Annexures II Code for prompt payment (Source: CII).

Recommendation

Action taken

6.01Crash training programmes for staff members of Regional Rural banks as also permission to them for opening specialised branches.

Co Commended to banks for implementation.

6.05 SIDBI should be accorded the same role and status as the nodal/coordinating agency for financing small industries as available to NABARD.

Acc Accepted.

6.06 The Mahila Nidhi Scheme of SIDBI should be reviewed in consultation with Govt. and at least twenty five thousand rural women should be covered under the scheme.

Acc Accepted

6.08 SIDBI should launch industry specific venture funds by setting up few software venture capital funds.

Acc Accepted

6.09 SIDBI should give big push to the Market Development Assistance Fund Scheme in order to give proper impact by offering the scheme through banks also and private sector intermediaries.

Acc Accepted.

6.10(i)& (ii) Measures like extensive publicity, buying software packages should be taken for utilization of Technology Development and modernization fund.

Acc Accepted.

6.13 Branch Managers should be delegated powers to grant ad-hoc facilities to the extent of 20% of the limits sanctioned.

Commended to banks for implementation.

6.14 SIDBI should open more branches vending most modern banking services in North –East, Bihar, and Jammu & Kashmir where the SFCs are weak.

Accepted.

6.15 The linkages of SIDBI with IDBI to be snapped and it linked to Ministry of SSI & ARI.

Accepted.

6.16 SIDBI should review its programmes with a view to weed out the schemes which have not created any viable impact.

Accepted

6.17 All the states may be covered by Rural Industries programme of SIDBI.

Accepted.

6.19 At least 40% of the resources of SIDBI should be earmarked for tiny sector enterprises having investment in plant and machinery up to Rs.5 lakh.

Accepted

6.20 Reserve Bank of India may take the initiative to hold an All India conference of Urban Co-operative Banks and take some policy decisions regarding upgradation of skills of their staff, improvement in the training programmes and linking and integrating them with the country’s banking system generally.

Accepted and

Implemented.

6.21 RBI should encourage setting up of more urban co-operative banks which could function as local area banks.

Accepted

6.23 A study of the Rural Co-operative structure be undertaken by NABARD to ensure that 20% of the co-operative credit goes to Artisans, Village industries and rural SSI sector.

Accepted.

6.24 SIDBI may make arrangements for training the staff of SFC and also take up the expenditure on this account.

Accepted

6.26 NABARD may take up more districts under its District Rural Industries Project (DRIP) May be extended to 100 districts in the next 5 years.

Accepted.

6.27 NABARD could prepare schemes similar to handloom and handicrafts for assisting leather based industries, vegetable and fruits and food processing industries, milk product units, village level oil units and rural transport and services in rural areas. NABARD should also set up a fund similar to National Equity Fund .

Accepted

6.28 The margin money scheme of KVIC needs a lot of publicity and pushing for take off.

Accepted.

6.29 Meticulous compliance of the instructions already issued in implementation of Nayak Committee recommendations need to followed up by carrying out special studies periodically.

Commended to banks for implementation

6.30 While carrying out inspections, the officials of the banks as well as RBI should insist and ensure that only the prescribed loan application forms are used.

Commended to banks for implementation.

6.31 The filled application forms should be examined by a bank official having adequate experience and also maintain a check list for calling additional information.

Commended to banks for implementation

6.32 Controlling offices of banks should reiterate their instructions to their branches for rendering necessary assistance to applicants. Adequate number of copies of instructions and schemes etc. should be made available at each branch.

Commended to banks for implementation

6.33 The loan application forms should be tri-lingual i.e. in Hindi, English and local language.

Commended to banks for implementation.

6.34 IBA should get copies of software packages designed by CII and WASME and make available to each branch especially specialsed SSI branches.

Commended to banks for implementation.

6.35 RBI should review the application forms and ensure that superfluous items, if any, are deleted.

Accepted by IBA and implemented.

6.36 Proforma of application forms up to Rs.2 lakh be used for up to Rs.10 lakh and that up to Rs.15 lakh be used for up to Rs 50 lakh and that used for limits up to Rs 1. crore can be considered for loans beyond Rs 50 lakh and up to Rs. 2 crore. The fourth category can be for loans beyond Rs.2 crore.

Commended to banks for recommendation.

6.37 For the purpose of working out bank finance, in the case of an existing unit, the bank officials and entrepreneur should work out an agreed growth rate and projected turnover based on the past performance, the likely prospects and few other factors.

For those sectors which are recording positive rate of growth and when the individual unit has also recorded positive rate of growth during the last 2-3 years, it may be permitted growth rate of a minimum of 15 per cent over the current year's turnover to arrive at the projected turnover and the working capital limits from banks be fixed accordingly.

