RBI/FIDD/2017-2018/56
Master Direction FIDD.MSME & NFS.12/06.02.31/2017-18

July 24, 2017
(Updated as on June 11, 2024)
(Updated as on December 28, 2023)
(Updated as on July 29, 2022)
(Updated as on April 25, 2018)

The Chairman / Managing Director / Chief Executive Officer
All Scheduled Commercial Banks
(excluding Regional Rural Banks)

Madam/Dear Sir,

Master Direction - Lending to Micro, Small & Medium Enterprises (MSME) Sector

The Reserve Bank of India has, from time to time, issued a number of instructions / guidelines to banks relating to lending to the Micro, Small and Medium Enterprises Sector. The Master Direction enclosed incorporates the updated instructions / guidelines on the subject. The list of circulars consolidated in this Master Direction is indicated in the Appendix.

Yours faithfully

(R Giridharan)
Chief General Manager

Master Direction – Reserve Bank of India [Lending to Micro, Small & Medium Enterprises (MSME) Sector] - Directions, 2017

In exercise of the powers conferred by Sections 21 and 35 A of the Banking Regulation Act, 1949, the Reserve Bank of India, being satisfied that it is necessary and expedient in the public interest to do so, hereby, issues the Directions hereinafter specified.

CHAPTER – I
PRELIMINARY

1.1 Short Title and Commencement

a) These Directions shall be called the Reserve Bank of India [Lending to Micro, Small & Medium Enterprises (MSME) Sector] Directions, 2017.

b) These Directions shall come into effect on the day they are placed on the official website of the Reserve Bank of India.

1.2 Applicability

The provisions of these Directions shall apply to all Scheduled Commercial Banks (excluding Regional Rural Banks RRBs).

1.3 Definitions/ Clarifications

In these Directions, unless the context otherwise requires, the terms herein shall bear the meanings assigned to them as below:

a) The MSMED Act, 2006 means ‘Micro, Small and Medium Enterprises Development (MSMED) Act, 2006’ as notified by the Government of India on June 16, 2006 and the amendments, if any, carried out therein by the Government of India from time to time.

b) ‘Micro, Small and Medium Enterprises’ mean the enterprises as defined in the MSMED Act, 2006 and the amendments, if any, carried out therein by the Government of India from time to time.

c) ‘Priority Sector’ means the sectors specified in the Master Direction on Priority Sector Lending (PSL) – Targets and Classification dated September 4, 2020 as updated from time to time.

d) ‘Adjusted Net Bank Credit (ANBC)’ shall have the same meaning as given in the Master Direction on Priority Sector Lending (PSL) – Targets and Classification dated September 4, 2020 as updated from time to time.

CHAPTER – II

2. Micro, Small and Medium Enterprises Development (MSMED) Act, 2006

2.1 In terms of Gazette Notification S.O. 2119 (E) dated June 26, 2020, an enterprise shall be classified as a micro, small or medium enterprise on the basis of the following criteria viz.,

1. a micro enterprise, where the investment in plant and machinery or equipment does not exceed ₹1 crore and turnover does not exceed ₹5 crore;

2. a small enterprise, where the investment in plant and machinery or equipment does not exceed ₹10 crore and turnover does not exceed ₹50 crore; and

3. a medium enterprise, where the investment in plant and machinery or equipment does not exceed ₹50 crore and turnover does not exceed ₹250 crore.

2.2 All the above enterprises are required to register online on the Udyam Registration portal and obtain ‘Udyam Registration Certificate’. For PSL purposes banks shall be guided by the classification recorded in the Udyam Registration Certificate (URC).

2.3 Retail and Wholesale trade are included as MSMEs for the limited purpose of priority sector lending and are allowed to be registered on Udyam Registration Portal.

2.4 The certificate issued on Udyam Assist Portal (UAP) to Informal Micro Enterprises (IMEs) shall be treated at par with Udyam Registration Certificate for the purpose of availing Priority Sector Lending benefits. IMEs with an Udyam Assist Certificate shall be treated as micro enterprises for the purpose of PSL classification.

CHAPTER - III

3. Targets / sub-targets for lending to MSME sector

3.1 Priority Sector Guidelines for MSME sector

Scheduled Commercial Banks shall adhere to the targets/sub-targets for lending to the MSME sector and related aspects as laid down in the Master Direction on Priority Sector Lending (PSL) – Targets and Classification dated September 4, 2020 as updated from time to time.

3.2 In terms of the recommendations of the Prime Minister’s Task Force on MSMEs, banks are advised to achieve:

(i) 20 per cent year-on-year growth in credit to micro and small enterprises,

(ii) 10 per cent annual growth in the number of micro enterprise accounts and

(iii) 60 per cent of total lending to MSE sector as of the corresponding quarter of the previous year to micro enterprises.

CHAPTER - IV

4. Common guidelines/Instructions for lending to MSME sector

4.1 Collateral

Banks are mandated not to accept collateral security in the case of loans up to ₹10 lakh extended to units in the MSE sector. Banks are also advised to extend collateral-free loans up to ₹10 lakh to all units financed under the Prime Minister Employment Generation Programme (PMEGP) administered by KVIC. Banks may, on the basis of good track record and financial position of the MSE units, increase the limit to dispense with the collateral requirement for loans up to ₹25 lakh (with the approval of the appropriate authority). Banks are advised to strongly encourage their branch level functionaries to avail of the Credit Guarantee Scheme cover, including making performance in this regard a criterion in the evaluation of their field staff.

4.2 Composite loan

A composite loan limit of ₹1 crore can be sanctioned by banks to enable the MSE entrepreneurs to avail of their working capital and term loan requirement through Single Window.

4.3 General Credit Card (GCC) Facility

Banks which are eligible to issue credit cards under the Master Direction -Credit Card and Debit card- Issuance and Conduct Directions, dated April 21, 2022 (as updated from time to time), may issue General Credit Cards to individuals/entities sanctioned working capital facilities for non-farm entrepreneurial activities which are eligible for classification under the priority sector guidelines. The terms and conditions of the credit facilities extended in the form of GCC shall be as per the Board approved policies of the banks, within the overall framework laid down by Reserve Bank. Guidelines on collateral free lending for micro and small units issued from time to time shall apply. Banks shall adhere to the instructions on reporting GCC data as issued by RBI from time to time.

4.4 Streamlining flow of credit to Micro and Small Enterprises (MSEs) for facilitating timely and adequate credit flow during their ‘Life Cycle’:

In order to provide timely financial support to Micro and Small enterprises facing financial difficulties during their ‘Life Cycle’, guidelines were issued to banks vide circular FIDD.MSME & NFS.BC.No.60/06.02.31/2015-16 dated August 27, 2015 on the captioned subject. In accordance with the guidelines, banks shall review and tune their lending policies to the MSE sector by incorporating therein the following provisions so as to facilitate timely and adequate availability of credit to viable MSE borrowers especially during the need of funds in unforeseen circumstances:

1. To extend standby credit facility in case of term loans

2. Additional working capital to meet with emergent needs of MSE units

3. Mid-term review of the regular working capital limits, where banks are convinced that changes in the demand pattern of MSE borrowers require increasing the existing credit limits of the MSMEs, every year based on the actual sales of the previous year.

4. Timeline for credit decisions for loans up to ₹25 lakh to units in the MSE borrowers shall not be more than 14 working days. For loans above the aforementioned limit, timelines shall be as per the Board approved sanction time norms. All credit related information pertaining to MSMEs including timelines for credit decisions, indicative document checklist etc., shall be displayed under a separate tab prominently on the bank’s website.

4.5 Debt Restructuring Mechanism for MSMEs

i) Banks are advised to follow the guidelines/instructions on debt restructuring pertaining to MSMEs contained in the ‘Master Circular - Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances’ as updated from time to time.

ii) All commercial banks are also advised in terms of our circular RPCD.SME&NFS.BC.No.102/06.04.01/2008-09 dated May 4, 2009 to do the following:

1. put in place loan policies governing extension of credit facilities, Restructuring/Rehabilitation policy for revival of potentially viable sick units / enterprises (now read with guidelines on Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises issued on March 17, 2016) and non- discretionary One Time Settlement scheme for recovery of non- performing loans for the MSE sector, with the approval of the Board of Directors and

2. give wide publicity to the One-Time settlement scheme implemented by them, by placing it on the bank’s website and through other possible modes of dissemination. They may allow reasonable time to the borrowers to submit the application and also make payment of the dues in order to extend the benefits of the scheme to eligible borrowers.

3. implement recommendations with regard to timely and adequate flow of credit to the MSE sector.

4.6 Framework for Revival and Rehabilitation of MSMEs

The Ministry of Micro, Small and Medium Enterprises, Government of India, vide their Gazette Notification dated May 29, 2015 had notified a ‘Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises’ to provide a simpler and faster mechanism to address the stress in the accounts of MSMEs and to facilitate the promotion and development of MSMEs. After carrying out certain changes in the captioned Framework in consultation with the Government of India, Ministry of MSME so as to make it compatible with the existing regulatory guidelines on ‘Income Recognition, Asset Classification and Provisioning pertaining to Advances’ issued to banks by RBI, the guidelines on the captioned Framework along with operating instructions were issued to banks on March 17, 2016. The revival and rehabilitation of MSME units having loan limits up to ₹25 crore would be undertaken under this Framework. The revised Framework supersedes our earlier Guidelines on Rehabilitation of Sick Micro and Small Enterprises issued vide our circular RPCD.CO.MSME& NFS.BC.40/06.02.31/2012-2013 dated November 1, 2012, except those relating to Reliefs and Concessions for Rehabilitation of Potentially Viable Units and One Time Settlement, mentioned in the said circular.

The salient features of the Framework are as under:

1. Before a loan account of an MSME turns into a Non-Performing Asset (NPA), banks or creditors should identify incipient stress in the account by creating three sub-categories under the Special Mention Account (SMA) category as given in the Framework

2. Any MSME borrower may also voluntarily initiate proceedings under this Framework

3. Committee approach to be adopted for deciding corrective action plan

4. Timelines have been fixed for taking various decisions under the Framework

4.7 Structured Mechanism for monitoring the credit growth to the MSE sector

Banks shall put in place a structured mechanism to monitor the entire gamut of credit related issues pertaining to the MSE sector. Accordingly, banks shall implement the following:

1. Credit Proposal Tracking System (CPTS): Banks shall put in place a CPTS/ equivalent tracking mechanism to facilitate central registration and a system of e-tracking of all MSME loan applications. This mechanism shall automatically generate an acknowledgement of the application, having a unique application serial number for both physical and online applications. Further, it shall also be ensured that the acknowledgement and status of the application is sent automatically to the applicants.

