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MSME Policy

Lending to Micro, Small & Medium Enterprises constitutes a thrust area for the Bank. Bank has formulated MSME policy to improve flow of credit to MSME Sector and to devise an organizational structure at all levels for handling MSME credit portfolio in a more focused manner. Details of the policy are as under: 1.1 Preamble: MSME is fast growing sector in the Indian Economy. Every Bank has given highest importance to financing MSMEs in their strategical growth plan. It has become necessary to bring policy shift and create free market environment from regulations & interventions in economic activity. Growth resulting from globalization and liberalization is visible most profoundly in the MSME segment. The relationship between the banker and the customer has become most crucial and competitive. The technology has entered the scene almost as a natural corollary of liberalization. Liberalized policies provide ample opportunities to Indian Market to compete with developed and developing countries. The clearance of the Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 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. 1.2 Objective: The MSME loan policy is designed with the following objectives: 1. To improve flow of credit to MSME Sector so as to double the credit to the Sector by the

year 2015.

2. To formulate liberal norms of lending to MSME sector, to ensure availability of adequate

and timely credit to the sector. 3. To provide guidelines to the branches to dispense credit to MSME Sector on liberalized

terms. 4. To devise an organizational structure at all levels for handling MSME credit portfolio in a

more focused manner. 5. To comply with guidelines received from Reserve Bank of India from time to time for

Implementation. 1.3 MSME Definition & Eligiblity: The Government of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 on June 16, 2006. With the enactment of MSMED Act 2006, the paradigm shift that has taken place is the inclusion of the services sector in the definition of Micro, Small & Medium enterprises, apart from extending the scope to medium enterprises. The MSMED Act, 2006 has modified the definition of micro, small and medium enterprises engaged in manufacturing or production and providing or rendering of services. (i)SME would henceforth be meant to include Micro Small and Medium Enterprises (MSMEs). As per the MSMED Act 2006 (Micro, Small, and Medium Enterprises Development Act 2006), the activities of these enterprises are classified into Manufacturing and Service Categories. (ii)The definitions of Micro, Small and Medium Enterprises would thus be in place of the existing definitions of Small & Medium Industries and SSSBEs/Tiny Enterprises. The following important points may please be borne in mind: Micro Enterprises would include Tiny Industries also.

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Micro, Small Enterprises (Manufacturing) would mean (and replace) Small Scale Industries (SSIs). Medium Enterprises (Manufacturing) would mean (and replace) Medium Industries (MIs). Micro, Small Enterprises (Services) and Medium Enterprises (Services) would mean Other Small & Medium Enterprises such as Professional & Self-Employed, Small Business Enterprises, and Small Road/Water Transport Operators and Other Service enterprises, engaged in providing/rendering of services. (iii) Thus, MSME Advances would be: All the advances to the MSME segments viz. Micro, Small and Medium Enterprises in the Manufacturing sector irrespective of sanctioned limits, (including advances against TDRs/Govt. Securities etc for business purposes to these categories of Borrowers), and Advances to the MSME segments in the Services Sectors, such as Professionals & Self-Employed, Small Business Enterprises, SRTOs/WRTOs and Other Services, irrespective of sanctioned limits, (including advances against TDRs/Govt. Securities etc for business purposes to these categories of Borrowers) PROVIDED these enterprises conform to their respective investment criteria (iv)Those enterprises exceeding the maximum prescribed investment ceilings would be categorised as Large Enterprises, and therefore be outside the purview of MSME. (v)The sanctioned limits would thus no longer be the criteria in determining the status as micro or small or medium enterprises in these cases.It is the investment levels which would qualify an enterprise as micro or small or medium and within these investment levels, these units would be classified as MSMEs whatever may be the sanctioned limits. Only the above categories should be reported as MSME advances wherever required. (vi)Investment Criteria: (a)The following chart indicates the threshold investment levels for both Manufacturing sector (investment in Plant & Machinery)* and Services sector (Investment in Equipment) i) Investment Criteria:

