-defined and recognized groups
(b) availability of appropriate information for risk
assessment
(c) monitoring by the lending institutions and
(d) reduction in costs.
United Nations Industrial Development Organization
(UNIDO) has identified 388 clusters spread over 21 states in
various parts of the country.
The Ministry of Micro, Small and Medium Enterprises has
also approved a list of clusters under the Scheme of Fund
for Regeneration of Traditional Industries (SFURTI) and
Micro and Small Enterprises Cluster Development Program
(MSE-CDP) located in 121 Minority Concentration Districts.
Accordingly, banks have been advised to take appropriate
measures to improve the credit flow to the identified
clusters.
As part of the financial sector liberalization, all credit
related matters of banks including charging of interest have
been deregulated by RBI and are governed by the banks'
own lending policies.
With a view to improve transparency in the methodology
followed by banks for determining interest rates on
advances and the efficiency of monetary policy
transmission, from April 1, 2016, banks are required to
sanction all their advances with reference to the Marginal
cost of fund-based lending rates (MCLR).
In no case the interest rates on advances shall fall below
MCLR.
However, loans sanctioned under the Base rate/BPLR
regime shall continue till the maturity or renewal.
Banks shall have to provide an option to the customers to
switch to the MCLR from Base rate/BPLR and this should
not be treated as a foreclosure of existing facility.
Banks are mandated not to accept collateral security in the
case of loans up to 10 lakhs extended to units in the MSE
sector.
Further, the banks have been advised by RBI that on the
basis of good track record and financial position of MSE
units, increase the limit of dispensation of collateral
requirement for loans up to 25 lakhs with the approval of
the appropriate authority.
Credit rating is not mandatory but it is in the interest of the
MSE borrowers to get their credit rating done as it would
help in credit pricing of the loans taken by them from banks.
With a view to facilitating credit flow to the MSME sector
and enhancing the comfort-level of the lending institutions,
the credit rating of MSME units done by reputed credit
rating agencies should be encouraged.
Banks are advised to consider these ratings as per
availability and wherever appropriate structure their rates
of interest depending on the ratings assigned to the
borrowing MSME units.
The Banking Codes and Standards Board of India (BCSBI) has
formulated a Code of Bank's Commitment to Micro and
Small Enterprises.
The Code sets minimum standards of banking practices for
banks to follow when they are dealing with Micro and Small
Enterprises (MSEs) as defined in the Micro Small and
Medium Enterprises Development (MSMED) Act, 2006.
It provides protection to MSEs and explains how banks are
expected to deal with MSEs for their day to-day operations
and in times of financial difficulty.
The Code may be accessed on the website of BCSBI
(www.bcsbi.org.in.)
Guidelines on 'Streamlining flow of credit to Micro and
Small Enterprises (MSES) for facilitating timely and
adequate credit flow during their 'Life Cycle' were issued to
Scheduled Commercial Banks (SCBs) by RBI.
These guidelines provide for the banks undertaking review
and tune their existing lending policies to the MSE sector by
incorporating therein the following provisions so as to
facilitate timely and adequate availability of credit to viable
MSE borrowers especially during the need of funds in
unforeseen circumstances:
(i) To extend standby credit facility in case of term loans
(ii) Additional working capital to meet with emergent needs
of MSE units
(iii) Mid-term review of the regular working capital limits,
where banks are convinced that changes in the demand
pattern of MSE borrowers require increasing the existing
credit limits of the MSEs, every year based on the actual
sales of the previous year.
(iv) Timelines for Credit Decisions
As delay in getting payments is one of the perennial
problems faced by MSMEs, RBI has introduced the Trade
Receivables Discounting System (TReDS) in the year 2014.
TReDS is an electronic platform where receivable of MSMEs
drawn against buyers (large corporates, PSUs, Government
Departments) are financed through multiple financiers at
competitive rates.
To widen the scopes of TREDS and to incentivize more
players to be part of this platform, banks' exposure through
this platform were brought under the priority sector lending
in the year 2016.
Presently, three entities licensed by the RBI (viz. Receivable
Exchange of India Ltd RXIL, A.TReDS Ltd., and Mynd
Solutions) are operating the platform.
These measures will not only give MSMEs greater access to
finance but will also put greater discipline on corporates to
pay their dues to the MSMEs on time.
In terms of announcement in para 48 of First Bi-monthly
Monetary Policy Statement, 2016-17, Reserve Bank laid
down a framework for accreditation of credit counsellors
which was shared with SIDBI for laying down operational
guidelines.
Accordingly, the scheme was launched by SIDBI in July 2017.
As per the scheme, Certified Credit Counsellors are
institutions or individuals registered with SIDBI who shall
assist MSMEs in preparing project reports in a professional
manner which would, in turn, help banks make more
informed credit decisions.
Apart from the loans and other banking facilities, the banks
are advised to provide the following services and guidance
to MSE entrepreneurs
Rural Self Employment Training Institutes (RSETIS):
At the initiative of the Ministry of Rural Development
(MoRD), Rural Self Employment Training Institutes (RSETIS)
have been set up by various banks all over the country.
These RSETIs are managed by banks with active co-
operation from the Government of India and State
Governments.
RSETIS conduct various short duration (ranging preferably
from 1 to 6 weeks) skill upgradation programs to help the
existing entrepreneurs compete in this ever-changing global
market.
RSETIS ensure that a list of candidates trained by them is
sent to all bank branches of the area and co-ordinate with
them for grant of financial assistance under any Govt.
sponsored scheme or direct lending.
