Preamble: | The Micro, Small and Medium Enterprises (MSME) Sector, particularly the tiny segment of the small enterprises, faces huge challenges as under: * Competition from both domestic & multi-national companies. * Inadequate access to finance due to lack of financial information and non-formal business practices * Lack of access to private equity and venture capital * Lack of access to inter-state and international markets; * Limited access to secondary market instruments * Fragmented markets in respect of their inputs as well as products * Vulnerability to market fluctuations * Limited access to technology and product innovations * Lack of awareness of global best practices * Considerable delays in the settlement of dues/payment of bills by the large scale buyersThe MSME sector therefore looks to the Banks for * Single window dispensation. * Quick decision with least Turnaround Time, and above all, * Better service.It is therefore the Bank’s priority:- * to provide timely and adequate credit to the MSMEs, * to encourage their Technology Upgradation, for better quality and competitiveness of their product(s), and * even pro-actively detect sick and viable units in time, so as to nurse them back to health through appropriate restructuring.With the deregulation of the financial sector, the ability of the bank to service the credit requirements of the MSME sector depends on the underlying transaction costs, efficient recovery processes and available security. There is an immediate need for the bank to focus on credit and finance requirements of MSMEs.Although the banks are allowed to fix their own targets for funding SMEs in Order to achieve a minimum 20% year-on-year growth, the Government’s objective is to double the flow of credit to SME sector from Rs.67,600 crore in 2004-05 to Rs.1,35,200 crore by 2009-10, i.e., within a period of 5 years.Credit Risk in the MSME sector is widely dispersed and Banks get better yield from MSME advances as against the corporate advances, where the spread is getting gradually reduced.With the paradigm shall shift from Small Scale Industries to Micro, Small & Medium Enterprises to be in alignment with global practices, it is time that our Bank set definitive policy and strategies to achieve the above set goals. | RBI GUIDELINES: | RBI guidelines also mandate that every bank shall have to put in place an SME policy duly approved by its Board of Directors. Accordingly the Bank’s MSME policy and Strategies encompassing the various schemes and norms within the overall ambit of the Govt / RBI directives is given hereunder.This policy would cover all credit related exposures (both fund based and non-fund based) and the guidelines relating to Credit Risk Management, credit delivery, credit monitoring and recovery shall be uniformly applicable to the MSME policy. With changes in any of these guidelines, at appropriate levels, the MSME policy would also automatically stands amended. | MSME Definition | In terms of definition, the following advances would presently be covered under MSME:Micro (manufacturing) Enterprises
Enterprises engaged in the manufacture / production, processing or preservation of goods and whose investment in plant and machinery (original cost including land & building and such items as in 2.1.1(a) does not exceed Rs.25 lakh, irrespective of the location of the unit.
Micro (service) Enterprises
Enterprises engaged in providing / rendering of services and whose investment in equipment [original cost excluding land and building and furniture, fittings and such items as in 2.1.2 (a)] does not exceed Rs.10 lakh.
Small (manufacturing) Enterprises
Enterprises engaged in the manufacture / production, processing or preservation of goods and whose investment in plant and machinery (original cost excluding land and building and the items specified by the Ministry of Small Scale Industries vide its notification no. S.O. 1722 (E) dated October 5, 2006) does not exceed Rs.5 crore.Small (service) Enterprises
Enterprises engaged in providing / rendering of services and whose investment in equipment (original cost excluding land and building and furniture, fittings and other items not directly related to the service rendered or as may be notified under the MSMED Act, 2006) does not exceed Rs.2 crore.Medium (manufacturing) Enterprises
Enterprises engaged in the manufacture / production, or preservation of goods and whose investment in plant and machinery (original cost excluding land and building and the items specified by the Ministry of Small Scale Industries vide its notification no. S.O. 1722 (E) dated October 5, 2006) does not exceed Rs.10 crore.Medium (service) Enterprises
Enterprises engaged in the providing / rendering of services and whose investment in equipment (original cost excluding land and building and furniture, fittings and other items not directly related to the service rendered or as may be notified under the MSMED Act, 2006) is more than Rs.2 crore but does not exceed Rs.5.00 crore.The small and micro (service) enterprises shall include small road & water transport operators, small business, professional & self employed persons, and all other service enterprises.Bank’s lending to medium enterprises will not be included for the purpose of reckoning under priority sector. |

Credit Thrust | Increased thrust is proposed to be given for lending to Micro, Small & Medium Enterprises, particularly village & tiny industries and other small scale units. The bank shall keep a minimum exposure of 50% of net credit toMSMEs on the whole.Branches situated in urban & metropolitan centres will be advised to give more focus on Medium Enterprises.

Credit Tenure
Loan repayment period:

The Bank’s Term Loan exposures to MSME sector would generally have a maximum maturity of 8 years.Holiday period:

Holiday period may be decided on the basis of gestation period of the project in case of new projects, on a case to case basis, subject to a maximum of 12 months.Bench Mark ratios: * Maximum debt equity ratio of 3:1 for loans upto and inclusive of Rs.2.00 crores and 2.50:1 in the case of loans of more than Rs.2.00 crores. * The minimum DSCR should be 1.33:1 for new clients and for existing clients, it should be 1.25:1 * Minimum current ratio of 1.10:1 for existing customers and 1.15:1 for new clients. Credit Acquisition:

Apart from direct credit acquisition, bank may also consider take-over of advance accounts from other banks /FIs if the following minimum financial parameters and conditions are complied with: * The account to be taken over should be standard account with the existing bank. * The unit should be a profitable one without incurring any cash losses. * Debt-equity ratio, DSCR and Current Ratio as prescribed above to the new clients.Working Capital Assessment:-

