RBI/2005-06/131
RPCD.PLNFS. BC.No.31/ 06.02.31/ 2005-06
August 19, 2005
The Chairman/Managing Director
All Public Sector Banks
Dear Sir,
Policy Package for Stepping up Credit to Small and Medium Enterprises
--Announcements made by the Union Finance Minister
The Hon'ble Finance Minister, Government of India has announced
certain measures in the Parliament on August 10, 2005 for stepping up credit
to small and medium enterprises (copy of the policy package enclosed), which
are required to be implemented by all public sector banks. Accordingly, banks
may take action as under:
Measures for improving credit flow to the sector:
2. At present, a small scale industrial unit is an industrial
undertaking in which investment in plant and machinery, does not exceed Rs.1
crore except in respect of certain specified items under hosiery, hand tools,
drugs and pharmaceuticals, stationery items and sports goods where this investment
limit has been enhanced to Rs.5 crore. A comprehensive legislation which would
enable the paradigm shift from small scale industry to small and medium enterprises
is under consideration of Parliament. Pending enactment of the above legislation,
current SSI/tiny industries definition may continue. Units with investment in
plant and machinery in excess of SSI limit and up to Rs.10 crore may be treated
as Medium Enterprises (ME). Only SSI financing will be included in Priority
Sector.
3. All banks may fix self-targets for financing to SME sector
so as to reflect a higher disbursement over the immediately preceding year,
while the sub-targets for financing tiny units and smaller units to the extent
of 40% and 20% respectively may continue. Banks may
arrange to compile data on outstanding credit to SME sector as on March 31,
2005 as per new definition and also showing the break up separately for tiny,
small and medium enterprises.
4. Banks may initiate necessary steps to rationalize the cost
of loans to SME sector by adopting a transparent rating system with cost of
credit being linked to the credit rating of enterprise.
SIDBI has developed a Credit Appraisal & Rating Tool (CART)
as well as a Risk Assessment Model (RAM) and a comprehensive rating model for
risk assessment of proposals for SMEs. The banks may consider to take advantage
of these models as appropriate and reduce their transaction costs.
The National Small Industries Corporation has recently introduced
a Credit Rating Scheme for encouraging SSI units to get themselves credit rated
by reputed credit rating agencies. Banks may consider these ratings as per availability
and wherever appropriate structure their rates of interest depending on the
ratings assigned to the borrowing SME units.
SIDBI in association with Credit Information Bureau (India)
Ltd. is initiating necessary steps to set up a credit rating agency expeditiously.
5. In order to increase the outreach of formal credit to the
SME sector, all banks, including Regional Rural Banks may make concerted efforts
to provide credit cover on an average to at least 5 new small/medium enterprises
at each of their semi urban/urban branches per year.
6. Reserve Bank had issued a master circular on lending to
SSI sector vide circular RPCD.PLNFS.BC.No.03/06.02.31/2005-06 dated July 1,
2005 incorporating instructions on the time to be taken for disposing of loan
applications of SSI units, the limit up to which banks are obliged to grant
collateral-free loans, etc. Based on the above guidelines, the Boards of banks
may formulate a comprehensive and more liberal policies than the existing policies
in respect of loans to SME sector. Till the banks formulate such a policy, the
current instructions of Reserve Bank will be applicable to advances granted/to
be granted by banks to SME units.
7. Cluster based approach for financing SME sector offers possibilities
of reduction in transaction costs, mitigation of risk and also provide an appropriate
scale for improvement in infrastructure. About 388 clusters have already been
identified. In view of the benefits accruing on account of cluster based approach
for financing SME sector, banks may treat it as a thrust area and increasingly
adopt the same for SME financing. SIDBI in association with Indian Banks’ Association
will initiate necessary steps to collect and pool common data on risks in each
identified clusters and develop an IT-enabled application, appraisal and monitoring
system for small (including tiny) enterprises. It is expected that this measure
will help in reducing transaction costs as well as improve credit flow to the
small and tiny enterprises in the clusters. To broaden the financing options
for infrastructure development in clusters through public private partnership,
SIDBI will formulate a scheme in consultation with the stakeholders.
