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LOAN POLICY FY 2013PARANO.

CONTENTS PAGENO.1 OVERVIEW 3

1.1 PREFACE 3

1.2 FRAMEWORK OF THE LOAN POLICY 4

1.3 OBJECTIVES OF THE LOAN POLICY 5

1.4 OVERVIEW OF LOAN POLICY 5

1.5 VALIDITY/ AUTHORITY OF LOAN POLICY 5

2 CREDIT MANAGEMENT POLICY 62.1 PRODUCT MANAGEMENT 6

2.2 PROCESS MANAGEMENT 7

3 EQUITY & RISK CAPITAL ASSISTANCE 83.1 INTRODUCTION 83.2 PRODUCT PROFILE 103.3 DUE DILIGENCE 114 ASSISTANCE FOR SERVICE SECTOR 12

4.1 INTRODUCTION 124.2 THRUST BUSINESS AREAS 12

4.3 APPROACH TO FINANCING SERVICE SECTOR 144.4 WORKING CAPITAL ASSISTANCE 15

5 ASSISTANCE FOR ENERGY EFFICIENCY 155.1 INTRODUCTION 155.2 OBJECTIVES 15

5.3 THRUST BUSINESS AREAS : DIRECT FINANCE 165.4 SUSTAINABLE FINANCE SCHEME 16

6 ASSISTANCE FOR RECEIVABLE FINANCE 176.1 INTRODUCTION 176.2 THRUST BUSINESS AREAS 186.3 PRODUCT RATIONALISATION 187 INDIRECT LENDING 18

7.1 INTRODUCTION 187.2 ASSISTANCE TO STATE FINANCIAL CORPORATIONS (SFCs) 197.3 MONITORING OF SFCs 197.4 ASSISTANCE TO SCHEDULED COMMERCIAL BANKS 197.5 ASSISTANCE TO SCHEDULED COOPERATIVE BANKS (SCBs) &

REGIONAL RURAL BANKS (RRBs) 197.6 ASSISTANCE TO SIDCs/SIICs 207.7 ASSISTANCE TO NBFCs 20

8 ASSISTANCE FOR INFRASTRUCTURE PROJECTS 219 SIDBI FOUNDATION FOR MICRO CREDIT (SFMC) 21

9.1 INTRODUCTION 219.2 FOCUS OF SFMC LOAN POLICY 219.3 PRODUCT PROFILE 229.4 ASSESSMENT OF BORROWERS, RATINGS, LOAN TENURES ETC. 22

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10 CREDIT RISK MANAGEMENT 2310.1 CREDIT RISK STRATEGY 23

10.2 RISK MEASUREMENT 23

10.3 RISK MITIGATION 2410.4 EXTERNAL RATINGS 24

10.5 PRICING 2410.6 MANAGEMENT OF ASSET CONCENTRATION 2511 CONCLUSION 26ANNEXURE I: BENCHMARK FINANCIAL NORMS & PARAMETERS AS

APPLICABLE FOR GENERAL PURPOSE TERM LOANS 28ANNEXURE II :TERM LOAN TO MFIs & LOAN TO NBFCs FOR ONLENDING TOMICRO ENTERPRISES/MISSING MIDDLE

30

ANNEXURE - III: HIGHER INVESTMENT GRADE RATINGS SELECT SECTORS 32ANNEXURE IV: EXPOSURE CAPS 33

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LOAN POLICY FY 20131. OVERVIEW1.1 PREFACE

The significant role played by the Micro, Small and MediumEnterprises [MSMEs] in the Indian Economy is well known. MSMEsare considered to be the nurseries for entrepreneurship, oftendriven by individual creativity and innovation, and makesignificant contributions to Indias GDP, manufacturing output,exports and employment generation. The MSME sector is thesecond largest contributor to countrys GDP. The geographicdistribution of the MSMEs is also more even. MSMEs are importantfor the national objectives of growth with equity and inclusion. The

Report of the Prime Ministers Task Force on MSMEs (January2010), recommended that all the scheduled commercial banksshould achieve a 20% growth in credit year-on-year to micro andsmall enterprises and 15% in number of micro enterprisesaccounts.

In order to address the challenges of the MSMEs to scale up theirperformance and competitiveness, the Bank has adopted a multi-pronged approach to meet their requirement of capital, receivablefinance, reduced energy consumption, infrastructure (in thecluster), etc., through various instruments/products of assistance.

The new Business Plan of the Bank has identified followingactivities to be the thrust/niche business areas:

Energy efficiency, clean technologies, sustainable financingalong with structured debt

Equity products like Risk Capital (including structured debt),contribution to funds, etc.

Service sector

Receivable finance and factoring services

Indirect lending viz. refinance to banks/ Financial Institutions(Fis), assistance to non-banking finance companies (NBFCs),resource support to public sector undertakings (PSUs)benefiting MSME sector, etc.

Infrastructure finance

Loan facilitation and syndication

The business of the Bank has been divided into broad products/business streams on the above lines.

1.1.1The Bank has put in place risk assessment tools for credit ratingwhich have enabled it to directly reach out to smaller customers in

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the MSME segment by cutting down the appraisal and processingtime. Meanwhile, with the advent of global standards for riskmanagement, RBI has suitably adopted need based changes inthe risk management practices in the Indian banking system.

1.1.2 Micro, Small and Medium Enterprises Development (MSMED) Act,2006

The definitions adopted for manufacturing and service sectoractivities under MSMED Act are as under:

F

urther

1.2 FRAMEWORK OF THE LOAN POLICY1.2.1 The policy lays down broad approach, which the Bank adopts in

respect of different credit processes, credit risk management,

control and monitoring and is supplemented by specificcirculars, manuals, guidelines issued from time to time. Thepolicy will be amended from time to time in the light ofchanging business and economic environment and will bereviewed annually. The focus of the Loan Policy 2013 is onquality asset growth, coupled with growth in income in eachsegment of business, maintaining the focus on customer needs.

1.2.2 Looking into the increasing competition and the resultantmargin pressures, theBank would also put in place a suitablestrategy to rapidly develop and increase the size and scope of

its portfolio for generating non-interest / fee based income. Asregards indirect finance business, cautious dispensation ofcredit with regard to state level institutions would continue.

1.2.3 The Loan Policy covers rupee as well as forex lending, riskcapital and micro finance operations of the Bank. Operationsunder Banks Treasury are excluded from the purview of thispolicy, as separate dispensation is required for Treasuryoperations.

1.2.4 The Bank would provide financial assistance to MSMEs for theeligible activities, irrespective of the nature of constitution of

the enterprise. Accordingly, assistance could be extended bythe Bank to an individual, proprietorship, association of persons,

EnterpriseCategory Manufacturing(Original Investment inP&M)Services(Original Investment inEquipment)

Micro Up to `25 lakh Up to `10 lakh

Small Upto `500 lakh Upto `200 lakh

Medium Upto `1000 lakh Upto `500 lakh

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partnership firm, limited liability partnership, company, societyor trust.

1.3 OBJECTIVES OF THE LOAN POLICYThe broad objectives of the Loan Policy of the Bank are outlined

hereunder:

(i) To build and sustain a high quality credit portfolio welldiversified in terms of clients, markets and products with anacceptable risk adjusted yield.

(ii) To establish a comprehensive credit strategy to fulfill theCorporate mandate as per the SIDBI Act, 1989, amended fromtime to time, and undertake all such activities, directly orindirectly, that support MSME sector.

