Loan Policy Document for Micro & Small Enterprises Sector

BANKS POLICY IN RESPECT OF LENDING TO MICRO AND SMALL ENTERPRISES SECTOR 1. PREAMBLE : Worldwide, the Micro and Small Enterprises (MSEs) have been accepted as the engine of economic growth and for promoting equitable development. In India too, the MSEs play a pivotal role in the overall industrial economy of the country. It is estimated that in terms of value, the sector accounts for about 39% of the manufacturing output and around 33% of the total export of the country. Further, in recent years the MSE sector has consistently registered higher growth rate compared to the overall industrial sector. The major advantage of the sector is its employment potential at low capital cost. The Government of India has been making concerted efforts for the promotion and development of MSE sector which enabled the MSE sector to grow at a higher pace than the overall industrial sector. To facilitate the development of this sector as also enhance their competitiveness, the Government has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, which is in force from 2nd October, 2006 which is a turning point for the development of Indian Industry, as it addresses and streamlines entire frame work along with key governance & operational issues being faced by the SMEs. One of the major policy initiatives of the Government has been inclusion of the MSE sector under priority sector lending. It has been done so because credit is one of the critical inputs for the sustained growth of the MSE sector. The MSE sector has been receiving direct assistance from the commercial banks mostly for meeting working capital requirements. The SME segment is broadly classified as under: Particulars Investment in Plant & Machineries of Manufacturing Enterprises Upto Rs.25.00 lakh Above Rs.25.00 lakh and upto Rs.500.00 lakh Investment in Equipments of Service Sector Enterprises Upto Rs.10.00 lakh Above Rs.10.00 lakh and upto Rs.200.00 lakh

Micro Enterprises Small Enterprises 2. Definitions:

2.1 Small (Manufacturing) Enterprises: Enterprise engaged in the manufacture/production or preservation of goods and whose investment in plat 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 as furnished in Annex I) does not exceed Rs.5.00 crore. 2.2 Small (Service) Enterprises:

Enterprise engaged in the providing/rendering of services and whose investment in equipment (original cost excluding land and building and furniture, fittings and other not directly related to the service rendered or as may be under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006) does not exceed Rs.2.00 crore. 2.3 Micro (Manufacturing) Enterprises: Enterprise engaged in the manufacture/production or preservation of goods and whose investment in plant and machinery (original cost excluding land and building and such items as in 1.1.1) does not exceed Rs.25.00 lakh, irrespective of the location of the unit. 2.4 Micro (Service) Enterprises: Enterprise engaged in the providing/rendering of services and whose investment in equipment (original cost excluding land and building and furniture, fittings and such items as in 1.1.2) does not exceed Rs. 10.00 lakh. 3. OBJECTIVES : The MSE Loan Policy is framed with the following objectives : To ensure availability of adequate and timely credit to MSE sector. To devise an organizational structure at all levels for handling MSE credit portfolio in a more focused manner. To improve flow of credit to MSE Sector so as to double the credit to the Sector in 5 years. To provide guidelines to the branches to dispense credit to MSE Sector on liberalized terms.

4. SCOPE OF POLICY : Broad guidelines on lending to MSE Sector Identifying Thrust Industries Composition of MSE Sector Pricing Policy

5. TARGETS FOR MSE SECTOR: Banks are advised to fix their own target in order to achieve a minimum 20% YOY growth over the MSE advances as of March, 2005 with an objective to double flow of credit to SME sector by the year, 2009-10. Sub-targets for lending to Micro Enterprises within the Small Enterprises, which are included under Priority Sector lending, are as under : 1. 40% of total advances to Small Enterprises Sector should go to Micro (Manufacturing_ enterprises having investment in Plant and Machinery upto Rs.5.00 lakh and Micro (Service) Enterprises having investment in equipment

upto Rs.2.00 lakh; 2. 20% of total advances to Small Enterprises Sector should go to Micro"(Manufacturing) Enterprises with investment in Plant and Machinery above Rs.5.00 lakh and upto Rs.25.00 lakh, and Micro (Service) Enterprises with investment in equipment above Rs.2.00 lakh and upto Rs.10.00 lakh. (Thus, 60% of Small Enterprises advances should go to Micro Enterprises). 6. COMMON GUIDELINES/INSTRUCTIONS FOR LENDING TO MSE SECTOR 6.1 Processing of Applications: i. Loan Application :

