POLICY FOR FINANCING MICRO, SMALL AND MEDIUM ENTERPRISES (MSMEs)

1. Introduction and Objective The MSME sector in a developing country has a vital role in the economic and social development. The promotion and growth of MSME sector has been a cardinal feature of the industrial policy over the years. In India, the MSME sector contributes 8% of the country's GDP, 45% of the manufactured output and 40% of exports and provides employment to about 60 million through 26 million enterprises. The micro and small enterprises sector alone employs over 30 million people and is next only to agriculture sector in employment generation. Thus, MSMEs are important for the national objectives of growth with equity and inclusion. With a view to ensure balanced growth of the MSMEs, Govt. of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 on 16.06.2006 (notified on 02.10.2006). With the enactment of MSMED Act 2006, Services sector has become part of Micro, Small & Medium Enterprises. The MSMEs engaged in manufacturing or production and providing or rendering of services are defined as per MSMED Act 2006 for the purpose of bank credit. The policy is aimed to provide direction for the involvement of the Bank in the growth of this sector. This would also help the MSME sector which is identified as an Engine of Growth both in terms of employment generation and improving production, to take advantage of various products offered by the Bank. 2. Organizational set up (i) MSME Wing has been established at HO comprising of SME Business Unit and SME Group. (ii) Each Circle is equipped with exclusive SME Section. (iii) Bank has established Specialized SME branches. (iv) SME Sulabhs for centralized processing of credit proposals emanating from branches/ clients are established at various Centres. Presently, the SME Sulabhs across the country are functioning from Circle Offices. 3. Definition of the MSME Sector as per MSMED Act, 2006 A. Direct Finance (Loans/advances granted directly to MSMEs):
Enterprise Manufacturing Services

Enterprises engaged in the manufacture or production, processing or preservation of goods and whose investment in plant and machinery is the original cost excluding land and building and the items specified by the Ministry of MSME vide its notification No. S.O.1722 (E) dated 05.10.2006, as specified below: Enterprises engaged in providing or rendering of services and whose investment in equipment (original cost excluding land & building and further, fitting and other items not directly related to the service rendered or as may be notified

under the MSMED Act, 2006) as specified below: (These will include small road & water transport operators, small business, retail trade, professional & self employed persons and all other service enterprises).

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Micro Investment in plant and machinery does not exceed Rs.25 lacs. Investment in equipment does not exceed Rs.10 lacs. Small Investment in plant and machinery is more than Rs.25 lacs but does not exceed Rs.5 crore. Investment in equipment is more than Rs.10 lacs but does not exceed Rs.2 crore. Medium Investment in plant and machinery is more than Rs.5 crore but does not exceed Rs.10 crore. Investment in equipment is more than Rs.2 crore but does not exceed Rs.5 crore. Note: All advances granted to units in the Khadi & Village Industries Sector (KVI), irrespective of their size of operations, location and amount of original investment in plant and machinery/ equipments will be covered under Priority Sector advances and will be eligible for consideration under the sub-target (55% for 2010-11) of the micro enterprises segment within the MSE (Micro and Small Enterprises) sector. Advances to Micro and Small Enterprises constitute advances to Priority Sector. Advances to Medium Enterprises constitute advances to Non Priority Sector. B. Indirect Finance (Loans/advances provided to MSMEs through certain agencies involved in promotion/development of the MSME sector): Persons involved in assisting the decentralized sector in the supply of inputs to and marketing of outputs of artisans, village and cottage industries. Advances to co-operatives of producers in the decentralized sector viz., artisans, village and cottage industries. Loans granted by banks to NBFCs for on-lending to Micro and Small Enterprises (manufacturing as well as service). An illustrative list of activities furnished by Govt. of India/RBI under manufacturing and services segments is furnished in Appendix-A. Items to be included / excluded while calculating the original investment in plant and machinery: Included: Wind mills The investment in establishing of windmill/s to generate electricity for captive consumption or partly for captive consumption and remaining power to

sell to Electricity Boards/others are to be included in the investment in plant and machinery for the purpose of computation of investment limit for classification as Micro, Small and Medium Enterprises under MSMED Act, 2006. Excluded: [S.O.1722(E)] In exercise of the powers conferred by Sub Section (1) of Section 7 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006) herein referred to as the said Act, the Central Govt. hereby specifies the following items, the cost of which shall be excluded while calculating the investment in plant