2. Indicative check list of documents: Banks shall furnish the MSME borrowers with an indicative checklist of documents required for processing the loan application at the time of applying for the loan.

3. Monitoring the loan application disposal process: Banks shall monitor the loan application disposal process and pendency beyond sanction time norms at appropriate levels on a quarterly basis. The position in this regard shall be displayed by banks on their websites in the format specified in (Annex I) within one month from the end of the preceding quarter.

4. Reasons for rejection of loan applications: Banks shall, within the Board approved sanction time norms, convey to the MSME borrowers in writing the main reason/reasons which, in the opinion of the bank after due consideration, have led to rejection of the loan applications.

5. Comprehensive Performance MIS: Banks shall implement a system-driven comprehensive performance management information system (MIS) at branches and supervisory levels (region, zone, head office). The Performance should be critically evaluated on a regular basis. The credit flow to the sector shall also be reviewed by the Board of the banks at periodic intervals.

Chapter - V

5 Institutional arrangements

5.1 Specialised MSME branches

Public sector banks are advised to open at least one specialised branch in each district. Further, banks have been permitted to categorise their general banking branches having 60% or more of their advances to MSME sector as specialized MSME branches in order to encourage them to open more specialised MSME branches for providing better service to this sector as a whole. As per the policy package announced by the Government of India for stepping up credit to MSME sector, the public sector banks would ensure specialized MSME branches in identified clusters/centres with preponderance of small enterprises to enable the entrepreneurs to have easy access to the bank credit and to equip bank personnel to develop requisite expertise. Though their core competence will be utilized for extending finance and other services to MSME sector, they will have operational flexibility to extend finance/render other services to other sectors/borrowers. Banks may take care to train the officials posted in such branches appropriately.

5.2 Empowered Committee on MSMEs

As part of the announcement made by the Union Finance Minister, Empowered Committees on MSMEs are constituted at the Regional Offices of Reserve Bank of India, under the Chairmanship of the Regional Directors with the representatives of SLBC Convenor, senior level officers from two banks having predominant share in MSME financing in the state, representative of SIDBI Regional Office, the Director of MSME or Industries of the State Government, one or two senior level representatives from the MSME Associations in the state, and a senior level officer from SFC/SIDC as members. The Committee would meet periodically and review the progress in MSME financing as also revival and rehabilitation of stressed Micro, Small and Medium units. It would also coordinate with other banks/financial institutions and the state government in removing bottlenecks, if any, to ensure smooth flow of credit to the sector. The committees may decide the need to have similar committees at cluster/district levels.

5.3 Banking Codes and Standards Board of India (BCSBI)

BCSBI in collaboration with the Indian Banks' Association (IBA), Reserve Bank of India (RBI) and member banks had evolved the ‘Code of Bank's Commitment to Micro and Small Enterprises’ - which set minimum standards of banking practices for member banks to follow when they are dealing with Micro and Small Enterprises. The objective of the Code is to promote good banking practices, setting minimum standards for the adherents, increasing transparency, achieving higher operating standards and above all, promoting a cordial banker-customer relationship which would foster confidence in the banking system. The Code lays great emphasis on transparency and providing full information to the customer before a product or service is sold to him/her. Above all, member banks of BCSBI have voluntarily adopted the Code for implementation. While BCSBI has initiated the process of its dissolution, banks may continue to follow their commitments as hitherto under the Code of Bank's Commitment to Micro and Small Enterprises.

5.4 Micro and Small Enterprises Sector – The imperative of Financial Literacy and consultancy support

Keeping in view the high extent of financial exclusion in the MSME sector, it is imperative for banks that the excluded units are brought within the fold of the formal banking sector. The lack of financial literacy, operational skills, including accounting and finance, business planning etc. represent formidable challenge for MSE borrowers underscoring the need for facilitation by banks in these critical financial areas. Moreover, MSE enterprises are further handicapped in this regard by absence of scale and size. To effectively and decisively address these handicaps, scheduled commercial banks were advised vide our circular RPCD.MSME & NFS.BC.No.20/06.02.31/2012-13 dated August 1, 2012 that they could either separately set up special cells at their branches, or vertically integrate this function in the Financial Literacy Centres (FLCs) set up by them, as per their comparative advantage. The bank staff should also be trained through customised training programs to meet the specific needs of the sector. Further, Financial Literacy Centres operated by Scheduled commercial Banks have been advised vide our circular FIDD.FLC.BC.No.22/12.01.018/2016-17 dated March 2, 2017 to conduct target specific financial literacy camps, where one of the target groups is small entrepreneurs.

5.5 Cluster Approach

A cluster shall mean a cluster identified by the Ministry of Micro, Small and Medium Enterprises, Government of India or the respective State /UT Governments. SLBC/UTLBC Convenor banks shall display the list of these clusters on their portals and update them semi-annually as at end-March and end-September. The updated list of clusters identified by Ministry of MSME may be accessed from Ministry's official website, while information on clusters recognized by State Governments/Union Territories shall be obtained directly from the respective authorities.

i) The lead bank of a district shall promote 'credit-linkage' in all clusters located within the district. The initiatives under promotion of the credit-linkage, shall include but not be restricted to the following measures:

• Assessing the credit requirements of the MSE units in the clusters and addressing their credit needs directly or facilitating their linkage with other banks operating in the area for credit proposals.

• Creating awareness among the MSE units in the clusters regarding the importance of formal credit linkage through various forums including financial literacy camps.

• Enabling coverage under various skill development initiatives in the district.

• Focused attention and proactive measures to improve financial services in the underbanked clusters.

ii) The banks shall ensure that the credit needs of clusters are appropriately included in the exercise of preparation of branch/block level plans so that the same can be aggregated by lead banks to form the District Credit Plan (DCP) and subsequently by SLBC /UTLBC Convenor banks to prepare the Annual Credit Plan (ACP).

iii) The SLBC /UTLBC Convenor banks shall disclose the credit extended to clusters in the State/UT on their portal every quarter in the prescribed format (Annex II).

5.6 Delayed Payment

In the Micro, Small and Medium Enterprises Development (MSMED), Act 2006, the provisions of The Interest on Delayed Payment to Small Scale and Ancillary Industrial Undertakings Act, 1998, have been strengthened as under:

1. The buyer has to make payment to the supplier on or before the date agreed upon between him and the supplier in writing or, in case of no agreement, before the appointed day. The period agreed upon between the supplier and the buyer shall not exceed forty-five days from the date of acceptance or the day of deemed acceptance.

2. In case the buyer fails to make payment of the amount to the supplier, he shall be liable to pay compound interest with monthly rests to the supplier on the amount from the appointed day or, on the date agreed on, at three times of the Bank Rate notified by Reserve Bank.

3. For any goods supplied or services rendered by the supplier, the buyer shall be liable to pay the interest as advised at (ii) above.

4. In case of dispute with regard to any amount due, a reference shall be made to the Micro and Small Enterprises Facilitation Council, constituted by the respective State Government.

Further, banks are 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 MSMEs.

CHAPTER - VI

6 Committees on flow of Credit to MSE sector

Scheduled Commercial Banks may be guided by the contents of the following circulars while extending credit to MSE sector:

6.1 Report of the High Level Committee on Credit to SSI (now MSE) (Kapur Committee)

All scheduled commercial banks were advised vide our circular RPCD. No. PLNFS.BC.22/06.02.31/98- 99 dated August 28, 1998 to implement the Kapur Committee Recommendations.

6.2 Report of the Committee to Examine the Adequacy of Institutional Credit to SSI Sector (now MSE) and Related Aspects (Nayak Committee)

All scheduled commercial banks were advised vide our circular RPCD.PLNFS.BC.No. 61/06.0262/2000-01 dated March 2, 2001 to implement the Nayak Committee Recommendations.

6.3 Report of the Working Group on Flow of Credit to SSI (now MSE) Sector (Ganguly Committee)

The recommendations of the Committee were communicated to banks for implementation vide circular RPCD.PLNFS.BC.28/06.02.31(WG)/2004-05 dated September 4, 2004.

6.4 Working Group on Rehabilitation of Sick SMEs (Chairman: Dr. K.C. Chakrabarty)

Banks were advised vide circular dated RPCD.SME&NFS.BC.No.102/06.04.01/2008-09 dated May 4, 2009 to consider implementation of the recommendations, inter alia, that lending in case of all advances upto ₹2 crores may be done on the basis of scoring model.

6.5 Prime Minister’s Task Force on Micro, Small and Medium Enterprises

A High-Level Task Force was constituted by the Government of India (Chairman: Shri T K A Nair), in January 2010, to consider various issues raised by Micro, Small and Medium Enterprises (MSMEs). The Task Force recommended several measures having a bearing on the functioning of MSMEs, viz., credit, marketing, labour, exit policy, infrastructure/technology/skill development and taxation. The comprehensive recommendations cover measures that need immediate action as well as medium term institutional measures along with legal and regulatory structures and recommendations for North- Eastern States and Jammu & Kashmir.

Banks are urged to keep in view the recommendations made by the Task Force and take effective steps to increase the flow of credit to the MSE sector, particularly to the micro enterprises. A circular was issued to all scheduled commercial banks vide RPCD.SME&NFS BC.No.90/06.02.31/2009-10 dated June 29, 2010 advising implementation of the recommendations of the Prime Minister’s Task Force on MSMEs.

6.6 Working Group to Review the Credit Guarantee Scheme for Micro and Small Enterprises

A Working Group was constituted by the Reserve Bank of India under the Chairmanship of Shri V.K. Sharma, Executive Director, to review the working of the Credit Guarantee Scheme (CGS) of CGTMSE and suggest measures to enhance its usage and facilitate increased flow of collateral free loans to MSEs. The recommendations of the Working Group included, inter alia, mandatory doubling of the limit for collateral free loans to micro and small enterprises (MSEs) sector from ₹5 lakh to ₹10 lakh and enjoining upon the Chief Executive Officers of banks to strongly encourage the branch level functionaries to avail of the CGS cover and making performance in this regard a criterion in the evaluation of their field staff, etc. have been advised to all banks. A circular to this effect was issued to all scheduled commercial banks vide RPCD.SME&NFS.BC.No.79/06.02.31/2009-10 dated May 6, 2010.

