While RBI had excluded Retail Traders vide their Master Circular dt. 02-07-2007from the scope of MSME Sector, it has subsequently included vide cicular no. RBI/2009-10/164 RPCD.CO.Plan.BC. 24 /04.09.01/2009-10 dt 18-09-2009 included Retail Traders [i.e. advances granted to retail traders dealing in essential commodities (fair price shops), consumer co-operative stores without any ceiling on the credit limit; and advances granted to private retail traders with credit limits not exceeding Rs. 20 lakh) as part of the MSME (Service) Enterprises.

3. Specialised MSME Branches;

All the then-existing Specialised SSI Branches at 32 Centres were designated as MSME Branches as per Board Approval dated 30/06/2005 with a view to increase the credit flow to MSME segment in these Centres by giving a special thrust on marketing. As on 30.06.2009 the number of  designated MSME Branches were 85 . Its number was increased to 100 with the identification of additional 15 more Branches as specialized MSME branches. The same has been approved by the then General Manager vide Memorandum No. SME /BBJ/09-10/61 dated 29.10.2009

4. MSME Cells at Zonal Offices

Specialised MSME Credit Cells called MSME hubs were set up at Zonal Offices in all key centres having good potential for MSME advances, with the following functions:

• Processing of all proposals where the limits are beyond the Branch Manager’s delegated authority. Branches would forward all related papers for an evaluation at MSME Cell with their recommendations. Branches should own responsibility for the borrower’s credentials and activity and ensure existing procedures/processes to continue if proposal falls within the Branch Manager’s Delegated Authority
• Branches would be free from processing of such proposals and sanction formalities and be responsible only for obtention of security documents from the borrower and for perfection of other securities as well as monitoring of the unit’s operations.
• Proposals processed by the Cell would be dealt directly at the Zonal Office, without any intervening authority;
• Turnaround time would thus be reduced, ensuring that stipulated time schedules are strictly followed by both- Branches and MSME Cell;
• The critical parameter for measuring the Cell’s performance would be the reduced Turnaround time and MSME business growth with the introduction of the centralised processing at the MSME Cell.

5. Delayed Payment

Under the Amendment Act, 1998 of Interest on Delayed Payment to Small Scale and Ancillary Industrial Undertakings, penal provisions have been incorporated to take care of delayed payments to MSME units. After the enactment of the Micro, Small and Medium Enterprises Development (MSMED) Act 2006, the existing provisions of the Interest on Delayed Payment Act, 1998 to Small Scale and Ancillary Industrial Undertakings, have been strengthened as under

• In case the buyer to make payment on or before the date agreed on between him and the supplier in writing or, in case of no agreement before the appointed day. The agreement between seller and buyer shall not exceed more than 45 days.
• In case the buyer fails to make payment of the amount to the supplier, he shall be liable to pay compound interest with monthly rests to the supplier on the amount from the appointed day or, on the date agreed on, at three times of the Bank Rate notified by Reserve Bank.

• For any goods supplied or services rendered by the supplier, the buyer shall be liable to pay the interest as advised at (ii) above.

• In case of dispute with regard to any amount due, a reference shall be made to the Micro and Small Enterprises Facilitation Council, constituted by the respective State Government

Further, banks have been advised by Reserve Bank of India to fix sub-limits within the overall working capital limits to the large borrowers specifically for meeting the payment obligation in respect of purchases from MSMEs. Accordingly, we shall advise branches to set up sub-limits for this purpose

6. Credit Thrust

In order to ensure that sufficient credit is available to micro enterprises within the MSE sector, it is to be ensured that;

• 40% of the total advances to MSE sector should go to micro (manufacturing) enterprises having investment in plant and machinery upto Rs.5 lakh, and micro (service) enterprises having investment in equipment upto Rs.2 lakh..
• 20% of the total advances to MSE sector should go to micro (manufacturing) enterprises with investment in plant and machinery above Rs.5 lakh and upto Rs.25 lakh, and micro (service) enterprises with investment in equipment above Rs.2 lakh and up to Rs.10 lakh. Thus, 60% of MSE advances should go the micro enterprises
• The aforesaid allocation of 60% of the MSE advances to the micro enterprises is to be achieved in stages viz 50% in the year 2010-11, 55% in the year 2011-12 and 60% in the year 2012.-13

8. Credit Tenure

The Bank’s Term Loan exposure to MSME sector would generally have a 7-10 year maturity.