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and machinery in the case of the enterprises mentioned in Section 7(1) of the said Act, namely: (i) Equipment such as tools, jigs, dyes, moulds and spare parts for maintenance and the cost of consumable stores; (ii) Installation of plant and machinery; (iii) Research and development equipment and pollution control equipment; (iv) Power generation set and extra transformer installed by the enterprise as per the regulations of the State Electricity Board; (v) Bank charges and service charges paid to the National Small Industries Corporation (NSIC) or the State Small Industries Corporation; (vi) Procurement or installation of cables, wiring, bus bars, electrical control panels (not mounted on individual machinery), oil circuit breakers or miniature circuit breakers which are necessarily to be used for providing electrical power to the plant and machinery or for safety measures; (vii) Gas producer plant; (viii) Transportation charges (excluding sales-tax or value added tax, excise duty) for indigenous machinery from the place of their manufacture to the site of the enterprise; (ix) Charges paid for technical know-how for erection of plant and machinery; (x) Such storage tanks which store raw materials and finished products only and are not linked with the manufacturing process; and (xi) Fire fighting equipment. While calculating the investment in plant and machinery referred to in (1) above, the original price thereof, irrespective of whether the plant and machinery are new or second hand, shall be taken into account provided that in the case of imported machinery, the following shall be included while calculating the value, namely: Import duty (excluding miscellaneous expenses such as transportation from the port to the site of the factory, demurrage paid at the port); Shipping charges; Customs clearance charges; and Sales tax or value added tax Memorandum of Micro, Small and Medium Enterprises: Any person who intends to establish, - (a) micro or small enterprise, may, at his discretion; or (b) medium enterprise engaged in providing or rendering of services may, at his discretion; or (c) a medium enterprise engaged in the manufacture or production of goods pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951, shall file the MEMORANDUM of micro, small or, as the case may be, of medium enterprise with such authority as

may be specified by the State Government under sub-section (4) or the Central Government under sub-section (3): Provided that any person who, before the commencement of this Act, established (i) a small scale industry and obtained a registration certificate, may, at his discretion; and (ii) an industry engaged in the manufacture or production of goods pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951, having investment in plant and machinery of more than Rs.1 crore but not exceeding Rs.10 crore and, in

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pursuance of the notification of the Govt. of India in the erstwhile Ministry of Industry (Department of Industrial Development) number S.O.477(E), dated 25.07.1991 filed an Industrial Entrepreneur's Memorandum, shall file the memorandum, in accordance with the provisions of this Act. The authority with which the Memorandum shall be filed by a Medium Enterprise shall be such as may be specified, by notification, by the Central Govt. The State Govt. shall, by notification, specify the authority with which a Micro or Small Enterprise may file the Memorandum. Filing of the Memorandum is not compulsory/mandatory in respect of Micro and Small Enterprises (both Manufacturing and Service units) and Medium Enterprises (Service units). 4. Target for Lending to MSME Sector Advances to Micro and Small Enterprises The Bank is expected to enlarge credit to Priority Sector and ensure that priority sector advances [which include advances to Micro and Small Enterprises (MSE) sector constitute 40% of ANBC (Adjusted Net Bank Credit)] or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher. In terms of the recommendations of the Prime Minister's Task Force on MSMEs, branches/offices are advised as under: Achieve a 20% year-on-year growth in credit to Micro and Small Enterprises to ensure enhanced credit flow. The allocation of the Micro and Small Enterprises advances to the micro enterprises is to be achieved in stages, viz., (i) 50% in the year 2010-11, (ii) 55% in the year 2011-12 and (iii) 60% in the year 2012-13. Achieve a 10% annual growth in number of Micro Enterprises accounts. Separate physical targets shall be fixed to Circles to allocate the same to branches under their control. Note: In terms of the Notification No. S.O.857 (E) dated 10.12.1997 issued by Govt. of India, for classification of an enterprise as SSI (now, Micro and Small Enterprises), investments of different enterprises set up by the same person/company are to be clubbed. With the introduction of MSMED Act, 2006, with regard to clubbing of investment, RBI has informed as under: "As the MSMED Act, 2006 does not provide for clubbing of investments of different enterprises set up by the same person/company for the purpose of classification as micro, small and medium enterprises, Govt. of India have intimated that the provision as notified in Notification No. S.O.857 (E) dated 10.12.1997 has been rescinded (except as respects things done or omitted to be done before such rescission), in terms of the Notification No. S.O.563 (E) dated 27.02.2009." With the withdrawal of the provision for clubbing of investments as above, the

scope for financing more number of enterprises falling under the definition of MSME would increase. Branches/offices shall make best use of the modified provisions and strive for increasing our exposure to MSME sector.