Financial Literacy and consultancy support:
Banks have been advised to either separately set up special
cells at their branches, or vertically integrate this function in
the Financial Literacy Centres (FLCs) set up by them, as per
their comparative advantage.
Through these FLCs, banks provide assistance to the MSE
entrepreneurs in regard to financial literacy, operational
skills, including accounting and finance, business planning,
etc.
(Refer circular RPCD.MSME & NFS.BC.No.20/06.02.31/2012-
13 dated August 1, 2012)
With a view to providing a guide for the new entrepreneurs
in this sector, a booklet titled "Nurturing Dreams,
Empowering Enterprises - Financing needs of Micro and
Small Enterprises - A guide" has also been launched by the
Reserve Bank.
Banks are advised to conduct target specific financial
literacy camps wherein one of the target groups identified is
MSES.

Expert Committee on MSMEs:

As the MSME sector has been facing several challenges,
notwithstanding the measures pursued by GOI and RBI in
this regard as discussed in the foregoing paragraphs, RBI
had set up an Expert Committee on MSMEs under the
chairmanship of Shri U K Sinha in Jan 2019 to go into various
issues concerning the sector.
The Committee had undertaken comprehensive review of
the sector and had made several recommendations for the
economic and financial sustainability of the MSME sector.
These recommendations are wide ranging and broadly
relate to legislative changes, infrastructure development,
capacity building, technological upgradation, improving
backward and forward linkages, improving financial support
from formal sources, newer technological interventions for
robust underwriting practices, and credit delivery.
Some of these recommendations of the Committee have
already been implemented, while others are being
reviewed at various levels.
The gist of specific measures taken by RBI in this regard in
the recent period for the growth and development of the
sector are furnished below:
Banks are incentivized to lend to MSMEs through the NBFC
sector.
Consequently, bank credit to registered NBFCs (other than
Micro Finance Institutions) for on-lending to micro and
small enterprises up to 20 lakh per borrower are eligible for
classification as priority sector lending.
A scheme of one-time restructuring without an asset
classification downgrade was permitted to GST registered
MSME accounts that were in default but standard as on
January 1, 2019.
As the process of formalization of the MSME sector had a
positive impact on financial stability the scheme has been
extended to accounts that are standard but in default as on
January 1, 2020 and restructuring, wherever eligible, for
implementation by December 31, 2020.
RBI had announced that the incremental loans to MSMEs
along with retail loans for automobiles and residential
housing will be exempted from CRR from fortnight ended
January 31, 2020 up to fortnight ended July 31, 2020.
Subsequent to the introduction of an external benchmark
system in October 2019, the monetary policy transmission
has improved where new floating rate loans to the micro
and small entrepreneurs were linked to the external
benchmark.
With a view to further strengthening monetary policy
transmission, all new floating rate loans to medium
enterprises extended by banks from April 01, 2020 will also
be linked to the external benchmarks.
As delay in getting payments is one the perennial problems
faced by MSMEs, Reserve Bank has introduced the Trade
Receivables Discounting System (TReDS) in the year 2014 as
already discussed.
Reserve Bank has allowed 'on tap' authorization to entities
desirous to provide platforms for TREDS, in order to make
the system more efficient.
In the Union Budget 2020-21, the Government has
announced app-based invoice financing products to obviate
the problem of delayed payments of MSME.
The mechanism may prove complementary to the TReDS
platform and would further alleviate the problem of
delayed payments.
INITIATIVES TAKEN BY GOI FOR THE DEVELOPMENT OF
MSME SECTOR:
Udyog Aadhaar Memorandum (UAM):
As part of 'Ease of Doing Business', the Ministry notified and
launched Udyog Aadhar Memorandum (UAM) in
September, 2015 to enable entrepreneurs to register
themselves, by filing an online simple one- page form on
Self-Certification basis.
No fees and supporting documents are required for the
online filing of the UAM.
Ministry of MSME GOI has notified in June, 2020, a
composite criterion of classification of MSMEs, based on
investment in plant and machinery/equipment and
turnover of MSMEs.
The guidelines regarding composite criteria of classification
of MSMEs is available at
https://msme.gov.in/sites/default/files/ IndianGazzate.pdf.
Based on composite criteria of classification of MSMEs, the
Ministry has replaced the erstwhile process of filing of
Udyog Aadhaar Memorandum, by 'Udyam' registration on a
portal developed by it.
Now the existing and prospective entrepreneurs may file
their 'Udyam' Registration online on portal:
As on 31 December, 2020, as many as 5.38 lakh enterprises
have registered under Manufacturing category and 8.65
lakh enterprises have registered under Service sector.
The Top five Industrial sectors of registrations are - Food
Products, Textile, Apparel, Fabricated Metal products and
Machinery and equipment.
Registration without PAN was permitted up to 31 March,
2021, as a transitional arrangement.
Similarly, registration without GST number was also
permitted up to 31 March, 2021, as a transitional
arrangement.
A Scheme for Promoting Innovation and Rural
Entrepreneurship (ASPIRE):
A Scheme for Promotion of Innovation, Rural Industry and
Entrepreneurship (ASPIRE) was launched by the Ministry of
MSME in March, 2015, following announcement in the
Union Budget 2014-15 and allocation of funds for the
purpose.
The main objectives of the ASPIRE scheme are to:
(i) to create new jobs and reduce unemployment;
(ii) to promote entrepreneurship culture in India;
(iii) to ensure grassroots economic development at the
district level;
(iv) facilitate innovative business solution for unmet social
needs; and
(v) promote innovation to further strengthen the
competitiveness of the MSME sector.