(iii) To encourage various functionaries to innovate and evolve

competitive products based on market requirements.(iv) To promote inclusive growth through micro finance and risk

capital.

(v) To strengthen the risk management systems for appropriatepricing of credit risks and ensure close monitoring of thecredit portfolio so as to prevent fresh slippages into NPAs.

(vi) To build strong alliances with intermediaries for tapping newbusiness.

1.4 OVERVIEW OF LOAN POLICYThe strategy for lending takes into account the Banks approachfor developing a healthy credit portfolio, its management and riskmitigation. Accordingly, the Loan Policy of the Bank broadly coversthe following broad aspects:

Business Policy of Verticals

Credit Management Policy

Credit Risk Management

There continues to be demand for indirect credit from the bankingsector in general. The strategy would be to raise resourcescompetitively given the Banks unique position as the principalfinancial institution for the MSME sector and meet the creditdemand from the banking sector, to the extent possible.

1.5 VALIDITY/ AUTHORITY OF LOAN POLICY1.5.1 The Loan Policy is the principal document for the credit

operations of the Bank, duly approved by the Board of Directorsand is expected to serve as the guiding document for the Bank.

1.5.2 This Loan Policy shall remain in force till the next revision iscarried out and disseminated, which will be on annual basis.

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1.5.3 The Regional Offices (ROs)/ Central Loan Processing Cells (CLPCs)/Branch Offices (BOs) including XBOs are authorised to act uponthis policy on its issuance by Head Office (HO). Clarifications /further guidelines, if needed, would be issued by RiskManagement Vertical (RiMV)/concerned Business Vertical, HO.

1.5.4 The Loan Policy guidelines will be applicable to all the creditfacilities extended to various customers by different verticals.

1.5.5 The Bank will abide by all the guidelines, directives and advices ofReserve Bank of India as may be in force from time to time. Theguidelines in this document should be read in conjunction with theoperational guidelines on the various products/business lines andthe circulars / master circulars / credit manual compiling theprocedural aspects of credit appraisal, processing, sanction,documentation, etc.

2. CREDIT MANAGEMENT POLICYThe business development strategy would be supported by aprudent Credit Management Policy. The market demand toimprove products & processes would be balanced with exercise ofsufficient control on the credit delivery processes so that exerciseof prudence is not sacrificed.

2.1 PRODUCT MANAGEMENT2.1.1 Benchmark Financial Norms:

The benchmark financial norms of the Bank applicable to termloans, in general, are given in Annexure I. The parameters oflending viz., debt equity ratio, total outside liabilities/tangible networth, promoters contribution/margin, debt service coverageratio, asset coverage ratio, loan repayment period, moratorium,etc., would be varied for different products, to suit therequirement of different sectors/ borrower segments.

2.1.2 Facilitation for Product Development /InnovationThe Bank has put in place a suitable mechanism to understandthe business needs of the customer and address them swiftly.Accordingly, a Product Innovation and Review Committee (PIRC) atthe HO level considers and approves product innovations and theirtest marketing. A suitable exposure cap could also be fixed forsuch test marketing proposals to be monitored by the BOs/ROsconcerned.

Apart from approving products, PIRC also approves structuring ofspecific arrangements in a cluster or around a large corporate/OEM where several MSMEs are expected to be benefited. Sucharrangements could have different dispensations than thosefollowed for regular credit products.

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The areas generally expected to be amenable to productinnovation are service sector segments like organised retailing, IT& IT enabled services, entertainment, cash flow/ rent discounting,cash flow management products for MSME segment, clusterspecific products, etc.

2.1.3. Coverage under CGTMSEThe credit facilities up to `100 lakh to the eligible MSE borrowerswould be generally covered under CGTMSE Scheme. In case, aneligible proposal is not getting covered under the CGTMSEScheme, justification may be given in the appraisal note whileputting up the proposal to the sanctioning authority (including acomparison of proposed security vis--vis the cover availableunder CGTMSE Scheme or other reasons, if any).

2.1.4. Cross-selling with Government SchemesThe products of the Bank would also be dovetailed with theschemes of Government of India and state governments,wherever feasible, to improve the viability of the assisted projectsand growth in overall asset base of the Bank.

2.2 PROCESS MANAGEMENT2.2.1 Delegation of Powers

The key tool for managing the internal processes of the Bank isthe Delegation of Powers (DoP) to the Credit Committees and theindividual functionaries of the Bank. It also puts in place suitable

system of checks and balances in the credit related decisionprocesses.

2.2.2 Appraisal processThe existing appraisal process of the Bank would be followed toappraise projects and other assistance. The Credit Appraisal andRating Tool (CART) is in use in the Bank for rating and appraisal ofcredit proposals from existing profit making units for assistanceup to `200 lakh and appraisal of other credit proposals upto `500lakh. It has brought standardisation to the credit decision making

process and has considerably reduced the turnaround time. Loanapplications outside the purview of CART are appraised as per laiddown detailed appraisal process of the Bank. The existingstandard formats of appraisal are already in place in this regard.Rating of exposures above `200 lakh and those not eligible forrating in CART is undertaken in Risk Assessment Models (RAMs).Appraisal of cash flow based term loan assistance would bestrictly carried out in Detailed Appraisal Memorandum with RAMrating.

Further, as far as lending to Commercial Real Estate is

concerned, considering the relatively higher risk attached to thesector and RBIs stand on financing real estate projects, the Bank

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needs to follow a selective approach and utmost care is takenwhile conceptualising the projects.

The Banks current guidelines on due diligence with regard toobtaining satisfactory credit reports, undertaking visits, due

diligence of suppliers /contractors etc., checking of CIBIL databasefor Consumer/ Commercial Credit Information Reports, KYC andAML norms, checking of RBI / CIBIL Defaulters list, Caution Advicesetc., guidelines on connected lending, multiple bankingarrangements, NOC from existing lenders, etc., whereverapplicable, shall be followed.

2.2.3 Fair Practices Code for lenders:Fair Practices Code for Lenders, as per RBI guidelines, has alreadybeen adopted by the Bank and hosted on Banks website. The

Code sets out the guidelines for processing of loan applications,appraisal, disbursement, post-disbursement supervision, etc. Allinformation relating to charges/ fees for processing would bedisclosed in the loan application forms. Further, the customerwould be informed of all costs to be borne in sourcing financefrom SIDBI. The facility of prepayment of loans would be availableand pre-payment interest, calculated as per the extantinstructions, would be charged by the Bank for such prepaymentfrom borrowers sanctioned assistance above `5 lakh. A GrievanceRe-dressal Mechanism has also been put in place to resolve the

disputes arising out of the Fair Practices Code.

3 EQUITY & RISK CAPITAL ASSISTANCE3.1 INTRODUCTION3.1.1The MSMEs have been largely dependent on the promoters

resources, borrowings from friends and relatives and securedloans from banks/financial institutions for meeting their financialrequirements. However, while promoters resources are limited,

bank finance is also restricted due to various norms such as assetcoverage ratio, DER, etc., which adversely impact the flow offinancial assistance to MSMEs and in turn puts constraints on theircredit absorption capacity and consequent growth. To facilitateenhanced flow of credit to this sector, the Government and theReserve Bank of India have been taking several measures fromtime to time.

