1

Small Scale Industries

1.1.

Small Scale and Ancillary Industries

Small scale industrial units are those engaged in the manufacture, processing or preservation of goods and whose investment in plant and machinery (original cost) does not exceed Rs. 1 crore. These would, inter alia, include units engaged in mining or quarrying, servicing and repairing of machinery. In the case of ancillary units, the investment in plant and machinery (original cost) should also not exceed Rs. 1 crore to be classified under small-scale industry.

The investment limit of Rs.1 crore for classification as SSI has been enhanced to Rs.5 crore in respect of certain specified items under hosiery, hand tools, drugs pharmaceuticals and stationery items & sports goods by the Government of India.

1.2

Tiny Enterprises

The status of ‘Tiny Enterprises’ may be given to all small scale units whose investment in plant & machinery is up to Rs. 25 lakh, irrespective of the location of the unit.

1.3

Small Scale Service & Business Enterprises (SSSBEs)

1.3.1

Industry related service and business enterprises with investment up to Rs. 10 lakh in fixed assets, excluding land and building will be given benefits of small scale sector. For computation of value of fixed assets, the original price paid by the original owner will be considered irrespective of the price paid by subsequent owners.

1.3.2

An illustrative list of eligible activities as SSSBEs and the illustrative list of activities that will not qualify as SSSBE is given in Annexures 1 & II respectively

1.4

Indirect finance in the small-scale industrial sector will include credit to:

1.4.1

Agencies involved in assisting the decentralised sector in the supply of inputs and marketing of outputs of artisans, village and cottage industries.

1.4.2

Government sponsored Corporation/organisations providing funds to the weaker sections in the priority sector.

1.4.3

Advances to handloom co-operatives.

1.4.4

Term finance/loans in the form of lines of credit made available to State Industrial Development Corporation/State Financial Corporations for financing SSIs.

1.4.5

Credit provided by banks to KVIC under the scheme for provision of credit to KVIC by consortium of banks for lending to viable Khadi and Village Industrial Units.

1.4.6

Funds provided by commercial banks to SIDBI/SFCs by way of rediscounting of bills of SSIs which are originally discounted by a commercial bank and rediscounted by SIDBI/SFCs will be eligible for inclusion under the priority sector as indirect finance to SSI.

1.4.7

1.4.8

1.4.9

(i) Financing of NBFCs or other intermediaries for on-lending to the tiny sector.

(ii) All new loans granted by banks to NBFCs and other intermediaries for on-lending to SSI sector with effect from November 11, 2003.

1.4.10

Deposits placed with SIDBI by Foreign Banks in fulfilment of shortfall in attaining priority sector targets.

1.4.11

1.5

Industrial Estates

Loans for setting up industrial estates.

1.6

KVI Sector

All advances to KVI sector, irrespective of their size of operations, location and investment in plant and machinery, will be covered under priority sector advances and will also be eligible for consideration under the sub-target (60 percent) of the SSI segment within the priority sector.

1.7

Manufacture of common salt through any process including manual operation (involving solar evaporation) may be considered as an industrial activity and credit provided by banks to units engaged in the manufacture of common salt which satisfy the norms of SSI unit may be classified under advances to SSI.

1.8

Units engaged in ship breaking/dismantling are composite ones which also undertake the processing of scrap thus obtained and hence the entire activity can be covered under processing. Therefore, all small scale industrial units with original cost of plant and machinery not exceeding Rs. 1 crore and engaged in ship breaking/dismantling activity may be considered as small scale industrial undertaking and bank advances to such units reckoned as priority sector advances.

1.9

Bank loans to bought leaf factories manufacturing tea are to be reckoned as priority sector lending to small scale industry, provided the investment in plant and machinery (original cost) does not exceed the prescribed limits.

1.10

Water mills (Gharat) has been recognised as an industrial activity and shall be eligible for registration as small scale industry.

2.

