Loan policy Document for MSE

Worldwide, the Micro and Small Enterprises (MSEs) have been accepted as the engine of economic growth and for promoting equitable development. In India too, the MSEs play a pivotal role in the overall industrial economy of the country. Further, in recent years the MSE sector has consistently registered higher growth rate compared to the overall industrial sector. The major advantage of the sector is its employment potential at low capital cost.

The Government of India has been making concerted efforts for the promotion and development of MSE sector which enabled the MSE sector to grow at a higher pace than the overall industrial sector. To facilitate the development of this sector as also enhance their competitiveness, the Government has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, which is in force from 2nd October, 2006 which is a turning point for the development of Indian Industry, as it addresses and streamlines entire frame work along with key governance & operational issues being faced by the SMEs.

One of the major policy initiatives of the Government has been inclusion of the MSE sector under priority sector lending. It has been done so because credit is one of the critical inputs for the sustained growth of the MSE sector. The MSE sector has been receiving direct assistance from the commercial banks mostly for meeting working capital requirements.

In terms of MSMED Act, 2006 the MSE segment is broadly classified as under:

Micro (Manufacturing) Enterprises:

Enterprise engaged in the manufacture/production or preservation of goods and whose investment in plant and machinery (original cost excluding land and building and such items as in 1.1.1) does not exceed Rs 25.00 lakh, irrespective of the location of the unit.

Micro (Service) Enterprises: 

Enterprise engaged in the providing/rendering of services and whose investment in equipment (original cost excluding land and building and furniture, fittings and such items as in 1.1.2) does not exceed Rs  10.00 lakh.

Small (Manufacturing) Enterprises: 

Enterprise engaged in the manufacture/production or preservation of goods and whose investment in plant and machinery (original cost excluding land and building and the items specified by the Ministry of Small Scale Industries vide its notification No. S.O. 1722(E) dated October 5, 2006 as furnished in Annex I) does not exceed Rs.5.00 crore.

Small (Service) Enterprises: 

Enterprise engaged in the providing/rendering of services and whose investment in equipment (original cost excluding land and building and furniture, fittings and other not directly related to the service rendered or as may be under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006) does not exceed Rs 2.00 crore.

1. To ensure availability of adequate and timely credit to MSE sector.
2. To devise an organizational structure at all levels for handling MSE credit portfolio in a more focused manner.
3. To improve flow of credit to MSE Sector so as to double the credit to the Sector in 5 years.
4. To provide guidelines to the branches to dispense credit to MSE Sector on liberalized terms.

1. Broad guidelines on lending to MSE Sector
2. Identifying Thrust Industries
3. Composition of MSE Sector
4. Pricing Policy

1. Banks are advised to fix their own target in order to achieve a minimum 20% YOY growth over the MSE advances.
2. Sub-targets for lending to Micro Enterprises within the Small Enterprises, which are included under Priority Sector lending, are as under :

a.) 40% of total advances to Small Enterprises Sector should go to Micro Enterprises (Manufacturing Enterprises having investment in Plant and Machinery upto Rs 10.00 lakh and Micro (Service) Enterprises having investment in equipment upto Rs 4.00 lakh;

b.) 20% of total advances to Small Enterprises Sector should go to Micro”(Manufacturing) Enterprises with investment in Plant and Machinery above Rs 10.00 lakh and upto Rs 25.00 lakh, and Micro (Service) Enterprises with investment in equipment above Rs  4.00 lakh and upto Rs 10.00 lakh.

(Thus, 60% of Small Enterprises advances should go to Micro Enterprises).

Yearly Disbursement Target:

1. 20% year-on-year growth in credit to Micro and Small Enterprises should be achieved.
2. Annual growth in the number of MICRO Enterprises Accounts should be at least 10%.

Processing of Applications:

• Loan Application :

The existing Common loan Application-cum-Appraisal Format applicable to all loans irrespective of limit will be applicable for financing to MSE sector.