3.1.2 Focus of Equity & Risk Capital Loan PolicySIDBI Foundation for Risk Capital for MSMEs was set up in FY2008-09with a view to addressing the issues related to existinggaps in the funding of MSMEs. However, due to promoters limited

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understanding of various issues related to external equity / riskcapital investments including the higher return expectation of theinvestors, feared consequences of dilution of equity, various rightswhich equity investors demand, higher disclosure and corporategovernance issues etc., these products have been slow in making

an impression in the market.

In view of the above, the focus of the Equity & Risk Capital LoanPolicy for FY 2013 is aimed at improving the off-take taking intoconsideration the felt needs of the sector, building up of qualityportfolio and management of the same combined with appropriaterisk mitigation measures.

3.1.3 Direct assistanceThe Bank provides risk capital to MSMEs using appropriate riskcapital products based on best practices being followed in other

parts of the world for providing risk capital to MSMEs. The Bankuses a mix of standardised products and structured products(where assistance is customised for each customer on a case tocase basis) for faster dispensation of risk capital to eligibleMSMEs.

3.1.4Indirect AssistanceThe Bank will continue to provide risk capital to MSMEs throughseveral state level and national level MSMEs funds. These Fundswould also be used as channel partners for bringing structuredequity deals, assist in carrying out due diligence and monitoring

for the Bank.3.1.5Assistance through focused equity funds (VCFs / PE Funds)The assistance to technology and innovation based MSME entitieswith very high growth potential is normally made throughspecialised Equity Funds / Venture Capital Funds / Private Equity(PE) Funds having relevant expertise and networking in dealmaking, monitoring and hand holding of investees. SIDBI could actas an anchor investor in some of these MSME focused funds andcould also take equity stake in the Asset Management Company ofsuch funds.

3.1.6 Assistance through Banks/ NBFCsThe Risk Capital assistance is also proposed to be routed throughselect banks and NBFCs to their MSME customers throughstandardised products (like sub-ordinated debt) with strictcustomer selection criteria.

3.1.7 Partnerships for startup assistanceThe major challenge due to which the banking sector is unable toassist small startups is proper mechanism for project validationand the effort/skill required in monitoring the borrowers.

Therefore, there is a need to develop a non-banking network ofmentor agencies which would help banking sector provide credit

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to start up and early stage enterprises. Towards this end, theBank has signed MoUs with angel networks viz. Indian AngelNetwork (IAN) and The Indus Entrepreneurs (TiE) for developing aframework for supporting start-up units and would work with otherorganizations having relevant mandates in line with the Banks

Risk Capital strategy.

3.2 PRODUCT PROFILE3.2.1 Start-up Assistance Scheme (SAS)

The projects where revenues have commenced with productacceptability by customers, are normally considered under theScheme. Assistance of a maximum of `100 lakh is considered (inthe form of OCD i.e. optionally convertible debt). Besides, equity(at par) in the company, equivalent to 1-2% of the paid-up capitalis also subscribed as part of the assistance.

3.2.2 Growth Capital and Equity Assistance Scheme for MSMEs (GEMS)The objective of the Scheme is to provide growth capital todeserving MSMEs for:a Bridging the gap in the means of finance for expansion/

modernization/ scaling up. New businesses/ diversification byentrepreneurs with established track record can beconsidered, selectively (along-with direct finance assistance).b Intangibles or non-asset creating investments viz. productdevelopment, marketing related expenditure, R&D, etc.,besides investments in quality control/energy efficiencyequipment, acquisitions, mergers in India or abroad, etc.c Margin money for working capital. Normal working capitalrequirements should generally be met under normal WCarrangement. However, need based gap in WC requirements(where the borrower has arrangements for major part of itsWC requirements tied up) could be considered, selectively,based on merits of the case and with justification.d Any other bonafide expenditure required for growth of thebusiness which may not qualify for assistance through normalbanking channels.

The scheme provides for faster dispensation of risk capitalthrough various instruments viz. debt based instruments likeSubordinated debt, Optionally Convertible Subordinated Debt(OCSD), Optionally Convertible Debt (OCD) and OptionallyConvertible Debentures (OCDR), and also equity basedinstruments like Optionally Convertible Cumulative PreferenceShares (OCCPS) etc., to the existing customers of the Bank andalso to new customers with good past track record.

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3.2.3 Resource Support to banks under Risk CapitalTo reach wider segment of MSMEs, efforts are being made toextend resource support to banks under Risk Capital Fund so thatthey can extend risk capital assistance to their customers.

3.2.4 Resource Support to NBFCs under Risk CapitalTo enhance the retail reach of risk capital assistance under MSMERCF, Channel Partners (CPs)/ NBFCs are being identified. Thiswould help a large number of good MSME customers to meet theirmargin and other bonafide growth requirements, includingintangible expenditure (viz. marketing, brand building, R&D, hiringprofessionals, quality control and energy efficiency investments)etc.

3.2.5 Venture Capital FinancingThe Bank has been acting as a fund of funds and subscribing tothe corpus of venture capital funds (VCFs) subject to itscontribution being utilized for extending assistance to MSMEs,besides service sector and other infrastructure projects eligible forfinancing under the Banks guidelines/ policies, issued from timeto time. In effect, it has been facilitating channelisation of funds tomeet the venture capital requirements of SMEs.

The Bank recognises that being a high risk industry, the returns inventure capital financing are quite uncertain while theinvestments in venture funds are mostly illiquid in nature and

locked for a longer tenure. However, keeping in view the potentialof private equity and venture capital in stimulating growth, theBank, as hitherto, would continue to support venture capitalfunds, asset management companies and trustee companies.

3.3 DUE-DILIGENCEEquity/ Preference share investments, unlike debt-basedinstruments, are not self-liquidating investments from businesscash flows. Thus, these investments entail a different perspective/dispensation as the preferred exit is either through an IPO or thirdparty sale. This calls for more detailed evaluation of the targetentity. This is usually done by undertaking an external DueDiligence Exercise (DDE) through a CA firm/ agency/ auditor/ratingagency.

The primary purpose of DDE is to identify major weaknesses/ gapsin the target entity (including its corporate governance levels) andissues which require special attention etc. The DDE helps inconfirming the material facts of the prospective businessopportunity and independent review of financial and non-financialrecords as considered relevant and material.

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Another purpose of DDE in MSMEs would also be to guide suchenterprises and provide a roadmap to correct/ improve theshortcomings in their business operations as also improve theircompliances/ disclosures and governance levels.

4. ASSISTANCE FOR SERVICE SECTOR4.1 INTRODUCTION

The service sector contributes more than 60% of the national GDP.The share of the service sector in the Indian economy is continuouslyincreasing. The sector contributes significantly in employmentgeneration and export earnings. There is substantial gap in fundingof service sector enterprises offering immense business potential.

The Service Sector Business Policy for FY 2013 is aimed at

identification of thrust areas for lending under service sector,charting out a focused business development strategy, encouragingproduct innovation suited to the needs of the industry, improvingcredit delivery and having in place a pricing policy which supportsbusiness growth and links it to risk.

4.2 THRUST BUSINESS AREASWhile the Bank would consider support to all eligible service sectoractivities, the following areas would be accorded due emphasis forfaster asset growth during the year.