Appendix

List of Circulars consolidated by the Master Direction

RBI/FIDD/2017-2018/56
Master Direction FIDD.MSME & NFS.12/06.02.31/2017-18

July 24, 2017
(Updated as on December 28, 2023)
(Updated as on July 29, 2022)
(Updated as on April 25, 2018)

The Chairman / Managing Director / Chief Executive Officer
All Scheduled Commercial Banks
(excluding Regional Rural Banks)

Madam/Dear Sir,

Master Direction - Lending to Micro, Small & Medium Enterprises (MSME) Sector

The Reserve Bank of India has, from time to time, issued a number of instructions / guidelines to banks relating to lending to the Micro, Small and Medium Enterprises Sector. The Master Direction enclosed incorporates the updated instructions / guidelines on the subject. The list of circulars consolidated in this Master Direction is indicated in the Appendix.

Yours faithfully

(R Giridharan)
Chief General Manager

Master Direction – Reserve Bank of India [Lending to Micro, Small & Medium Enterprises (MSME) Sector] - Directions, 2017

In exercise of the powers conferred by Sections 21 and 35 A of the Banking Regulation Act, 1949, the Reserve Bank of India, being satisfied that it is necessary and expedient in the public interest to do so, hereby, issues the Directions hereinafter specified.

CHAPTER – I
PRELIMINARY

1.1 Short Title and Commencement

a) These Directions shall be called the Reserve Bank of India [Lending to Micro, Small & Medium Enterprises (MSME) Sector] Directions, 2017.

b) These Directions shall come into effect on the day they are placed on the official website of the Reserve Bank of India.

1.2 Applicability

The provisions of these Directions shall apply to all Scheduled Commercial Banks (excluding Regional Rural Banks RRBs).

1.3 Definitions/ Clarifications

In these Directions, unless the context otherwise requires, the terms herein shall bear the meanings assigned to them as below:

a) The MSMED Act, 2006 means ‘Micro, Small and Medium Enterprises Development (MSMED) Act, 2006’ as notified by the Government of India on June 16, 2006 and the amendments, if any, carried out therein by the Government of India from time to time.

b) ‘Micro, Small and Medium Enterprises’ mean the enterprises as defined in the MSMED Act, 2006 and the amendments, if any, carried out therein by the Government of India from time to time.

c) ‘Priority Sector’ means the sectors specified in the Master Direction on Priority Sector Lending (PSL) – Targets and Classification dated September 4, 2020 as updated from time to time.

d) ‘Adjusted Net Bank Credit (ANBC)’ shall have the same meaning as given in the Master Direction on Priority Sector Lending (PSL) – Targets and Classification dated September 4, 2020 as updated from time to time.

CHAPTER – II

2. Micro, Small and Medium Enterprises Development (MSMED) Act, 2006

2.1 In terms of Gazette Notification S.O. 2119 (E) dated June 26, 2020, an enterprise shall be classified as a micro, small or medium enterprise on the basis of the following criteria viz.,

1. a micro enterprise, where the investment in plant and machinery or equipment does not exceed ₹1 crore and turnover does not exceed ₹5 crore;

2. a small enterprise, where the investment in plant and machinery or equipment does not exceed ₹10 crore and turnover does not exceed ₹50 crore; and

3. a medium enterprise, where the investment in plant and machinery or equipment does not exceed ₹50 crore and turnover does not exceed ₹250 crore.

2.2 All the above enterprises are required to register online on the Udyam Registration portal and obtain ‘Udyam Registration Certificate’. For PSL purposes banks shall be guided by the classification recorded in the Udyam Registration Certificate (URC).

2.3 Retail and Wholesale trade are included as MSMEs for the limited purpose of priority sector lending and are allowed to be registered on Udyam Registration Portal.

2.4 The certificate issued on Udyam Assist Portal (UAP) to Informal Micro Enterprises (IMEs) shall be treated at par with Udyam Registration Certificate for the purpose of availing Priority Sector Lending benefits. IMEs with an Udyam Assist Certificate shall be treated as micro enterprises for the purpose of PSL classification.

CHAPTER - III

3. Targets / sub-targets for lending to MSME sector

3.1 Priority Sector Guidelines for MSME sector

Scheduled Commercial Banks shall adhere to the targets/sub-targets for lending to the MSME sector and related aspects as laid down in the Master Direction on Priority Sector Lending (PSL) – Targets and Classification dated September 4, 2020 as updated from time to time.

3.2 In terms of the recommendations of the Prime Minister’s Task Force on MSMEs, banks are advised to achieve:

(i) 20 per cent year-on-year growth in credit to micro and small enterprises,

(ii) 10 per cent annual growth in the number of micro enterprise accounts and

(iii) 60 per cent of total lending to MSE sector as of the corresponding quarter of the previous year to micro enterprises.

CHAPTER - IV

4. Common guidelines/Instructions for lending to MSME sector

4.1 Issue of Acknowledgement of Loan Applications to MSME borrowers

Banks are advised to mandatorily acknowledge all loan applications, submitted manually or online, by their MSME borrowers and ensure that a running serial number is recorded on the application form as well as on the acknowledgement receipt. Banks are further advised to put in place a system of Central Registration of loan applications, online submission of loan applications and a system of e-tracking of MSE loan applications.

4.2 Collateral

Banks are mandated not to accept collateral security in the case of loans up to ₹10 lakh extended to units in the MSE sector. Banks are also advised to extend collateral-free loans up to ₹10 lakh to all units financed under the Prime Minister Employment Generation Programme (PMEGP) administered by KVIC. Banks may, on the basis of good track record and financial position of the MSE units, increase the limit to dispense with the collateral requirement for loans up to ₹25 lakh (with the approval of the appropriate authority). Banks are advised to strongly encourage their branch level functionaries to avail of the Credit Guarantee Scheme cover, including making performance in this regard a criterion in the evaluation of their field staff.

4.3 Composite loan

A composite loan limit of ₹1 crore can be sanctioned by banks to enable the MSE entrepreneurs to avail of their working capital and term loan requirement through Single Window.

4.4 General Credit Card (GCC) Facility

Banks which are eligible to issue credit cards under the Master Direction -Credit Card and Debit card- Issuance and Conduct Directions, dated April 21, 2022 (as updated from time to time), may issue General Credit Cards to individuals/entities sanctioned working capital facilities for non-farm entrepreneurial activities which are eligible for classification under the priority sector guidelines. The terms and conditions of the credit facilities extended in the form of GCC shall be as per the Board approved policies of the banks, within the overall framework laid down by Reserve Bank. Guidelines on collateral free lending for micro and small units issued from time to time shall apply. Banks shall adhere to the instructions on reporting GCC data as issued by RBI from time to time.

4.5 Streamlining flow of credit to Micro and Small Enterprises (MSEs) for facilitating timely and adequate credit flow during their ‘Life Cycle’:

In order to provide timely financial support to Micro and Small enterprises facing financial difficulties during their ‘Life Cycle’, guidelines were issued to banks vide circular FIDD.MSME & NFS.BC.No.60/06.02.31/2015-16 dated August 27, 2015 on the captioned subject. Banks are advised to review and tune their existing lending policies to the MSE sector by incorporating therein the following provisions so as to facilitate timely and adequate availability of credit to viable MSE borrowers especially during the need of funds in unforeseen circumstances:

1. To extend standby credit facility in case of term loans

2. Additional working capital to meet with emergent needs of MSE units

3. Mid-term review of the regular working capital limits, where banks are convinced that changes in the demand pattern of MSE borrowers require increasing the existing credit limits of the MSMEs, every year based on the actual sales of the previous year.

4. Timelines for Credit Decisions

4.6 Debt Restructuring Mechanism for MSMEs

i) Banks are advised to follow the guidelines/instructions on debt restructuring pertaining to MSMEs contained in the ‘Master Circular - Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances’ as updated from time to time.

ii) All commercial banks are also advised in terms of our circular RPCD.SME&NFS.BC.No.102/06.04.01/2008-09 dated May 4, 2009 to do the following:

1. put in place loan policies governing extension of credit facilities, Restructuring/Rehabilitation policy for revival of potentially viable sick units / enterprises (now read with guidelines on Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises issued on March 17, 2016) and non- discretionary One Time Settlement scheme for recovery of non- performing loans for the MSE sector, with the approval of the Board of Directors and

2. give wide publicity to the One-Time settlement scheme implemented by them, by placing it on the bank’s website and through other possible modes of dissemination. They may allow reasonable time to the borrowers to submit the application and also make payment of the dues in order to extend the benefits of the scheme to eligible borrowers.

3. implement recommendations with regard to timely and adequate flow of credit to the MSE sector.

4.7 Framework for Revival and Rehabilitation of MSMEs

The Ministry of Micro, Small and Medium Enterprises, Government of India, vide their Gazette Notification dated May 29, 2015 had notified a ‘Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises’ to provide a simpler and faster mechanism to address the stress in the accounts of MSMEs and to facilitate the promotion and development of MSMEs. After carrying out certain changes in the captioned Framework in consultation with the Government of India, Ministry of MSME so as to make it compatible with the existing regulatory guidelines on ‘Income Recognition, Asset Classification and Provisioning pertaining to Advances’ issued to banks by RBI, the guidelines on the captioned Framework along with operating instructions were issued to banks on March 17, 2016. The revival and rehabilitation of MSME units having loan limits up to ₹25 crore would be undertaken under this Framework. The revised Framework supersedes our earlier Guidelines on Rehabilitation of Sick Micro and Small Enterprises issued vide our circular RPCD.CO.MSME& NFS.BC.40/06.02.31/2012-2013 dated November 1, 2012, except those relating to Reliefs and Concessions for Rehabilitation of Potentially Viable Units and One Time Settlement, mentioned in the said circular.

The salient features of the Framework are as under:

1. Before a loan account of an MSME turns into a Non-Performing Asset (NPA), banks or creditors should identify incipient stress in the account by creating three sub-categories under the Special Mention Account (SMA) category as given in the Framework

2. Any MSME borrower may also voluntarily initiate proceedings under this Framework

3. Committee approach to be adopted for deciding corrective action plan

4. Timelines have been fixed for taking various decisions under the Framework

4.8 Structured Mechanism for monitoring the credit growth to the MSE sector

In view of the concerns emerging from the deceleration in credit growth to the MSE sector, an Indian Banking Association (IBA)-led Sub-Committee (Chairman: Shri K.R. Kamath) was set up to suggest a structured mechanism to be put in place by banks to monitor the entire gamut of credit related issues pertaining to the sector. Based on the recommendations of the Committee, banks are advised to:

• strengthen their existing systems of monitoring credit growth to the sector and put in place a system-driven comprehensive performance management information system (MIS) at every supervisory level (branch, region, zone, head office) which should be critically evaluated on a regular basis;

• put in place a system of e-tracking of MSE loan applications and monitor the loan application disposal process in banks, giving branch-wise, region-wise, zone-wise and State-wise positions. The position in this regard is to be displayed by banks on their websites.