In case of new units, the projections accepted by the term lending institutions, for the first year of operation should normally be accepted unless there are specific reasons for not doing so.

Commended to banks for implementation.

6.38 The banks should, with the approval of their Boards, lay down some clear guidelines for computing the working capital limits for various sub sectors granted to SSI borrowers, particularly those units where fund based working capital requirements exceed Rs.4 crore.

Commended to banks for implementation

6.39 Where the banks have a first charge over fixed assets, they should not ask for cash margins from SSI borrowers on non-fund based facilities, provided there is adequate surplus of security to cover their exposure.

Accepted.

6.40 Banks should open more specialised SSI branches or shift/ restructure some of their existing branches and convert them into specialised branches for financing the small scale sector. The banking sector within the next two years should ensure collectively that at least one such branch is opened in every district of the country, particularly at those centres where the number of small units is at least 100. These branches should be opened by strong banks only. The Committee is confident that the number of specialised and profit making branches can easily increase by 1,000 within the next three years.

Commended to banks for implementation.

6.41 The banks should ensure that specialised SSI branches entertain loan proposals from the tiny sector and village industries units unhesitatingly. Each such branch may look after upto 200 units, out of which a minimum of 150 should be from the tiny sector with loans less than Rs.10.00 lake. This ratio should preferably be maintained in case the number of such units at a branch is less than 200.

Commended to banks for implementation.

6.42 Selective specialised branches should be encouraged to innovate and experiment with new products such as factoring services and business credit cards.

Commended to banks for implementation.

6.43 National Equity Fund should be disbursed through specialised SSI branches. SIDBI may provide direct credit lines to these branches.

Accepted.

6.45 The Committee was informed that one field officer in a specialised branch is able to handle about 50 SSI units. The number of field officers should be sufficient to take care of number of accounts entertained by a branch. Properly trained and preferably technically oriented direct recruits in adequate number should be posted in specialised SSI branches.

Accepted.

6.46 Banks should undertake research activities on credit related policies in relation to specific sectors of SSI for a consistent medium term policy formulation purposes.

Accepted.

6.47 Further delegation of sanctioning powers should be made in respect of specialised SSI branches in particular and other branches in general for prompt disposal of applications.

Commended to banks for implementation.

6.49 Banks and financial institutions are hesitant to deal with SSI enterprises requiring loans of less than Rs.5 lakh. The Public Sector Banks, with resources and expertise available at their disposal, should sanction loans to SSI enterprises requiring loans upto Rs.5.00 lakh in a big way and SIDBI should refinance these on attractive terms.

Commended to banks for implementation.

6.50 The limit of composite loans should be enhanced from Rs. 2 lakh to Rs.5.00 lakh so that the entire requirement of such units is met by single documentation and security and charge creation process. This facility should also be extended to all SSI units requiring loans upto Rs.5.00 lakh irrespective of their location.

Commended to banks for implementation.

6.51 Only banks should entertain projects both for term loans and working capital of borrowers with loan requirement, up to and inclusive of Rs.5.00 lakh. Only one organisation, either SFC or a bank may sanction both the term loan and working capital for projects requiring institutional credit for more than Rs.5.00 lakh and upto and inclusive of Rs.25.00 lakh. For Projects having loan requirement in excess of Rs.25 lakh, arrangements should be made by SIDBI with the Public Sector Banks to have an MOU signed between the SFC and selected Public Sector Banks active in different regions of the country for joint financing, whereby both the term loan as well as working capital should be shared alongwith sharing of securities on pari passu basis. However, the borrowers in this category who want to avail such facilities from a single agency i.e. bank or SFC, should be allowed to exercise their option.

Commended to banks for implementation.

6.52 The scope of leasing, hire-purchase and equipment finance should be expanded and obstacles removed including legal hurdles. Financing institutions should be advised to have a flexible approach in fixing margins for financing of DG sets, modernisation or technology upgradation or equipment required for pollution control or obtaining quality markings under International Standards Organisation (ISO) programmes. Banks/SFCs may consider utilising the funds available from the National Equity Fund to be treated as margin.

Accepted.

6.53 There is need to provide for NEF line (in addition to presently available for project outlay upto Rs.10 lakh) for purchase of equipment for modernisation/technology upgradation or DG set purchase upto Rs.10 lakh. Wherever amount from NEF is provided, no additional margin should be obtained.

Accepted.

6.56 For ensuring competitiveness of SSI units, it is necessary to set up units with optimum size of operations and capital. There are a number of agencies in public sector engaged in preparing project profiles on economic sized units. Project Profile work can be undertaken by them also for SSIs. We can also depend on technical consultants in respect of hi-tech or new technology projects. The ultimate decision, however, shall have to be taken by the controlling offices of banks which should periodically advise their branch managers accordingly.