In the meantime, SIDBI has already initiated the process of
establishing Small Enterprises Financial Centres (SEFCs) in select clusters.
Risk profile of each cluster will be studied by professional credit rating agency
and such risk profile reports will be made available to commercial banks. Each
lead bank of a district may consider adoption of at least one cluster.
8. A debt restructuring mechanism for nursing of sick units
in SME sector and a One Time Settlement (OTS) Scheme for small scale NPA accounts
in the books of the banks as on March 31, 2004 are being introduced. Necessary
circulars are being issued in this regard separately.
Monitoring and Review Mechanism
a. The existing institutional arrangements for review of credit
to SSI sector like the Standing Advisory Committee in Reserve Bank and cells
at the bank head office level as also at important regional centres will review
periodically flow of credit to SME, including tiny sector as whole.
b. At the Regional offices, the Reserve Bank is
constituting empowered committees with the Regional Director of
the Reserve Bank as the Chairman to review the progress in SME financing and
rehabilitation of sick SSI and ME units and to coordinate with other banks/financial
institutions and the state government in removing bottlenecks, if any, to ensure
smooth flow of credit to the sector. These Regional level committees
may decide the need to have similar committees at cluster/district levels.
c. The banks may ensure specialized SME branches in identified
clusters/centres with preponderance of Medium Enterprises to enable the SME
entrepreneurs to have easy access to the bank credit and to equip bank personnel
to develop requisite expertise. The existing specialised SSI branches may be
also be redesignated as SME branches. Though the core competence
will be utilized for extending finance and other services to SME sector, they
will have operational flexibility to extend finance/render other services to
other sectors/borrowers.
d. For wider dissemination and easy accessibility,
the policy guidelines formulated by Boards of banks as well as instructions/guidelines
issued by Reserve Bank may be displayed on the respective web sites of banks
as well as web site of SIDBI. The banks may also prominently display all the
facilities/schemes offered by them to small entrepreneurs at each of their branches.
10. The above instructions and the guidelines to be formulated
by your Board of Directors may please be advised to your controlling offices
and branches for immediate implementation.
11. Boards of banks may review the progress in achieving the
self-set targets as also financing of SME accounts (including tiny sector) on
a quarterly basis to ensure that the required emphasis at the highest forum
of the banks is given to this sector.
12. Please acknowledge receipt.
Yours faithfully,
(G.Srinivasan)
Chief General Manager
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Policy Package for stepping up credit to Small and Medium
Enterprises
The small-scale industries (SSI) produce about 8000 products,
contribute 40% of the industrial output and offer the largest employment
after agriculture. The sector, therefore, presents an opportunity to the
nation to harness local competitive advantages for achieving global dominance.
In recognition of these aspects, the National Common Minimum Programme
makes the following declarations for accelerating the development of small-scale
sector.
"Household and artisanal manufacturing will be given greater technological,
investment and marketing support. Small–scale industry will be freed from
Inspector Raj and given full credit, technological and marketing support.
Infrastructure upgradation in major industrial clusters will receive urgent
attention."
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2. From SSI to SME: Defining the New Paradigm
2.1 Government policy as well as credit policy has so
far concentrated on manufacturing units in the small-scale sector. The
lowering of trade barriers across the globe has increased the minimum
viable scale of enterprises. The size of the unit and technology employed
for firms to be globally competitive is now of a higher order. The definition
of small-scale sector needs to be revisited and the policy should consider
inclusion of services and trade sectors within its ambit. In keeping with
global practice,. there is also a need to broaden the current concept
of the sector and include the medium enterprises in a composite sector
of Small and Medium Enterprises (SMEs). A comprehensive legislation, which
would enable the paradigm shift from small-scale industry to small and
medium enterprises under consideration of Parliament. The Reserve Bank
of India, had meanwhile set up an Internal Group which has recommended:
"Current SSI/tiny industries definition may continue.
Units with investment in plant and machinery in excess of SSI limit and
up to Rs.10 crore may be treated as Medium Enterprises (ME). The definition
may be reviewed after enactment of the Small and Medium Enterprises Development
Bill. Only SSI financing will be included in Priority Sector."