Chapter - V

5 Institutional arrangements

5.1 Specialised MSME branches

Public sector banks are advised to open at least one specialised branch in each district. Further, banks have been permitted to categorise their general banking branches having 60% or more of their advances to MSME sector as specialized MSME branches in order to encourage them to open more specialised MSME branches for providing better service to this sector as a whole. As per the policy package announced by the Government of India for stepping up credit to MSME sector, the public sector banks would ensure specialized MSME branches in identified clusters/centres with preponderance of small enterprises to enable the entrepreneurs to have easy access to the bank credit and to equip bank personnel to develop requisite expertise. Though their core competence will be utilized for extending finance and other services to MSME sector, they will have operational flexibility to extend finance/render other services to other sectors/borrowers. Banks may take care to train the officials posted in such branches appropriately.

5.2 Empowered Committee on MSMEs

As part of the announcement made by the Union Finance Minister, Empowered Committees on MSMEs are constituted at the Regional Offices of Reserve Bank of India, under the Chairmanship of the Regional Directors with the representatives of SLBC Convenor, senior level officers from two banks having predominant share in MSME financing in the state, representative of SIDBI Regional Office, the Director of MSME or Industries of the State Government, one or two senior level representatives from the MSME Associations in the state, and a senior level officer from SFC/SIDC as members. The Committee would meet periodically and review the progress in MSME financing as also revival and rehabilitation of stressed Micro, Small and Medium units. It would also coordinate with other banks/financial institutions and the state government in removing bottlenecks, if any, to ensure smooth flow of credit to the sector. The committees may decide the need to have similar committees at cluster/district levels.

5.3 Banking Codes and Standards Board of India (BCSBI)

BCSBI in collaboration with the Indian Banks' Association (IBA), Reserve Bank of India (RBI) and member banks had evolved the ‘Code of Bank's Commitment to Micro and Small Enterprises’ - which set minimum standards of banking practices for member banks to follow when they are dealing with Micro and Small Enterprises. The objective of the Code is to promote good banking practices, setting minimum standards for the adherents, increasing transparency, achieving higher operating standards and above all, promoting a cordial banker-customer relationship which would foster confidence in the banking system. The Code lays great emphasis on transparency and providing full information to the customer before a product or service is sold to him/her. Above all, member banks of BCSBI have voluntarily adopted the Code for implementation. While BCSBI has initiated the process of its dissolution, banks may continue to follow their commitments as hitherto under the Code of Bank's Commitment to Micro and Small Enterprises.

5.4 Micro and Small Enterprises Sector – The imperative of Financial Literacy and consultancy support

Keeping in view the high extent of financial exclusion in the MSME sector, it is imperative for banks that the excluded units are brought within the fold of the formal banking sector. The lack of financial literacy, operational skills, including accounting and finance, business planning etc. represent formidable challenge for MSE borrowers underscoring the need for facilitation by banks in these critical financial areas. Moreover, MSE enterprises are further handicapped in this regard by absence of scale and size. To effectively and decisively address these handicaps, scheduled commercial banks were advised vide our circular RPCD.MSME & NFS.BC.No.20/06.02.31/2012-13 dated August 1, 2012 that they could either separately set up special cells at their branches, or vertically integrate this function in the Financial Literacy Centres (FLCs) set up by them, as per their comparative advantage. The bank staff should also be trained through customised training programs to meet the specific needs of the sector. Further, Financial Literacy Centres operated by Scheduled commercial Banks have been advised vide our circular FIDD.FLC.BC.No.22/12.01.018/2016-17 dated March 2, 2017 to conduct target specific financial literacy camps, where one of the target groups is small entrepreneurs.

5.5 Cluster Approach

All SLBC Convenor banks are advised to incorporate in their Annual Credit Plans, the credit requirement in the clusters identified by the Ministry of Micro, Small and Medium Enterprises, Government of India. They are also encouraged to extend banking services in such clusters / agglomerations which have come up and identified subsequently by SLBC / DCC members.

i) As per Ganguly Committee recommendations (September 4, 2004), banks are advised that a full- service approach to cater to the diverse needs of the SSI sector (now MSE sector) may be achieved through extending banking services to recognized MSE clusters by adopting a 4-C approach namely, Customer focus, Cost control, Cross sell and Contain risk. A cluster-based approach to lending may be more beneficial:

a) in dealing with well-defined and recognized groups;

b) for making available of appropriate information for risk assessment; and

c) for monitoring by the lending institutions.

Clusters may be identified based on factors such as trade record, competitiveness and growth prospects and/or other cluster specific data.

ii) All SLBC Convenor banks were advised vide letter RPCD.PLNFS.No.10416/06.02.31/2006-07 dated May 8, 2007 to review their institutional arrangements for delivering credit to the MSME sector, especially in 388 clusters identified by United Nations Industrial Development Organisation (UNIDO) spread over 21 states in various parts of the country. A list of SME clusters as identified by UNIDO has been furnished in Annex I.

iii) The Ministry of Micro, Small and Medium Enterprises has approved a list of clusters under the Scheme of Fund for Regeneration of Traditional Industries (SFURTI) and Micro and Small Enterprises Cluster Development Programme (MSE-CDP) located in 121 Minority Concentration Districts. Accordingly, appropriate measures have been taken to improve the credit flow to the identified clusters of micro and small entrepreneurs from the Minority Communities residing in the minority concentrated districts of the country.

iv) In terms of recommendations of the Prime Minister’s Task Force on MSMEs, banks should open more MSE focused branch offices at different MSE clusters which can also act as Counselling Centres for MSEs. Each lead bank of a district may adopt at least one MSE cluster.

5.6 Delayed Payment

In the Micro, Small and Medium Enterprises Development (MSMED), Act 2006, the provisions of The Interest on Delayed Payment to Small Scale and Ancillary Industrial Undertakings Act, 1998, have been strengthened as under:

1. The buyer has to make payment to the supplier on or before the date agreed upon between him and the supplier in writing or, in case of no agreement, before the appointed day. The period agreed upon between the supplier and the buyer shall not exceed forty-five days from the date of acceptance or the day of deemed acceptance.

2. In case the buyer fails to make payment of the amount to the supplier, he shall be liable to pay compound interest with monthly rests to the supplier on the amount from the appointed day or, on the date agreed on, at three times of the Bank Rate notified by Reserve Bank.

3. For any goods supplied or services rendered by the supplier, the buyer shall be liable to pay the interest as advised at (ii) above.

4. In case of dispute with regard to any amount due, a reference shall be made to the Micro and Small Enterprises Facilitation Council, constituted by the respective State Government.

Further, banks are 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 MSMEs.

CHAPTER - VI

6 Committees on flow of Credit to MSE sector

Scheduled Commercial Banks may be guided by the contents of the following circulars while extending credit to MSE sector:

6.1 Report of the High Level Committee on Credit to SSI (now MSE) (Kapur Committee)

All scheduled commercial banks were advised vide our circular RPCD. No. PLNFS.BC.22/06.02.31/98- 99 dated August 28, 1998 to implement the Kapur Committee Recommendations.

6.2 Report of the Committee to Examine the Adequacy of Institutional Credit to SSI Sector (now MSE) and Related Aspects (Nayak Committee)

All scheduled commercial banks were advised vide our circular RPCD.PLNFS.BC.No. 61/06.0262/2000-01 dated March 2, 2001 to implement the Nayak Committee Recommendations.

6.3 Report of the Working Group on Flow of Credit to SSI (now MSE) Sector (Ganguly Committee)

The recommendations of the Committee were communicated to banks for implementation vide circular RPCD.PLNFS.BC.28/06.02.31(WG)/2004-05 dated September 4, 2004.

6.4 Working Group on Rehabilitation of Sick SMEs (Chairman: Dr. K.C. Chakrabarty)

Banks were advised vide circular dated RPCD.SME&NFS.BC.No.102/06.04.01/2008-09 dated May 4, 2009 to consider implementation of the recommendations, inter alia, that lending in case of all advances upto ₹2 crores may be done on the basis of scoring model.

6.5 Prime Minister’s Task Force on Micro, Small and Medium Enterprises

A High-Level Task Force was constituted by the Government of India (Chairman: Shri T K A Nair), in January 2010, to consider various issues raised by Micro, Small and Medium Enterprises (MSMEs). The Task Force recommended several measures having a bearing on the functioning of MSMEs, viz., credit, marketing, labour, exit policy, infrastructure/technology/skill development and taxation. The comprehensive recommendations cover measures that need immediate action as well as medium term institutional measures along with legal and regulatory structures and recommendations for North- Eastern States and Jammu & Kashmir.

Banks are urged to keep in view the recommendations made by the Task Force and take effective steps to increase the flow of credit to the MSE sector, particularly to the micro enterprises. A circular was issued to all scheduled commercial banks vide RPCD.SME&NFS BC.No.90/06.02.31/2009-10 dated June 29, 2010 advising implementation of the recommendations of the Prime Minister’s Task Force on MSMEs.

6.6 Working Group to Review the Credit Guarantee Scheme for Micro and Small Enterprises

A Working Group was constituted by the Reserve Bank of India under the Chairmanship of Shri V.K. Sharma, Executive Director, to review the working of the Credit Guarantee Scheme (CGS) of CGTMSE and suggest measures to enhance its usage and facilitate increased flow of collateral free loans to MSEs. The recommendations of the Working Group included, inter alia, mandatory doubling of the limit for collateral free loans to micro and small enterprises (MSEs) sector from ₹5 lakh to ₹10 lakh and enjoining upon the Chief Executive Officers of banks to strongly encourage the branch level functionaries to avail of the CGS cover and making performance in this regard a criterion in the evaluation of their field staff, etc. have been advised to all banks. A circular to this effect was issued to all scheduled commercial banks vide RPCD.SME&NFS.BC.No.79/06.02.31/2009-10 dated May 6, 2010.

Appendix

List of Circulars consolidated by the Master Direction

RBI/FIDD/2017-2018/56
Master Direction FIDD.MSME & NFS.12/06.02.31/2017-18

July 24, 2017
(Updated as on July 29, 2022)
(Updated as on April 25, 2018)

The Chairman / Managing Director / Chief Executive Officer
All Scheduled Commercial Banks
(excluding Regional Rural Banks)

Madam/Dear Sir,

Master Direction - Lending to Micro, Small & Medium Enterprises (MSME) Sector

The Reserve Bank of India has, from time to time, issued a number of instructions / guidelines to banks relating to lending to the Micro, Small and Medium Enterprises Sector. The Master Direction enclosed incorporates the updated instructions / guidelines on the subject. The list of circulars consolidated in this Master Direction is indicated in the Appendix.