The scheme fund has a 200-crore corpus, which will be
dedicated for the following uses:
(i) Automation of agricultural practices and activities related
thereto;
(ii) Value addition to agriculture and forest produce;
(iii) Recycling of agricultural pre/post-harvest wastages, off-
farm but farm linked, animal husbandry, etc.,
(iv) Business models for aggregation and value addition
relevant for rural areas;
(v) Business models for the creation of local employment in
rural areas; and
(vi) Business models for social impact.
The most important component is to set up Livelihood
Business Incubators (LBI) under the aegis of the National
Small Industries Corporation (NSIC), KVIC or Coir Board or
any other Institution/agency of GOI/State Government or
under PPP mode, with these institutions.
The next important component is to set up Technology
Business Incubators (TBI) at twin levels, i.e., supporting
existing incubation centres operated currently under
different Ministries and Departments of the Government of
India or Institutions including National/Regional level
institutions of GOI/State Governments, to set up such a
centre, dedicated to incubation and enterprise creation in
the area of Agro-based Industries and also new incubation
centres, to be set up by eligible private institutions,
including Industry Associations, along with the Academic
Institutions, R&D laboratories, Universities, Government
entities and Technology Parks.
The other important component is to create a framework
for Start-up Promotion through Small Industries
Development Bank of India (SIDBI), by using innovative
means of finance like Equity, Quasi-Equity, Angel fund,
Venture capital fund, Impact funds, Challenge funds, etc.
to enable ideas/innovation with creativity and scalability to
come to the fore and convert these into commercial
enterprises with specific outcomes and within a specific
time period.
The financial support under LBI is up to 1 crore for NSIC &
others and 50 Lakh for PPP incubators.
For setting up of TBI, the assistance is for 30 Lakh for
existing and 1 Crore for new incubators.
Other financial support includes funds for incubation of
ideas @ 3 lakh per idea and a seed capital of 1 Crore for
setting up of start-ups by the incubators.
Under the scheme, 500 new incubation centres will be set
up all over India.
National Manufacturing Competitiveness Program-Lean
Manufacturing Competitiveness Scheme for MSMEs:
Under the Scheme, MSMEs will be assisted in reducing their
manufacturing costs, through proper personnel
management, better space utilization, scientific inventory
management, improved processed flows, reduced
engineering time and so on.
LMCS also brings improvement in the quality of products
and lowers costs, which are essential for competing in
national and international markets.
The larger enterprises in India have been adopting LMCS to
remain competitive, but MSMEs have generally stayed
away from such Programs, as they are not fully aware of the
benefits.
Besides, experienced and effective Lean Manufacturing
Counsellors or Consultants are not easily available and are
expensive to engage and hence most MSMEs are unable to
afford LMCS.
The scheme has been approved as a pilot project in 100
Mini Clusters for implementations of Lean Techniques.
The main objective of the Lean Manufacturing
Competitiveness Scheme (LMCS) is to bring the
manufacturing competitiveness in the MSME Sector.
Lean Manufacturing involves applying Lean Techniques
[e.g., Total Productive Maintenance (TPM), 5S (Sort, Set-in-
order, Shine, Standardize, Sustain)], Visual control,
Standard Operation Procedures, Just in Time, Kanban
System, Cellular Layout, Poka- Yoke, TPM, etc.) to identify
and eliminate waste and streamline the system.
The focus is on making the entire process flow, not
improving only a few operations.
Worker empowerment is also emphasized throughout the
effort.
The approach involves engagement of Lean Manufacturing
Consultants (LMCs) to assess the existing manufacturing
system of member units of the Mini Cluster(s) and stipulate
detailed step by step procedures and schedules for
implementing and achieving of lean techniques.
A Special Purpose Vehicle (SPV) will be formed in each
cluster.
It is expected that once MSMEs are introduced to the
benefits and savings that accrue from LM techniques, they
would themselves continue the Scheme from the second
year onwards at their own expense.
A three- tier implementing structure is in place with a group
of 10 or so MSMEs (SPV) at the lowest local-tier and a Lean
Manufacturing Screening and Steering Committee (SSC)
under Development Commissioner (MSME) at the highest
tier The intermediate tier, National Monitoring and
Implementing Unit (NMIU) is responsible for facilitating
implementation and monitoring of the Scheme.
Certification Reimbursement Scheme-HACCP ISO 9000, ISO
14001:
In order to enhance the competitive strength of the MSES,
the Government introduced a scheme to provide
technological upgradation, quality improvement and better
environment management by the MSMEs.
The scheme reimburses 75% of the fees, subject to a
maximum of 75,000 for acquiring Quality Management
System (QMS) ISO 9000/HACCP certification and/or
Environment Management System (EMS) ISO 14001
certification by the MSMEs.
All Micro and Small Enterprises having Entrepreneurial
Memorandum (EM) Number are eligible to avail the
reimbursement and units can apply for reimbursement
under the Scheme only after obtaining ISO
9000/14001/HACCP Certification.
The Scheme provides one time reimbursement.
Scheme of Fund for Regeneration of Traditional Industries
(SFURTI):
With a view to making the traditional industries more
productive and competitive and facilitating their
sustainable development, GOI announced setting up of a
fund for regeneration of traditional industries.
