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Credit Policy
Of all the elements that go into a business, credit is perhaps the most crucial. The best of plans can come to naughtif adequate finance is not available at the right time. MSMEs need credit support not only for running the enterprise & operational requirements but also for diversification, modernisation/ upgradation of facilities, capacity, expansion etc. In respect of MSMEs, the problem of credit becomes all the more critical when ever any episodic event occurs such as a large order, rejection of consignment, inordinate delay in payment etc. In general, MSMEs operate on tight budgets, often financed through owner's own contribution, loans from friends and relatives and some bank credit.
Government of India recognised the need for a focused credit policy for MSMEs in the early days of promotion of MSMEs. This in turn led to a credit policy with the following components:-
Priority Sector Lending: Credit to the small scale sector is ensured as part of the priority sector lending by banks. Banks are required to compulsary ensure that defined percentage (currently 40%) of their overall lending is made to priority sectors as classified by Government. These sectors include agriculture, small industries, export etc. The inclusion of small industries in this list makes them eligible for this earmarked credit.
Institutional Arrangement: Small Industries Development Bank of India ( SIDBI ) was set up as the apex refinance bank. Term loans are provided by State Financial Corporations (SFCs) and Scheduled Banks. Credit lending in direct/indirect forms is also undertaken to some extent by NABARD , NSIC etc.
With the liberalisation of the Indian economy, greater emphasis was placed on meeting the credit needs of MSMEs. This was manifest through the following initiatives:-

  • Earmarking of credit for tiny sector within overall lending to small industries.
  • Opening of specialised MSME bank branches.
  • Establishment of National Equity Fund for venture capital support.
  • Technology Development & Modernisation Fund through SIDBI.
  • Enhancement of turnover limit for asseMSMEng aggregate working capital requirement.
  • Enhancement of limit of composite loan to Rs. 10 lakhs. (Rs 1 million)
  • No collateral security for loans upto Rs. 5 lakhs. (Rs 0.5 million)

The Comprehensive Policy Package announced on 30th August 2000 took this process further. This included:-

  • Launch of Credit Guarantee Scheme to cover loans upto Rs. 25 lakhs. (Rs 2.5 million)
  • Launch of Credit Linked Capital Subsidy Scheme to provide for subsidy against loans taken for technology upgradation.
  • Further enhancement of ceiling composite loan limit to Rs. 25 lakhs.(Rs 2.5 million)
  1. Enhancement of project cost limit under National Equity Fund to Rs. 50 lakhs.(Rs 5 million)

Many of these initiatives were based on the recommendations made by the Nayak Committee, the Kapur Committee and the Dr. S.P. Gupta Study Group.

Credit to MSME Sector From Public Sector Banks

The table below gives the status of credit flow to Village & Small Industries (VSI) Sector since 1991:-


Year

Net Bank Credit
(in Rs. crores)

To MSME
(in Rs. crores)

Share of MSME

March 1991

1,05,632

16,783

15.89%

March 1992

1,12,160

17,398

15.51%

March 1993

1,32,782

19,388

14.60%

March 1994

1,40,914

21,561

15.30%

March 1995

1,69,038

25,843

15.29%

March 1996

1,84,381

29,485

15.99%

March 1997

1,89,684

31,542

16.60%

March 1998

2,18,219

38,109

17.50%

March 1999

2,46,203

42,674

17.33%

March 2000

2,92,943

45,788

15.6%

March 2001

3,40,888

48,445

14.2%

March 2002

3,96,954

49,743

12.5%

March 2003

4,77,899

52,988

11.1%

Source: RBI
The Table below give the status of credit flow to Tiny Sector since 1995:-

 

At the
end of
March '95

At the
end of
March '96

At the
end of
March '97

At the
end of
March '98

At the
end of
March '99

At the
end of
March '2000

At the
end of
March '2001

At the
end of
March '2002

At the
end of
March '2003

Net Credit
To Tiny Sector (Rs. Crore)

7734

8183

9515

10273.13

8837.47*

22,742**

26,019

27,030

26,937

Tiny Credit as percentage
of net MSME credit

29.93

27.76

30.2

27.0

20.7

54.03

53.7

54.34

50.84

 
* Refers to units with investment in P&M upto Rs. 5 lakhs.
** Refers to units with investment in P&M upto Rs. 25 lakhs.
Note: Rs. 1 Crore = Rs. 10 million, Rs. 1 Lakh = Rs. 100,000/-

assistance to MSMEs by SFCs

The main objective of State Financial Corporations (SFCs) is to meet Term Loan/Fixed Capital needs of the Small Scale Industries. There are 18 SFCs in the country.
The Table below gives the total assistance and assistance to MSMEs by SFCs:-


Year

SANCTIONS (Rs Crores)

DISBURSEMENTS (Rs Crores)

Total
assistance

To MSMEs

Total
assistance

To MSMEs

1992-93

2015.3

1686

1557.4

1163.9

1993-94

1908.8

1561

1563.4

1175.2

1994-95

2702.4

1920

1880.9

1314.5

1995-96

4188.5

2513

2961.1

1675.4

1996-97

3544.8

2115

2782.7

1529.6

1997-98

2626.0

1786

2110

1222

1998-99

1864

1365

1625

1004

1999-2000

2203

1617

1754

1083

Source: IDBI Annual Report

Improving the Credit Flow

Nayak Committee (1991-92)

Nayak Committee set up by the Reserve Bank of India in December 1991 (Report came in September 1992) dealt with aspects of adequacy and timeliness of credit to MSMEs. Nayak Committee found that small scale sector was getting working capital to the extent of 8.1% of its annual output which was less than the normative requirement of 20%. Accordingly, Nayak Committee recommended that the MSME sector should obtain 20% of its annual projected turnover by way of working capital. Based on these, as well as other recommendations of the Nayak Committee, RBI issued a number of guidelines advising the banks to grant working capital to the extent of 20% of the projected annual turnover, timely disposal of loan applications and setting up of specialised bank branches for MSME loaning in areas of higher MSME concentration. This norm is applicable to units with annual turnover up to Rs. 5 crores.