The existing Common loan Application-cum-Appraisal Format applicable to all loans irrespective of limit will be applicable for financing to MSE sector. ii. Issue of Acknowledgement of Loan Applications :

Each branch will issue an acknowledgement for loan applications received from the borrowers towards financing under this sector and maintain the record of the same. iii. Disposal of Applications :

In case of Loans upto Rs.25000/- : Within 2 weeks In case of Loans above Rs.25000/- : Within 4 weeks (Provided the loan applications are complete in all respects and are accompanied by a check list enclosed to the application form). iv. Register of Receipt/Sanction/Rejection of Applications :

1. A register should be maintained at branch wherein the date of receipt, sanction/disbursement, rejection with reasons, should be recorded. The register should be made available to facilitate verification by the Banks officials including Zonal Manager during visit to the branch. 2. Branch Manager may reject application (except in respect of SC/ST). In the case of proposals from SC/ST, rejection should be done at a level higher than Branch Manager. 3. The reason for rejection will be communicated to the borrower in line with stipulation mentioned in the Fair Practice Lenders Code. 6.2. Types of Loans MSE Units may be granted a variety of Credit facilities for their different needs which will

include the following: 1. Term Loan/ Demand Loan/ Deferred Payment guarantee For acquisition of capital goods (excluding second hand), fixed assets, vehicles, Plant & machinery, purchase of land, construction of buildings etc. There is no provision in the Policy for allowing term loan against purchase of second hand machinery. 2. Working Capital by way of Cash Credit, Overdraft etc for: i. Purchase of raw material, components, stores and maintenance of stock of these items at minimum level and stock in process and finished goods. ii. Finance against receivables including receipted challans/invoices iii. Meeting marketing expenses where the units have to incur large-scale expenditure towards marketing of their products. 3. Bills Purchase/Discounting under L/C or outside L/C 4. Export Credit facilities like Packing Credit,FBP/UFBP. 5. Letter of Credit on sight/usance basis for purchase of raw material/ capital goods. 6. Bank Guarantee for performance, advance Payment, Tender Money , Security Deposit, Guarantees for getting orders , for procurement of raw materials etc. 6.3. Margin For Term Loan In case of factory land & building, overall margin of 20% In case of Plant & Machineries and Equipment margin is proposed at 20% For Working Capital 25% uniform margin on stocks and receivables. For export credit margin may be stipulated @10%

6.4. Collateral Free Advances covered under CGTMSE: Presently, the Banks guidelines for providing collateral free loans are as under: i. ii. Collateral Free Loan up to Rs.5.00 Lakh to Micro & Small Enterprises. As per the Special Stimulus Package, it has been decided by the Bank to dispense with collateral security including third party

guarantee for loans to MSE Sector up to a limit of Rs. 100.00 Lakh, subject to satisfying the following criteria in case of existing borrowers as also in case of takeover accounts. 1. Consistent growth in sales for last 3 years. 2. Continuous profit for last 3 years. 3. Credit rating of A or equivalent and above and no slippage in credit rating during last 3 years. 4. The units assets (fixed as also current) are charged to the Bank and Promoters/Directors personal guarantee are available. 5. Asset coverage ratio of more than 1:5. 6. Other take-over norms are complied with. The category-wise maximum extent of cover under CGTMSE is as under: Category Maximum extent of Guarantee whose credit facility is Upto Rs.5 lakh Micro Enterprises Above Rs. 5 lakh Above Rs. 50 lakh upto Rs.50 lakh upto Rs.100 lakh Rs 37.50lakh plus 50% of amount in default above Rs.50 lakh subject of overall ceiling of Rs 62.50 lakh. Rs.40 lakh plus 50% of the amount in default above Rs.50 lakh subject to overall ceilinh of Rs.65 lakh.