The objective of SFURTI is to organize the traditional
industries and artisans into clusters to make them
competitive and provide support for their long-term
sustainability and economy of scale, and provide sustained
employment for traditional industry artisans and rural
entrepreneurs to enhance marketability of products of such
clusters by providing support for new products, design
intervention and improved packaging and also the
improvement of marketing infrastructure.
The idea is to equip traditional artisans of the associated
clusters with the improved skills and capabilities through
training and exposure visits and to make provision for
common facilities and improved tools and equipment for
artisans in order to strengthen the cluster governance
systems with the active participation of the stakeholders, so
that they are able to gauge the emerging challenges and
opportunities and respond to them in a coherent manner.
Funding for the cluster varies from 1.5 Crore to 8 Crore in
view of the size and scale of the project.
The quantum of assistance under SFURTI is given as stated
below:

Type of cluster Number of artisans Per cluster budget

limit
Heritage cluster 1000-2500 artisans 8 crores
Major cluster 500-1000 artisans 3 crores
Mini Cluster Up to 500 artisans 1.50 crore

Funding pattern under the scheme has provision for

interventions including skill training, capacity building,
design development, etc.
as also facilitating setting up Common Facility Centres, Raw
Material Banks (RMB), training centres, etc.
Brand building & promotion, news media marketing, e-
commerce, innovation, R&D initiatives and developing
linkages between clusters are some of the other initiatives
proposed under the scheme.
Schemes for Coir Sector:
Coir Vikas Yojana:
Coir Board is implementing the Export Market Promotion
Scheme for adoption of strategic and aggressive product
specific and market specific promotional programs for
popularizing coir and coir products in markets abroad,
supporting the export-oriented industry on modernization
program and to attain overall and sustainable development
of Indian Coir Industry by participating in international
fairs/product promotion programs/seminars, etc.
and to assist the entrepreneurs to participate in such
programs, through export market development assistance
scheme.
Travel Assistance of up to 2.00 lakh is provided to the
eligible coir exporters to participate in the international
fairs/product promotion programs, etc.
Assistance for publicity material up to 25% of the
production cost with overall ceiling of 15,000 is also
admissible.
All micro, small and medium exporters, with FOB turnover
of less than 2.00 crore worth coir and coir products in the
previous year and micro, small & medium entrepreneurs of
coir and coir products, registered with the Coir Board,
would be eligible for assistance under the scheme,
provided, they have not availed the facility from any other
source for the same purpose or participated three times in
the same exhibition at the same destination, thrice with
government assistance.
Coir Udyami Yojana:
The objective of the scheme is to rejuvenate, modernize
and technologically upgrade the most crucial link in the coir
production chain, namely spinners and tiny Household
sector.
The scheme envisages replacement of outdated ratts/looms
and providing of work sheds to spinners and tiny household
units, resulting in increase in production and earnings of
workers.
Any individual above 18 years of age with Indian Citizenship
can apply under the scheme.
There will be no income ceiling for assistance for setting up
of project under CUY Scheme.
Assistance under the Scheme is only available for projects
for the production of coir fibre/yarn/products, etc. under
coir sector.
Assistance will be made available to individuals, companies,
Self Help Groups, NGO, institutions registered under
Societies Registration Act 1860, production co-operative
societies, Joint Liability Groups and Charitable Trust.
The SC/ST, Women, NER and Andaman and Nicobar Island
and Lakshadweep beneficiaries will be given priority.
The scheme provides 40% as subsidy, 55% as Bank loan and
5% beneficiary contribution for setting up of coir units with
project cost up to 10.00 lakh (revised from 5.00 lakh).
Assistance to Training Institutions Scheme:
The Scheme envisages financial assistance for establishment
of new institutions (EDIs), strengthening the infrastructure
of the existing EDIs and supporting entrepreneurship and
skill development activities.
The assistance shall be provided to these training
institutions in the form of capital grant for
creation/strengthening of infrastructure and program
support for conducting entrepreneurship development and
skill development programs.
Maximum assistance for creation or strengthening of
infrastructure will be ₹ 150 lakhs on matching basis, not
exceeding 50% of project cost.
However, for the North Eastern region (including Sikkim),
Andaman & Nicobar and Lakshadweep, the maximum
assistance on matching basis would be 270 lakhs or 90% of
project cost, whichever is less.
Any State/Union Territory Government, Training
Institutions, NGOs and other development agencies can
apply for assistance for creation or strengthening of
infrastructure.
Training Institutions who wish to conduct training programs
under the Scheme will have to enrol themselves with any of
the three National Level EDIs of the Ministry viz, NIESBUD,
Noida; IIE Guwahati and NIMSME, Hyderabad. Maximum
assistance per trainee per hour for entrepreneurship
development and skill development programs is ₹50 (₹60
for NER, A&N and Lakshadweep).
The Ministry has set up three national level
Entrepreneurship Development Institutes viz; National
Institute for Entrepreneurship and Small Business
Development (NIESBUD) (1983) at Noida (Uttar Pradesh),
National Institute for Micro, Small and Medium Enterprises
(NIMSME) (1960) at Hyderabad, and Indian Institute of
Entrepreneurship (IIE) (1993) at Guwahati, as autonomous
societies.
These institutes are engaged in developing training
modules; undertaking research & training; and providing
consultancy services for entrepreneurship development &
promotion of MSMEs, including enhancement of their
competitiveness.
India has the world's largest youth population with about
356 million persons in the age group of 10-24 years.
While this demographic dividend offers India an
opportunity to rapidly increase productivity and growth, the
need to provide jobs to the ever-increasing work-force
poses a huge challenge.