4.2.1 Focus on Target segmentsTowards meeting the financial requirements of the sector, the Bankwould target select segments in the service sector, especially thosewhere there is a large gap in the availability of financial assistancefrom banks vis-a-vis the requirement. While a comprehensive list ofservice sector activities eligible for financing from the Bank has beencirculated from time to time, an indicative list of segments proposedto be targeted is given below:

(i) Logistics(ii) Supply chain management

(iii) Warehousing and cold storage(iv) Retail outlets(v) Hotels below 5 star category, especially budget hotels(vi) Restaurants(vii) Modern health care facilities/ Health clinics/ Hospitals with

focus on relatively smaller hospitals(viii)Franchisees / Franchisors(ix) Rent a car operators(x) Scientific or technical consultancy, testing and analysis

agency, event management for industry, promotion ofindustrial growth.

(xi) Tourism related activities(xii) Auto workshops / Repairs/ Auto Dealers

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(xiii) IT / IT enabled services(xiv)Telecommunication Services(xv) Advertisement and Promotional Services(xvi)Business Process Outsourcing (BPO), Knowledge Process

Outsourcing (KPO) and other knowledge based activities like

call centres, technical help desks, medical transcriptions, bio-informatics, contract research, etc.

(xvii) Setting up of mobile/radio frequency transmission/receivertowers, cabling, network installation, systems integration,service centres, dealerships, etc.

(xviii)Setting up of service stations (petrol and gas filling stations,auto workshops, etc.), health and fitness centres, eventsmanagement, and establishment of design houses/studios.

4.2.2 Eligible borrowersSIDBI would continue to finance the service sector based on thecriterion of activity under section 2(h) of SIDBI Act.

4.2.3 Direct Assistance to existing well performing Service SectorEnterprisesAssistance to existing well performing service sector enterprisesfor their varied business needs would be a thrust area of the Bank.

The focus on existing well established entities would facilitatesimplified appraisal process, quick credit decision and timelycredit delivery and would help in building up sizable qualityassets.

4.2.4 Even though some of the projects in the service sector do notcreate tangible assets and may not meet security related norms,these are found to generate comfortable cash flows. Thesesegments include IT and other knowledge based industries,retailing, franchising, etc. As there is good potential forconsidering assistance to these sectors, proposals of such kindwith borrowers having sound financial position, past performanceas reflected in cash flows and management track record could beconsidered for Banks financial support based on factors like orderbook position, projected cash flow, etc. The Bank would also

consider devising specific products/ schemes suited to therequirements of the specific industries which do not fit into thegeneral norms for such industries under service sector.

(i) In respect of standalone IT/telecom services projects, the creditrisk aspects should be properly addressed. In this regard,safeguards like tie up with established corporates/ contractorsparticipating under consortium financing, escrow mechanisms andadequate promoters contribution being brought in, should beensured.

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(ii) Commercial Real EstateThe Bank has been adopting a cautious approach in lending to thecommercial real estate (CRE) sector. The CRE guidelines issued byRBI in September 2009 are being followed in this regard.

(iii) Lending under infrastructure /CRE projects shall be subject toadherence to the National Disaster Management Guidelines forEnsuring Disaster Resilient Construction of Buildings andInfrastructure formulated by the National Disaster ManagementAuthority (NDMA), Government of India to ensure that physicalassets created through their financing remain safe and disasterresilient. The guidelines will be applicable to new constructions aswell as additions, modifications, extensions or alteration.

4.3 APPROACH TO FINANCING SERVICE SECTORFor the purpose of this policy, the assistance to service sector hasbeen broadly divided into two categories viz. (a) asset backed

term loan assistance, and (b) cash flow based term loan

assistance.

(a) Asset backed term loan assistance to service sectorenterprisesAsset backed term loan assistance would include assistance

towards projects involving substantial primary and /or collateral

security in the form of fixed assets [more particularly in

immovable assets like land and building]. Hotels, hospitals,warehouses etc., would generally fall under this category.

In service sector, while considering larger loans to hotels,

hospitals, nursing homes, multiplexes/ malls, cold storages,

warehouses, logistics projects, etc., longer moratorium of say 3

4 years and longer repayment period say of 8 12 years, with

ballooning repayment could be considered depending upon

realistic assessment of the implementation schedule and futurerevenue generation.

(b) Cash flow based term loan assistance to service sectorenterprisesAssistance to projects which do not offer adequate primary and /or

collateral security in the form of fixed assets to meet the norms

for asset backed assistance shall be considered as Cash flow

based assistance.

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Cash flow based assistance upto `100 lakh shall be covered under

CGTMSE. In case, the borrower is not inclined to be covered under

CGTMSE or the Borrower is not eligible for coverage under

CGTMSE as per CGTMSEs extant guidelines, the asset cover

applicable for cash flow based term loans shall apply.

4.4. WORKING CAPITAL ASSISTANCEWorking Capital Assistance would be considered selectively to:

(i) existing borrowers who are solely banking with SIDBI(including enhancement);

(ii) existing borrowers of SIDBI (who are also banking with otherbanks) and have placed major share of immovable securitywith SIDBI, for renewal / enhancement;

(iii) existing well performing service sector entities who are newto SIDBI and do not enjoy working capital facility with anyother bank;

(iv) new entities in service sector where term loan is consideredby SIDBI.

Takeover of working capital would not generally be encouraged.5. ASSISTANCE FOR ENERGY EFFICIENCY5.1 INTRODUCTION

SIDBI has recognized financing for energy efficient and cleantechnologies in the MSME sector as one of the high potential areasfor strengthening the competitiveness of MSMEs in India. SIDBIhas in the past contracted lines of credit from various multilateral/bilateral agencies viz. Kreditanstalt fur Wiederaufbau (KfW),Germany, Japan International Cooperation Agency (JICA), Japan,Agence Francaise de Developpement (AfD), France, for financingenergy efficient and cleaner environment investments in MSMEs.

5.2 OBJECTIVES(i) to promote the use of energy efficient and cleaner

technologies by MSMEs.

(ii) to reduce energy consumption, enhance energy efficiency,reduce CO2 emissions and improve the profitability of theIndian MSMEs in the long run.

(iii) to support promotion of energy efficiency and sustainabledevelopment in MSME sector under other products / byintroducing new products with an element of some

concessionality in interest rates.

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(iv) to encourage innovation in technology, products and delivery,particularly aimed at supporting the supply side.

5.3 THRUST BUSINESS AREAS: DIRECT FINANCEAn indicative list of segments in the MSME sector which have highpotential for energy saving/ cleaner production, to be targeted forbusiness thrust, is given below:

(i) Engineering & machine tools

(ii) Auto components

(iii) Electronics and electrical products

(iv) Sponge iron plants

(v) Foundry & Forgings

(vi) Pulp & Paper

(vii) Ceramics

(viii)Rice Mills

(ix) Textiles, in particular, readymade garments and hosiery

(x) Drugs and pharmaceuticals

(xi) Food processing & agro based industries

(xii) Hazardous Waste Treatment

(xiii)Common Effluent Treatment plants(xiv)Transport operators using cleaner energy such as LPG/CNG,

etc.

(xv) Green building in manufacturing as well as service sector

(xvi)Units engaged in manufacturing and service of EE/CPproducts/services

(xvii) Any sector- Out phasing of ozone depleting substances

5.4 SUSTAINABLE FINANCE SCHEME SFSThere are certain projects which may not meet the eligibilitynorms set by the international donor agencies but considering thefact that these projects also result in energy efficiencyimprovements in the MSMEs and result in abatement of GreenHouse Gas (GHG) emissions that harms the environment. Aseparate scheme, viz. Sustainable Finance Scheme (SFS) hasbeen carved out of existing Direct Finance Scheme (DFS) tofinance such projects.