85% of the 75% of the amount in amount in default default subject to subject to a a maximum of maximum of Rs. Rs. 4.25 lakh 37.50 lakh 80% of the amount in default subject to a maximum of Rs.40 lakh.

Women Entrepreneurs/ Units located in North Eastern Region(including Sikkim) Composite Loans:

As per RBI guidelines, credit assistance to artisans, village and cottage Industries and other MSE units up to Rs.100.00 Lakh for equipment finance or working capital or both should be considered as composite term loan. This will enable majority of Micro & Small Enterprises to avail loans from a single window eliminating the need for borrowing term loan from SFCs and working capital from Banks. This will also facilitate to sign one set of documents only instead of signing facility-wise separate documents.

6.5 Credit Rating (i) The RBI has directed to Banks to take steps to rationalize the cost of loans to MSE sector by adopting a transparent rating system. (ii) The rating of account may be done under In-House Module or Rating from outside rating

Agencies. (a) In-House Rating Modules :- In case of MSE accounts with aggregate limit over Rs. 25 lacs and unto Rs. 1 crore, the accounts are to be rated as per existing norms for general advances. The purpose of rating is for ascertaining the quality of the asset and not for deciding the rate of Interest. For aggregate exposure above Rs. 1 crore, the rate of Interest is decided as per credit Rating. (b) Rating from outside rating Agencies :- Our Bank has entered into MOU with SMERA, Fitch Ratings India (P) Ltd., Dun & Brad Street and ICRA Ltd. for getting the SME borrowers rated by them. The National Small Industries Corporation (NSIC) has been appointed as nodal agency which provides subsidy to the units obtaining credit rating from any of the empanelled agencies to the Micro and Small Enterprises (manufacturing sector, i.e earlier SSI units). The Credit rating awarded by Rating Agencies under NSIC Subsidy Scheme is conclusive for borrower as well as lender. The good rated borrowal accounts will get concession in applicable Rate of Interest unto 1% depending upon the grade/rating awarded by Rating Agencies. 6.6 Interest Rate: INTEREST RATES: Total Funded Exposure up to Rs. 5.00 Lakh BPLR-3.50% = 9.00% (Minimum)

TFE of more than Rs.5.00 Lakh to Rs.25.00 Lakh BPLR-1.50% = 11.00% (Minimum) TFE of more than Rs.25.00 Lakh to Rs.1.00 Crore TFE of more than Rs. 1.00 Crore BPLR-0.50% = 12.00% (Minimum) As per credit rating

The credit rating module of our Bank for MSEs will be as per Loan Policy document of our Bank. As a part of the Special package announced by the IBA for the MSME Sector, our Bank has reduced the interest rates for borrowing by Micro Enterprises by 100 basis points i.e. 1% for all existing and new loans with effect from 17.12.2008. Similarly interest rates for borrowing by Small and Medium Enterprises with fund based exposures unto Rs.10 crores has reduced by 50 basis points i.e. 0.50% for all existing and new loans w.e.f. 17.12.2008. The benefits of this special package will be applicable till further instruction. 7. Penal Interest: Penal interest @ 1% to be charged for the period of default in repayment, non-submission of financial statements, non-compliance of terms and conditions etc. as per extant guidelines of the Bank. 8. Processing Charges for Micro & Small Enterprises Amount of Processing Charges for advances Processing Charges For other than from Loan & DPG Term Loan & DPG

Advance

a) Fresh sanctions Upto Rs.25000/NIL NIL 1.1236%of the sanctioned limit Min. Rs.600/Above Rs.25000/- Rs.350/-per lac Min. Rs.350/b) Renewal /Review of limit Upto Rs.25000/NIL NIL Rs.120/-per lac Min.Rs.250/-Max. Rs.55000/Above Rs.25000/- Rs.350/-per lac Min. Rs.350/-

9. Methodology for calculation of Bank Finance 1. Working Capital Loan i. Working Capital Credit limits to Micro, Small and Medium Enterprises in individual cases up to Rs.2.00 Crore(Manufacturing Sector) and up to Rs 1.00 Crore(Service sector) will be computed as per existing guidelines on the basis of minimum 20% of their projected annual turnover(turnover method).However in cases of borrower applying for working capital limit lower than the working capital computed on the basis of turnover method shall be assessed as per actual requirement. For assessment of the working capital requirement of the borrowers falling within the band of above Rs.2.00 crores and below Rs.10.00 crore (Manufacturing sector) and above Rs.1.00 crore and below Rs.10.00 crore (service sector) the traditional method of computing MPBF as per second method of lending will continue. If any of the borrower falling in this band intends to shift to cash budget system, the same may be accepted.

ii.