There is a pressing need to impart “employable skills" to the
millions of youths who are entering the work-force in the
coming years.
The Ministry of MSME has been in the forefront of
entrepreneurship and skill development in the country by
implementing various schemes and programs through its
Entrepreneurship Development Institutes and other training
centres.
National Mission for Capacity Building of bankers for
financing MSME sector:
With a view to develop entrepreneurial sensitivity amongst
banks' field-level functionaries for lending to the MSME
sector, the Reserve Bank rolled out a capacity building
program named as 'National Mission for Capacity Building
of Bankers for Financing the MSME Sector' (NAMCABS) in
collaboration with College of Agricultural Banking, Pune,
which covers
(i) Training programs for MSME division in charges of
commercial banks,
(ii) Training the trainers of commercial bank owned training
colleges and
(iii) Capacity building for in-charges of specialized branches
for MSMEs
Scheme for Credit Linked capital subsidy for technology
upgradation (CLCS-TU):
The Credit Linked Capital Subsidy Scheme (CLCSS) was
launched on 1st October, 2000.
The Cabinet Committee on Economic Affairs (CCEA) has
approved the changes in ceiling of credit from ₹ 40.00 lakhs
to ₹ 1.00 crore with the rate of subsidy enhanced from 12%
to 15% with effect from (e) 29 September, 2005.
The Scheme aims at facilitating technology up-gradation by
providing 15% upfront capital subsidy up to a maximum cap
of 15.00 lakhs (i.e., maximum investment in approved
machinery is 1.00 crore) to MSE units, including tiny, khadi,
village and coir industrial units on institutional finance
availed by them for induction of state-of-the-art or near
state-of-the-art technology for up-gradation of the present
technology level to a substantially higher one, involving
improved productivity, and/or improvement in quality of
product and/or improved environmental condition
including work environment.
It would also include installation of improved packaging
technique as well as anti-pollution measures, energy
conservation machinery, in-house testing and on-line
quality control.
This Scheme is linked with term loans availed by the MSEs
from Banks or Financial Institutions.
Presently, the Scheme facilitates subsidy to 51 sub-
sectors/products including Khadi and Village Industries.
As the Scheme progressed, the list of products/sub-sectors
has been expanded by inducting new
technologies/products/sub-sectors with the approval of the
competent authority i.e., Technical Sub-Committee (TSC)
and Governing and Technology Approval Board (GTAB) of
the CLCSS.
At present, the Scheme is being implemented by 12 nodal
banks/ agencies including SIDBI and NABARD.
Except SIDBI and NABARD, all the nodal banks/agencies
would consider proposals only in respect of credit approved
by their respective branches, whereas, for other Primary
Lending Institutions (PLI) approved under the guidelines,
SIDBI and NABARD would be the nodal agencies for release
of subsidy under this Scheme.
Online Application and Tracking System has been
introduced by the Government and the SME units need to
upload their subsidy claim application though their PLIS.
GOI had decided subsequently to continue the CLCS
component of CLCS-TUS till March, 2020 or till the time the
sanctions if aggregated capital subsidy disbursed reaches
2360 crore (approved outlay) whichever is earlier.
MSE Cluster Development Program (MSE-CDP):
Micro, Small & Medium Enterprises (MSMEs) in India have
evolved as a formidable component of the country's
economic growth.
While a key achievement of MSMEs over time has been
their talent in utilizing available domestic resources to
deliver quality products and services, these firms have now
made their presence felt across India's key sectors as well as
in prominent export markets.
MSMEs have made an impact on a range of issues, from
industrial progress to entrepreneurship and from job
creation to economic empowerment.
Due to its low capital structure, coupled with high labour
absorbing power, the sector has played a noteworthy role
in achieving rural industrialization as well.
The MSME sector remains a key driving force for India's
complete transition from an agrarian economy to an
industrialized one.
Historical circumstances, resource availability, demand
conditions, supporting industries and competitive
conditions obligate enterprises to evolve as Clusters within
an identifiable and contiguous area, manufacturing same or
related products.
Each cluster varies greatly in terms of key features such as
geographic locations, products, functions, and patterns of
inter-firm linkages.
Clusters give rise to emergence of specialized suppliers of
raw materials, machinery & spares, human skill, product
related services, etc.
It also enables small firms to combine the advantages of
running a small unit with the benefits of scale and
specialization provided by large units.
A number of clusters are so large, that they account for
nearly 80% of production of a selected product within the
country.
The essential characteristics of enterprises in a cluster are -
(i) similarity or complementarity in the methods of
production, quality control and testing, energy
consumption, pollution control, etc.
(ii) similar level of technology and marketing
strategies/practices
(iii) channels for communication among the members.
The objectives of the cluster development program are as
under:
(i) To support the sustainability and growth of MSEs, by
addressing common issues such as improvement of
technology, skills and quality, market access, access to
capital, etc.
(ii) To build capacity of MSEs, for common supportive action
through formation of self-help groups, consortia,
upgradation of associations, etc.
(iii) To create/upgrade infrastructural facilities, in the
new/existing industrial areas/clusters of MSES
(iv) To set up common facility centres for testing, training
centre, raw material depot, effluent treatment,
complementing production processes, etc.
The Micro and Small Enterprises - Cluster Development
Program (MSE-CDP) is being implemented for holistic and
integrated development of micro and small enterprises in
clusters.