For working capital limits upto Rs.5 crores, Turnover Method would be applicable as mandated under Nayak Committee Recommendations for financing working capital needs of the SSI sector @ 20% of the projected turnover based on the assumption of a three month operating cycle. I method of lending (Tandon committee method) may be resorted in specific cases with longer operating cycle enabling higher quantum of finance than the one available in the projected turnover method. Branches should obtain and scrutinize latest audited financials of the constituent in all cases of WC limits above Rs.10 lakhs. In case of provisional balance sheets, it should be ensured that in the audited financials, the variation is not beyond +/- 10%.
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 Turnover * Credit summation in the account * Sales Tax paid / Turnover Tax / Excise Register, as applicable * Orders on hand / expected orders. * Installed capacity vis-à-vis the projections. * Overall market trend, etc.Such projections should be within reasonable limits, say, 25% over the last year’s sales. However, in exceptional cases, deviations from this may be allowed if supported by LCs / Firm orders on hand, etc.Credit Rating Model
Govt / RBI had also advised that Banks may consider to take advantage of the Credit Appraisal & rating Tool (CART) as well as a Risk Assessment Model (RAM) and a comprehensive rating model for risk assessment of proposals for MSMEs, developed by SIDBI or to consider the ratings given by reputed credit rating agencies as initiated by National Small Industries Corporation and wherever appropriate, structure the interest rates in tune with such ratings.

CRISIL has also recently launched its SME rating service (SMERA). Ratings would be based on parameters such as turnover, market position, operating efficiency, existing financial position, and management evaluation.For the time being, the Bank may adopt the internal credit risk model already approved by the Board at the meeting held on 30.06.2005 as applicable to manufacturing units for credit facilities of Rs.75 lakhs and above. | | Pricing: | In view of the severe competition in the market, interest rates offered at times may have to be lower than the rate arrived at reckoning the borrower’s credit rating. Hence, the existing pricing model as approved by the Board at the meeting held on 31.01.2005 may be adopted to fix the interest rate on MSME advances for advances of Rs.10 lakhs and above. For advances of above Rs.2 lakhs and upto Rs.10 lakhs, (those not subjected to any rating), the interest rate will be 0.50% above the BPLR of the bank.
For those borrowers obtained satisfactory credit rating from SIDBI, NSIC and reputed external agencies, the pricing will be 0.50% less than the BPLR of the bank.

Service Charges / Penal Interest:

No service charges / processing Charges / Inspection charges or penal interest shall be levied for credit facilities extended to MSME upto Rs.25000/-. Processing charges of Rs.100/- may be levied for advances of above Rs.25000/- but below and upto Rs.2.00 lakhs for Medium Enterprises. In respect of Micro and Small enterprises, no processing fee will be levied for credit facilities upto Rs.5 lakhs and also no prepayment penalty for loans upto Rs.5 lakhs.Exposure Norms:

Bank’s extant exposure norms (single as well as group) would be applicable.Collateral Security and Margin Norms:

As per extant RBI guidelines, Tiny/SSI Borrowers with limits upto Rs.5 lakhs may be sanctioned credit facilities without any collateral security. For customers with good track record, this waiver of collateral security may be considered for limits upto Rs.10 lakhs. However, the issue of collateral security would be addressed on a case specific basis.

Margin Requirements:

The minimum Promotor’s margin should be:
Loans upto & inclusive of Rs.2.00 crores : 15%
Loans of more than Rs.2.00 crores : 20%
Relaxation of norms:

Chaiman may be authorized to relax norms relating to minimum margin, collateral security requirements, maturity of loan holiday period and pricing of loans.Time Norms for Disposal of Applications:The following time frame may be fixed for disposal of applications received under this sector.(from the date of submission of complete papers by the borrower): | Limits | Time Limits for Disposal | Upto and including Rs.2.00 lakhs | 2 weeks | Over Rs.2.00 lakhs and upto & inclusive of Rs.5 lakhs | 4 weeks | Over Rs.5.00 lakhs and upto & inclusive of Rs.50 lakhs | 6 weeks | Over Rs.50.00 lakhs and upto & inclusive of Rs.1.50 crores | 8 weeks | Over Rs.1.50 crores | 10 weeks | | A register should be maintained at the branches to record the dates of receipt of applications / sanctions/ disbursements/ rejections with reasons therefore.Training:

Credit Officials at the various levels shall be given necessary training with a view to up date themselves and also give renewed thrust to the MSME lending.Rehabilitation of Sick unitsRehabilitation involves pre-emptive identification of causes of sickness, assessment of the sick unit’s viability, and nursing viable sick unit back to health to ensure that the unit generates adequate surplus to service the debt including interest burden and also to wipe off the past losses. The Bank’s extant instructions and RBI guidelines would be applicablemutatis mutandis.Sanctioning Authority:

The competent authority under the delegated powers shall take a decision on sanction of credit facilities to MSME. However, the Board may empower Chairman to increase the delegated powers to the sanctioning authorities on a need based manner for sanction of credit to this sector.In case of rejections, approval shall have to be obtained from the next higher authority, not below the level of Assistant General Manager.Monitoring & Reporting to Top Management

The progress of the SME Branches and the MSME Credit expansion as also the units under nursing would be submitted to the Board on a Quarterly basis to ensure that the required emphasis at the highest forum of the banks is given to the MSME sector. The first such reporting shall commence from the position as at the quarter ending 30.06.2006.Display of MSME PolicyFor wider dissemination and easy accessibility, these policy guidelines would be displayed on the Bank’s website. |