May 20, 2005

The Chairman/Managing Director
All Scheduled Commercial Banks
All SLBC Convenor Banks

Dear Sir,

Please refer to the announcement made by the Governor in paragraph No.84 of the Annual Policy Statement 2005-06 regarding formulation of a scheme of strategic alliance between branches of banks and SIDBI located in the clusters (extract of the paragraph is enclosed). A scheme for 'Small Enterprises Financial Centres (SEFCs)' has been worked out in consultation with the Ministry of SSI and Banking Division, Ministry of Finance, Government of India, SIDBI, IBA and select banks which is enclosed herewith for your perusal.

2. As the above scheme is important in the context of expanding outreach of banks and improving credit flow to the Small Scale Industries (SSIs) sector, banks are requested to initiate an early action in this regard.

3. Please acknowledge receipt.

Yours faithfully,

(G.Srinivasan)
Chief General Manager

84. The small scale industries (SSI) sector plays a very important role in the development of the economy. While large industries have access to various sources of finance, the SSI sector has to primarily depend on finance from banks and other financial institutions. With a view to further smoothening the flow of credit, the following measures have been initiated:

• Under a scheme to be drawn up by the RBI, banks will be encouraged to establish mechanisms for better co-ordination between their branches and branches of SIDBI which are located in 50 clusters that have been identified by the Ministry of Small Scale Industries, Government of India. Under the scheme of strategic alliance (i) the existing branches of SIDBI redesignated as 'Small Enterprises Financial Centres' (SEFC) will take up co-financing of term loan requirements of SSI units along with the bank branches and the working capital requirements of these units will be met by the banks; (ii) the expertise of the SIDBI in appraisal of credit requirements of SSI units will be leveraged by the branches of commercial banks, by payment of a nominal fee; (iii) SIDBI will provide other expert services to help the banks in simplifying the application forms, documentation and disbursement procedures, etc.; and (iv) the working of the scheme may be monitored and modified to suit the local conditions by the State Level Bankers’ Committee (SLBC) and, depending on the experience, the coverage of the scheme may be extended to more clusters. The services of SEFCs will be available for tiny industrial units also.

a) All tiny units irrespective of loan size will be eligible for coverage under SEFCs. Special focussed attention will be given to financing to tiny sector as they have limited access to institutional finance.

b) New SME units (including service sector units) will be eligible under SEFC Scheme.

c)All proposals from existing units for expansion/modernisation/ diversification/technology upgradation/ marketing/exports etc. will also be eligible.

d) Existing units, which are not having banking linkage or having limited banking linkage, will be eligible under SEFCs.

As envisaged in the Annual Policy Statement, the SEFCs will take up co-financing or exclusive financing of term loan requirements of SSI units along with the bank branches and the working capital requirements of these units will be met by the banks. The strategic partners may also work out arrangement for sharing of financial assistance on mutually agreeable terms on a case to case basis especially in respect of facilities currently not being extended by SIDBI.

Generally norms for debt equity ratio, repayment period, security coverage, rate of interest, etc. would be aligned as per mutual consent of strategic partners.Operational guidelines may be worked out by SIDBI and strategic partners with mutual consent.