The scheme envisages soft interventions i.e., diagnostic
studies, hard interventions i.e., setting up of CFCs and
Infrastructure Development in the new/existing industrial
estates.
Till Nov 2018, about 30 CFC projects and 31 Infrastructure
Development Projects have been approved benefitting
about 322 units under the MSE-CDP interventions.
(Ref: http://laghu-udyog.gov.in/mse-cdprog.htm)
Credit Guarantee Fund Scheme for MSES:
GOI launched the Credit Guarantee Fund Scheme for Micro
and Small Enterprises in August, 2000, with the objective of
making credit available to micro and small enterprises
(MSEs), particularly micro enterprises, without
collateral/third party guarantees.
The Scheme is being operated through the Credit Guarantee
Fund Trust for Micro and Small Enterprises (CGTMSE) set up
jointly by the GOI and SIDBI.
The objective of the scheme is to make available credit to
SSI units, particularly tiny units, for loans up to 200 lakh
without collateral third party guarantees.
The scheme covers collateral free credit facility (term loan
and/or working capital) extended by eligible lending
institutions to new and existing micro and small enterprises
up to 200 lakh per borrowing unit.
The CGTMSE made the following changes in the Credit
Guarantee Scheme from 1 Jan, 2017.
The enhancements in existing guarantee cover beyond 100
lakh in respect of working capital facilities, where such
enhancements are approved on or after January 01, 2017,
would also be eligible for the enhanced coverage up to 200
lakh, provided the proposal meets the guidelines of CGS.
CGTMSE shall cover credit facilities (Fund based and/or Non
fund based) extended by Member Lending Institutions
(MLIS) to a single eligible borrower in the Micro and Small
Enterprise's Sector.
The corpus of the Trust has been recently enhanced from
2500 crore to 7500 crore and the entire enhancement in the
corpus is fully funded by GOI.
The Trust shall cover credit facilities (Fund based and/or
Non fund based) extended by Member Lending
Institution(s) to a single eligible borrower in the Micro and
Small Enterprises sector for credit facility
(i) not exceeding 50 lakh (Regional Rural Banks/select
Financial Institutions);
(ii) not exceeding 200 lakh (Scheduled Commercial ks, select
inancial Institutions, Small Finance Banks (SFBs) and
Scheduled Urban Co-operative Banks by way of term loan
and/or working capital facilities on or after entering into an
agreement with the Trust, without any collateral security
and/or third party guarantees or such amount as may be
decided by the Trust from time to time.
The cap of 200 lakh is the maximum guarantee coverage
limit per borrower based on the outstanding credit facilities
and the borrowers can avail incremental credit facilities (i.e.
to the extent of reduction in the outstanding exposure limit)
under Credit Guarantee Scheme of CGTMSE, subject to
maximum cap of 200 lakh.
The extent of guarantee cover for various categories are as
per table given below:
Category Maximum extent of guarantee where
credit facility is
Up to 5 Above 5 Above 50
lakhs lakhs and up lakhs and up
to 50 lakhs to 200 lakhs
Micro 85% of the 75% of the 75% of the
Enterprises amount in amount in amount in
default default default
subject to a subject to a subject to a
 maximum of maximum of maximum of
4.25 lakhs 37.50 lakhs 150 lakhs
Women 80% of the amount in
entrepreneurs/ default subject to a
units located in maximum of 40 lakhs
NER (other
than credit
facilities up to
5 lakhs to
micro-
Entrepreneurs
All other 75% of the amount in
category of default subject to a
borrowers maximum of 37.50 lakhs
Activity From 10 lakhs up to 100 lakhs
MSE Retail 50% of the amount in default subject to a
Trade maximum of ₹50 lakhs

The lender should cover the eligible credit facilities as soon

as they are sanctioned.
In any case, the lender should apply for guarantee cover in
respect of eligible credits sanctioned in one calendar
quarter latest by end of subsequent calendar quarter.
Guarantee will commence from the date of payment of
guarantee fee and shall run through the agreed tenure of
the term credit in case of term loans/composite loans and
for a period of 5 years where working capital facilities alone
are extended to borrowers, or for such period as may be
specified by the Guarantee Trust in this behalf.
https://www.cgtmse.in/Home/VS/3
The cumulative guarantee approved by the trust till 31
March, 2018 stood at 30.3 lakh for a cumulative loan
amount of 1.47 lakh crore.
PROBLEMS FACED BY MSMES:
Although Indian MSMEs are a diverse and heterogeneous
group, they face a number of constraints, which are briefly
indicated below:
*Lack of availability of adequate and timely credit;
*High cost of credit;
*Difficulties in complying with the collateral requirements;
*Limited access to equity capital;
*Problems in supply to government departments and
agencies;
*Difficulties in procurement of raw materials at a
competitive cost;
*Problems of storage, designing, packaging and product
display;
*Lack of access to global markets;
*Inadequate infrastructure facilities, including power,
water, roads, etc.;
*Low technology levels and lack of access to modern
technology;
*Lack of skilled manpower for manufacturing, services,
marketing, etc.;
*Multiplicity of labour laws and complicated procedures
associated with compliance to such laws;
*Absence of a suitable mechanism which enables quick
revival of viable sick enterprises and allows unviable
entities to close down speedily; and
*Issues relating to taxation, both direct and indirect, and
procedures thereof.