2.2 It is proposed to accept the recommendation with
regard to the credit facilities being offered by the banking sector and
accordingly request the Reserve Bank of India to advise the banks to frame
a policy for enhancing the flow of credit to both small and medium enterprises,
within the overall framework of credit policy of banks to small and medium
enterprises.
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2.3. The challenges being faced by the small and medium
scale sector may be briefly set out as follows-
a. Small and Medium Enterprises (SME), particularly the
tiny segment of the small enterprises have inadequate access to finance
due to lack of financial information and non-formal business practices.
SMEs also lack access to private equity and venture capital and have a
very limited access to secondary market instruments.
b.SMEs face fragmented markets in respect of their inputs
as well as products and are vulnerable to market fluctuations.
c.SMEs lack easy access to inter-state and international
markets.
d.The access of SMEs to technology and product innovations
is also limited. There is lack of awareness of global best practices.
e.SMEs face considerable delays in the settlement
of dues/payment of bills by the large scale buyers.
With the deregulation of the financial sector, the ability
of the banks to service the credit requirements of the SME sector depends
on the underlying transaction costs, efficient recovery processes and
available security. There is an immediate need for the banking sector
to focus on credit and finance requirements of SMEs.
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3. Measures to increase the quantum of credit to SMEs
at the right price
3.1 Public
Sector Banks will be advised to fix their own targets for funding SMEs
in order to achieve a minimum 20% year on year growth in
credit to SMEs. The objective is to double the flow of
credit from Rs.67,600 crore in 2004-05 to Rs.135,200 crore to the SME
sector by 2009-10, i.e. within a period of 5 years.
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3.2 Public Sector Banks will be advised to follow a transparent
rating system with cost of credit being linked to the credit rating of
the enterprise.
3.3 SIDBI in association with Credit Information Bureau(India)
Ltd. (CIBIL)will expedite setting up a credit rating agency.
3.4 SIDBI in association with Indian Banks’ Association
(IBA) would collect and poo common data on risk in each identified cluster
and develop an IT-enabled application, appraisal and monitoring system
for small (including tiny) enterprises. This would help reduce transaction
cost as well as improve credit flow to small (including tiny) enterprises
in the clusters.
3.5 The National Small Industries Corporation has recently
introduced a Credit Rating Scheme for encouraging SSI units to get themselves
credit rated by reputed credit rating agencies. Public Sector Banks will
be advised to consider these ratings appropriately and as per availability,
and structure their rates suitably.
3.6 SIDBI has developed a Credit Appraisal & Rating
Tool (CART) as well as a Risk Assessment Model (RAM) and a comprehensive
rating model for risk assessment of credit proposals for SMEs. Public
sector banks will be advised to take advantage of these models as appropriate
and reduce their transaction costs.
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4. Outreach of Formal Credit: Opening of New Accounts
The commercial banks (including regional rural banks)
with over 67,000 branches, will make concerted efforts to
provide credit cover on an average to at least 5 new tiny,small
and medium enterprises at each of their semi urban/urban branches per
year
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5. Nursing the Sick Units Back to Health: Debt Restructuring
Reserve Bank will issue detailed guidelines relating
to debt restructuring mechanism so as to ensure restructuring of debt
of all eligible small and medium enterprises at terms which are not less
favourable than the Corporate Debt Restructuring (CDR) mechanism
in the banking sector. The restructuring would follow upon a
request to that effect from the borrowing unit. All accounts,
except those classified as ‘loss assets’ will be eligible for restructuring,
provided the industrial units are viable or potentially viable.
Based on the Reserve Bank’s guidelines, banks may formulate,
with the approval of their Boards of Directors, more liberal policies
relating to restructuring of accounts. Until the banks formulate their
own policies, Reserve Bank’s guidelines will be operative.
A one-time settlement scheme to apply to small-scale
NPA accounts in the books of the banks as on March 31, 2004 will be introduced.The
scheme will be in force upto March 31, 2006.