Enterprises Investment in plant and machinery

Micro Enterprises Do not exceed twenty five lakh rupees

Small Enterprises More than twenty five lakh rupees but does not exceed five crore rupees

Medium Enterprise

More than 5 cr rupees but does not exceed ten crore rupees

Service Sector-Loans

Enterprises Investment in equipment

Micro Enterprises Does not exceed ten lakh rupees

Small Enterprises More than ten lakh rupees but does not exceed two crore rupees

Medium Enterprise

More than 2 cr rupees but does not exceed 5 crore rupees

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Calculation of Cost of Plant and Machinery: As per notification of Ministry of Small Scale Industries cost of plant and machinery is calculated as under: While calculating the value of plant and machinery for manufacturing enterprises, the cost of land and building should not be included. While calculating the investment in plant and machinery the original price thereof, irrespective of whether the plant and machinery is new or second hand, shall be taken into account. In the case of imported machinery, the following shall be included in calculating the value, namely;

i. Import duty (excluding miscellaneous expenses such as transportation from the port to

ii. the site of the factory, demurrage paid at the port);

iii. Shipping charges;

iv. Customs clearance charges; and (iv) Sales tax or value added tax.

The cost which shall be excluded while calculating the investment in plant and machinery in the case of the enterprises:

i. equipment such as tools, jigs, dyes, moulds and spare parts for maintenance and the

cost of consumables 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

regulations of the State Electricity Board;

v. bank charges and service charges paid to the National Small Industries Corporation

or the State Small Industries Corporation;

vi. procurement or installation of cables, wiring, bus bars, electrical control panels (not

mounded on individual machines), 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 producers plants; transportation charges ( excluding sales-tax or value added

tax and excise duty) for indigenous machinery from the place of the manufacture to

the site of the enterprise;

viii. charges paid for technical know-how for erection of plant and machinery;

ix. such storage tanks which store raw material and finished produces and are not

linked with the manufacturing process; and

x. Fire fighting equipment.

Services Sector: Service Enterprises are those engaged in providing or rendering of services (subject to above investment criteria) and will include:

Small Road and Water Transport Operators. Professional & Self-Employed. Small Businesses. All Other Service Enterprises.

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An illustrative list of Services Enterprises is furnished in Annexure IV. It may be noted that the activities should be of services nature and not any and every activity. It may be industry-related such as industrial consultancy, industrial photography, auto repairs/services/garages, Undertakings engaged in maintenance/repairs/testing/servicing of vehicles/machinery etc or non-industry- related such as tailoring, X-Ray clinic, ISD/STD Booths etc. 1.4. Classification of MSMEs Under Priority Sector: Bank loans to micro and small enterprises both manufacturing and service are eligible to be classified under priority sector as per the following:

Direct Finance

Manufacturing Enterprises

The Micro and Small enterprises engaged in the manufacture or production of goods to any industry specified in the first schedule to the Industries (Development and regulation) Act, 1951. The manufacturing enterprises are defined in terms of investment in plant and machinery.

Loans for food and agro processing Loans for food and agro processing will be classified under Micro and Small Enterprises, provided the units satisfy investments criteria prescribed for Micro and Small Enterprises, as provided in MSMED Act, 2006. Service Enterprises

Bank loans up to 2 crore per unit to Micro and Small Enterprises engaged in providing or rendering of services and defined in terms of investment in equipment under MSMED Act, 2006.

Export credit to MSE units (both manufacturing and services) for exporting of goods/services produced by them. Khadi and Village Industries Sector (KVI)

All loans sanctioned to units in the KVI sector, irrespective of their size of operations, location and amount of original investment in plant and machinery. Such loans will be eligible for classification under the sub-target of 60 percent prescribed for micro enterprises within the micro and small enterprises segment under priority sector. Indirect Finance

(i) Loans to persons involved in assisting the decentralised sector in the supply of inputs to and marketing of outputs of artisans, village and cottage industries.

(ii) Loans to cooperatives of producers in the decentralised sector viz. artisans village and cottage industries.