DELAYED PAYMENTS TO MICRO AND SMALL ENTERPRISES

UNDER THE MICRO SMALL AND MEDIUM ENTERPRISES
DEVELOPMENT (MSMED) ACT, 2006:
The Micro, Small and Medium Enterprise Development
(MSMED) Act, 2006 (Section 15 to 24) contains provisions
relating to "Delayed Payment to Micro and Small Enterprise
(MSEs)".
State Governments are required to establish Micro and
Small Enterprise Facilitation Council (MSEFC), for settlement
of disputes on getting references/filing on Delayed
payments.
(Section 20 and 21).
The provisions under the Act are implemented by MSEFC
chaired by Director of Industries of the State/UT having
administrative control over the MSE units.
The buyer is liable to pay compound interest with the
monthly rests to the supplier on the amount at the three
times of the Bank Rate, notified by RBI, in case he does not
make payment to the supplier for his supplies of goods or
services within 45 days of the acceptance of the
goods/service rendered (Section 16).
Every reference made to MSEFC shall be decided within a
period of 90 days from the date of making such a reference,
as per provisions laid down in the Act.
If the Appellant (not being the supplier) wants to file an
appeal, no application for setting aside any decree or award
by the MSEFC shall be entertained by any court, unless the
appellant (not being supplier) has deposited with it, the
75% of the award amount (Section 19).
In order to take care of payment obligations of large
corporate borrowers to MSEs, banks have been advised by
RBI that while sanctioning/renewing credit limits to their
large corporate borrowers (i.e., borrowers enjoying working
capital limits of 10 crore and above from the banking
system), to fix separate sub-limits, within the overall limits,
specifically for meeting payment obligations in respect of
purchases from MSEs either on cash basis or on bill basis.
Banks were also advised to closely monitor the operations
in the sub-limits, particularly with reference to their
corporate borrowers' dues to MSE units, by ascertaining
periodically from their corporate borrowers, the extent of
their dues to MSE suppliers and ensuring that the
corporates pay off such dues, before the appointed
day'/agreed date by using the balance available in the sub-
limit so created.
As already discussed earlier, RBI has introduced the Trade
Receivables Discounting System (TReDS) to facilitate quick
settlement of dues to MSMEs
PERFORMANCE AND CREDIT RATING SCHEME (PCRS):
The scheme is being implemented through National Small
Industries Corporation (NSIC) Limited.
The main objective of the scheme is to provide a trusted
third-party opinion on the capabilities and creditworthiness
of the MSEs, so as to create awareness amongst them about
the strengths and weakness of their existing operations.
Rating under the scheme is being carried out through
empanelled rating agencies i.e., CRISIL, CARE Ratings,
ONICRA Credit Rating Agency of India Ltd, SMERA (SME
Rating Agency of India), ICRA Ltd and Brickwork India
Ratings.
Under this Scheme, rating fee payable by the micro & small
enterprises is subsidized for the first year only and that is
subject to maximum of 75% of the fee or ₹ 40000/-,
whichever is less.
The scheme has been accepted very well by the MSE sector
which is corroborated from the growth in the number of
units as depicted in the progress made in rating of the
MSEs.
During one decade of implementation of the scheme more
than 1.10 lakh units have been rated under the scheme.
FRAMEWORK FOR REVIVAL AND REHABILITATION OF
MSMEs:
The Reserve Bank of India in terms of their circular dated 17
March, 2016 has advised revised guidelines for the revival
and rehabilitation of MSMEs having loan limits up to 25
crores.
As regards restructuring of loan accounts with exposure of
above 25 crores, they will continue to be governed by the
extant guidelines on Corporate Debt Restructuring
(CDR)/Joint Lenders' Forum (JLF) mechanism.
Before a loan account of MSME turns into a Non-Performing
Asset (NPA), banks should identify incipient stress in the
account by creating three sub-categories under the Special
Mention Account (SMA) category as given in the table
below.
SMA Sub-categories Basis for classification
SMA-0 Principal or interest
payment not overdue for
more than 30 days but
account showing signs of
incipient stress
SMA-1 Principal or interest
payment overdue between
31-60 days
SMA-2 Principal or interest
payment overdue between
61-90 days
On the basis of the warning signals in respect of accounts in
SMA-2, the branch should forward the details of stressed
account with aggregate loan limits above 10 lakhs to the
Committee within five working days for a suitable
corrective action plan (CAP).
As regards accounts in SMA-2 with aggregate loan limit of
less than 10 lakh it should be mandatorily examined for CAP
by the branch itself under the authority of the branch
manager/such other official (hereinafter referred to as
'designated official') as decided by the bank in terms of
their Board approved policy.
Where the branch manager/designated official has decided
the option of recovery under CAP instead of rectification or
restructuring such account/s should be referred to the
Committee for their concurrence.
Voluntarily Initiation of Proceedings by Borrower:
An enterprise which apprehends failure of its business or its
inability or likely inability to pay debts or there is erosion in
the net worth due to accumulated losses to the extent of
50% of its net worth during the previous accounting year, by
making an application to the branch or directly to the
Committee as applicable, may voluntarily initiate the
proceedings under the framework.
If the matter falls within the authority of a committee, it
should convene its meeting at the earliest but not later than
five working days from the receipt of the application, to
examine the account for a suitable CAP.
Constitution of Committees for Stressed Micro, Small and
Medium Enterprises:
All banks having exposure towards MSME sector have to
constitute a Committee at each District where they are
present or at Division level or Regional Office level,
depending upon the number of MSME units financed in the
region.
These Committees will be Standing Committees and will
resolve the reported stress of MSME accounts of the
branches falling under their jurisdiction.