• Issue of Acknowledgement of Loan Applications :

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

• Disposal of Applications :

All applications for a credit limit or enhancement in existing credit limit up to Rs 2 lakh within two weeks;
For credit limit up to Rs 5 lakh within 4 weeks from the date of receipt, Provided the application is complete in all respects and is accompanied by all documents as per check list.
Loan applications for amounts exceeding Rs 5 lakh, within reasonable time frame.

• Register of Receipt/Sanction/Rejection of Applications :

a.) A register should be maintained at branch wherein the date of receipt, sanction/disbursement, rejection with reasons, should be recorded. The register should be made available to facilitate verification by the Bank’s officials including Zonal Manager during visit to the branch.

b.) Branch Manager may reject application (except in respect of SC/ST). In the case of proposals from SC/ST, rejection should be done at a level higher than Branch Manager.

c.) The reason for rejection will be communicated to the borrower in line with stipulation mentioned in the Fair Practice Lenders Code.

Types of Loans

MSE Units may be granted a variety of Credit facilities for their different needs which will include the following:

• Term Loan/ Demand Loan/ Deferred Payment guarantee

For acquisition of capital goods (excluding second hand), fixed assets, vehicles, Plant & machinery, purchase of land, construction of buildings etc. There is no provision in the Policy for allowing term loan against purchase of second hand machinery.

• Working Capital by way of Cash Credit, Overdraft etc for:

1. Purchase of raw material, components, stores and maintenance of stock of these items at minimum level and stock in process and finished goods.
2. Finance against receivables including receipted challans/invoices. 3. Meeting marketing expenses where the units have to incur large-scale expenditure towards marketing of their products.

(c) Bills Purchase/Discounting under L/C or outside L/C.
(d) Export Credit facilities like Packing Credit, FBP/UFBP.
(e) Letter of Credit on sight/usance basis for purchase of raw material / capital goods.
(f) Bank Guarantee for performance, advance payment, Tender Money, Security Deposit, Guarantees for getting orders, for procurement of raw materials etc.

Margin Rules Relating to Take over of Accounts:

1. Consistent growth in sales for last 3 years.
2. Continuous profit for last 3 years.
3. Credit rating of “A: or equivalent and above and no slippage in credit rating during last 3 years.
4. The unit's assets (fixed as also current) are charged to the Bank and Promoter’s/Director’s personal guarantee are available..
5. Asset coverage ratio of more than 1:5.
6. Other take-over norms are complied with.

The category-wise maximum extent of cover under CGTMSE is as under: Composite Loans:

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

Credit Rating

Considering the feedback received from Field Level functionaries, it has been decided that financing loan upto Rs. 1.00 Crore shall not be subject to internal credit rating. 

• For aggregate exposure above Rs  1 crore, the rate of Interest is decided as per credit Rating.

The credit rating module of our Bank for MSEs will be as per Loan Policy document of our Bank.

• Rating from outside rating Agencies :-

Our Bank has entered into MOU with SMERA, Fitch Ratings India (P) Ltd., Dun & Brad Street and ICRA Ltd. for getting the SME borrowers rated by them. The National Small Industries Corporation (NSIC) has been appointed as nodal agency which provides subsidy to the units obtaining credit rating from any of the empanelled agencies to the Micro and Small Enterprises (manufacturing sector, i.e earlier SSI units). The Credit rating awarded by Rating Agencies under NSIC Subsidy Scheme is conclusive for borrower as well as lender.
However, in case of take over a/cs EXTANT guidelines shall continue.

Pricing

Risk of default in the MSME sector is spread amongst a wide base of borrowers and therefore the pricing.

1. Would not be linked to credit rating upto certain limit, presently upto Rs. 1.00 Crore.
2. Would be linked to credit rating of the constituent for credit limit above Rs. 1 Cr.

Also keeping in view the RBI directives from time to time.

Penal interest @ 1% to be charged for the period of default in repayment, non-submission of financial statements, non-compliance of terms and conditions etc. as per extant guidelines of the Bank.