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5. Classification of finance to MSME Sector Priority sector Non Priority sector Loans/advances (both fund and non fund based) (other than to Retail Trade) extended to Micro and Small Enterprises(MSE) both industry and service (direct and indirect finance) Loans/advances (both fund and non fund based) (other than to Retail Trade) extended to Medium Enterprises both industry and service (direct and indirect finance) Loans/advances to Retail Traders: a. Dealers of essential commodities (fair price shops) and consumer cooperative stores, without any ceiling in credit limit b. Private retail traders upto a credit limit of Rs.20 lakhs only Loans/advances to Retail Traders: Credit facilities extended to retail traders other than (a & b) of adjacent column. Note: Advances to food and agro- based processing units with original investments in plant and machinery upto Rs.10 crore and undertaken by those other than individuals, SHGs and co-operatives in rural areas irrespective of locations may be classified as Indirect Finance to Agriculture (even if the unit is registered as SSI unit/ micro or small enterprises) or may be classified under advances to MSME, but not under both the heads. In other words, such advances if classified under MSME should not be classified under Indirect Finance to Agriculture. Advances to storage units (warehouse, market yards, godowns, cold storages and silos) which are registered as SSI/Micro or Small Enterprises have to be classified under Advances to Micro/Small Enterprises. If the certificate to that effect is not available, the same has to be classified under Indirect Finance to Agriculture. The above classifications are subject to investment ceiling in plant, machinery and equipments. Certain types of funds deployment eligible as Priority Sector advances: i. Investments made by banks in securitized assets, representing loans to various categories of priority, shall be eligible for classification under respective categories of priority sector (direct or indirect) depending on the underlying assets, provided the securitized assets are originated by bank and financial institutions and fulfill the RBI guidelines on securitization. This would mean that the bank's investments in the above categories of securitized assets shall be eligible for classification under the respective

categories of priority sector only if the securitized advances were eligible to be classified as priority sector advances before their securitization. ii. Outright purchases of any loan asset eligible to be categorized under priority sector, shall be eligible for classification under the respective categories of priority sector (direct or indirect), provided the loans purchased are eligible to be categorized under priority sector; the loans

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assets are purchased (after due diligence and at fair value) from banks and financial institutions, without any recourse to the seller; and the eligible loan assets are not disposed of, other than by way of repayment, within a period of 6 months from the date of purchase. iii. Investments by banks in Inter Bank Participation Certificates (IBPCs), on a risk sharing basis, shall be eligible for classification under respective categories of priority sector, provided the underlying assets are eligible to be categorized under the respective categories of priority sector and are held for at least 180 days from the date of investment. 6. Time Norms for disposal of Loan applications The time norms for disposal of loan applications are stipulated in accordance with RBI guidelines are to be strictly adhered. Disbursement of loans: shall be within TWO working days from the date of compliance of all terms and conditions governing such sanctions. 7. Validity period of sanctions The validity period of sanctions for various credit facilities are furnished in the credit risk management policy. 8. Delegation of Powers for sanction of credit Proposals Detailed guidelines are furnished in the Scheme of Delegation of Powers for Credit Sanctions issued by the Bank. 9. Rejection of Credit Proposals The authorities empowered for rejection of credit proposals is furnished in the credit risk management policy. 10. Risk Rating The modalities are defined in the Credit Risk Management Policy. 11. Pricing Effective from 01.07.2010, rate of interest on loans and advances to MSMEs is with reference to Base Rate policy of the Bank and rate of interest is based on scoring norms/ credit risk rating (both internal and external) wherever applicable. 12. Service charges Loans and advances to MSMEs are subjected to levy of service charges, viz., processing charges in respect of working capital loans, upfront fee in respect of term loans, inspection/godown charges, commission on guarantee, LCs, solvency issued, etc. Bank also stipulates pre-payment penalty for pre-closure of term loans (both priority and non priority). The detailed guidelines in this regard are furnished in Credit Risk Management policy.