Commended to banks for implementation.

6.58 Banks should consider providing `SWIFT' services in specialised SSI branches catering to big clusters of SSI units engaged in export of goods.

Commended to banks for action.

6.59 It is very essential that the loan applications are sanctioned promptly and normally within one month. Banks should be advised to adopt committee approach for sanction of the applications.

Commended to banks for implementation.

6.60 There should be at least one Debt Recovery Tribunal (DRT) in each State and their functioning be smoothened by providing adequate support staff for expediting recovery of bank loans above Rs.10 lakh.

Accepted

6.61 Regarding loans below Rs.10 lakh, the State Government should provide all facilities and assistance for the recovery of these loans. Special revenue courts should be set up in each state to deal with SSI cases. The State Government should also get in touch with the respective High Courts and get a few Civil Courts (one at every district headquarters with proper infrastructure) designated as Recovery of Bank Dues Courts. These courts should deal with loan recovery matters in a summary manner. Government can also examine treating such loans on the pattern of agricultural loans upto Rs.10 lakh as Government dues and recover these as arrears of land revenue. The banks should take advantage of the Lok Adalats and arbitration to settle dues up to Rs.10 lakh. The banks should appoint special officers or designate existing officers having aptitude for work relating to recovery, who should exclusively deal with recovery.

Commended to banks.

6.66 Banks should be directed to report separately the figures of those sick SSI units which are neither defunct nor closed (other than temporary closure) nor have been set up under Government sponsored schemes. RBI should also take suitable measures to ensure that the statistics relating to sick SSI units are collected and reported correctly. Banks should motivate specialised SSI branches to take up innovative products and new schemes. They could be given some autonomy and freedom to take up such innovative products.

Commended to banks.

6.68 The overall interest payable by SSI should remain within the existing parameters fixed by RBI i.e. maximum of PLR plus four per cent. The PLR should take care of the cost of funds incurred by the banks. Additional spreads over the PLR will be used as premium for guaranteeing the repayment of the loan. Naturally, SSI units, with good track record will have to pay lower premium and can derive some advantage out of lower spreads.

Commended to banks.

6.69 The existing Credit Guarantee Scheme being operated by DICGC should be scrapped and be replaced by a more objective and suitable scheme to be operated by a new Guarantee Corporation. Reserve Bank of India should take the initiative for setting it up in SIDBI. The proposed corporation should cover only those loans which are sanctioned by Public Sector Banks/financial institutions and where principal amount sanctioned does not exceed Rs.10.00 lakh. The coverage for the purpose of guarantee will be limited to 80% of the amount in default. Depending upon the experience gained over a period of time, the scheme can be extended to loans with higher credit limits.

Accepted.

6.70 The proposed Credit Guarantee Corporation should have a strong corpus of at least Rs.500 crore which can be contributed by SIDBI, NABARD, Government of India, State Governments and banks. The proposed Corporation may appoint either selected bankers as their agents or the Corporation can set up its own offices in different States for extending such guarantees. The premium under the Scheme would also be decided by the agents subject to a maximum of 4 per cent points depending upon the risk perception.

Accepted.

6.71 Unlike DICGC, option to have guarantee cover or not in individual accounts should rest with the banks. On a reciprocal basis, acceptance or not of a borrower for extending guarantee cover shall be at the discretion of the Guarantee Corporation. Simultaneously or as an alternative, the banks can set up special funds for meeting losses arising on account of defaults of repayments in SSI loan accounts. RBI should take up the matter suitably with the Government of India to ensure that necessary amendments are carried out in related Tax Laws to enable the banks to set up such funds and provide effective in-house guarantee for loans granted by them.

Accepted.

6.72 In order to promote some guarantee service associations on the lines being operated in Italy, it is necessary to provide incentives to some of the banks to take up a kind of service-cum-guarantee arrangement in respect of few clusters. Reserve Bank of India should give them or get from the Government of India some small corpus fund of say Rs.10.00 crore which could be made use of in a few such clusters like bicycle component manufacturers in Ludhiana.

Accepted.

6.73 With a view to reduce the cost of funds to the promoters, ensure availability of liquidity, improve debt equity ratio, and pave the way for setting up of more viable projects and provide an incentive to the banks/financial institutions to take up cases of tiny units with credit limits upto Rs. 10 lakh, these institutions should be permitted to utilize the national equity fund of SIDBI in addition to the normal margin to be contributed by the entrepreneurs. The restriction on applicability of NEF in the metropolitan areas should be removed. Additionally, NEF should be permitted to provide margin required for undertaking nursing programmes in respect of the sick SSIs. To cope with increased fund requirement, the corpus of NEF should be expanded. However, NEF facility should not be available to those units which are getting margin money from KVIC or any grant/subsidy under any scheme of Central/State Government or their undertakings.