Food and Agro-based Processing Sector

The following items within the food and agro-based processing sector would be eligible for classification as priority sector for lending by banks:

• Fruit and vegetable processing industry
• Food grain milling industry
• Dairy products
• Processing of poultry and eggs, meat products
• Fish processing
• Bread, oilseeds, meals (edible), breakfast foods, biscuits, confectionery (including cocoa processing and chocolate), malt extract, protein isolate, high protein food, weaning food and extruded/ other ready to eat food products
• Aerated water/ soft drinks and other processed foods
• Special packaging for food processing industries
• Technical assistance and advice to food processing industry

With regard to the size of the units within this sector, it is clarified that food and agro-based processing units of small and medium size with investment in plant and machinery up to Rs 5 crore would be included under priority sector lending.

While loans to units satisfying SSI definition may be shown under advances to SSI, loans to other units should be shown separately in the half-yearly statements on priority sector lending.

2.1

Software Industry

Loans to software industry with credit limit upto Rs. 1 crore from the banking industry to be included under this item.

2.2

Venture Capital

Investment in Venture Capital will be eligible for inclusion in priority sector, subject to the condition that the venture capital funds/companies are registered with SEBI.

SECTION II

CERTAIN TYPES OF funds deployment eligible as priority sector advances

1.

Investments in Special Bonds

1.1

Investments made by the banks in special bonds issued by the specified institutions could be reckoned as part of priority sector advances, subject to the following conditions:

(i)

State Financial Corporations (SFCs)/State Industrial Development Corporations (SIDCs)

(a)

Subscription to bonds exclusively floated by SFCs & SIDCs for financing SSI units will be eligible for inclusion under priority sector as indirect finance to SSI.

(b)

(ii)

NABARD

Subscription to bonds issued by NABARD with the objective of financing exclusively agriculture/allied activities and the non-farm sector will be eligible for inclusion under the priority sector as indirect finance to SSI, as the case may be.

(iii)

Small Industries Development Bank of India (SIDBI)

Subscriptions to bonds exclusively floated by SIDBI for financing of SSI units will be eligible for inclusion under priority sector as indirect finance to SSIs.

(iv)

The National Small Industries Corporation Ltd. (NSIC)

Subscription to bonds issued by NSIC exclusively for financing of SSI units will be eligible for inclusion under priority sector as indirect finance to SSIs.

(v)

Housing & Urban Development Corporation (HUDCO)

1.1.1

The issue of bonds should be accompanied by a declaration from the issuing institution that the proceeds would be utilised for financing of borrowers under the priority sector as detailed above and no refinance would be availed of against such loans to the ultimate borrowers from any other agency.

1.1.2

The rate of interest and maturity period of bonds may be settled by banks with the respective institutions.

1.1.3

While reporting to the RBI, the quantum of investment in bonds (as they would appear under investments in the Balance Sheet) should be shown separately under the appropriate sub-head in the priority sector returns.

1.2

2.

Other Investments

Investment by banks in venture capital will be eligible for inclusion in priority sector lending. This is subject to the condition that venture capital funds/companies are registered with SEBI.

3.

Lines of Credit

3.1

Banks may consider on merit, proposals received from State Industrial Development Corporations (SIDCs) and State Financial Corporations (SFCs) for sanction of term finance/loans in the form of lines of credit.

3.2

Such term finance/loans to the extent granted for/to the Small Scale Industrial (SSI) units, will be treated as priority sector lending, subject to the observance of following conditions:

(i)

SFC/SIDC should maintain separate and distinct accounts of fresh disbursements made to SSI units and outstanding amounts there against.

(ii)

Periodical statements to be obtained from SFC/SIDC to monitor the position.

(iii)

Annually, a certificate issued by SFC/SIDC statutory auditors certifying that the outstanding borrowings from banks were fully covered by the non-overdue loans outstanding in respect of fresh disbursements made to SSI units from out of term finance/lines of credit granted by banks.

(iv)

3.3

4.

Bills Rediscounting

4.1

Funds provided by commercial banks to SIDBI by way of rediscounting of bills of SSIs which are originally discounted by a commercial bank and rediscounted by SIDBI will be eligible for inclusion under the priority sector as indirect finance to SSI.

4.2

5.