(iii) Loans sanctioned by banks to MFIs for on-lending to MSE sector as per the conditions specified in RBI circular no. RBI/2012-13/138 1.5 Targets for Domestic Commercial banks: 1.5.1 The Domestic commercial Banks are expected to enlarge credit to priority sector and ensure that priority sector advances (which include the micro and small enterprises (MSE)

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sector) constitute 40 percent of Adjusted Net bank Credit (ANBC) or credit equivalent amount of Off- Balance Sheet Exposure, whichever is higher. 1.5.2 In terms of the recommendations of the Prime Minister’s Task Force on MSMEs , banks are advised to achieve a 20 percent year on year growth in credit to micro and small enterprises and a 10 percent annual growth in the number of micro enterprise accounts. 1.5.3 In order to ensure that sufficient credit is available to micro enterprises within the MSE sector, it should be ensured that:

a) 40 per cent of the total advances to MSE sector should go to micro (manufacturing)

enterprises with investment in plant and machinery up to Rs. 5 lakh, and micro

(service) enterprises with investment in equipment above Rs. 2 lakh.

b) 20 per cent of the total advances to MSE sector should go to micro (manufacturing)

enterprises with investment in plant and machinery above Rs. 5 lakh and upto Rs. 25

lakh , and micro (service) enterprises with investment in equipment above Rs. 2 lakh

and upto Rs. 10 lakh. Thus, 60 per cent of MSE advances should go to the micro

enterprises.

c) While it is advised achieve the 60% target as above, in terms of the MSE advances

to the micro enterprises is to be achieved in stages viz. 50% in the year 2010-11,

55% in the year 2011-12 and 60% in the year 2012-13.

1.6. Filing of Memorandum by Micro, Small & Medium Enterprises: There is a change in the entire registration process with the MSMED Act.2006 coming into force w.e.f. 02/10/2006. Vide Chapter III Section 8 (Page 7), the Act stipulates certain important requirements from the Entrepreneurs which are quoted verbatim in the Annexure hereto. Accordingly, the following would be the requirements under the MSMED Act 2006: a. New Enterprises established/to be established after the MSMED Act 2006: A Memorandum has to be filed with the District Industries Centre under whose jurisdiction the enterprise is located/proposed to be located. Depending on the activity of the Enterprise, the filing of the said memorandum is either mandatory or discretionary as shown below:

Sl.No.

Enterprises

Memorandum

A. Micro & Small Industries in both Manufacturing and services sector.

Not mandatory but only discretionary with the discretion left to the Entrepreneur concerned.

B Medium Enterprises in the Services Sectors

Not mandatory but only discretionary with the discretion left to the Entrepreneur.

C Medium Enterprises in Manufacturing Sector

Mandatory.

However, with the advantages/benefits available in many ways to such

enterprises (A & B above), from several Authorities/Organisations, it is always desirable (though not mandatory) to file Memorandum of Registration.

Wherever SSI Registration Certificate Number is asked for by any other body/authority, the units may furnish the date of filing the Memorandum and the date of acknowledgement thereof, as received from the authorities.

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b. Existing SSI & Medium Industries:

In much the same way as above, it is not mandatory for an existing SME (Mfg.) unit

to file the Memorandum as above; however, at their discretion the SME (Mfg.) may

file the Memorandum, in view of the benefits available due to Registration.

An existing Medium industry (in the manufacturing sector), however,

should mandatorily file the Memorandum as required.

c. Period for Filing: i) Already Established Medium Enterprises:

In respect of established Medium Enterprises, such a filing of memorandum was to be done within 180 days from the date of commencement (02/10/2006) of the MSMED Act 2006 i.e. on or before 30/03/2007. If units financed by us, more particularly in the Medium Enterprises segment where mandatory filing is required, have not filed the requisite memorandum before 30/03/2007 and submitted the copy of DIC acknowledgement thereof, they should be advised to seek the permission for late filing from the respective DICs.