Yours faithfully

(Nisha Nambiar)
Chief General Manager

Master Direction – Reserve Bank of India [Lending to Micro, Small & Medium Enterprises (MSME) Sector] - Directions, 2017

In exercise of the powers conferred by Sections 21 and 35 A of the Banking Regulation Act, 1949, the Reserve Bank of India, being satisfied that it is necessary and expedient in the public interest to do so, hereby, issues the Directions hereinafter specified.

CHAPTER – I
PRELIMINARY

1.1 Short Title and Commencement

a) These Directions shall be called the Reserve Bank of India [Lending to Micro, Small & Medium Enterprises (MSME) Sector] Directions, 2017.

b) These Directions shall come into effect on the day they are placed on the official website of the Reserve Bank of India.

1.2 Applicability

The provisions of these Directions shall apply to all Scheduled Commercial Banks (excluding Regional Rural Banks RRBs).

1.3 Definitions/ Clarifications

In these Directions, unless the context otherwise requires, the terms herein shall bear the meanings assigned to them as below:

a) The MSMED Act, 2006 means ‘Micro, Small and Medium Enterprises Development (MSMED) Act, 2006’ as notified by the Government of India on June 16, 2006 and the amendments, if any, carried out therein by the Government of India from time to time.

b) ‘Micro, Small and Medium Enterprises’ mean the enterprises as defined in the MSMED Act, 2006 and the amendments, if any, carried out therein by the Government of India from time to time.

c) ‘Priority Sector’ means the sectors specified in the Master Direction on Priority Sector Lending (PSL) – Targets and Classification dated September 4, 2020 as updated from time to time.

d) ‘Adjusted Net Bank Credit (ANBC)’ shall have the same meaning as given in the Master Direction on Priority Sector Lending (PSL) – Targets and Classification dated September 4, 2020 as updated from time to time.

CHAPTER – II

2. Micro, Small and Medium Enterprises Development (MSMED) Act, 2006

2.1 In terms of Gazette Notification S.O. 2119 (E) dated June 26, 2020, an enterprise shall be classified as a micro, small or medium enterprise on the basis of the following criteria viz.,

1. a micro enterprise, where the investment in plant and machinery or equipment does not exceed ₹1 crore and turnover does not exceed ₹5 crore;

2. a small enterprise, where the investment in plant and machinery or equipment does not exceed ₹10 crore and turnover does not exceed ₹50 crore; and

3. a medium enterprise, where the investment in plant and machinery or equipment does not exceed ₹50 crore and turnover does not exceed ₹250 crore.

2.2 All the above enterprises are required to register online on the Udyam Registration portal and obtain ‘Udyam Registration Certificate’.

2.3 Retail and Wholesale trade are included as MSMEs for the limited purpose of priority sector lending and are allowed to be registered on Udyam Registration Portal.

2.4 Composite criteria of investment and turnover for classification

1. Composite criteria of investment and turnover shall apply for classification of an enterprise as micro, small or medium.

2. If an enterprise crosses the ceiling limits specified for its present category in either of the two criteria of investment or turnover, it will cease to exist in that category and will be placed in the next higher category; but no enterprise shall be placed in the lower category unless it goes below the ceiling limits specified for its present category in both the criteria of investment as well as turnover.

3. All units with Goods and Services Tax Identification Number (GSTIN) listed against the same Permanent Account Number (PAN) shall be collectively treated as one enterprise and the turnover and investment figures for all of such entities shall be seen together and only the aggregate values will be considered for deciding the category as micro, small or medium enterprise.

2.5 Calculation of investment in plant and machinery or equipment

1. The calculation of investment in plant and machinery or equipment will be linked to the Income Tax Return (ITR) of the previous years filed under the Income Tax Act, 1961. The online form for Udyam Registration captures depreciated cost as on 31st March each year of the relevant previous year. Therefore, the value of plant and machinery or equipment for all purposes of the Notification No. S.O. 2119(E) dated June 26, 2020 and for all the enterprises shall mean the Written Down Value (WDV) as at the end of the Financial Year as defined in the Income Tax Act.

2. In case of a new enterprise, where no prior ITR is available, the investment will be based on self-declaration of the promoter of the enterprise and such relaxation shall end after the 31st March of the financial year in which it files its first ITR.

3. The expression ‘’plant and machinery or equipment’’ of the enterprise, shall have the same meaning as assigned to the plant and machinery in the Income Tax Rules, 1962 framed under the Income Tax Act, 1961 and shall include all tangible assets (other than land and building, furniture and fittings).

4. The purchase (invoice) value of a plant and machinery or equipment, whether purchased first-hand or second hand, shall be taken into account excluding Goods and Services Tax (GST), on self-disclosure basis, if the enterprise is a new one without any ITR.

5. The cost of certain items specified in the Explanation I to sub-section (1) of section 7 of the MSMED Act, 2006 shall be excluded from the calculation of the amount of investment in plant and machinery.

2.6 Calculation of turnover

1. Exports of goods or services or both, shall be excluded while calculating the turnover of any enterprise whether micro, small or medium, for the purposes of classification.

2. Information as regards turnover and exports for an enterprise shall be linked to the Income Tax Act or the Central Goods and Services Act (CGST Act) and the GSTIN.

3. The turnover related figures of such enterprise which do not have PAN will be considered on self-declaration basis for a period up to March 31, 2021 and thereafter, PAN and GSTIN shall be mandatory.

2.7 Classification of Enterprises in case of upward /downward migration

In case of an upward change in terms of investment in plant and machinery or equipment or turnover or both, and consequent re-classification, an enterprise will maintain its prevailing status till expiry of one year from the close of the year of registration. In case of reverse-graduation of an enterprise, whether as a result of re-classification or due to actual changes in investment in plant and machinery or equipment or turnover or both, and whether the enterprise is registered under the Act or not, the enterprise will continue in its present category till the closure of the financial year and it will be given the benefit of the changed status only with effect from 1st April of the financial year following the year in which such change took place. Other aspects relating to registration of enterprises, grievance redressal, etc. are mentioned in the Gazette Notification S.O. 2119 (E) dated June 26, 2020.

CHAPTER - III

3. Targets / sub-targets for lending to MSME sector

3.1 Priority Sector Guidelines for MSME sector

Scheduled Commercial Banks shall adhere to the targets/sub-targets for lending to the MSME sector and related aspects as laid down in the Master Direction on Priority Sector Lending (PSL) – Targets and Classification dated September 4, 2020 as updated from time to time.

3.2 In terms of the recommendations of the Prime Minister’s Task Force on MSMEs, banks are advised to achieve:

(i) 20 per cent year-on-year growth in credit to micro and small enterprises,

(ii) 10 per cent annual growth in the number of micro enterprise accounts and

(iii) 60 per cent of total lending to MSE sector as of the corresponding quarter of the previous year to micro enterprises.

CHAPTER - IV

4. Common guidelines/Instructions for lending to MSME sector

4.1 Issue of Acknowledgement of Loan Applications to MSME borrowers

Banks are advised to mandatorily acknowledge all loan applications, submitted manually or online, by their MSME borrowers and ensure that a running serial number is recorded on the application form as well as on the acknowledgement receipt. Banks are further advised to put in place a system of Central Registration of loan applications, online submission of loan applications and a system of e-tracking of MSE loan applications.

4.2 Collateral

Banks are mandated not to accept collateral security in the case of loans up to ₹10 lakh extended to units in the MSE sector. Banks are also advised to extend collateral-free loans up to ₹10 lakh to all units financed under the Prime Minister Employment Generation Programme (PMEGP) administered by KVIC. Banks may, on the basis of good track record and financial position of the MSE units, increase the limit to dispense with the collateral requirement for loans up to ₹25 lakh (with the approval of the appropriate authority). Banks are advised to strongly encourage their branch level functionaries to avail of the Credit Guarantee Scheme cover, including making performance in this regard a criterion in the evaluation of their field staff.

4.3 Composite loan

A composite loan limit of ₹1 crore can be sanctioned by banks to enable the MSE entrepreneurs to avail of their working capital and term loan requirement through Single Window.

4.4 Revised General Credit Card (GCC) Scheme

In order to enhance the coverage of GCC Scheme to ensure greater credit linkage for all productive activities within the overall Priority Sector guidelines and to capture all credit extended by banks to individuals for non-farm entrepreneurial activity, the GCC guidelines were revised on December 2, 2013.

4.5 Streamlining flow of credit to Micro and Small Enterprises (MSEs) for facilitating timely and adequate credit flow during their ‘Life Cycle’:

In order to provide timely financial support to Micro and Small enterprises facing financial difficulties during their ‘Life Cycle’, guidelines were issued to banks vide circular FIDD.MSME & NFS.BC.No.60/06.02.31/2015-16 dated August 27, 2015 on the captioned subject. Banks are advised to review and tune their existing lending policies to the MSE sector by incorporating therein the following provisions so as to facilitate timely and adequate availability of credit to viable MSE borrowers especially during the need of funds in unforeseen circumstances:

1. To extend standby credit facility in case of term loans

2. Additional working capital to meet with emergent needs of MSE units

3. Mid-term review of the regular working capital limits, where banks are convinced that changes in the demand pattern of MSE borrowers require increasing the existing credit limits of the MSMEs, every year based on the actual sales of the previous year.

4. Timelines for Credit Decisions

4.6 Debt Restructuring Mechanism for MSMEs

i) Banks are advised to follow the guidelines/instructions on debt restructuring pertaining to MSMEs contained in the ‘Master Circular - Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances’ as updated from time to time.

ii) All commercial banks are also advised in terms of our circular RPCD.SME&NFS.BC.No.102/06.04.01/2008-09 dated May 4, 2009 to do the following:

1. put in place loan policies governing extension of credit facilities, Restructuring/Rehabilitation policy for revival of potentially viable sick units / enterprises (now read with guidelines on Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises issued on March 17, 2016) and non- discretionary One Time Settlement scheme for recovery of non- performing loans for the MSE sector, with the approval of the Board of Directors and

2. give wide publicity to the One-Time settlement scheme implemented by them, by placing it on the bank’s website and through other possible modes of dissemination. They may allow reasonable time to the borrowers to submit the application and also make payment of the dues in order to extend the benefits of the scheme to eligible borrowers.

3. implement recommendations with regard to timely and adequate flow of credit to the MSE sector.