LEASING AND HIRE PURCHASE

Para-banking activities such as leasing and hire purchase financing undertaken departmentally by banks will be classified as priority sector advances, provided the ultimate beneficiary satisfies the criteria laid down by RBI for treating such advances as advances to priority sector.

SECTION III

targets for priority sector lending by scheduled commercial banks (excluding RRBs)

1.

Main Targets for All Scheduled Commercial Banks excluding Foreign Banks

1.1

The scheduled commercial banks are expected to enlarge credit to priority sector and ensure that priority sector advances (which includes the SSI sector) constitute 40 per cent of net bank credit.

1.2

While there is no sub-target fixed for lending to SSI sector banks may fix self set target for growth in advances to SSI sector over the previous year’s achievement and overall trends in growth of net bank credit.

1.3

In order to ensure that credit is available to all segments of the SSI sector, banks should ensure that -

(a)

40 per cent of the total credit to small scale industry goes to the cottage industries, khadi & village industries, artisans and tiny industries with investment in plant and machinery up to Rs. 5 lakh;

(b)

20 per cent of the total credit to small scale industry goes to SSI units with investment in plant and machinery between Rs. 5 lakh and Rs. 25 lakh; and

(c)

The remaining 40 per cent goes to other SSI units with investment exceeding Rs. 25 lakh.

2.

Targets for Foreign Banks

2.1.1

Within the overall target of 32 per cent to be achieved by foreign banks, the advances to small scale industries sector should not be less than 10 per cent of the net bank credit and the export credit should not be less than 12 per cent of the net bank credit.

3.

DEPOSIT by Foreign Banks WITH SIDBI towards shortfall in priority sector lending

3.1

b) The funds placed with SIDBI will have a graded interest rate structure linked to the Bank Rate as in the case of RIDF scheme for Public Sector Banks.

Sr. No.

Shortfall in lending to Priority Sector Target (32%)/ Sub-Targets for SSI-(10%)and Export credit(12%) to Net Bank Credit whichever is higher.

1

Less than 2 percentage points

Bank Rate (6% at present)

2

2 and above, but less than 5 percentage points

Bank Rate minus 1 percentage point

3

5 and above, but less than 9 percentage points

Bank Rate minus 2 percentage points

4

9 percentage points and above

Bank Rate minus 3 percentage points

c) SIDBI will pass on the lower interest rates to the borrowers.

N.B. Above instructions would be made effective from the financial year 2005-06.

3.2

The shortfall in achieving the priority sector lending target and the sub-targets should be computed as on the last reporting Friday of March every year and made good by placing a deposit with SIDBI as stated above. The deposits should be placed before the end of April of that year.

3.3

In regard to the above, it is to be clarified that in the event of failure on the part of foreign banks to achieve any of the stipulated sub-targets in respect of advances to SSI sector and export credit, even if they achieve the overall target of 32 per cent, the shortfall should be made good by placing with SIDBI a deposit of an amount equivalent to the shortfall in each of the sub-targets. Also, in the event of failure on the part of banks to achieve one of the sub-targets or both the sub-targets, and also the overall target of 32 per cent, the shortfall in achieving the sub-targets and the overall target should be made good by placing with SIDBI a deposit of an amount equivalent to (i) aggregate shortfall in the sub-targets, or (ii) the shortfall in the overall target, whichever shortfall is higher. In case the shortfall is in achievement of the overall target only and not in the sub-target, banks should make good the shortfall in achieving the overall target.

3.4

The outstanding balances of these deposits placed with SIDBI may be reckoned as part of their priority sector advances during the currency of the deposits, as indirect finance to SSI. The amount of deposits should, however, be shown separately in the returns on priority sector advances submitted to RBI.

SECTION IV

common guidelines/ INSTRUCTIONS for LENDING TO SSI sector

1.

Based on the recommendations made by the Working Groups and High Powered Committees, appointed by the Government of India and the Reserve Bank of India, a set of comprehensive guidelines to be followed for advances to all categories of borrowers in the SSI sector were evolved.

2.

Processing of Applications

2.1

Issue of Acknowledgement of Loan Applications

2.2

Disposal of Applications

2.3

A register should be maintained at branch wherein the date of receipt, sanction/rejection/disbursement with reasons therefor etc., should be recorded. The register should be made available to all inspecting agencies.

