August 25, 2005
The Chairman/ Managing Director/
Chief Executive Officer
All Private Sector Banks All Foreign Banks
All Regional Rural Banks/Local Area 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, which are required to
be implemented by 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. 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. 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.
9. 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.
10. 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. A copy of the "Policy
Package for Stepping up Credit to Small and Medium Enterprises" announced
by the Union Finance Minister is enclosed for information.
11. Please acknowledge receipt.
Yours faithfully,
(G.Srinivasan)
Chief General Manager
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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