4.7 Framework for Revival and Rehabilitation of MSMEs

The Ministry of Micro, Small and Medium Enterprises, Government of India, vide their Gazette Notification dated May 29, 2015 had notified a ‘Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises’ to provide a simpler and faster mechanism to address the stress in the accounts of MSMEs and to facilitate the promotion and development of MSMEs. After carrying out certain changes in the captioned Framework in consultation with the Government of India, Ministry of MSME so as to make it compatible with the existing regulatory guidelines on ‘Income Recognition, Asset Classification and Provisioning pertaining to Advances’ issued to banks by RBI, the guidelines on the captioned Framework along with operating instructions were issued to banks on March 17, 2016. The revival and rehabilitation of MSME units having loan limits up to ₹25 crore would be undertaken under this Framework. The revised Framework supersedes our earlier Guidelines on Rehabilitation of Sick Micro and Small Enterprises issued vide our circular RPCD.CO.MSME& NFS.BC.40/06.02.31/2012-2013 dated November 1, 2012, except those relating to Reliefs and Concessions for Rehabilitation of Potentially Viable Units and One Time Settlement, mentioned in the said circular.

The salient features of the Framework are as under:

1. Before a loan account of an MSME turns into a Non-Performing Asset (NPA), banks or creditors should identify incipient stress in the account by creating three sub-categories under the Special Mention Account (SMA) category as given in the Framework

2. Any MSME borrower may also voluntarily initiate proceedings under this Framework

3. Committee approach to be adopted for deciding corrective action plan

4. Timelines have been fixed for taking various decisions under the Framework

4.8 Structured Mechanism for monitoring the credit growth to the MSE sector

In view of the concerns emerging from the deceleration in credit growth to the MSE sector, an Indian Banking Association (IBA)-led Sub-Committee (Chairman: Shri K.R. Kamath) was set up to suggest a structured mechanism to be put in place by banks to monitor the entire gamut of credit related issues pertaining to the sector. Based on the recommendations of the Committee, banks are advised to:

• strengthen their existing systems of monitoring credit growth to the sector and put in place a system-driven comprehensive performance management information system (MIS) at every supervisory level (branch, region, zone, head office) which should be critically evaluated on a regular basis;

• put in place a system of e-tracking of MSE loan applications and monitor the loan application disposal process in banks, giving branch-wise, region-wise, zone-wise and State-wise positions. The position in this regard is to be displayed by banks on their websites.

Chapter - V

5 Institutional arrangements

5.1 Specialised MSME branches

Public sector banks are advised to open at least one specialised branch in each district. Further, banks have been permitted to categorise their general banking branches having 60% or more of their advances to MSME sector as specialized MSME branches in order to encourage them to open more specialised MSME branches for providing better service to this sector as a whole. As per the policy package announced by the Government of India for stepping up credit to MSME sector, the public sector banks would ensure specialized MSME branches in identified clusters/centres with preponderance of small enterprises to enable the entrepreneurs to have easy access to the bank credit and to equip bank personnel to develop requisite expertise. Though their core competence will be utilized for extending finance and other services to MSME sector, they will have operational flexibility to extend finance/render other services to other sectors/borrowers. Banks may take care to train the officials posted in such branches appropriately.

5.2 Empowered Committee on MSMEs

As part of the announcement made by the Union Finance Minister, Empowered Committees on MSMEs are constituted at the Regional Offices of Reserve Bank of India, under the Chairmanship of the Regional Directors with the representatives of SLBC Convenor, senior level officers from two banks having predominant share in MSME financing in the state, representative of SIDBI Regional Office, the Director of MSME or Industries of the State Government, one or two senior level representatives from the MSME Associations in the state, and a senior level officer from SFC/SIDC as members. The Committee would meet periodically and review the progress in MSME financing as also revival and rehabilitation of stressed Micro, Small and Medium units. It would also coordinate with other banks/financial institutions and the state government in removing bottlenecks, if any, to ensure smooth flow of credit to the sector. The committees may decide the need to have similar committees at cluster/district levels.

5.3 Banking Codes and Standards Board of India (BCSBI)

BCSBI in collaboration with the Indian Banks' Association (IBA), Reserve Bank of India (RBI) and member banks had evolved the ‘Code of Bank's Commitment to Micro and Small Enterprises’ - which set minimum standards of banking practices for member banks to follow when they are dealing with Micro and Small Enterprises. The objective of the Code is to promote good banking practices, setting minimum standards for the adherents, increasing transparency, achieving higher operating standards and above all, promoting a cordial banker-customer relationship which would foster confidence in the banking system. The Code lays great emphasis on transparency and providing full information to the customer before a product or service is sold to him/her. Above all, member banks of BCSBI have voluntarily adopted the Code for implementation. While BCSBI has initiated the process of its dissolution, banks may continue to follow their commitments as hitherto under the Code of Bank's Commitment to Micro and Small Enterprises.

5.4 Micro and Small Enterprises Sector – The imperative of Financial Literacy and consultancy support

Keeping in view the high extent of financial exclusion in the MSME sector, it is imperative for banks that the excluded units are brought within the fold of the formal banking sector. The lack of financial literacy, operational skills, including accounting and finance, business planning etc. represent formidable challenge for MSE borrowers underscoring the need for facilitation by banks in these critical financial areas. Moreover, MSE enterprises are further handicapped in this regard by absence of scale and size. To effectively and decisively address these handicaps, scheduled commercial banks were advised vide our circular RPCD.MSME & NFS.BC.No.20/06.02.31/2012-13 dated August 1, 2012 that they could either separately set up special cells at their branches, or vertically integrate this function in the Financial Literacy Centres (FLCs) set up by them, as per their comparative advantage. The bank staff should also be trained through customised training programs to meet the specific needs of the sector. Further, Financial Literacy Centres operated by Scheduled commercial Banks have been advised vide our circular FIDD.FLC.BC.No.22/12.01.018/2016-17 dated March 2, 2017 to conduct target specific financial literacy camps, where one of the target groups is small entrepreneurs.

5.5 Cluster Approach

All SLBC Convenor banks are advised to incorporate in their Annual Credit Plans, the credit requirement in the clusters identified by the Ministry of Micro, Small and Medium Enterprises, Government of India. They are also encouraged to extend banking services in such clusters / agglomerations which have come up and identified subsequently by SLBC / DCC members.

i) As per Ganguly Committee recommendations (September 4, 2004), banks are advised that a full- service approach to cater to the diverse needs of the SSI sector (now MSE sector) may be achieved through extending banking services to recognized MSE clusters by adopting a 4-C approach namely, Customer focus, Cost control, Cross sell and Contain risk. A cluster-based approach to lending may be more beneficial:

a) in dealing with well-defined and recognized groups;

b) for making available of appropriate information for risk assessment; and

c) for monitoring by the lending institutions.

Clusters may be identified based on factors such as trade record, competitiveness and growth prospects and/or other cluster specific data.

ii) All SLBC Convenor banks were advised vide letter RPCD.PLNFS.No.10416/06.02.31/2006-07 dated May 8, 2007 to review their institutional arrangements for delivering credit to the MSME sector, especially in 388 clusters identified by United Nations Industrial Development Organisation (UNIDO) spread over 21 states in various parts of the country. A list of SME clusters as identified by UNIDO has been furnished in Annex I.

iii) The Ministry of Micro, Small and Medium Enterprises has approved a list of clusters under the Scheme of Fund for Regeneration of Traditional Industries (SFURTI) and Micro and Small Enterprises Cluster Development Programme (MSE-CDP) located in 121 Minority Concentration Districts. Accordingly, appropriate measures have been taken to improve the credit flow to the identified clusters of micro and small entrepreneurs from the Minority Communities residing in the minority concentrated districts of the country.

iv) In terms of recommendations of the Prime Minister’s Task Force on MSMEs, banks should open more MSE focused branch offices at different MSE clusters which can also act as Counselling Centres for MSEs. Each lead bank of a district may adopt at least one MSE cluster.

5.6 Delayed Payment

In the Micro, Small and Medium Enterprises Development (MSMED), Act 2006, the provisions of The Interest on Delayed Payment to Small Scale and Ancillary Industrial Undertakings Act, 1998, have been strengthened as under:

1. The buyer has to make payment to the supplier on or before the date agreed upon between him and the supplier in writing or, in case of no agreement, before the appointed day. The period agreed upon between the supplier and the buyer shall not exceed forty-five days from the date of acceptance or the day of deemed acceptance.

2. In case the buyer fails to make payment of the amount to the supplier, he shall be liable to pay compound interest with monthly rests to the supplier on the amount from the appointed day or, on the date agreed on, at three times of the Bank Rate notified by Reserve Bank.

3. For any goods supplied or services rendered by the supplier, the buyer shall be liable to pay the interest as advised at (ii) above.

4. In case of dispute with regard to any amount due, a reference shall be made to the Micro and Small Enterprises Facilitation Council, constituted by the respective State Government.

Further, banks are 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 MSMEs.

CHAPTER - VI

6 Committees on flow of Credit to MSE sector

Scheduled Commercial Banks may be guided by the contents of the following circulars while extending credit to MSE sector:

6.1 Report of the High Level Committee on Credit to SSI (now MSE) (Kapur Committee)

All scheduled commercial banks were advised vide our circular RPCD. No. PLNFS.BC.22/06.02.31/98- 99 dated August 28, 1998 to implement the Kapur Committee Recommendations.

6.2 Report of the Committee to Examine the Adequacy of Institutional Credit to SSI Sector (now MSE) and Related Aspects (Nayak Committee)

All scheduled commercial banks were advised vide our circular RPCD.PLNFS.BC.No. 61/06.0262/2000-01 dated March 2, 2001 to implement the Nayak Committee Recommendations.

6.3 Report of the Working Group on Flow of Credit to SSI (now MSE) Sector (Ganguly Committee)

The recommendations of the Committee were communicated to banks for implementation vide circular RPCD.PLNFS.BC.28/06.02.31(WG)/2004-05 dated September 4, 2004.

6.4 Working Group on Rehabilitation of Sick SMEs (Chairman: Dr. K.C. Chakrabarty)

Banks were advised vide circular dated RPCD.SME&NFS.BC.No.102/06.04.01/2008-09 dated May 4, 2009 to consider implementation of the recommendations, inter alia, that lending in case of all advances upto ₹2 crores may be done on the basis of scoring model.

6.5 Prime Minister’s Task Force on Micro, Small and Medium Enterprises

A High-Level Task Force was constituted by the Government of India (Chairman: Shri T K A Nair), in January 2010, to consider various issues raised by Micro, Small and Medium Enterprises (MSMEs). The Task Force recommended several measures having a bearing on the functioning of MSMEs, viz., credit, marketing, labour, exit policy, infrastructure/technology/skill development and taxation. The comprehensive recommendations cover measures that need immediate action as well as medium term institutional measures along with legal and regulatory structures and recommendations for North- Eastern States and Jammu & Kashmir.