Accepted.

6.74 Reserve Bank of India should initiate appropriate policy measures for phasing out the system of collateral securities. Greater emphasis may be laid on the viability of the project and the management of the enterprises rather than on collateral security.

Accepted.

6.75 A revised floor level of Rs.2.00 lakh for exemption of borrowal accounts from obtention of collateral securities is recommended as against the existing level of Rs.25,000/-. In respect of other accounts, the collateral security including third party guarantee should be in relation to the risk undertaken. The Committee also suggests that for loans upto Rs.10.00 lakh, the value of collateral security or the net means of third party guarantee should not be more than 50% of the fund and non-fund based exposure of the bank/financing institution. Beyond loans of Rs.10.00 lakh, the banks may exercise their commercial judgement in determining the level of collateral or third party guarantee. However, in no case a bank should obtain a collateral security or third party guarantee which is in excess of the loan amount. Reserve Bank of India may also prescribe that at least 10% of the SSI loans sanctioned by a bank branch should be without collateral guarantees.

Accepted.

6.80 It would be appropriate to assess the flow of credit to SSI by using data on disbursement rather than `outstanding balances'. The Committee feels that it is possible for banks to achieve a growth rate of 30% p.a. in disbursement terms and accordingly, the banks should be advised to fix their disbursement targets along with outstanding balances. Reserve Bank may also advise the banks to pay more attention to the backward states such as Bihar, J&K, M.P. and North Eastern States while fixing the lending targets and seek progress in this behalf separately.

Commended to banks for action.

6.83 There are certain doubts whether RIDF set up in NABARD can be used for supporting infrastructure for rural industries as well. Reserve Bank of India should examine the matter and permit this fund to be used for such purposes as also for provision of alternate power sources.

Accepted.

6.85 The banks have been directed to ensure that not less than 25 per cent of total credit purchases are through the bills drawn by the seller so as to develop bills culture. RBI may examine the possibility of increasing this percentage to 50 per cent in the next year depending on the experience gained during the current year.

Accepted.

6.86 Government of India may be requested to make amendments in the Companies Act to provide that the company accounts and reports should contain a separate section indicating period-wise delays in the payment of SSI dues.

Accepted.

6.88 The Union Finance Minister has recently announced in his Budget speech that steps would be taken to amend the `Delayed Payments Act' to make it more effective. The new legislation may provide for the setting up of a statutory authority on the lines of MRTP Commission which should be empowered to impose deterrent penalties.

Accepted.

6.90 The mechanism of `Factoring' should be got studied afresh by an expert Committee with a view to expand the scope and reach of these services. This could be followed by enacting a new law, if necessary, so as to remove legal impediments relating to stamp duty, registration fee, assignment of contracts etc.

Accepted.

6.93 It was decided by RBI that SFCs should act as principal financing agency for small sector industry under the Single Window Scheme of SIDBI in 23 districts having a concentration of SSI units. The SFCs may not be able to do much in this regard. It is possible that these districts would have been reallocated to the commercial banks. However, if this has not been done so far, this should be done now.

Accepted.

6.95 Bankers should publish that it is borrowers' right to get loans from the bank in case these are merited. The SSI entrepreneurs should also bear in mind that they can get loans only if their projects are viable and they are found to be creditworthy by the banks. Borrowers have also to be clearly told that while it is their right to get the loans, they also have a corresponding duty to earnestly implement their projects and repay the dues of the bank as per the terms agreed to at the time of sanction.

Commended to banks for action.

6.96 Banks should develop a set of written loan policies. Such policies should, inter- alia, specify explicitly customer and group exposure limits, standards for documentation, sectoral exposure limits and delegation of powers. The smallest customer should expect and receive the courtesy and service reserved today for the biggest company. The prescribed comprehensive code of Banking Practices should be drawn up expeditiously outlining standards for disclosure of information about the bank's services and available products and the rights and obligations of its customers.

Accepted.

6.98 The banks should upgrade their systems to be able to access the latest information about technology even from international sources including Internet. The Public Sector Banks should select one or two Regional Centres where they can get all the technological information inputs. The same could then be shared with the branches as per their requirement. The banks could also keep a panel of technology consultants who could be addressed specific problems relating to technology. The fee payable to these consultants should be predetermined which may be borne by the entrepreneurs.

Accepted.

6.99 Some special training courses have been designed by Entrepreneurship Development Institute (EDI), Ahmedabad to help bank managers and trainers of bank staff requiring the requisite skills for appraising small projects and the entrepreneurs behind them. RBI may like to advise banks to make use of such training programmes and incorporate the same in the training courses provided by Bankers Training Institutes.

Commended to banks for implementation.

