Micro, Small and Medium Enterprises (MSME)

The Small enterprises contribute nearly 40% of the country’s industrial output and offer the largest employment after agriculture. Therefore, this sector presents an opportunity to the country to harness its local competitive advantages for achieving global dominance. In recognition of these aspects, Government of India enacted the MSMED Act in the year 2006. In accordance with the provisions of the act, the activities of MSME are broadly classified into Manufacturing Enterprises and Service Enterprises.

Manufacturing Enterprises are those which are engaged in manufacturing or production of goods. These are defined in terms of investment in Plant & Machinery. Recently, activities such as Seed Processing (for genetic enhancement) involving collection of germplasm, cleaning, gravity separation, chemical treatment etc., and Composite unit in Poultry with Chicken (Meat) Processing are treated as Manufacturing units under MSME.

Service Enterprises are the enterprises engaged in providing or rendering of services. These are defined in terms of investment in Equipment. Recently activities such as Medical Transcription Service, Production of TV serials / program, Ripening of Raw Fruits under controlled conditions and Service Rating Agency are treated as Service Enterprises under MSME. The modified definitions of Micro, Small and Medium Enterprises are as under:

Small Enterprises: It includes all loans given to micro and small (manufacturing) enterprises engaged in manufacture / production / processing / preservation of goods, and micro and small (service) enterprises engaged in providing or rendering of services which include small road & water transport operators, small business, Professional & Self-employed persons and other service enterprises. Indirect finance to small enterprises shall include finance to any person providing inputs to or marketing the output of artisans, village and cottage industries, handlooms and cooperatives of producers in this sector.

As per recent RBI guidelines – Loans granted to private retail traders with credit limits not exceeding Rs.20 lakh and loans to retail traders dealing in essential commodities (fair price shops) and consumer co-operative stores without any ceiling in credit limit are eligible for classification under Micro (service) or small (service) depending on investment in equipment criteria as mentioned above.

Medium Enterprises: Enterprises engaged in manufacture/production/ preservation of goods and whose investment in plant and machinery should be as per above said guidelines. BankRs.s lending to medium enterprises will not be included for the purpose of reckoning under priority sector. Interest rates are charged as per rates prevailing at the time and are subject to change from time to Time. Rate of Interest is determined as per credit rating system for loans above Rs.10 lakhs as per Internal Credit Risk Assessment Model. No collateral security or third party guarantee is insisted for loan up to Rs.5 lakh and for Tiny Sector up to Rs.25 lakh based on the good track record and financial position of the borrowing unit.

Banks may fix self set target for growth in advances to SME Sector in order to achieve a minimum 20% year on year growth in credit to SMEs with the objective to double the flow of credit to the SME sector within a period of 5 years. Further, banks should ensure that –

i)40% of the total advances to micro and small enterprises sector should go to micro (manufacturing) enterprises having investment in plant and machinery up to Rs.10 Lakh and micro (service) enterprises having investment in equipment up to Rs.4 Lakh.

ii) 20% of the total advances to micro and small enterprises sector should go to micro (manufacturing) enterprises with investment in plant and machinery above Rs.10 Lakh & up to Rs.25 lakh, and micro (service) enterprises with investment in equipment above Rs.4 Lakh & up to Rs.10 Lakh. Thus 60% of MSE advances should go to the Micro Enterprises.

Further, banks are advised to

• Achieve a 20 percent year-on-year growth in credit to Micro and Small enterprises to ensure enhanced credit flow.
• Allocate 60% of MSE advances to the Micro Enterprises.
• Achieve minimum 10% growth in number of Micro Enterprise accounts.
• Pay focused attention in opening of more MSE branch offices at different MSE clusters and each lead bank of a district may adopt atleast one MSE cluster.

Banks are mandated not to accept collateral security in case of loans up to Rs.10 lakhs extended to units in the Micro and Small Enterprises sector and all such loans are to be covered under Credit Guarantee Scheme. Banks may, on the basis of good track record and the financial position of the MSE units, increase the limit of dispensation of collateral requirement for loans up to 25 lakh (with the approval of the appropriate authority). Women entrepreneurs will be given further interest rebate of 0.50% irrespective of credit rating and size of the unit. Composite loan (Term Loan and Working Capital) up to Rs.100 lakhs should be processed under single window concept.

Units undergoing technology up-gradation are eligible for 15% Credit Linked Capital Subsidy Scheme (CLCSS). Units engaged in food processing are eligible for subsidy 25% of unit cost with maximum of Rs.50 lakhs and units are located at difficult areas (J&K, HP, Sikkim, Andaman, NE States and tribal development project areas) are eligible for 33.33% with maximum of Rs.75 lakhs.

Communication of the bank’s decision regarding the credit assistance is done promptly. As per Ministry of Finance, Government of India, all credit proposals for additional limit, rescheduling for loan or any other facility should be disposed in 15 days from the date of receipt of application at the branch. With regard to new cases for sanction, the time norm stipulated is 30 days from the date of receipt of application at the branch. No loan application is rejected without approval of the next higher authority.