2.3.1

2.4

Collaterals

2.5

Composite loan

2.6

Specialised SSI branches

2.7

Delayed Payment

Under the Amendment Act, 1998 of Interest on Delayed Payment to Small Scale and Ancillary Industrial Undertakings, penal provisions have been incorporated to take care of delayed payments to SSI units which inter-alia stipulates a) agreement between seller and buyer shall not exceed more than 120 days b) payment of interest by the buyers at the rate of one and a half times the prime lending rate (PLR) of SBI for any delay beyond the agreed period not exceeding 120 days. Further, banks have been advised to fix sub-limits within the overall working capital limits to the large borrowers specifically for meeting the payment obligation in respect of purchases from SSI.

2.8

2.8.1

2.9

Technology upgradation

2.10

3.

4.

Repayment Schedule

4.1

Repayment programme should be fixed taking into account the sustenance requirements, surplus generating capacity, the break-even point, the life of the asset, etc., and not in an "ad hoc" manner. In respect of composite loan up to Rs. 50,000/- to artisans, village and cottage industries, repayment schedule may be fixed for term loan component only (subject to SIDBI's requirements being fulfilled).

4.2

In the case of other borrowers affected by natural calamities, banks may convert drawings in excess of the value of security into a term loan repayable over a reasonable period of time and provide further working capital and extend/re-phase the instalments due under term loans.

5

Rates of Interest

As per extant guidelines the banks are required to fix their own prime lending rates (PLRs) and the maximum band over the PLR. The interest rates on loans up to Rs.2 lakh should not exceed the PLR and that beyond Rs.2 lakh is left to the discretion of the banks subject to PLR and the maximum bands. The banks have been advised to accord SSI units with a good track record the benefit of lower spreads over the PLR. Banks have been advised to set the interest rate on advances keeping in view prevailing general southward movement in interest rates. The banks have been further advised to fix at least 3 slabs for advances to SSI sector.

6.

Penal Interest

6.1.1

The issue of charging penal interests that should be levied for reasons such as default in repayment, non-submission of financial statements etc. has been left to the Board of each bank. Banks have been advised to formulate policy for charging such penal interest with the approval of their Boards, to be governed by well accepted principles of transparency, fairness, incentive to service the debt and due regard to difficulties of customers.

6.1.2

No penal interest should be charged by banks for loans under priority sector up to Rs 25,000 as hitherto. However, banks will be free to levy penal interest for loans exceeding Rs 25,000, in terms of the above guidelines.

7.

SERVICE CHARGES / INSPECTION CHARGES

7.1.1

No service charges/inspection charges should be levied on priority sector loans up to Rs. 25,000/-.

7.1.2

For loans above Rs. 25,000/- banks will be free to prescribe service charges with the prior approval of their Boards in terms of circular No. DBOD.Dir.BC.86/03.01.00/99-2000 dated September 7, 1999.

8.

Insurance against Fire and Other Risks

8.1

Banks may waive insurance of assets financed by bank credit in the following cases:

9.

Photographs of Borrowers

While there is no objection to taking photographs of the borrowers, for purposes of identification, banks themselves should make arrangements for the photographs and also bear the cost of photographs of borrowers falling in the category of Weaker Sections. It should also be ensured that the procedure does not involve any delay in loan disbursement.

10.

Discretionary Powers

All Branch Managers of banks should be vested with discretionary powers to sanction proposals from weaker sections without reference to any higher authority. If there are difficulties in extending such discretionary powers to all the Branch Managers, such powers should exist at least at the district level and arrangements be ensured that credit proposals on weaker sections are cleared promptly.

11.

Machinery to look into Complaints

11.1.1

There should be a machinery at the regional offices to entertain complaints from the borrowers if the branches do not follow these guidelines, and o verify periodically that these guidelines are implemented by the branches in actual practice.

11.1.2

The names and addresses of the officer with whom complaints can be lodged should be displayed on the notice board of every branch.

12.

Amendments

These guidelines are subject to any instructions that may be issued by the RBI from time to time.