6.100 RBI should update its instructions relating to the software industry which were issued during 1988.

Accepted.

6.101 There has been a hefty escalation in fee, commission and charges levied by the banks on various facilities. While no concessions should be given, yet excessive charges which are not directly related to the costs should be suitably rolled back to make such services cost effective for the banks.

Accepted and implemented.

6.105 The Committee also supports the recommendation of Expert Committee for setting up of a special fund for taking care of the equity support and interest rate concessions for expansion of SSIs, technology upgradation, modernisation and training. This fund should be of 5 annual tranches of Rs. 500 crore each for technology upgradation etc. of those SSI units which are facing problems on account of liberalisation (including deregulation) and increasing competition. These funds could be used to provide refinance to SIDBI, banks and other SFCs for low cost funding.

Accepted.

6.106 The scope of lending of micro credit should be increased considerably.

Accepted.

6.107 Every bank should be asked to earmark a part of its credit for assisting SSI units established by women entrepreneurs. Separate schemes could also be framed to promote women enterprises by the banks in consultation with Government Ministries and departments engaged in developing programmes and enterprises for women.

Accepted.

6.109 SSI branches should help their customers in the designing of their bank products and thereby offer a new kind of customised and personalised banking service

Commended to banks for implementation.

6.110 RBI should ask the Public Sector Banks to upgrade skills and training programmes of the bank staff to enable them to deal freely with the appraisal of diverse SSI projects and their credit related needs.

Commended to banks for implementation.

6.111 The aspect of training for the bankers particularly those posted in new SSI branches has to be adequately focussed at the highest level in the bank. The training programmes should attempt to prepare the managers for meeting the challenges involved in dealing with this vital and demanding sector.

Commended to banks for necessary action.

6.114 While fixing accountability a line should be drawn to separate malafide decisions from normal bonafide credit decisions in order to keep the morale of the staff high.

Accepted.

6.115 To instill confidence in the staff and encourage them to make decisions including some bonafide mistakes, there is a need to evolve in Public Sector Bank a system of maintaining a Balanced Score Card for assessing of performance of each officer in taking credit decisions.

Accepted.

6.117 Computerised information and monitoring system should be developed by banks for SSI units. There should also be a provision for inputs from the individual industrial units themselves either directly or through the SSI associations. SIDBI should be the nodal institution for this task of furnishing client input for inclusion in the information system.

Accepted

6.118 Public and Private Sector Banks should take up schemes in respect of professionals needing financial assistance for meeting their professional requirements including their needs of finance to bankroll their own businesses. One such area where there is requirement for such funds is the computer software business set up by professionals.

Commended to banks for implementation.

6.120 With a view to redress customers grievances, time limits and systems prevalent in banks should be made as transparent as possible and well publicised.

Commended to banks for implementation.

6.121 The procedures for making complaints should be simple and as informal as possible.

Commended to banks for action.

6.123There should be machinery at all Controlling Offices of banks to entertain complaints from the borrowers if the branches do not follow the prescribed guidelines. Regional Offices/Controlling Offices could periodically verify that these guidelines are implemented by branches in actual practice.

Commended to banks for implementation.

6.124 RBI should consolidate all the guidelines relating to grievances redressal and reiterate their implementation by the bank branches.

Accepted.

6.125 Instructions issued by RBI do not percolate to bank branches and these are not meticulously followed by them. For instance, the borrowers availing of credit facilities from a bank find it extremely difficult to shift to another bank. RBI should look into this aspect and ensure compliance by the branches of various instructions/guidelines issued by it in this regard.

Commended to banks for necessary action.

6.126 It is recommended that the Small Scale Companies who wish to have overseas presence should be allowed to invest up to US$ Twenty thousand based on a simple procedure and the banks should assist them for this purpose. This will help SSI units to increase exports and upgrade technology.

Commended to banks for necessary action.

6.07The Mahila Udyam Nidhi Scheme being operated by SIDBI should be merged with NEF and the funds placed at the disposal of the Public Sector Bank

. Other things being equal, entrepreneurs belonging to weaker sections, SC, ST, backward classes and women should be given preference in the matter of disbursal of NEF. Government bodies taking up schemes for helping entrepreneurs belonging to weaker sections should follow the pattern suggested for NEF and place the funds with banks to be used as equity or margin money.

Assistance under NEF and MUN is provided by SIDBI to new/existing entrepreneurs for meeting gap in equity while setting up projects costing up to Rs.10 lakh. Both the schemes are operated through PLIs and norms under MUN are prescribed on the lines of NEF. While the corpus of NEF fund is jointly shared by GOI and SIDBI, MUN fund is created by SIDBI out of its own resources. Thus the merger of these two schemes may not be necessary. The NEF is operated by PLIs for assisting all class of entrepreneurs including SC, ST and backward classes. Any advance placement of NEF with the public sector banks need not necessarily enhance the flow of assistance under the scheme. Moreover this would lead to problems of monitoring the projects assisted there under. SIDBI does not subscribe to the idea of placing NEF with banks to be used as equity or margin money.