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13. Security Norms The security norms for lending to Micro and Small Enterprises (MSEs) are as under: No collateral security/third party guarantee is insisted in respect of loans/advances to Micro & Small Enterprises as under (including loans sanctioned under KVIC and other Govt. sponsored schemes):

(i) Upto Rs.10 lacs (which is mandatory). (ii) Upto Rs.25 lacs in respect of units whose track record and financial position are good as per Bank records. (iii) Upto Rs.100 lacs in respect of units in Micro & Small Enterprises sector whose borrowal accounts are covered under Credit Guarantee Fund Scheme for Micro & Small Enterprises (CGMSE). (iv) The Bank shall cover the loans/advances up to Rs. 100 lakhs granted to Micro & Small Enterprises without collateral security and/or third party guarantee, under the Credit Guarantee Scheme for Micro & Small Enterprises (CGMSE) of Credit Guarantee Fund Trust for Micro & Small Enterprises (CGTMSE). (v) Presently, CGMSE cover is not available for credit facilities extended to Retail Traders, Educational Institutions, Training Institutes, Training cum Incubator Centres and loans and advances to Medium Enterprises. (vi) In respect of other Micro and Small Enterprises and the Medium Enterprises the guidelines for obtaining collateral security/third party guarantee on case to case basis as determined by the Bank shall continue. (vii) In respect of credit facilities extended to Micro and Small Enterprises (MSEs) wherever collateral security and/or third party guarantee is not obtained, CGMSE cover is to be necessarily taken. 14. Risk Mitigation Assessment & Monitoring The detailed guidelines on appraisal, assessment & monitoring are dealt separately under Credit Risk Management policy. 15. Debt Restructuring Mechanism for MSMEs / Rehabilitation of Sick MSE units / One Time Settlement Scheme (OTS): The Bank has put in place a comprehensive policy for Debt Restructuring of MSMEs, Rehabilitation of Sick MSEs and One Time Settlement schemes for MSE sector in tune with RBI directives. Gist of the same is furnished below: 15.1 Debt Restructuring Mechanism for Micro, Small and Medium Enterprises (MSMEs) The detailed guidelines on restructuring of advances for MSMEs are furnished under policy on restructuring of advances. 15.2 Rehabilitation/Nursing of Sick Small Enterprises (Manufacturing) Units In tune with RBI guidelines, the Bank has already put in place a scheme for rehabilitation /nursing of Sick Small (Manufacturing) Enterprises for their revival. A Small Enterprises (Mfg.) shall be considered Sick, if(i) Any of its borrowal account remains Sub-Standard for more than 6 months i.e., principal or interest, in respect of any of its borrowal account has remained overdue for a period not exceeding one year. The requirement of

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overdue period exceeding one year will remain unchanged even if the present period for classification of an account as Sub Standard is reduced in due course. OR (ii) there is erosion in the Net worth due to accumulated cash losses to the extent of 50% of its Net worth during the previous accounting year; AND The unit has been in commercial production for atleast 2 years. Units becoming sick due to wilful mismanagement, wilful default, unauthorized diversion of funds, disputes among partners/promoters, etc

are not eligible for rehabilitation. A unit may be regarded as potentially viable if it is in a position after implementing a relief package spread over a period not exceeding 5 years from the commencement of the package from banks/FIs/Govt. agencies, to continue to service its repayment obligations agreed upon including those forming part of the package, without the help of the concessions after the aforesaid period. Viability of the unit to be decided quickly and informed to the unit and others concerned at the earliest. The rehabilitation package shall be fully implemented within 6 months from the date of unit is declared potentially viable/viable and 'holding on operation' may be allowed for a period of 6 months enabling the units draw funds from the cash credit account. The rehabilitation package shall include: (i) Waiver of penal interest or service charges levied from the accounting year of the unit in which the unit started incurring cash losses continuously. (ii) Unpaid interest to be segregated from the outstanding liability and funded interest-free and be repayable in 3 years from the date of commencement of package. (iii) The rate of interest on term loans may be reduced wherever considered necessary. (iv) Working capital term loan (WCTL) representing principal dues in cash credit account treated as irregular to the extent of exceeding drawing power and the same shall be repayable in 5 years. (v) Need based fresh working capital, contingency loan assistance, funds for start up expenses and margin for working capital may be permitted. (vi) Promoter's contribution shall be minimum of 10% of the additional long term requirements under rehabilitation package in the case of tiny sector and 20% in the case of other Small Enterprises. 15.3 One Time Settlement scheme for MSE sector As per RBI directions, Bank has put in place Scheme for One Time settlement of dues of doubtful and loss assets with total dues of Rs.50 lacs and below in Micro and Small Enterprises sector. However, the cases of wilful default, fraud and malfeasance will not come under the purview of the scheme.