Banks are urged to keep in view the recommendations made by the Task Force and take effective steps to increase the flow of credit to the MSE sector, particularly to the micro enterprises. A circular was issued to all scheduled commercial banks vide RPCD.SME&NFS BC.No.90/06.02.31/2009-10 dated June 29, 2010 advising implementation of the recommendations of the Prime Minister’s Task Force on MSMEs.

6.6 Working Group to Review the Credit Guarantee Scheme for Micro and Small Enterprises

A Working Group was constituted by the Reserve Bank of India under the Chairmanship of Shri V.K. Sharma, Executive Director, to review the working of the Credit Guarantee Scheme (CGS) of CGTMSE and suggest measures to enhance its usage and facilitate increased flow of collateral free loans to MSEs. The recommendations of the Working Group included, inter alia, mandatory doubling of the limit for collateral free loans to micro and small enterprises (MSEs) sector from ₹5 lakh to ₹10 lakh and enjoining upon the Chief Executive Officers of banks to strongly encourage the branch level functionaries to avail of the CGS cover and making performance in this regard a criterion in the evaluation of their field staff, etc. have been advised to all banks. A circular to this effect was issued to all scheduled commercial banks vide RPCD.SME&NFS.BC.No.79/06.02.31/2009-10 dated May 6, 2010.

Appendix

List of Circulars consolidated by the Master Direction

RBI/FIDD/2017-2018/56
Master Direction FIDD.MSME & NFS.12/06.02.31/2017-18

July 24, 2017
(Updated as on April 25, 2018)

The Chairman / Managing Director / Chief Executive Officer
All Scheduled Commercial Banks
(excluding Regional Rural Banks)

Dear Sir/Madam,

Master Direction - Lending to Micro, Small & Medium Enterprises (MSME) Sector

As you are aware, the Reserve Bank of India has, from time to time, issued a number of guidelines / instructions / circulars / directives to banks in the matters relating to lending to Micro, Small & Medium Enterprises Sector. The Master Direction enclosed incorporates the updated guidelines / instructions / circulars on the subject. The list of circulars consolidated in this Master Direction is indicated in the Appendix. The Direction will be updated from time to time as and when fresh instructions are issued. This Master Direction has been placed on the RBI website at www.rbi.org.in.

2. Please acknowledge receipt.

Yours faithfully

(Uma Shankar)
Chief General Manager- in- Charge

Master Direction – Reserve Bank of India [Lending to Micro, Small & Medium Enterprises (MSME) Sector] - Directions, 2017

In exercise of the powers conferred by Sections 21 and 35 A of the Banking Regulation Act, 1949, the Reserve Bank of India, being satisfied that it is necessary and expedient in the public interest to do so, hereby, issues the Directions hereinafter specified.

CHAPTER – I

PRELIMINARY

1.1 Short Title and Commencement

(a) These Directions shall be called the Reserve Bank of India [Lending to Micro, Small & Medium Enterprises (MSME) Sector] Directions, 2017.

(b) These Directions shall come into effect on the day they are placed on the official website of the Reserve Bank of India.

1.2 Applicability

The provisions of these Directions shall apply to every Scheduled Commercial Bank {excluding Regional Rural Banks (RRBs)} licensed to operate in India by the Reserve Bank of India.

1.3 Definitions/ Clarifications

In these Directions, unless the context otherwise requires, the terms herein shall bear the meanings assigned to them as below:

(a) The MSMED Act, 2006 means ‘Micro, Small and Medium Enterprises Development (MSMED) Act, 2006’ as notified by the Government of India on June 16, 2006 and the amendments, if any, carried out therein by the Government of India from time to time.

(b) ‘Micro, Small and Medium Enterprises’ mean the enterprises as defined in the MSMED Act, 2006 and the amendments, if any, carried out therein by the Government of India from time to time.

(c) ‘Manufacturing’ and ‘Service’ Enterprises mean the enterprises as defined in the MSMED Act, 2006 or as notified by the Government of India, Ministry of MSME under the MSMED Act, 2006 from time to time.

(d) ‘Priority Sector’ means the sectors as defined in Master Direction - Reserve Bank of India (Priority Sector Lending –Targets and Classification) Directions, 2016 dated July 07, 2016 or as modified from time to time.

(e) ‘Adjusted Net Bank Credit (ANBC)’ would mean Adjusted Net Bank Credit (ANBC) as defined in Master Direction - Reserve Bank of India (Priority Sector Lending–Targets and Classification) Directions, 2016 dated July 07, 2016 or as modified from time to time.

CHAPTER – II

2 Micro, Small & Medium Enterprises Development (MSMED) Act, 2006

The Government of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 and notified the same vide Gazette Notification dated June 16, 2006. With the enactment of MSMED Act 2006, the paradigm shift that has taken place is the inclusion of the services sector in the definition of Micro, Small & Medium enterprises, apart from extending the scope to medium enterprises. The MSMED Act, 2006 has modified the definition of micro, small and medium enterprises engaged in manufacturing or production and providing or rendering of services. The Reserve Bank has notified the changes to all scheduled commercial banks. Further, the definition, as per the Act, has been adopted for purposes of bank credit vide RBI circular ref. RPCD.PLNFS. BC.No.63/06.02.31/2006-07 dated April 4, 2007.

2.1 Definition of Micro, Small and Medium Enterprises

(a) Manufacturing Enterprises i.e. Subject to the definition in MSMED Act, 2006, manufacturing enterprises would mean enterprises engaged in the manufacture or production of goods as specified below:

(i) A micro enterprise is an enterprise where investment in plant and machinery does not exceed Rs. 25 lakh;

(ii) A small enterprise is an enterprise where the investment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore; and

(iii) A medium enterprise is an enterprise where the investment in plant and machinery is more than Rs.5 crore but does not exceed Rs.10 crore.

In case of the above enterprises, investment in plant and machinery is the original cost excluding land and building and the items specified by the Ministry of Small Scale Industries vide its notification No.S.O. 1722(E) dated October 5, 2006 (Annex I).

(b) Service Enterprises i.e. Enterprises engaged in providing or rendering of services and whose investment in equipment (original cost excluding land and building and furniture, fittings and other items not directly related to the service rendered or as may be notified under the MSMED Act, 2006) as specified below:

(i) A micro enterprise is an enterprise where the investment in equipment does not exceed Rs. 10 lakh;

(ii) A small enterprise is an enterprise where the investment in equipment is more than Rs.10 lakh but does not exceed Rs. 2 crore; and

(iii) A medium enterprise is an enterprise where the investment in equipment is more than Rs. 2 crore but does not exceed Rs. 5 crore.

In terms of Ministry of MSME, GoI, Office Memorandum (OM) F. No. 12(4)/2017-SME dated March 8, 2017, it is clarified that for ascertaining the investment in plant and machinery for classification of an enterprise as Micro, Small and Medium, the following documents could be relied upon:

(i) A copy of the invoice of the purchase of plant and machinery; or

(ii) Gross block for investment in plant and machinery as shown in the audited accounts; or

(iii) A certificate issued by a Chartered Accountant regarding purchase price of plant and machinery.

Further, the Ministry has clarified that for the investment in plant and machinery for the purpose of classification of an enterprise as Micro, Small or Medium, the purchase value of the plant and machinery is to be reckoned and not the book value (purchase value minus depreciation)

The effective date for the above provision would be from the date MSMED Act, 2006 came into force and not prospectively. The above provisions would be applicable to section 7 (1) (a) and section 7 (1) (b) of the MSMED Act, 2006 i.e. enterprises engaged in manufacturing of goods and rendering of services as well. The detailed instructions in this regard were issued to the Scheduled Commercial Banks vide our circular FIDD.MSME & NFS. BC. No. 10/06.02.31/2017-18 dated July 13, 2017.

2.2 Priority Sector Guidelines for MSME sector

In terms of Master Direction FIDD.CO.Plan.1/04.09.01/2016-17 dated July 07, 2016 on ‘Priority Sector Lending - Targets and Classification’, bank loans to Micro, Small and Medium Enterprises, for both Manufacturing and Service sectors are eligible to be classified under the Priority Sector as per the following norms:

2.2.1 Manufacturing Enterprises

The Micro, Small and Medium Enterprises engaged in the manufacture or production of goods to any industry specified in the first schedule to the Industries (Development and Regulation) Act, 1951 and as notified by the Government from time to time. The Manufacturing Enterprises are defined in terms of investment in plant and machinery.

2.2.2 Service Enterprises

All bank loans to MSMEs, engaged in providing or rendering of services as defined in terms of investment in equipment under MSMED Act, 2006, shall qualify under priority sector without any credit cap.

2.3 Khadi and Village Industries Sector (KVI)

All loans to units in the KVI sector will be eligible for classification under the sub-target of 7.5 percent prescribed for Micro Enterprises under priority sector.

2.4 Bank loans to food and agro processing units shall form part of agriculture.

2.5 Other Finance to MSMEs

(i) Loans to entities involved in assisting the decentralized sector in the supply of inputs to and marketing of outputs of artisans, village and cottage industries.

(ii) Loans to co-operatives of producers in the decentralized sector viz. artisans, village and cottage industries.

(iii) Loans sanctioned by banks to MFIs for on-lending to MSME sector as per the conditions specified in the extant Master Direction on ‘Priority Sector Lending - Targets and Classification’.

(iv) Credit outstanding under General Credit Cards (including Artisan Credit Card, Laghu Udyami Card, Swarojgar Credit Card, and Weaver’s Card etc. in existence and catering to the non-farm entrepreneurial credit needs of individuals).

(v) Overdrafts extended by banks after April 8, 2015 up to Rs.5,000/- under Pradhan Mantri Jan Dhan Yojana (PMJDY) accounts provided the borrower’s household annual income does not exceed Rs.100,000/- for rural areas and Rs.1,60,000/- for non-rural areas. These overdrafts will qualify as achievement of the target for lending to Micro Enterprises.

(vi) Outstanding deposits with SIDBI and MUDRA Ltd. on account of priority sector shortfall.

2.6 To ensure that MSMEs do not remain small and medium units merely to remain eligible for priority sector status, the MSME units shall continue to enjoy the priority sector lending status up to three years after they grow out of the MSME category concerned.

2.7 As the MSMED Act, 2006 does not provide for clubbing of investments of different enterprises set up by same person / company for the purpose of classification as Micro, Small and Medium enterprises, therefore, the Gazette Notification No. S.O.2 (E) dated January 1, 1993 on clubbing of investments of two or more enterprises under the same ownership for the purpose of classification of industrial undertakings as SSI has been rescinded vide GOI Notification No. S.O. 563 (E) dated February 27, 2009.