6.10 In order to give a big push to the utilisation of the Technology Development and Modernisation Fund, the following measures should be taken :

(iii) Loans under this Scheme should be routed through banks and adequate spread; say 4 per cent could be given to them to make the scheme attractive for them.

(iv) Some amount, say 10 per cent could also be provided out of this fund for matching the entrepreneurs' contribution towards margin and thus making it easy for the banks to lend under the Scheme.

SIDBI is already providing assistance through refinance route for modernisation and technological upgradation of SSIs so that SSIs get assistance on same terms and conditions as available directly from SIDBI under TDMFS. Refinance for the purpose is provided at 2% below PLR of SIDBI. Given the existing cost of funds for SIDBI, any further downward revision in refinance rate may not be possible.

The promoters’ contribution under the Scheme is already kept very low at 20% as against the usual requirement of 33% under other schemes. Provision for contributing to equity under TDMFS is already available since assistance under the Scheme is provided by way of term loan or equity or both.

In view of the above comments given by SIDBI, we may treat the recommendation as not accepted.

6.11 Reserve Bank should convene a meeting of SIDBI and Public Sector Banks and decide what should be the margins (spreads) normally available to the banks if the risk is shared by SIDBI or not so shared.

Relates to utilisation of Technology Development and Modernisation Fund with SIDBI and the issue relating to margin available to banks on refinance availments from SIDBI with and without risk sharing. SIDBI is already providing assistance through refinance route for modernisation and technological upgradation of SSIs. Refinance for the purpose is provided @ 2% below PLR of SIDBI. Any further downward revision in refinance rate may not be possible unless Government of India / RBI provides low cost funds to SIDBI or Government of India bears the interest rate differential. Convening of the meeting as recommended may not be purposeful in the above circumstances.

6.24 SFCs (ii) Funds for lending under Single Window Scheme by SFCs should be placed by SIDBI with the SFCs in adequate measures. Alternatively, SIDBI should receive proposals from SFCs to do the lending itself directly in such cases till the health, particularly of weak SFCs, is restored.

Placing of any funds with SFCs for Single Window operation is not considered necessary as SIDBI is extending 100% automatic refinance to all PLIs for assistance under Single Window Scheme (SWS) which is presently provided for venture outlay of Rs.1 crore. Effective October 1, 1998, SWS outlay has been increased to Rs.2 crore per ultimate beneficiary borrowing unit.

6.25 The number of units assisted by NEDFI is insignificant. Further, the State Financial Corporations in the North-East are almost defunct. SIDBI should set up an office in each of the States of the North-East and fill in the gap by taking up direct lending in a big way. Good Public Sector Banks should be persuaded to open more specialised SSI branches in this Region. The State Governments should help by providing assistance to recover bank loans and to improve infrastructure to upgrade performance of SSIs.

SIDBI is already having its branches in all the seven states in the Region and operating both direct and indirect assistance schemes. SIDBI is, however, not interested in competing with existing state level institutions in north-eastern region. It is interested in strengthening their activities so as to enable increased flow of assistance by these PLIs to SSI in the region. In fact, as directed by Government, refinance to SFCs and twin-function IDCs would be taken care of by NEDFI instead of IDBI / SIDBI. SIDBI would intensify its developmental activities in each of the north – eastern states for enabling entrepreneurial entry and growth of SSI and continue to refinance banks in the Region. In view of the comments given by SIDBI as above, we may not pursue the recommendation further and treat it as not accepted.

6.44 Steps should be taken to open new SSI branches for servicing particular industry in a big cluster. These specialised branches should be managed by competent staff and should be properly equipped with computer and communication lines. A beginning should be made by opening such branches for electronics and software industries.

Further compartmentalisation of specialised branches (either by opening new branches or converting the existing branches) may not be advisable. This would reduce the flexibility available to banks in their planning and operations. Moreover, where there is a cluster of a particular industry (like software, electronics, and vehicle parts. Hosiery, etc.), the staff of the specilaised SSI branch/es in that area automatically develop competence and expertise in handling loan proposals of such industrial units. We may not accept the recommendation.

6.57 RBI may set up a task force consisting of SIDBI, bankers, experts and export oriented SSIs to outline new credit policies and procedures for SSI exporters.