2. Term Loan i) In case of term loan, Debt Equity Ratio (DER) should not normally be above 3:1. ii) However, in case of capital intensive industries, the same may be considered 5:1 iii) In case of Term Loan, minimum Average DSCR of 1.50:1 will be considered as reasonable requirement for any New connection. Relaxation may however be considered on merit of the case by the sanctioning authority not below the rand of Zonal Head. iv) Moratorium period depending on requirement of the project/proposal will be considered. 3. The Technical feasibility the economic, financial, commercial viability, Managerial competence, environment viability and bank-ability of the proposal with reference to risk will be assessed.

4. Other benchmark financial ratios like Current Ratios, Tenure etc. will be in line with the Banks Loan Policy. 10. Financing under cluster based approach: i. The cluster based approach should be given a thrust area. ii. The cluster financing approach reduces the cost of transition to the entrepreneurs. iii. The Zonal Office/ branches will give due importance for financing of MSME sector in the identified Special Credit Delivery branches and Branches situated near to clusters. 11. Discretionary authority As per Loan Policy Document of the Bank. 12. Repayment Schedule Repayment schedule should be fixed taking into account the sustenance requirements, surplus generating capacity, the break-even point, the life of the asset, etc., and not in an ad hoc manner. The maximum door to door tenor should not exceed 60 months excluding the moratorium period. In respect of composite loan the repayment schedule may be fixed for term loan component only. Moratorium period of 6 months to 1 year may be allowed taking into consideration the nature of the project and also commencement of commercial production. 13. Mode of Disbursement of Loan The disbursement of the loan amount for Plant & Machinery, Equipment and other fixed assets will be made in favour of the supplier through Demand Draft/ Pay Order. Branches will continue to ensure the end use verification on monthly/quarterly basis. 14. Monitoring Policy directives for monitoring of accounts covering documentation, supervision and control over accounts, special watch/potential NPAs etc., are as per Credit Monitoring Policy 2007-08 of the Bank and any amendment thereof. Where ever the lending to MSE sector is eligible to be covered under CGTMSE, it will be the responsibility of the respective branch head and the concerned officials at Zonal Office to ensure that the respective accounts are duly covered under CGTMSE and the Guarantee Fee and the Annual Service Fee is paid to CGTMSE in time. It is to be ensured that any loan sanctioned to MSE up to a limit of Rs. 5 lac will be without any collateral and or third party guarantee. However all those accounts are invariably be covered under CGTMSE Scheme. Any deviation from this policy will attract accountability to the sanctioning authority.

The Priority Sector Department of the Bank will ensure proper implementation of this Policy in the Bank. 15. Review of the Scheme In case any modification/changes are warranted in this Policy, the Chairman and Managing Director/Executive Directors of the Bank will be approved the same and the same will be got vetted by the Credit Risk Management Committee (CRMC) and the Board of Directors of the Bank before its circulation among our Branches/Offices. 16. Our SME Products: i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii. xiii. xiv. Laghu Udyami Credit Card Artisan Credit Card Prime Minister Employment Generation Programme (PMEGP) Collateral Free Loans under Credit Guarantee Trust Fund for Micro & Small Enterprises (CGTMSE) Loans under Technology Upgradation Fund Scheme for Textile Units (TUFS Scheme) Swarozgar Credit Card Scheme Uco Shilpa Udyog Uco Vishwakarma Yojna Uco Mahila Shilpa Udyog Scheme Composite Loans to MSE Units Scheme for financing Handloom Weavers Group (HWGs) Loans under Credit Linked Capital Subsidy Scheme for Technology Upgradation. Uco Channel Scheme Scheme for Food Processing Industries