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An Illustrative list of projects which can be covered under SFS areas under:

Renewable energy projects such as solar power plants, wind

energy generators, mini hydel power projects, Biomass

gassifier power plants, etc.

Investments in green, energy efficient buildings.

Any kind of potential CP investments including waste

management, which do not belong to the listed industrial

sectors which are eligible to be assisted under the KfW CP-

LoC.

Energy Efficient / Green / Environment friendly / Pollution

reducing, waste minimising equipment / measures in service

sector projects like hotels, hospitals, nursing homes, tourism

related activities, etc.

Green micro finance (micro loans upto `5 lakh to micro

enterprises for green / energy efficient equipment

measures) through various micro finance intermediaries or

NBFCs.

Expenditure on energy audit / environment compliance audit

/ pollution control & management consultancy services.

Expenditure on green rating, BEE star rating of its product,

eco-friendly labeling, etc.

ISO 50001 / 14000 or other accredited environmental

certification.

CDM registration related expenditure.

6. ASSISTANCE FOR RECEIVABLE FINANCE6.1 INTRODUCTION:

Receivable Finance Scheme (RFS) is being operated by the Bankfor nearly two decades to mitigate the receivables problem ofMSME sellers and improving their cash flow / liquidity.

RFS covers discounting of bills/invoices arising out of sale ofindigenous components/ parts/ sub-assemblies/ accessories/

intermediates manufactured/ job work done/ services provided byMSMEs and eligible service providers to Large Purchaser

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Corporates. The scheme also allows coverage of bills relating toSmall Road Transport Operators (SRTOs), being service providers.

The Bank has been making need based modifications/simplifications/ rationalisation in the scheme considering inter-aliathe changing business environment, demand of the customers,feedback from the operating offices and for increasing the reachof the Scheme for the benefit of a large number of MSMEs.

End-use of funds is verified by undertaking select visits to MSMEbeneficiary units and random verification of the discountedinvoices / bills.

In order to improve the quality of overall portfolio and to addressinadequacies of existing internal rating system, external ratinghas now been made mandatory, in respect of new customers

under MSME RFS, especially where the limits are not backed bycollateral security.

6.2 THRUST BUSINESS AREAS:i) The scheme basically covers bills raised by MSME units

engaged in manufacturing / job works / service sector. Keepingin view the increasing share of service sector, businessopportunities in these sectors will be identified.

ii) Keeping in view the national agenda for moving to electronic

mode, efforts would be made to encourage business under e-discounting and enhance operations under NSE TradeReceivables Engine for E-discounting in association with SIDBI(NTREES) platform.

iii) The Bank will facilitate promotion of Factoring servicesincluding increasingly extending debt support to factoringcompanies registered with RBI as per provisions of FactoringRegulation Act.

6.3 PRODUCT RATIONALISATION: Over a period of time, MSME RFS has been improvised to meet the

growing business requirements, as under:

o MSME RFS without Bills of Exchange, MSME RFS backed byL/C, Modified Invoice Discounting Scheme & E-discountingunder NTREES platform, while Factoring is on the anvil.

7. INDIRECT LENDING7.1 INTRODUCTION7.1.1 The indirect lending portfolio of the Bank consists predominantly

of refinance to Primary Lending Institutions (PLIs), comprisingState Financial Corporations (SFCs), State Industrial Development/

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Investment Corporations (SIDCs / SIICs) [collectively referred to asState Level Financial Institutions (SLFIs)], Scheduled CommercialBanks, Scheduled Cooperative Banks, Regional Rural Banks andselect financial institutions. In addition, the portfolio also includesresource support/ term loan to Non Banking Financial Companies

[NBFCs] and other Public Sector Undertakings benefiting theMSMEs. Term loans for infrastructure projects under consortiumarrangements with Banks are also considered provided suchprojects have linkages to MSMEs.

7.1.2 The business plan of the Bank for FY 2013 for assistance throughPLIs would take into account the availability of resources with theBank.

7.2 ASSISTANCE TO STATE FINANCIAL CORPORATIONS [SFCs]Broadly, the support to SFCs would continue to be based on the

overall exposure norms, financial health and coverage under MoU.7.3 MONITORING OF SFCsGiven the sizeable exposure of the Bank to the SFCs, theperformance of all the SFCs would continue to be closelymonitored both by way of on- site and off- site mechanisms.Further, with a view to bringing about convergence in theregulatory framework, vis a vis the industry practices, the Bankhas been advising the SFCs to comply with prudential normsprescribed by Reserve Bank of India. SFCs shall also comply withother regulatory directives such as adoption of accrual system of

accounting, income recognition and asset classification [IRAC]norms, KYC / AML norms, industry-wise exposure norms, valuationof assets, etc.

7.4 ASSISTANCE TO SCHEDULED COMMERCIAL BANKS7.4.1 The risk profile of scheduled commercial banks as a whole is low.

The scheduled commercial banks generally prefer to avail shortterm refinance assistance. However, looking to the need to createlong term assets under the Scheme, creation of such assetsthrough refinance to scheduled commercial banks would continueto be the thrust area for FY 2013. Banks would be encouraged to

avail longer term refinance having repayment periods of 5 yearsand above. Exposure to the scheduled commercial banks by wayof refinance during FY 2013 would be encouraged but within theindividual counterparty exposure limits fixed by the Bank as givenin Annexure IV. The individual bank wise caps are fixed on thebasis of category of the bank, its net worth and risk rating.

7.5 ASSISTANCE TO SCHEDULED COOPERATIVE BANKS [SCBs] &REGIONAL RURAL BANKS [RRBs]Over the years, SCBs have registered significant growth in thenumber, size and volume of business handled. Some of the RRBs

are also now profit driven and, in addition to commercial lendingsuch as agriculture and project funding, compete with scheduled

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commercial banks for fee and commission incomes such as issueof drafts, sale of insurance products and mutual fund schemes.Counterparty exposure limits to these banks shall be decided on acase to case basis, depending on risk rating and other factorssuch as net worth of the bank, eligible micro and small enterprise

[MSE] portfolio, overall financial health, compliance withregulatory directives, etc.

7.6 ASSISTANCE TO SIDCs/SIICsThe Bank would continue to make a conscious attempt, ashitherto, to reduce / exit from the existing exposures to weakerSIDCs / SIICs (including TFIDCs).

7.7 ASSISTANCE TO NBFCs7.7.1 The NBFCs (both in category A and B) registered with RBI which

are engaged in financing enterprises in the micro, small and

medium sector [MSME], and in business for the last 5 years, are,prima facie, eligible for resource support from the Bank subject tomeeting the prescribed benchmark norms relating to net ownedfunds, capital adequacy ratio, gross NPA, recovery percentage,minimum investment grade external rating and compliance withall the prudential guidelines prescribed by the Reserve Bank ofIndia from time to time. SIDBI provides term loan and resourcesupport mainly to Asset Finance Companies. However, theassistance could also be extended to Loan Companies, if the loanis given for income generating activities.

7.7.2 During FY 2013, the focus of the Bank shall be on providingresource support to NBFCs for on lending to MSMEs for creation ofphysical assets/ to micro and small enterprises for incomegenerating activities.

7.7.3 The assistance to NBFCs would be secured by, first exclusivecharge on the assets financed / First pari-passu charge with otherlenders by way of hypothecation of book debts of the NBFC withsuitable margin.