The All India Export Advisory Committee consisting of representatives of RBI, export organizations, export promotion councils and banks is presently functioning to look in to the credit and exchange control issues of exporters, including SSI exporters. This committee is periodically meeting and bringing the exporters’ problems to the notice of the policy- making authorities for taking remedial measures. We have not received any complaints / suggestions from the SSI entrepreneurs or their Associations regarding export finance. The Kapur Committee also has not enumerated any problems being faced by SSI exporters. In view of the above, task force suggested is not found to be necessary. We may not accept the recommendation.

6.62 The definition of sick SSI unit may be changed to read as under :

(a) If anyone of the borrowal accounts of the unit remains sub-standard for six months i.e. principal or interest in respect of any of its borrowal accounts has remained overdue for a period exceeding one year,

(b) There is erosion in the net worth due to accumulated losses to the extent of minimum 50% of peak net worth during1he previous accounting year, and

(c) The unit has been in, commercial production for at least three years.

Since the new definition in terms of Nayak committee recommendation has been introduced recently, no change has been considered necessary.

6.65 To encourage banks to take up rehabilitation of potentially viable sick SSls some relaxation in Income Recognition and Asset Classification norms should be provided. A period of one year both for the additional exposure as well as old outstanding advances, to such SSI units should be permitted and these facilities treated as standard advanced for a period of one year where after the classification should be changed depending upon the record of recovery.

The exemption from prudential norms of income recognition and provisioning is not available for existing facility. The suggestions to classify both the additional credit facilities and the old outstanding accounts as standard assets for a period of one year would amount to further relaxation of the existing norms which is not considered feasible in view of the recommendation on the report of the Committee on banking sector Reforms, that not only the suggestion made from time to time for a relaxation of the definition of NPAs and the norms in this regard should be resisted but also the existing norms should be brought in line with more stringent international standards in a phased manner.

6.67 SSI should get a special treatment in the matter of interest rates. In view of their contribution to the economy, they should normally get credit at PLR.

Whether a SSI will get credit a PLR or at PLR + depends on the internal credit rating by the lending bank. Under the existing interest rate policy interest rates are linked to the quantum of loan and purpose-wise linkage has been done away with. It has been our view not to have separate interest rate policy for SSI sector. If we change the position, similar demands may come from other segments, which will lead to multiple, and complex interest rate structure again. Secondly, granting concessions, in the interest rate will also adversely affect profitability of banks. We may, therefore, not accept the recommendation.

6.77 Consequent upon revision in the definition of SSI the 40% allocation of SSI credit for units having investment in plant and machinery upto Rs. 5.00 lakh may continue. However, the allocation of 20% for units having investment between Rs. 5.00 lakh and Rs. 25 lakh should be raised to 30%. The balance 30% may be given to the units with investment in plant and machinery between Rs. 25-60/75 lakh.

Under the existing instructions, units with investment in plant and machinery up to Rs.5 lakh will get 40% of credit to all SSIs; units with investment in plant and machinery between Rs.5 lakh and Rs.25 lakh allocated 20% of the SSI credit by banks and the balance 40% to units with investment in plant and machinery between Rs.25 lakh and Rs.3 crore. This stipulation was made in the Credit Policy for the first half of 1997-98 and brought into force from February 1998. We may, therefore, not accept this recommendation.

The Committee has further recommended that the balance 30% may be given to the units with investment in plant and machinery between Rs. 25 lakh and Rs.60 lakh (Rs.75 lakh in the case of ancillary or export-oriented units). This would mean that credit given by banks to the SSI units with investment in plant and machinery above Rs.60/75 lakh should not be reckoned as priority sector lending. This is not a desirable feature because bigger units in SSI sector should not completely be ignored as regards preferentiality and some kind of protectionism while safeguarding the interest of tiny and smaller SSI units. Further Govt. of India is likely to bring down the investment limit from Rs. 3 crore to Rs.1 crore. We may not, therefore, accept this part of the recommendation also.

6.78 The commercial banks should not be permitted to utilise funds earmarked for direct priority sector lending for :

(i) Subscription 10 bonds issued by NABARD with the object of financing exclusively agriculture/ allied activities as well as non-farm sector.

(ii) Subscription to bonds floated by SIDBI, SFCs/SIDCs and NSIC exclusively for financing SSI units.

(iii) Subscription to bonds issued by NHB & HUDCO.

These suggestions have been examined while discussing the draft report of sub- group II constituted to examine financial and fiscal measures for promotion and growth of SSEs. Under the Study Group on the Development of Small Enterprises. Such restrictions are not considered necessary since subscriptions to the bonds are also utilized for the development of the sector. We may not accept the suggestion.

6.79 The banks should neither be permitted to exercise soft options nor rewarded for not meeting their targets of priority lending by payment of high interest on funds placed with SIDBI/NABARD. Rates of interest available to recalcitrant banks which continue to default in meeting the targets for lending to priority sector may be reduced to 5-6 per cent and over 3 years' time, the banks which still continue to default should be allowed a nominal return of only 1-2 per cent.