The Composition of the Committee will be as under:

(a) The regional or zonal head of the convener bank, and
he/she will be the Chairperson of the Committee;
(b) Officer-in-charge of the Micro, Small and Medium
Enterprises Credit Department of the convener bank at the
regional or zonal office level, will be the member and
convener of the Committee;
(c) One independent external expert with expertise in
Micro, Small and Medium Enterprises related matters to be
nominated by bank;
(d) One representative from the concerned State
Government.
Endeavour should be made to bring representative from the
respective State Government in the Committee.
In case State Government does not nominate any member,
then the convening bank should proceed to include an
independent expert in the Committee, namely a retired
executive of another bank of the rank of AGM and above;
(e) When handling accounts under consortium or multiple
banking arrangement, senior representatives of all
banks/lenders having exposure to the borrower.

The following procedures shall be adhered to while dealing

with the application admitted by the Committee
(a) If an application is filed by the lender, Committee should
notify the concerned enterprise about such application
within five working days and require the enterprise to:
(i) Respond to the application or make a representation
before the Committee; and
(ii) Disclose the details of all its liabilities, including the
liabilities owed to the State or Central Government and
unsecured creditors, if any, within fifteen working days of
receipt of such notice; if the enterprise does not respond
within the above period, the Committee may proceed ex-
parte.
(b) On receipt of information relating to the liabilities of the
enterprise, the Committee may send notice to such
statutory creditors as disclosed by the enterprise as it may
deem fit, informing them about the application under the
Framework and permit them to make a representation
regarding their claims before the Committee within fifteen
working days of receipt of such notice.
The information so received is required for determining the
total liability of the Enterprise in order to arrive at a suitable
CAP and not for payments of the same by the lenders.
(c) Committee shall take a decision on the option to be
adopted under the corrective action plan within 30 days of
convening its first meeting for a specific enterprise and
convey its decision to the enterprise within 5 working days
from the date of its decision.
(d) If the corrective action plan decided by the Committee
envisages restructuring of the debt of the enterprise, a
detailed Techno-Economic Viability (TEV) study needs to be
conducted and finalize the terms of such a restructuring in
accordance with the extant prudential norms for
restructuring, within 20 working days (for accounts having
aggregate exposure up to 10 crore) and within 30 working
days (for accounts having aggregate exposure above 10
crore and up to 25 crore) and notify the enterprise about
such terms, within five working days.
(e) Upon finalization of the terms of the corrective action
plan, the implementation of that plan shall be completed by
the concerned bank within 30 days (if the CAP is
Rectification) and within 90 days (if the CAP is
restructuring).
In case recovery is considered as CAP, the recovery
measures should be initiated at the earliest.
Various options available under the corrective action plan
are as under:
Rectification:
Obtaining a commitment, specifying actions and timelines,
from the borrower to regularize the account so that the
account comes out of Special Mention Account status or
does not slip into the Non-Performing Asset category and
the commitment should be supported with identifiable cash
flows within the required time period and without involving
any loss or sacrifice on the part of the existing lenders.
Restructuring:
Consider the possibility of restructuring the account, if it is
prima facie viable and the borrower is not a wilful defaulter,
i.e., there is no diversion of funds, fraud or malfeasance,
etc.
Commitment from promoters for extending their personal
guarantee along with their net worth statement supported
by copies of legal titles to assets may be obtained along
with a declaration that they would not undertake any
transaction that would alienate assets without the
permission of the Committee.
Recovery:
Once the first two options at (i) and (ii) above are seen as
not feasible, due recovery process may be resorted to.
The Committee may decide the best recovery process to be
followed, among the various legal and other recovery
options available, with a view to optimizing the efforts and
results.
The decisions agreed upon by a majority of the creditors
(75% by value and 50% by number) in the Committee would
be considered as the basis for proceeding with the
restructuring of the account, and will be binding on all
lenders under the terms of the Inter-Creditor Agreement.
If the Committee decides to proceed with recovery, the
minimum criteria for binding decision, if any, under any
relevant laws of Acts shall be applicable.
Accounts eligible for restructuring:
(a) Committee can take up only those accounts reported as
Standard, Special Mention Account or Sub-Standard by one
or more lenders of the Committee.
(b) Committee may also consider restructuring of the debt,
where the account is doubtful with one or two lender/s but
it is Standard or Sub-Standard in the books of majority of
other lenders (by value).
(c) Wilful defaulters are not eligible for restructuring.
However, the Committee may review the reasons for
classification of the borrower as a wilful defaulter and
satisfy itself that the borrower in a position to rectify the
wilful default.
The decision to restructure such cases shall have the
approval of the Board of concerned bank within the
Committee who has classified the borrower as wilful
defaulter.
(d) Cases of Frauds and Malfeasance remain ineligible for
restructuring.
However, in cases of fraud/malfeasance where the existing
promoters are replaced by new promoters and the
borrower company is totally delinked from such erstwhile
promoters/management, banks and the Committee may
take a view on restructuring of such accounts based on their
viability, without prejudice to the continuance of criminal
action against the erstwhile promoters/management.
Once the account is taken up for restructuring timeline
during which certain viability milestones such as
improvement in certain financial ratios after a period of 6
months may be achieved are to be stipulated and the
Committee has to periodically review the account for
achievement/non achievement of milestones and should
consider initiating suitable measures including recovery
measures as deemed appropriate.
The general principle of restructuring shall be that the
stakeholders bear the first loss of the enterprise rather than
the lenders.