7.7.4 The RBI guidelines issued to banks for NBFCs lending to MSMEsagainst the security of gold in terms of exposure to single NBFC

not exceeding 7.5% of the banks capital funds, and limiting theLoan to Value [LTV] to 60%, would be followed.

7.7.5 The broad eligibility parameters for lending to NBFCs are givenbelow:

Registered with RBI

In business for 5 years (could be relaxed upto 4 years)

Net profit for last 3 years

Net owned funds minimum `20 crore

CRAR Not less than15%

Recovery not less than 90% Gross NPA less than 5%

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Minimum investment grade rating (SEBI approved ratingagency) for FD and bonds.

Interest rate broadly linked to External Rating / PLR

NBFCs to comply with all prudential guidelines laid down byRBI.

8. ASSISTANCE FOR INFRASTRUCTURE PROJECTSAvailability of adequate and quality infrastructure facilities is a keycomponent for speedy growth of the MSME sector. It has positiveimpact in terms of creation of employment, efficiency inoperations and waterfall effect on the entire economy. The Bankhas been providing assistance for infrastructure projects in theareas of industrial parks, transportation, power, telecom, etc.,after satisfying the MSME linkages of the assisted projects.

The infrastructure sector provides adequate scope for upscaling oflending by the Bank. While assistance for infrastructure projects inother areas would be extended through consortium/ multiplebanking arrangements, assistance to industrial infrastructureprojects could be considered on a stand alone basis. Withininfrastructure sector, the projects from ports, energy, gaspipelines, telecommunications, tourism, warehousinginfrastructure, cold chain sub-sectors, having linkage with MSMEs,could be explored.

Further, projects of Common Waste management facilities andeffluent treatment plants at industrial clusters, renewable energyprojects with MSME linkages, may be considered for coverageunder the Schemes after satisfying itself on MSME linkages andbenefits.

9. SIDBI FOUNDATION FOR MICRO CREDIT9.1 INTRODUCTION

Micro finance remains an instrument for the poor to improvelivelihoods and reduce financial vulnerabilities by increasing theirincome and savings. With emphasis on supporting incomegeneration activities under microfinance, SIDBI continues financialassistance to Micro Finance Institutions (MFIs).

9.2 FOCUS OF SFMC LOAN POLICYOn asset quality, focus is on risk management through theassessment, monitoring and exposure management. The focus ofthe Bank is on MFIs with track record of resource mobilization,

capital, strong systems, compliances with new regulatory

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guidelines and responsible lending practices and long termsustainability in terms of financial and operational efficiencies.

9.3. PRODUCT PROFILE SIDBI Foundation for Micro Credit (SFMC) shall continue with

term loan to MFIs for on-lending under microfinance, tointermediaries for on-lending to micro enterprises and tomarketing service providers. Suitable changes are made inthe eligibility criteria and guidelines for these productsconsidering the current scenario. Details of eligibilitycriteria, etc., for various products are at AnnexureII.

Following the introduction ofMicro Enterprise Loan Direct(MEL-Direct) for loans of `50,000 - `10,00,000 to microenterprises, SIDBI implemented a project on Financing

Micro Enterprises and Capacity Building in SIDBI usingDownscaling Techniques to redesign MEL-Direct.

Banks equity and related investments in MFIs will be guidedby statutory guidelines.

9.4 ASSESSMENT OF BORROWERS, RATINGS, LOAN TENURES, ETC.Banks Fair Practices Code, Grievance Redressal Mechanism andRBIs guidelines to all India Fis on connected lending areapplicable for assistance under SFMC.

10. CREDIT RISK MANAGEMENTRBI had issued guidelines that the banks should have a robustCredit Risk Management (CRM) system which is sensitive andresponsive to the credit risks emanating from its dealings withindividuals, corporate, banks, FIs or sovereign. According to theRBI guidelines, banks have to devise a risk managementframework oriented towards their requirements, dictated by size,

complexity of business, risk philosophy, marketing perception,etc.

The dimensions of credit risk to which the Bank is exposed tofundamentally emanate from exposure to MSME enterprises/sector which are characterised by weaknesses in corporatestructure, systems, accounting standards, lack of availability/reliability of information and vulnerability to externaldevelopments, risk concentration in exposure to the MSME sector.

In compliance with the Policy Guidelines on KYC Norms and Anti

Money Laundering (AML) Standards, a Scoring Matrix based on tenbroad parameters and 3 risk categories for risk categorization of

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Direct Finance Schemes (DFS) borrowers had been developed andput in place.

10.1 CREDIT RISK STRATEGYIn line with the strategy for managing risks in the credit portfolio,following tenets have been incorporated in the Loan Policy :

(a) Monitoring exposure to SFCs/ SIDCs as a percentage of totalportfolio.

(b) Implementation of internal rating models to measure creditrisk for majority of the borrower categories. Use ofinternal/external ratings in the decision making process forlending would eventually lead to improvement in the overallcredit quality and better risk management of the Banksportfolio.

(c) Risk control, inter alia, through implementation of exposurelimit framework for different segments of borrowers.

(d) Implementation of processes to ensure that initiative toincrease lending by innovation in products, target clients,etc., does not lead to deterioration of the asset quality of theBanks portfolio.

(e) Installation of an enabling framework capable of grading therisk and eventually linking pricing to internal ratings as suitedto the Banks requirements.

10.2 RISK MEASUREMENT10.2.1 Internal Credit Rating Systems

The Bank uses CART to process and rate loan proposals coveringexposures up to ` 500 lakh, respectively, received from existingunits fulfilling certain criteria.

For loans outside the purview of CART, Risk Assessment Models(RAMs) are being used for borrower segments indicated below :

(a) Small and Medium Enterprises (SMEs); Larger SMEs;(b) Service sector enterprises;

(c) Infrastructure Special Purpose Vehicles (SPVs) Road,Power, Telecom and Port;

(d) Banks (public/ private sector/ foreign banks, etc.) andfinancial institutions;

(e) State Financial Corporations, State Industrial DevelopmentCorporations;

(f) Large companies / corporate entities having financial

linkages with the MSME sector, State Electricity Boards,

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other State/Central level specialized Corporations, etc. andfor RFS limits.

10.2.2 Investment GradesProposals with internal risk rating at the time of appraisal between

CR1 to CR5 on the combined scale in RAM (CAAA to CA in CART,and C1 to C5 in MSME-RFS) are considered as investment gradei.e. suitable for extending credit facility. However, in respect ofcertain sectors, higher investment grade ratings have beenstipulated for greater selectivity and credit quality as indicated inAnnexure III with minimum internal rating grade specified.Such higher investment grades shall not be applicable forassistance to infrastructure projects/ joint financing proposals[consortium/ multiple banking arrangement], other than powersector projects which will continue to be considered with a

minimum rating of CR3 only.10.3 RISK MITIGATIONThe present credit risk mitigation strategies in vogue would becontinued which are primarily being applied at two levels. At theproject specific level [transaction level], efforts are made toidentify critical risk factors and suitable mitigation measures areexplored and stipulated, wherever possible. Risk rating would beused for objective grading of risk. At the portfolio level, the Bankhas been following a strategy of exposure management andprudential caps on credit exposures under various activity/

industry /type of borrower.The Bank has also been working outthe portfolio rating of the operating officeson an annual basisforinternal purposes.

10.4 EXTERNAL RATINGSIn respect of MSME-RFS limits without collateral security andresource support to NBFCs, external rating (Long term rating) byRBI accredited rating agencies is considered for the purpose ofeligibility and pricing with minimum specified external ratinggrade.