Seven Point Action Plan (1995-96)

As a follow up of Nayak Committee recommendations, the Union Finance Minister in the Budget Speech of 1995-96, announced a Seven Point Action Plan for improving the flow of credit to small scale sector. This included:-

  • Setting up of specialised MSME bank branches;
  • Adequate delegation of powers at branch and regional levels;
  • Conducting sample surveys of their performing MSME accounts by banks;
  • Sanction of composite loans as far as possible;
  • Regular meeting with MSME entrepreneurs;
  • Sensitization of bank managers towards working of MSME Sector; and
  • Simplification of procedural formalities by banks.

Action has been taken by banks on the above action plan.

Kapur Committee (1997-98)

Reserve Bank of India (RBI) had in December 1997 appointed a One Man Committee headed by Shri S.L. Kapur, the then Member, Board for Industrial & Financial Reconstruction (BIFR), to review inter-alia:

  • the working of credit delivery system of small scale industries with a view to making the system more effective, simple and efficient to administer ; and
  • to make suggestions for simplification and improvement in system and procedures. The Committee submitted its Report to RBI on 30th June 1998, which contains 126 recommendations. Out of 126 recommendations, 103 have been examined by RBI and decision taken thereon. Banks/ Financial Institutions and other agencies have already implemented 86 recommendations. Some of the important measures taken pursuant to the Recommendations of the Committee include:-
    • Delinking of SIDBI from IDBI.
    • Opening of more specialized branches.
    • Enhancement in the limits of Composite Loan from Rs. 2 lakhs to Rs. 5 lakhs.
    • Setting of DRTs.
    • Introduction of Credit Guarantee Scheme.
    • Raising the exemption limit for collateral security from Rs. 25,000/- to Rs. 5 lakhs.

Other steps taken by Reserve Bank of India to improve credit flow to MSME Sector

  • In order to ensure that credit is available to all segments of MSME sector, RBI has issued instructions that out of the funds normally available to MSME sector, 40% be given to units with investment in plant and machinery up to Rs.5 lakhs, 20% for units with investment between Rs.5 lakhs to Rs.25 lakhs and remaining 40% for other units.
  • Public sector banks have been advised to operationalise more specialised MSME branches at centres where there is a potential for financing many MSME borrowers. As on March 2002, 391 specialised MSME branches are working in the country.
  • Extension of 'Single Window Scheme' to all districts to meet the financial requirements (both term loan & working capital) of MSMEs.
  • With a view to moderating the cost of credit to MSME units, banks have been advised to accord MSME units with a good track record, the benefit of lower spreads over the prime lending.
  • In order to take expeditious decision on credit proposals of MSME units, banks have been advised to delegate enhanced powers to the branch managers of the specialised MSME branches so that most of the credit proposals are decided at the branch level
  • Laghu Udyami Credit Card (LUCC) Scheme launched by Public Sector Banks for providing simplified & borrower friendly Credit facilities to MSME, tiny enterprises retail traders & artisans.
  • An interest rate band of 2% above & below PLR should be applicable to MSMEs.
  • Bank advised to fix self set targets for growth in advances to MSME sector based on previous year's achievements and overall tread in growth of net bank credit.
  • Bank to consider 3 slabs for rate of interest-loans upto Rs.50,000, between Rs.50,000 and Rs.2 lakhs and above Rs.2 lakhs.
  • Composite loan limit to be enhanced to Rs.50 lakhs from Rs.25 lakhs.
  • Limit on collateral free loans to be increased to Rs.25 lakhs in deserving cases.
  • Deposits of foreign banks with SIDBI to earn interest at Bank Rate.
  • Working Group to be set up on flow of credit to MSME sector.

Incorporating credit requirement in the identified clusters in the banks’ Annual Credit Plans for the year 2003- 04:

As a follow up to the decisions of Review Meeting, the Ministry of MSME had forwarded to the RBI a list of 60 identified clusters for focused development of MSMEs to disseminate the information to all public sector banks. As per RBI’s directives, all SLBC Convenor Banks to initiate action for incorporating the credit requirements in the State Credit Annual Plans in respect of 60 clusters identified by the Ministry of MSME for focused development of MSMEs. Further, as decided in the meeting of the Standing Advisory Committee held at RBI, Mumbai on 1st September, 2003, the banks have been advised by the RBI that credit requirement in the identified clusters to be incorporated in the banks’ Annual Credit Plans for the year 2003-04.

Adequate publicity by the banks to various schemes/ facilities like availability of collateral- free/composite loan:

As decided in the meeting of Standing Advisory Committee held on 1st September, 2003, the banks have to give adequate publicity to their schemes/facilities like availability of collateral free /composite loans and schemes under TUFs/NEF/KVIC/CGTSI etc.

Interest rate band of 2% above and below PLR:

As per the announcement made by the Hon’ble Finance Minister in the Union Budget 2003-04, Indian Banks’ Association (IBA) has advised the banks to adopt the interest rate band of 2% above and below their prime lending rates (PLRs) for advances to MSME