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16. Take over Norms The Bank has put in place the norms for take over of borrowal accounts from other banks/Financing Institutions with relaxation in certain norms for MSME sector. The detailed guidelines are furnished in Credit Risk Management Policy. 17. Export Finance and MSMEs The extant guidelines for Export finance to continue for financing export units under MSME sector also. 18. Delayed payment to Micro & Small Enterprises The existing provisions of the Interest on Delayed Payment Act, 1998 to Small Scale and Ancillary Industrial Undertakings, have been strengthened under the MSMED Act as under: (i) The buyer to make payment on or before the date agreed on between him and the supplier in writing or, in case of no agreement before the appointed day. The agreement between seller and buyer shall not exceed

more than 45 days. (ii) If the buyer fails to make payment of the amount to the supplier, he shall be liable to pay compound interest with monthly rests to the supplier on the amount from the appointed day or, on the date agreed on, at three times of the Bank Rate notified by Reserve Bank. (iii) For any goods supplied or services rendered by the supplier, the buyer shall be liable to pay the interest as advised at (ii) above. (iv) In case of dispute with regard to any amount due, a reference shall be made to the Micro and Small Enterprises Facilitation Council, constituted by the respective State Government. 19. Enabling mechanism for meeting payment obligations by large corporates to MSMEs Bank has put in place enabling mechanism for meeting payment obligations by large corporates to MSMEs as per RBI guidelines. The details are furnished in the Credit Risk Management policy. 20. Product development The Bank shall develop suitable loan products to meet the comprehensive credit needs of MSME sector. 21. Cluster Approach Cluster based approach for financing MSME sector offers possibilities of reduction in transaction costs, better mitigation of risks and also provides an appropriate scale for improvement in infrastructure. In terms of recommendations of the Prime Minister's Task Force on MSMEs, bank to open more MSME focused branches at different clusters which can also act as Counseling Centres for MSMEs. Each Lead Bank of a district may adopt at least one MSME cluster. 22. Code of Bank's Commitment to Micro & Small Enterprises The Code has been developed by Banking Codes Standards Bureau of India (BCSBI) to:

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(i) Give a positive thrust to the MSE sector by providing easy access to efficient banking services. (ii) Promote good and fair banking practices by setting minimum standards in dealing with MSEs. (iii) Increase transparency so that a better understanding of what can reasonably expected of the services. (iv) Improve understanding of business through effective communication. (v) Encourage market forces, through competition, to achieve higher operating standards. (vi) Promote a fair and cordial relationship between MSEs and banks and also ensure timely and quick response to banking needs. (vii) Foster confidence in the banking system. Code of Bank's Commitment to Micro & Small Enterprises is made available to MSME clients/ prospective clients on request, through all branches. The same is also available in Bank's website. 23. Strategy for increasing flow of credit to MSME sector The Bank adopts suitable strategy to achieve the desired goal of increasing credit flow to MSME sector in tune with the Government/RBI guidelines/expectations. Among others, the following are put in place: Information on Bank's MSME policy, loan products/schemes to MSME sector, simplified loan application forms are made available in Bank's Website.

 Facility is created for submission of online loan application by the MSME entrepreneurs. Holding periodical meets of entrepreneurs involving representative bodies of MSME sector for creating awareness amongst MSME entrepreneurs about various schemes. Displaying posters containing details on our various schemes prominently in all our branches. As a customer facilitation measure, simplified loan applications shall be made available to Micro & Small Enterprises. Focused attention to MSME sector through Specialized SME branches Opening of SME Sulabhs (SME Hubs) in Circles for centralized processing and speedy disposal of MSME credit proposals falling beyond the delegated powers of branches. Conduct of workshops/seminars in association with external credit risk rating agencies creating awareness, advantages of risk rating among the Bank personnel and entrepreneurs. Effective marketing of the MSME loan products by utilizing the services of the marketing team in Circles/SME Sulabhs. Advising branches/offices to have good liaison with existing and reliable clients', larger units for introducing new clients. Good liaison with Cluster management bodies, Industry associations, term lending institutions for securing leads of prospective clients. Formulation of area/cluster specific schemes facilitating credit needs of MSMEs in specified industrially potential areas/clusters. Conduct of video conference periodically at HO with Circles/Sulabh Executives analyzing their performance vis--vis targets and giving directions for improvement in credit flow.