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6. Facilitative Measures
Reserve Bank had issued a detailed master circular on
March 2005 on the time to be taken for disposing of loan applications
of SSI units, the limit up to which banks are obliged to grant collateral-free
and composite loans, norms for computation of working capital credit limits
to SSI units, opening of atleast one specialized SSI branch in each district,
etc. Taking these guidelines as indicative minimum, banks will formulate
a comprehensive and more liberal policy relating to advances to SME sector.
Untill the banks formulate such a policy, the extant instructions of Reserve
Bank will be applicable to advances granted or to be granted by banks
to SME units.
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7. Credit Guarantee Fund Trust Scheme for Small Industries(CGTSI)
At present, Member Lending Institutions (MLIs), like
banks, are provided guarantee cover of 75% of the amount of default by
CGTSI,I respect of term loan and/or working capital facilities up to Rs.25
lakh extended by the MLIs to new and existing SSI units/IT/software units/small
scale service business enterprises (SSSBEs), without collateral security
and/or third party guarantee. One-time guarantee fee of 2.5% and annual
service fee of 0.75% of the credit facility sanctioned are currently charged
by CGTSI from the MLIs. In order to reduce the cost of guarantee to the
weaker segments of the borrowers, particularly tiny units, the CGTSI will
be advised to reduce the one-time guarantee fee from 2.5% to 1.5% for
all (i) loans up to Rs.2 lakh, (ii) eligible women entrepreneurs, and
(iii) eligible borrowers located in the North Eastern regions (Sikkim)
and Jammu & Kashmir. Further, public sector banks will be encouraged
to absorb the annual service fee in excess of 0.25% in respect of guarantee
for all (i) loans up to Rs.2 lakh, (ii)eligible women entrepreneurs, and
(iii) eligible borrowers located in the North Eastern regions(Sikkim)
and Jammu & Kashmir.
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8. Cluster based approach
Cluster based approach for financing SME sector offers
possibilities of reduction of transaction costs and mitigation of risk.
About 388 clusters have already been identified. Cluster based approach
now be treated as a thrust area. Banks will increasingly adopt the cluster-based
approach for SME financing. To broaden the financing options for infrastructure
development in clusters through public private partnership, SIDBI will
formulate a scheme in consultation with the stakeholders.
SIDBI has already initiated the process of establishing
Small Enterprises Financial Centres in select clusters. Risk profile of
each cluster would be studied by a professional credit rating agency and
such risk profile reports would be made available to commercial banks.
Each lead bank of a district will consider adoption of atleast one cluster
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9. Setting up of Watchdogs: Monitoring and Review
The following supervisory arrangements will be ensured:
a. The existing institutional arrangements for review
of credit to SSI sector like the Standing Advisory Committee in Reserve
Bank of India and cells at the banks’ head office level as well as at
important regional centres will be made more rigorous and regular. They
will also review the flow of credit to small (SSI) and medium enterprises.
b. At the Regional offices, the Reserve Bank will constitute
empowered committees with the Regional Director of the Reserve Bank as
the Chairman to review the progress in SME financing and rehabilitation
of sick small (SSI) and medium units and to coordinate with other banks/financial
institutions and the state governments in removing bottlenecks, if any,
to ensure smooth flow of credit to the sector. The said Regional level
committees may decide on the need to have similar committees at cluster/district
levels.
c. The banks will ensure specialized SME branches in
identified clusters/centres with preponderance of small enterprises to
enable the entrepreneurs to have easy access to the bank credit and to
equip bank personnel to develop requisite expertise. The existing specialised
SSI branches may be also be redesignated as SME branches.
d. Boards of banks will be advised to review the progress
in achieving the self-set targets as also rehabilitation and restructuring
of SME accounts on a quarterly basis to ensure that the required emphasis
is given to this sector.
e.For wider dissemination and easy accessibility, the
policy guidelines formulated by Boards of banks as well as instructions/guidelines
issued by Reserve Bank will be displayed on the respective websites of
Public Sector Banks as well as website of SIDBI. The banks would also
be advised to prominently display all the facilities/schemes offered by
them to the small entrepreneurs at each of their branches.
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