9. Credit Acquisition

Apart from direct/primary credit acquisition, we may also consider take-over of advance accounts from other Banks/FIs if the following minimum financial parameters and conditions are complied with:

1. Accounts should be eligible for a credit rating of minimum AA / SBS-5 (total score 180) for manufacturing units and SBS-5.5 (total score 196) for service units as per our credit rating model treating the account as a new one.
2. The accounts to be taken over should be standard accounts with the existing Bank.
3. The firm/company continuously registering increasing trend in sales volume and making cash profit for at least last three years.
4. Maximum debt equity ratio of 4:1 in the case of Micro & Small Enterprises enjoying working capital limits upto Rs.5.00 Crores; and 3:1 in the case of Micro and Small Enterprises enjoying working capital limits over Rs.5.00 Crores. 
5. Maximum debt equity ratio of 3:1 in the case of Medium Enterprises irrespective of the WC limit.
6. Current Ratio of 1.20:1 for accounts with limits up to Rs 5 crores, where Turn Over Method alone would be applied for assessment of the Working Capital (as against 1.33 prescribed normally).
7. Minimum Interest Service Coverage Ratio (ISCR) of 1.50:1 as against 1.75:1 prescribed normally.
8. If Term Loan is also proposed to be taken over, the minimum Debt:Service Coverage Ratio (DSCR) should be 1.25.
9. The Asset Coverage Ratio should not be less than 1.50.

Authority for Approval of Takeover:

If all terms are complied with, the Zonal Manager will be the minimum authority to approve takeover and sanction can be accorded by the respective delegated authority. For proposals falling within the authority of Zonal Manager and above, respective sanctioning authority will approve the take over.

Authority for approval of deviation in Take Over norms :

Any deviation in takeover norms shall be approved by two levels higher than the authority under whose power the sanction would otherwise fall subject to minimum authority of General Manager. Sanctions falling within the delegated authority of GM shall be approved by ED and those falling within the delegated power of ED/CMD can be approved by the respective authority. (Approval-BM 30-03-2011)

10. Credit Appraisal

Although same appraisal norms cannot be uniformly applied to Micro, Small and Medium Enterprises, broadly the appraisal would involve:.

Proper identification of the Proponent(s) and?? his/her/their antecedents in accordance with KYC Norms/Guidelines, the proponents’ experience, educational and social background, technical/ professional competence, integrity, initiatives, etc,.

• Checking out for Willful Defaulters’ List of RBI,? Specific Approval List (SAL) of ECGC etc,.
• The acceptability of the product manufactured,? its popularity/market demand, market competitors.
• Evaluation of State and Central Govt. Policies? (enabling environment) with specific reference to the Enterprise in question, Environmental stipulations, Availability of necessary infrastructure-roads, power, labor, raw material and markets.
• Techno-economic Appraisal of units? where it is felt absolutely necessary by the Zonal Managers.
• Project Cost, the Proponent’s own financial? contribution, projections for three years, and other important parameters which would include the BEP, liquidity, solvency, and profitability ratios, etc,.

11. Working Capital Assessment

For working capital limits up to Rs.5 Crores , Turnover Method would be applicable as mandated under Nayak Committee Recommendations for financing working capital needs of the SMEs @ 20% of the projected turnover based on the assumption of a three month operating cycle. It is abundantly clarified that this 20% is the minimum WC limit to be sanctioned even if the proponent’s operating cycle is shorter than 3 months. Branches should, however, ensure to restrict the drawings in such cases to actual drawing power. MPBF method may be resorted in specific cases with longer operating cycle. Branches should obtain and scrutinize latest audited financials of the constituent in all cases of WC limits above Rs.10 lakhs. In case provisional balance sheets are submitted by the constituent, adverse variation between the provisional and audited financials should not exceed 5%. In the event of deviation beyond 5%, branches should have a discussion with the constituent to find out the reason for such variation and report to the sanctioning authority.