10.5 PRICING10.5.1 In the scenario of dynamic interest rates, competition and the

need for the Bank to expand the direct finance portfolio withaddition of quality assets, a dynamic pricing strategy has becomesine qua non. The pricing of loans is carried out as per thegradation of risk determined by the internal ratings for variousborrower segments. With a view to remaining competitive in themarket, the existing practice of fixing the interest/ discount ratedepending upon competitiveness/ demand and such other factors,

may continue. As regards assistance sanctioned to infrastructureprojects and such other projects under joint finance / consortium

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arrangement, the interest rate stipulated by the lead institution /other banks would normally be followed.

10.5.2 In case of projects involving multiple/joint/consortium financing,interest rate reset clauses would be in line with the practiceobtaining with other banks / institutions.

10.6 MANAGEMENT OF ASSET CONCENTRATION10.6.1 Exposure1 Caps

Asset concentration is being managed by the Bank by way ofvarious exposure caps/ norms for credit deployment which havebeen fixed, as under, taking into account the norms prescribed byRBI.

10.6.1.1 Individual / Group Exposure(a) In respect of schemes of direct assistance to MSMEs andspecialized organizations marketing MSME products, the individual/ group exposures shall be as follows:

Particulars Cap

For Single Borrowers 3% of capital funds of SIDBI

For Group Exposure 6% of capital funds of SIDBI

b) The exposure cap applicable in respect of assistance to NBFCs/

private sector corporations shall be as under:Particulars Cap RBI Guid elines

For Single Borrowers 10% of capital funds of SIDBI 15% of capital funds

For Group Exposure 15% of capital funds of SIDBI 40% of capital funds

c) The exposure cap applicable in respect of MSME ReceivableFinance Scheme (MSME-RFS), direct resource support and suchother forms of bulk lending (except refinance and BRS) to publicand financial institutions shall be as under:

Particulars

Cap RBI Guid elines

For Single Borrowers 15% of capital funds of SIDBI 15% of capital funds

For Group Exposure 25% of capital funds of SIDBI 40% of capital funds

Though SIDBI is a refinancing institution, from the prudentialperspective and in accordance with RBIs suggestions, suitableinternal caps have been put in place for the refinance portfolio.

1Exposure has been defined as under:

Product Exposure computation

Fund based & Non-fund based

facilities

Limit sanctioned or outstanding

whichever is higher.

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The Bank has in place overall exposure caps for SFCs and SIDCs,which are perceived to be relatively higher risk segment of thisportfolio. Keeping in view the RBIs policy on Exposure Norms forFinancial Institutions, the exposure, inter alia, has been related tocapital funds of SIDBI.

10.6.1.2 Counterparty / Activity / Industry exposureInternal caps have been laid down in respect of different schemesof direct assistance and for various industrial sectors assummarised in the table at Annexure IV

10.6.2 Restricted industriesThe extant instructions for a cautious approach in respect ofindustries such as chemical dyes & dye intermediates, industrialoxygen, distilleries, etc., would continue. Further, keeping in viewthe NPA level, substantial exposure in certain industries, etc., thelist of restricted industries would be reviewed periodically.Assistance to deserving units in the list could be considered if theyhave an internal rating of CR3 or above. Such proposals could beconsidered by RCSC or Credit Committees at HO.

Industries consuming / producing ozone depleting substances viz.Chlorofluorocarbons (CFCs), Halon Carbon tetrachloride, Methylchloroform, Hydrobromofluorocarbons (HBFCs), hydrochloro-fluorocarbons (HCFCs), Methyl bromide, Bromochloromethane(BCM), etc., would not be assisted at all.

10.6.3 Policy on Group LendingThe Bank considers assistance to large groups only under selectschemes such as MSME-RFS, NBFC and Infrastructure Scheme.Decisions on sanction/ continuation of exposure on a concernwhose group/ associate concern(s) has defaulted to the Bank and /or to other banks/ Fis are being taken on case specific merits. Thepractice would be continued and a final view on such cases wouldbe taken by the delegated sanctioning authority.

11 CONCLUSIONEfficient credit delivery is the key to quality portfolio build up andcustomer retention. The Loan Policy gives adequate flexibility todevelop viable business proposals. The Policy has also put in placea suitable structure for approval / clearance of new products.Hence, any business proposition considered to be viable andbankable should not be lost on account of non-availability of asuitable scheme/product. It will also be the endeavour of the Bankto further simplify and streamline procedures/processes toexpedite the credit delivery besides making efficient use of IT for

internal credit monitoring. Strategic alliance entered into withcommercial banks would also be utilised for giving better facilities

http://www.environment.gov.au/atmosphere/ozone/ods/halon/index.htmlhttp://www.environment.gov.au/atmosphere/ozone/ods/methylbromide/index.htmlhttp://www.environment.gov.au/atmosphere/ozone/ods/methylbromide/index.htmlhttp://www.environment.gov.au/atmosphere/ozone/ods/halon/index.html

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and services to the MSME customers. While the Bank has beenmaking efforts in introducing risk management practices on an on-going basis, it would also accord due emphasis in initiating aparadigm transition towards an integrated risk managementframework.

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Annexure IBenchmark Financial Norms & Parameters as applicable for generalpurpose term loans (including energy efficiency, cleanerproduction, direct credit, etc.)

Sr.No. Parameters Benchmarknorms[whereverapplicable]A B C1 DER (For the company as a whole,including proposed assistance)

(a) Micro and small enterprises 2:1

(b) Medium enterprises 2:1

2 Projected DSCR 1.5:13 Promoters contributionNew Entity2 33%Existing Entity3 25%4 Overall asset coverage

i. Micro, Small and Mediumenterprises

(a) New Entity 1.4(b) Existing Entity [other than (c)

below]1.3

(c) Existing Entity with CGMTSE cover 1.2

The above benchmark financial norms are not applicable for

assistance to infrastructure projects/ joint financing proposals

[consortium/ multiple banking arrangement/ under Memorandum

of Understandings (MoUs) with banks/Fis]. The norms for such

proposals would be in line with the norms of consortium / others

banks in the multiple banking arrangement. Similarly, the bench

mark norms would not be applicable in respect of test marketing

proposals for new products, resource support and structured

products or other arrangements approved by the

Board/Committees of the Board.

Further, good business opportunities exist in modern MSME

clusters in terms of financing industrial infrastructure, financing

individual MSME units, other income generating activities like

earning LC charges, syndication fee, etc. As cluster financing is

2A New entity is an entity newly set up/proposed to be set up. This would also include entities

established in the past but with nil or insignificant commercial production.3An Existing entity is one which has already been established and is engaged in commercial

production (with or without SIDBI's financial assistance).

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Annexure IIA. TERM LOAN TO MICRO FINANCE INSTITUTIONS (MFIs)1. Objective

SIDBI extends term loans to

MFIs for onlending to the poor individuals or groups ofindividuals formed as JLGs, SHGs, etc.

entities for onlending to MFIs

2. Eligibility criteriaTo be eligible for term loan assistance from SIDBI the MFI:

a. should be registered as Society, Trust, Company/Section-25Company, NBFC-MFI4, Co-operative Society and MACS.

b. registered as any other legal entity may be considered only afterBO obtains Legal Departments clearance on its suitability.

c. should have been lending under MF for at least 36 months orshould have promoters/senior management having at least 10years of experience in micro credit/banking/NBFC lendingoperations.

d. has a minimum outreach of 5,000 loan accounts or 3,000borrowers

e. targets the poor, especially women and is secular .

f. has audited financial statements (in case of NGO withmicrofinance as a programme, the NGO should have separateaudited financial statements for the MF programme) and

g. has systems, processes and procedures in place required of afinancial intermediary like internal accounting, internal audit, riskmanagement, cash management, timely MIS, etc.

h. shall be in compliance with RBI and other statutory guidelines.