The Local DIC should be contacted for the latest guidelines in this regard. Branches/Zones should insist upon the filing before extending any further limits. Since online filing is also permitted, there is no reason why medium industries cannot file the requisite memorandum in time. No concessions should be extended to such units till they file the memorandum and produce the copy of the acknowledgement from the DIC.

ii) Newly established/proposed Medium Enterprises:

In respect of newly established/proposed Medium Enterprises, the Branches should insist on the filing and production of the acknowledgement before consideration of any limits/taking up the proposals.

d. Procedural Guidelines for the Entrepreneurs:

The form of the Entrepreneur’s Memorandum comprises of Parts I & II:

Existing units to file only Part II of the Memorandum.

Part I to be filed as an expression of interest by all intending entrepreneurs.

Part II to be filed once the enterprise starts production or starts providing/rendering

services, within two years from the date of filing Part I.

If Part II not filed within the said two years, Part I would automatically become invalid.

Whenever changes/additions take place in the investment/product/Services, the filing

to be done within three months of such changes/additions.

The Memorandum to be filed would be in quadruplicate.

There is no fee prescribed for processing such memorandum.

The DIC issues an acknowledgement after allotting an Entrepreneur memorandum

Number:

o Within five days of the receipt of the memorandum - If submitted by

post.

o Same day - If submitted in person or online.

The Entrepreneurs’ Memorandum issued by DIC would also be available at the

Small Industries Service Institutes of the State/Jurisdiction as well as with the Joint Development Commissioner in the Office of the Development Commissioner (Small Scale Industries).

1.7. Interest Rate for MSME Advances: To boost the MSME advances bank will adopt a competitive interest rate policy keeping in view of the prevailing market conditions.

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1.8. Take Over/ Transfer of Accounts from other banks: While considering proposal of take over or transfer of account from other banks/ financial institutions, the takeover guidelines prescribed under lending policy be followed. 1.9 Issue of Acknowledgement of Loan Applications: Branches are advised to give acknowledgement for loan applications received from the borrowers. Recently Bank has adopted simplified common loan application form for MSE customers as devised by Indian Bank Association along with the checklist of documents to be obtained from the MSME borrowers. All borrowers in the MSEs sector irrespective of the loan amount can use this standardized

loan application form. However, for facilities beyond Rs. 25.00 lakhs branches may obtain

additional information from the borrower, as deemed necessary, as shown in the checklist

enclosed to the loan application form. It is to be ensured that all relevant information is

received while processing the proposal.

Online Application: Bank has also made available online application form for MSME applicants. The system provides online tracking facility for the applicants. The branches shall update the status regularly. All the applications should be responded on the same day. 1.10 Time Norms for Disposal of loan applications: In order to provide better customer service and to ensure that applications for loans for all categories of borrowers are dealt with and disposed off expeditiously, the following norms shall be adhered to, provided the loan applications received are complete in all respects and duly accompanied by a check list.

• In respect of loans upto Rs.25,000/- within a maximum period of one week of receipt of loan applications complete in all the respects and duly accompanied by a check list.

• In respect of other cases for loans above Rs.25,000/- and upto Rs.5.00 lacs, within a maximum period of two weeks on receipt of duly completed loan applications in all the respects and accompanied by a checklist.

• In respect of loans over Rs. 5.00 lacs, within a maximum period of 4 weeks on receipt of duly completed loan applications in all respects and accompanied by a check list.

1.11 Rejection of applications: Rejection of applications for fresh limits/enhancement of existing limits should be done with the concurrence of the next higher authority. Sanction of reduced limits should be reported to the next higher authority immediately with full details for review and confirmation. A register should be maintained at branch wherein the date of receipt, sanction

/disbursement/rejection with reasons thereof etc., should be recorded. The register should

be made available to all inspecting Officer/Visiting Executives.

1.12. Credit Appraisal: Although same appraisal norms cannot be uniformly applied to Micro, Small and Medium Enterprises, broadly the appraisal would involve: Proper identification of the Proponent(s) and his/her/their antecedents in accordance

with KYC Norms/Guidelines, the proponents’ experience, educational and social

background, technical/ professional competence, integrity, initiatives, etc,.