This recommendation also was examined while finalizing the report of the Sub- Group II. We have taken the view to retain the rates of interest being offered as they are in tune with the rates offered by banks on term deposits. The matter was also referred to MPD and MPD in turn advised us with the approval of DG (R) that the interest on deposits maintained by foreign banks with SIDBI may be continued at 8 percent. We may not accept the suggestion.

6.91 Some Lead Banks due to their weak financials are not able to lead in lending. Reserve Bank of India should review the performance of such banks with regard to their lending to priority sector and reallocate the responsibility of lead banks to stronger banks, which are able to take a lead in lending to SSIs.

The recommendation was examined in LBS section and decided not to reallocate the responsibility of Lead Banks as suggested because the performance of the lead banks which are financially weak is not as bad as would warrant change in their lead responsibility. The performance of all the banks present in the district is primarily significant for good performance in the district as a whole and not the financial position of the bank. The recommendation may be treated as not accepted.

6.94 Credit rating for SSI units can help in augmenting the flow of credit to SSI. The existing agencies are not equipped to cater to the credit rating requirement of a large sector like SSI. SIDBI should assist the formation of new credit rating agencies, which can be set up by professionals having experience SSI financing. While rating SSI units all relevant factors may be taken into consideration. While lending the banks should take into consideration the rating provided by such agencies.

SIDBI commented that introducing credit rating agency exclusively for SSI does not appear to be feasible at this point of time.

6.112 Banks may be advised to improve their system of promotion and reward to calibrate the same to the individual performance, not only in matters of deposits and house keeping but also in respect of granting loans, particularly to SSI. If required, the Annual Confidential Report Forms and procedures should be modified to provide for the above. Banks should give due importance to loaning activities for assessing the performance of individual manager. While judging the performance of a Manager Officer in case of specialised SSI branches this should rank as the most important criteria. A Balanced Score Card can be introduced in our banking system.

Bank Officials particularly those of branch levels are required to attend multifarious functions simultaneously. Emphasis on and time taken by the official/s for each type of function may vary from official to official and from branch to branch depending upon the size of the branch, area in which it is located and the nature and volume of each kind of activity handled by the branch. Therefore the suggestion to include the aspect of SSI financing in the Annual Confidential Report Form is not practicable.

6.113 Some ad hoc rewarding system could be introduced and encouraged. The banks may take up grant of some non-monetary rewards to recognise and promote good performance. These managers could be deputed to some specialised training programmes outside the banking system both within and outside the country. Outstanding performance can even be considered as a qualification for attractive postings abroad, wherever feasible.

The system of Human Resources Development exist in all banks. The non-monetary rewards cannot be extended depending on the performance in SSI area alone. It may depend on several parameters and the suggestion is not practicable. We may not accept.

6.116 Cases involving amounts up to Rs. 25 lakh should be dealt with by the Chief Vigilance Officer of the bank instead of referring it to the Central Vigilance Commission.

The dealing of cases by the Chief Vigilance Officer of the banks are as per CVC guidelines.

6.119 The work done by State Financial Corporations in 22 districts where they have been advised to take the lead role in financing SSIs should be evaluated. SIDBI should be asked to open its branches in those districts, out of these 23, where term lending services are not being provided; it may also have to act as primary lender in these 22 districts. Similarly, SIDBI should be requested to act as a primary lender in those states where the SFCs are either moribund or are not functioning.

SIDBI would not be in a position to commit to open its branches in the said districts. However, it had agreed to add new branches to its network based on business potential, promotional and developmental initiatives required at the centre as also keeping in view the potential for resource raising, etc.

6.122 Each Public Sector Bank should appoint an Ombudsman who should be a person of high integrity and inclined to do public service. He can look after the credit related grievances of the borrowers, which are outside the scope of Banking Ombudsman Scheme. In. addition to having only one Ombudsman, banks can have a Commissioner of Grievances, one in each zone, who should look after the complaints arising from 500 branches. Eminent retired citizens having adequate background of banking/industry/business may be appointed as Commissioners. The Governor, RBI may appoint each such Ombudsman or Commissioner on the recommendations of the bank concerned.

The scheme of Banking Ombudsman is under revision. The revised scheme under finalisation includes arbitration of inter bank disputes and also that between the customer and bank for amounts up to Rs 10 lakh. In view of this we may not accept the suggestion.

Sd/

(Jaya Arunachalam)

Sd/

(A.K.Purwar)

Sd/

(Kailash P. Jhunjhunwala)

Sd/

(N.Vaghul)

Sd/

(Dr.Ashok Jhunjhunwala)

(S.S.Kohli)