Amount of Advance	Processing Charges for advances other than from Loan & DPG	Processing Charges for Term Loan & DPG
Fresh Sanctions
Upto Rs. 25000/-	Nil	Nil
Above Rs. 25000/-	Rs.350/- per lac  Min Rs. 350/-	1.1236% of the sanctioned limit. Min. Rs. 600/-
Renewal / Review of limit
Upto Rs. 25000/-	Nil	Nil
Above Rs. 25000/-	Rs.350/- per lac  Min Rs. 350/-	Rs.120/- per lac  Min. Rs. 250/- Max. Rs. 55000/-

Working Capital Loan

Computation of Working capital limits to

Manufacturing Sector

Micro & small enterprises Upto Rs.5 Cr

Service Sector

Micro & Small Enterprises Upto Rs.1 Cr

Turnover method would be applicable for financing working capital needs @ 20% of projected turnover based on the assumptions of a three month operating cycle.

Additionally, the assessment of working capital requirement of such unit should be done as per traditional method and if the requirement so computed is higher than the one computed on projected turnover method basis the same should be considered.

Computation of Working capital limits to

Manufacturing Sector

Micro and small enterprises - Above Rs. 5 Crore

Service Sector Micro and Small Enterprises -
Above Rs. 1 Crore upto Rs 2 Crore   
Traditional method of computing MPBF as per second method of lending will continue. If any of the borrowers falling in this band intends to shift to cash budget system, the same may be accepted.
Term Loan The technical feasibility, the economic, financial, commercial viability, Managerial competence, environment viability and bank-ability of the proposal with reference to risk will be assessed. Other benchmark financial ratios like Current Ratios, Tenure etc. will be in line with the Bank’s Loan Policy.

1. The cluster based approach should be given a thrust area.
2. The cluster financing approach reduces the cost of transition to the entrepreneurs.
3. The Zonal Office/ branches will give due importance for financing of MSME sector in the identified Special Credit Delivery branches and Branches situated near to clusters.

As per Loan Policy Document of the Bank.

Repayment schedule should be fixed taking into account the sustenance requirements, surplus generating capacity, the break-even point, the life of the asset, etc., and not in an "ad hoc" manner. The maximum door to door tenor should not exceed 60 months excluding the moratorium period.

In respect of composite loan the repayment schedule may be fixed for term loan component only.

Moratorium period of 6 months to 1 year may be allowed taking into consideration the nature of the project and also commencement of commercial production.

The disbursement of the loan amount for Plant & Machinery, Equipment and other fixed assets will be made in favour of the supplier through Demand Draft/ Pay Order. Branches will continue to ensure the end use verification on monthly/quarterly basis.

Policy directives for monitoring of accounts covering documentation, supervision and control over accounts, special watch/potential NPAs etc., are as per Credit Monitoring Policy 2007-08 of the Bank and any amendment thereof.

Where ever the lending to MSE sector is eligible to be covered under CGTMSE, it will be the responsibility of the respective branch head and the concerned officials at Zonal Office to ensure that the respective accounts are duly covered under CGTMSE and the Guarantee Fee and the Annual Service Fee is paid to CGTMSE in time.

The Agriculture & Rural Business Department of the Bank will ensure proper implementation of this Policy in the Bank.

In case any modification/changes are warranted in this Policy, the Chairman and Managing Director/Executive Directors of the Bank will approved the same and will be got vetted by the Credit Risk Management Committee (CRMC) and the Board of Directors of the Bank before its circulation among our Branches/Offices.

Sl. No.	Particulars
1	Laghu Udyami Credit Card
2	Artisan Credit Card
3	Prime Minister Employment Generation Programme (PMEGP)
4	Collateral Free Loans under Credit Guarantee Trust Fund for Micro & Small Enterprises (CGTMSE)
5	Loans under Technology Upgradation Fund Scheme for Textile Units (TUFS Scheme)
6	Swarozgar Credit Card Scheme
7	UCO Udyog Mitra
8	UCO Weavers Card
9	UCO Mahila Pragati Dhara
10	Composite Loans to MSE units
11	Scheme for financing Handloom Weavers Group (HWGs)
12	Loans under Credit Linked Capital Subsidy Scheme for technology Upgradation.
13	UCO Channel Scheme
14	Scheme for Food Processing industries
15	UCO Commercial Vehicle Finance Scheme
16	UCO Doctor