The next year’s sales projections made by the borrower, however, would have to be corroborated by the trend in sales over 2 years, last year actual sales through verification of the following indicative parameters (besides the financial data submitted by the borrower):

• Sales Ledger/Sales Turnover.
• Credit Summation in the account
• Sales Memos or Invoices/Delivery Challans.
• Sales Tax Paid/Turnover Tax/Excise Register,as applicable,
• Electricity Bills –wherever applicable.
• Orders on hand/expected orders.
• Installed capacity vis-à-vis the projections.
• Overall market trend etc,

11.1.Current Ratio:

While a benchmark current ratio of 1.33:1 is always desirable, it is felt that some relaxations are provided to SMEs in their Current Ratio. They may be permitted to maintain a minimum current ratio of 1:1 as against 1.25-1.33:1 stipulated for others. Classification of Current Assets and Current Liabilities under MPBF method would be based on extant RBI/Bank guidelines.

11.2. Financial Ratios:

The following may be accepted as the benchmark in this regard:

Sanctioning authority may accept Debt Equity/Debt Quasi Equity Ratio of upto 4:1 for all accounts if he is satisfied with the performance of the account and stipulates a definite time period within which to improve the position

Authority for Approval of Deviation:

• Of the 4 parameters stated above, relaxation in any one of the parameters can be permitted by DGM within the permissible bandwidth for sanctions which fall within the delegated powers upto Scale V and those sanctions within his/her delegated powers
• In respect of proposals which normally would fall within the delegated powers of TEG VI but where more than one financial parameter are to be relaxed within the permissible bandwidth, the proposal should be sent to GM NBG/GM SBU (HO) for consideration and sanction.
• GM NBG/ GM SBU and above can sanction relaxations in one or more than one financial parameter within the permissible bandwidth while sanctioning/reviewing the proposals within their respective delegated powers.
• In respect of all proposals where financial parameters are beyond the permissible bandwidth of relaxation as shown above, the accounts falling upto 3 notches below entry level may be considered and sanctioned for review at the existing level or below by one level above the delegatee under whose powers they would otherwise fall stating clearly as to the need for continuing the limits. Any proposal with additional limits with financial parameters beyond the permissible bandwidth has to be sanctioned by M.Com. (Approval-BM 30-03-2011)

12. Credit Rating Model

Govt./RBI had advised that Banks may initiate necessary steps to rationalize the cost of loans to SME sector by adopting a transparent rating system with cost of credit being linked to the credit rating of the enterprise. The following credit rating models will be used.

1. Hybrid Large Corporate Model (Fund/Non-Fund based limits of Rs.30 Crores and above );
2. Hybrid Mid Segment Model ( Fund / Non – Fund based limits of Rs.5 Crores and above but below Rs.30 Crores ;
3. SBS Model (Fund/ Non-Fund based limits of Rs.10 Lakhs and above but below Rs.5 Crores);

The ratings given by reputed Credit Rating agencies such as SMERA, CRISIL etc, which have been approved by the National Small Industries Corporation, are also considered for granting concessions in the interest rates, in tune with such credit ratings, based on parameters such as turnover, market position, operating efficiency, existing financial position, and management evaluation

13. Pricing:

14. Exposure Norms:

Bank’s extant exposure norms would be applicable. Accordingly, the Bank’s exposure is not to exceed :

• 15% of Bank’s Capital Funds to Individual Borrowers including PSUs. (20% in case of exposures to Infrastructure Lending).
• 40% of Bank’s Capital Funds to Group Borrowers (50% in case the additional exposure of 10% is on account of Infrastructure projects, i.e. Power, Telecommunications, Roads Ports etc)

15. Collateral Security and Margin Norms:

Credit facilities extended to a single Micro & Small Enterprises, Borrower (i.e. erstwhile SSI), either by way of Term Loan or Working Capital or both, without any collateral security or third party guarantee, will be covered, if eligible, under SIDBI’s Credit Guarantee Fund Trust for Micro & Small Enterprise (CGTMSE ). A composite limit of Rs.1 Crore will be considered by branches to meet working capital and term loan requirements of Micro & Small Entrepreneurs.

As per extant RBI guidelines, Micro & Small Enterprises with limits up to Rs.10 Lakhs may be sanctioned credit facilities without any collateral security. For customers with good track record, this waiver of collateral security may be extended for limits up to Rs.25 Lakhs with the approval of the Zonal Manager.