3. Othersa. Mainline NBFCs would be considered for assistance undermicrofinance by SFMC, HO on a case to case basis.

b. MFI may follow any generally practiced MF models like Grameenmodel, SHG model, JLG model, cooperatives, etc., and any otherappropriate model permissible under the law

c. SIDBIs loan to be onlent by MFIs for use by borrowers in:

Setting up/running non-farm income generating activities andmicro enterprises under MSMED Act and

4 In this document, NBFCs operating as full fledged MFIs prior to introduction of NBFC-MFIcategory by RBI are considered as NBFC-MFI, pending their re-registration as NBFC-MFIs.

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for construction of new / renovation/ expansion of dwellingunits / dwelling unit-cum-work sheds, etc.

d. Loan to an MFI will be on annual/need basis with minimum loan of`0.50 crore to an MFI.

e. NBFC-MFI to submit a certificate from a C.A regarding compliancewith RBI norms for NBFC-MFIs and all other MFIs to submit a C.Acertificate regarding compliance with RBIs norms on eligibility ofbank loans to MFIs under priority sector

f. Availability of a valid external rating.

g. Primary security shall comprise hypothecation ofbookdebts/receivables.

h. Suitable collateral security like deposit of FDs, personalguarantee, pledge of shares, guarantee by multilateral donors and

other forms of collateral security may be considered on a case tocase basis.

B. LOANS TO NBFCS FOR ONLENDING TO MICRO ENTERPRISES /MISSING MIDDLE1. Approach

The Bank shall extend term loan to NBFCs for onlending to microenterprises loans in the range of `50,000 10,00,000 perenterprise/borrower.2. Eligibility CriteriaFollowing are the eligible criteria for such NBFCs:

a. NBFCs with experience in lending to micro enterprises/MSME

b. Minimal BBB+ group rating by CRISIL or its equivalent grade ofrating by other rating agencies whose ratings are accepted by SIDBI3. Others

a. Lending will be based on in-house appraisal along with creditrating by an independent rating agency as in vogue in SFMC.

b. For existing MFI borrowers, loan may be considered based onthe valid rating reports and their borrower profile.

c. Security shall comprise Hypothecation of assets created out of

the loan and collateral security on case to case basis.d. Exposure norms and rate of interest shall be as per guidelinesfrom time to time.C. Securitisation/Acquisition by way of Direct assignment of cash flows

The Bank had earlier introduced a partnership scheme forpurchase of portfolio from MFIs. However, it is proposed todispense with the same given the banks exposure to MFIsthrough loans.

However, purchase of Micro Enterprise / Missing Middle loans byway of securitization and direct assignment of cash flows will beconsidered on a case to case basis in accordance with the extantRBI guidelines in the regard.

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Annexure IIIHigher investment grade ratings Select Sectors

Sr. No. Particulars ofindustry/facility/borrower groups Minimuminternalrating1 Chemical & chemical products

including drugs and pharmaceuticalsCR4

2 Commercial Real Estate CR3

3 Deserving units in the restricted list ofindustries such as chemical dyes & dye

intermediates, industrial oxygen,distilleries, etc.

CR3

4 Electronic equipment CR4

5 Food & food products including foodprocessing sector

CR4

6 Hotels, hospitals / nursing homes, coldstorages, industrial or ware housespaces, etc

CR4

7 Industries covered under RedCategories by Pollution Control Board

(PCB) of the concerned state

CR3

8Iron & steel industry CR3

9Leather & leather products CR4

10Marble industry CR4

11Power sector projects CR4

12 Textiles (including jute)/ readymadegarments/ hosiery) / powerloom CR4

13Wind mill projects (stand alone5) CR3

5Minimum rating of windmill projects taken up by existing companies primarily for depreciation

benefit/ captive use/ sale to SEB would be CR5.

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Annexure IVExposure Caps

6Includes exposure to activities in various sub-sectors under infrastructure.

S. No. Activity / Industry Exposure cap1 Bills Finance

(a) MSME-RFS without collateral 15% of o/s portfolio ofSIDBI

2 Infrastructure activities/projects(a) Total portfolio6 10% of o/s portfolio of

SIDBI

(b) Power sector including generation,transmission and distribution.

7.5 % of o/s portfolio ofSIDBI

3 NBFCs (overall exposure of the Bank) 20 % of o/s portfolio ofSIDBI

4 Resource Support 12.5 % of o/s portfolio ofSIDBI

5 Services Sector(a) Exposure in service sector projects 15 % of o/s portfolio of

SIDBI

6 Industry Exposure(a) Cap on exposure to a particular industry

other than those at (b) below5 % of o/s portfolio ofSIDBI

(b)(i) Transport Equipment (including Auto and

auto components)10 % of o/s portfolio of SIDBI

(ii) Textiles / ready made garments andhosiery

10 % of o/s portfolio of SIDBI

(iii) Food processing industry 10 % of o/s portfolio of SIDBI

(iv) Engineering industry 10 % of o/s portfolio of SIDBI

(v) Drugs and pharmaceuticals 10 % of o/s portfolio of SIDBI

(vi) Electronics and electrical products 10 % of o/s portfolio of SIDBI

(vii) Agro based industries 10 % of o/s portfolio of SIDBI(viii) Commercial Real Estate 8.5 % of o/s portfolio of SIDBI

(xi) Iron & Steel 5 % of o/s portfolio of SIDBI

(xii) Petroleum & Petroleum Products 10 % of o/s portfolio of SIDBI

7 Direct Assignment business 5 % of o/s portfolio of SIDBI

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S. No. Activity / Industry Exposure cap

8 Ceiling on Exposure in unsecured advances[including MSME-RFS without collateral at1(a) above]

30% ofo/s portfolio of SIDBI

9 Primary Lending Institutions (Individual PLI limits)Refinance/Co-accepted Bills/ BRS/LOCFC[per institution]

(a) State Bank / its Associate Banks/Nationalised Banks/ Financial Institutions

Individual bank-wise limit asapproved by the Board.

(b) Private sector banks/ foreign banks

(c) SFCs [per institution] 15% of capital funds of SIDBI

(d) SIDCs including TFIDCs [per institution] 1% of capital funds of SIDBI

(e) SSIDCs [per institution] 0.5% of capital funds of SIDBI

(f) Scheduled Co-operative banks/ RegionalRural Banks [per institution]

7.5 % of capital funds ofSIDBI

10 Aggregate exposure to State Level Institutions(a) All SFCs (Aggregate) `5300 crore

(b) All SIDCs including TFIDCs (Aggregate) 5 % of capital funds of SIDBI

11 Aggregate exposure to(a) All Nationalised Banks (aggregate) 300% of capital funds ofSIDBI

(b) All State Bank and its Associate Banks(aggregate)

200% of capital funds ofSIDBI

(c) All FIs (aggregate) 100 % of capital funds ofSIDBI

(d) Private Sector Banks (aggregate) 200 % of capital funds ofSIDBI

(e) Foreign Banks (aggregate) 100 % of capital funds ofSIDBI