Checking out for Wilful Defaulters’ List of RBI, Specific Approval List (SAL) of ECGC

etc,.

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The acceptability of the product manufactured, its popularity/market demand, market

competitors.

Evaluation of State and Central Govt. Policies (enabling environment) with specific

reference to the Enterprise in question, Environmental stipulations, Availability of

necessary infrastructure-roads, power, labour, raw material and markets. Project

Cost, the Proponent’s own financial contribution, projections for three years, and

other important parameters which would include the BEP, liquidity, solvency, and

profitability ratios, etc,.

Working Capital Assessment The Bank shall follow the following methods for computation of bank finance. a) Turnover Method (Nayak Committee Recommendations)

The finance to following category of borrowers shall be considered on the basis of turnover method. i) MSME Borrowers availing fund based facilities up to ` 5 crores. ii) Other category of borrowers availing fund based facilities up to ` 2.00 crores. b) Projected Working Capital Gap Method

Working capital requirements of all borrowers excluding those mentioned at (a) above shall be assessed on the basis of projected working capital method. In case of borrowers at (a)above, the working capital limits may be considered under projected working capital gap method at the specific request of the borrower. c) Cash Budget System

For Seasonal industries such as sugar, tea etc; Software industry; Sick units; Construction/Contractors/Developers cash budget method shall be used for assessment of working capital requirements. Separate Peak and Non Peak level credit limits shall be given consideration while working on the credit appraisal where the borrower’s activities are of seasonal nature. d) Benchmark ratio for credit proposals

Following benchmark ratio shall be observed for credit proposals where WC is assessed on projected working capital method. For all borrowal accounts

S.No. Ratio Micro & Small Enterprises under manufacturing sector and Service Sector falling under regulatory guidelines

Medium Enterprises under manufacturing sector and Service Sector falling under regulatory guidelines

1 Current Ratio 1.17 & above 1.25 & above

2 Debt Equity Ratio (Total Term Liability/ Tangible Net Worth)

3:1 3:1

3 TOL/TNW 4.5:1 4:1

4 FACR (FA/ Term Debts) Above 1.25 Above 1.25

5 Average DSCR for Term Loan

1.50:1 1.50:1

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Relaxation in the above benchmark ratios may be considered by the sanctioning authority in deserving cases after recording justification for the same and shall be reported to next higher authority.

e) II method of lending: However in deserving cases, the assessment of working

capital under II method of lending is also allowed

1.13 Credit Risk Rating: The Credit Risk Rating exercise shall be carried out as per Risk Management guidelines The interest rates for MSMEs under RBPF, application of size-wise rate of Interest for new MSMEs, relaxation in rate of interest as per ratings of MSME units by accredited rating agencies shall be governed by the existing guidelines and guidelines to be issued from time to time by the Credit Priority Department, Head Office. External Credit Rating: Small Enterprises borrowers are rated by few external credit rating agencies. In case of MEs, some of the borrowers are getting their accounts rated by external credit agency like CRISIL etc. Our Bank has entered into MOU with SMERA & CRISIL to get our SME borrowers rated at confessional rate. The Bank may enter into MoU with other approved agencies. The Bank may extend interest rate concession to the extent of 0.50% for first and second top rated borrowers. External credit rating under the BASEL-II guidelines should be carried out in all accounts involving exposure above Rs. 5 cr by the agencies approved by RBI. 1.14 Techno-economic viability study: The guidelines of bank on TEV study issued from time to time will continue to apply. The bank will enter into an agreement with agencies for TEV study. Bank may enter into tie up with various other organisations to improve the credit flow to MSME.

1.15 MSME Care Centers:

Bank has formed 32 MSME Care centers at 32 Zonal offices of Our Bank to monitor flow of credit to MSME and redress complaints from the borrowers and to verify periodically that guidelines on MSME are implemented by the branches. The names and addresses of the officer with whom complaints can be lodged should be displayed on the notice board of every branch.

Processing Hub: The bank envisages to establish Centralized Loan Processing centres for speedy decision making and improved asset quality.

1.16. Collateral Security & Margin Requirements: As per RBI guidelines issued on 6th May, 2010, it is mandatory that no collateral security is required to be obtained in respect of Micro & Small Enterprises units (both manufacturing and service enterprises) with the credit limit upto Rs. 10.00 lakh. However, the issue of collateral security for the borrowal account above Rs. 10 lakhs would be addressed on a case to case basis. Credit Guarantee Scheme of Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). Credit Guarantee Fund Trust for Micro and Small Enterprises was set up in July 2000 by

the Govt.of India and SIDBI with a committed corpus of Rs.2500 crores for guaranteeing

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collateral free credit extended by Member Lending Institutions (MLIs). The Trust guarantees

credit facilities in respect of a single eligible borrower not exceeding Rs.100 lacs both fund

based and non-fund based by way of term loan and/or working capital facilities to Micro

and Small Enterprises covered under MSMED Act, 2006. The scheme offers various

advantages, some of which are mentioned below:

Credit facilities guaranteed under the scheme carry zero risk weight/provisioning for

guaranteed portion.

Promotes credit to MSE Sector, thus increasing business.

Enables financial inclusion and employment generation.

Facilitates shift from collateral to merit based lending.

Encourages first generation entrepreneurs/start ups who generally do not

have collateral to offer.

Contributes to quicker dispensation of credit due to the time saved on security

creation/title related issue of collaterals.

Ensures hassle free guarantee cover.

Helps in active participation in lending under Govt. schemes for financing

eligible cases due to the availability of the guarantee cover.

We also reiterate the following guidelines conveyed earlier through various communications:

As per guidelines of RBI "the limit for all MSE borrowal accounts for obtention of collateral

security (both manufacturing or production and providing or rendering services) is Rs.10.00

lacs". As such, banks cannot insist for any collateral, for any advance sanctioned below

Rs.10.00 lacs to MSE borrowers.

As conveyed vide circular no.AX1/CRP/Cir.1/37/0001 dated 24.2.01, all the eligible

advances are to be covered under the scheme and if any branch is of the opinion that

particular advance is not to be covered under the scheme, it is mandatory to obtain prior

approval of the Zonal Head and the same to be kept on record.

As per the above guidelines not covering any eligible advance under the scheme will attract

staff accountability and necessary punitive action.

Margin:

For Term Loan: In case of plant, machineries and equipments margin is proposed at minimum 25% For Working Capital: 25% margin is proposed on stock and receivables. 1.17 Purpose of the Loans: The Advances can be given for Capital expenditure and Working Capital requirements only. 1.18 Loan Amount: The Loan amount is as per the requirements of the Customer and eligibility arrived as per the Appraisal/Analysis. 1.19 Tenor/ period of Advance: Working Capital loans will be sanctioned for a period of one year on renewal basis and the Tenor of the Term Loans is defined based on the cash flows and repayment capacity and maximum tenor shall be 7 years..

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1.20 Disbursal of Loans: The Disbursement of Loans will be done only after completion of the all documentation and pre sanction conditions as mentioned in the Sanction Letter. 1.21 Documentation: The Documentation of the loans will be done based on the Banks policy. 1.22 MSME Products:

1. Mahabank Trade & Services scheme for financing of trades

2. Mahabank Transport Operator Loan Scheme

3. MAHA Doc+

4. Mahabank Professional Loan Scheme

5. PMEGP Loan

6. Loan Under KVIC Margin Money Scheme

7. Collateral free loans under credit guarantee fund trust scheme

8. Composite loans to SSI units

9. Loans under technology upgradation fund scheme for textile units

1.23 Rehabilitation of sick units / Debt Restructuring Scheme for MSMEs/ Scheme for One Time Settlement for MSME: These areas are covered as per guidelines received from RBI from time to time.

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