CHAPTER - III

3 Targets / sub-targets for lending to Micro, Small and Medium Enterprises (MSME) sector by Domestic Commercial Banks and Foreign Banks operating in India

3.1 Advances to Micro, Small and Medium Enterprises (MSME) sector shall be reckoned in computing achievement under the overall Priority Sector target of 40 percent of Adjusted Net Bank Credit (ANBC) or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher, as per the extant guidelines on priority sector lending.

3.2 Domestic Commercial Banks and foreign banks with 20 branches and above are required to achieve a sub-target of 7.5 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher, for lending to Micro Enterprises. However, this sub-target for lending to Micro Enterprises is not applicable to foreign banks with less than 20 branches operating in India.

3.3 In terms of the recommendations of the Prime Minister’s Task Force on MSMEs, banks are advised to achieve:

(i) 20 per cent year-on-year growth in credit to micro and small enterprises,

(ii) 10 per cent annual growth in the number of micro enterprise accounts and

(iii) 60 per cent of total lending to MSE sector as on corresponding quarter of the previous year to Micro enterprises.

CHAPTER - IV

4 Common guidelines / instructions for lending to MSME sector

4.1 Issue of Acknowledgement of Loan Applications to MSME borrowers

Banks are advised to mandatorily acknowledge all loan applications, submitted manually or online, by their MSME borrowers and ensure that a running serial number is recorded on the application form as well as on the acknowledgement receipt. Banks are further advised to put in place a system of Central Registration of loan applications, online submission of loan applications and a system of e-tracking of MSE loan applications.

4.2 Collateral

Banks are mandated not to accept collateral security in the case of loans up to Rs.10 lakh extended to units in the MSE sector. Banks are also advised to extend collateral-free loans up to Rs. 10 lakh to all units financed under the Prime Minister Employment Generation Programme (PMEGP) administered by KVIC.

Banks may, on the basis of good track record and financial position of the MSE units, increase the limit to dispense with the collateral requirement for loans up to Rs.25 lakh (with the approval of the appropriate authority).

Banks are advised to strongly encourage their branch level functionaries to avail of the Credit Guarantee Scheme cover, including making performance in this regard a criterion in the evaluation of their field staff.

4.3 Composite loan

A composite loan limit of Rs.1 crore can be sanctioned by banks to enable the MSE entrepreneurs to avail of their working capital and term loan requirement through Single Window.

4.4 Revised General Credit Card (GCC) Scheme

In order to enhance the coverage of GCC Scheme to ensure greater credit linkage for all productive activities within the overall Priority Sector guidelines and to capture all credit extended by banks to individuals for non-farm entrepreneurial activity, the GCC guidelines were revised on December 2, 2013.

4.5 Credit Linked Capital Subsidy Scheme (CLSS)

Government of India, Ministry of Micro, Small and Medium Enterprises had launched Credit Linked Capital Subsidy Scheme (CLSS) for Technology Upgradation of Micro and Small Enterprises subject to the following terms and conditions:

(i) Ceiling on the loan under the scheme is Rs.1 crore.

(ii) The rate of subsidy is 15% for all units of micro and small enterprises up to loan ceiling at Sr. No. (i) above.

(iii) Calculation of admissible subsidy will be done with reference to the purchase price of plant and machinery instead of term loan disbursed to the beneficiary unit.

(iv) SIDBI and NABARD will continue to be implementing agencies of the scheme.

4.6 Streamlining flow of credit to Micro and Small Enterprises (MSEs) for facilitating timely and adequate credit flow during their ‘Life Cycle’:

In order to provide timely financial support to Micro and Small enterprises facing financial difficulties during their ‘Life Cycle’, guidelines were issued to banks vide our circular FIDD.MSME & NFS.BC.No.60/06.02.31/2015-16 dated August 27, 2015 on the captioned subject. Banks are advised to review and tune their existing lending policies to the MSE sector by incorporating therein the following provisions so as to facilitate timely and adequate availability of credit to viable MSE borrowers especially during the need of funds in unforeseen circumstances:

i) To extend standby credit facility in case of term loans

ii) Additional working capital to meet with emergent needs of MSE units

iii) Mid-term review of the regular working capital limits, where banks are convinced that changes in the demand pattern of MSE borrowers require increasing the existing credit limits of the MSMEs, every year based on the actual sales of the previous year.

iv) Timelines for Credit Decisions

4.7 Debt Restructuring Mechanism for MSMEs

(i) All scheduled commercial banks are advised to follow the guidelines / instructions pertaining to SME Debt Restructuring, as contained in circular DBR.No.BP.BC.2/21.04.048/2015-16 dated July 1, 2015 on ‘Master Circular - Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances’ and as updated from time to time.

(ii) All commercial banks are also advised in terms of our circular RPCD.SME&NFS.BC.No. 102/06.04.01/2008-09 dated May 4, 2009 to do the following:

1. put in place loan policies governing extension of credit facilities, Restructuring/Rehabilitation policy for revival of potentially viable sick units / enterprises (now read with guidelines on Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises issued on March 17, 2016) and non- discretionary One Time Settlement scheme for recovery of non-performing loans for the MSE sector, with the approval of the Board of Directors and

2. give wide publicity to the One Time settlement scheme implemented by them, by placing it on the bank’s website and through other possible modes of dissemination. They may allow reasonable time to the borrowers to submit the application and also make payment of the dues in order to extend the benefits of the scheme to eligible borrowers.

3. implement recommendations with regard to timely and adequate flow of credit to the MSE sector.

4.8 Framework for Revival and Rehabilitation of MSMEs

The Ministry of Micro, Small and Medium Enterprises, Government of India, vide their Gazette Notification dated May 29, 2015 had notified a ‘Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises’ to provide a simpler and faster mechanism to address the stress in the accounts of MSMEs and to facilitate the promotion and development of MSMEs. After carrying out certain changes in the captioned Framework in consultation with the Government of India, Ministry of MSME so as to make it compatible with the existing regulatory guidelines on ‘Income Recognition, Asset Classification and provisioning pertaining to Advances’ issued to banks by RBI, the guidelines on the captioned Framework along with operating instructions were issued to banks on March 17, 2016. The revival and rehabilitation of MSME units having loan limits up to Rs.25 crore would be undertaken under this Framework. The revised Framework supersedes our earlier Guidelines on Rehabilitation of Sick Micro and Small Enterprises issued vide our circular RPCD.CO.MSME& NFS.BC.40/06.02.31/2012-2013 dated November 1, 2012, except those relating to Reliefs and Concessions for Rehabilitation of Potentially Viable Units and One Time Settlement, mentioned in the said circular.

The salient features of the Framework are as under:

i) Before a loan account of an MSME turns into a Non-Performing Asset (NPA), banks or creditors should identify incipient stress in the account by creating three sub-categories under the Special Mention Account (SMA) category as given in the Framework

ii) Any MSME borrower may also voluntarily initiate proceedings under this Framework

iii) Committee approach to be adopted for deciding corrective action plan

iv) Time lines have been fixed for taking various decisions under the Framework

4.9 Structured Mechanism for monitoring the credit growth to the MSE sector

In view of the concerns emerging from the deceleration in credit growth to the MSE sector, an Indian Banking Association (IBA)-led Sub-Committee (Chairman: Shri K.R. Kamath) was set up to suggest a structured mechanism to be put in place by banks to monitor the entire gamut of credit related issues pertaining to the sector. Based on the recommendations of the Committee, banks are advised to:

• strengthen their existing systems of monitoring credit growth to the sector and put in place a system-driven comprehensive performance management information system (MIS) at every supervisory level (branch, region, zone, head office) which should be critically evaluated on a regular basis;

• put in place a system of e-tracking of MSE loan applications and monitor the loan application disposal process in banks, giving branch-wise, region-wise, zone-wise and State-wise positions. The position in this regard is to be displayed by banks on their websites; and

Detailed guidelines were issued to the scheduled commercial banks vide our circular RPCD. MSME&NFS.BC.No.74/06.02.31/2012-13 dated May 9, 2013.

Chapter - V

5 Institutional arrangements

5.1 Specialised MSME branches

Public sector banks are advised to open at least one specialised branch in each district. Further, banks have been permitted to categorise their general banking branches having 60% or more of their advances to MSME sector as specialized MSME branches in order to encourage them to open more specialised MSME branches for providing better service to this sector as a whole. As per the policy package announced by the Government of India for stepping up credit to MSME sector, the public sector banks would ensure specialized MSME branches in identified clusters/centres with preponderance of small enterprises to enable the entrepreneurs to have easy access to the bank credit and to equip bank personnel to develop requisite expertise. Though their core competence will be utilized for extending finance and other services to MSME sector, they will have operational flexibility to extend finance/render other services to other sectors/borrowers. Banks may take care to train the officials posted in such branches appropriately.

5.2 State Level Inter Institutional Committee (SLIIC)

In order to deal with the problems of co-ordination for rehabilitation of sick micro and small units, State Level Inter-Institutional Committees were set up in the States. However, the matter of continuation or otherwise, of the SLIIC Forum has been left to the individual States / Union Territory.

5.3 Empowered Committee on MSMEs

As part of the announcement made by the Union Finance Minister, Empowered Committees on MSMEs are constituted at the Regional Offices of Reserve Bank of India, under the Chairmanship of the Regional Directors with the representatives of SLBC Convenor, senior level officers from two banks having predominant share in MSME financing in the state, representative of SIDBI Regional Office, the Director of MSME or Industries of the State Government, one or two senior level representatives from the MSME Associations in the state, and a senior level officer from SFC/SIDC as members. The Committee would meet periodically and review the progress in MSME financing as also revival and rehabilitation of stressed Micro, Small and Medium units. It would also coordinate with other banks/financial institutions and the state government in removing bottlenecks, if any, to ensure smooth flow of credit to the sector. The committees may decide the need to have similar committees at cluster/district levels.

5.4 Banking Codes and Standards Board of India (BCSBI)

The Banking Codes and Standards Board of India (BCSBI) has formulated a Code of Bank's Commitment to Micro and Small Enterprises. The Code sets minimum standards of banking practices for banks to follow when they are dealing with Micro and Small Enterprises (MSEs) as defined in the Micro Small and Medium Enterprises Development (MSMED) Act, 2006. It provides protection to MSE and explains how banks are expected to deal with MSE for their day to-day operations and in times of financial difficulty.

The Code also mentions, inter alia, that the banks are expected to dispose of MSE loan application for a credit limit or enhancement in the existing credit limit up to Rs.5 lakh within two weeks; and for credit limit above Rs.5 lakh and up to Rs.25 lakh within 3 weeks; and for credit limit above Rs.25 lakh within 6 weeks from the date of receipt, provided the application is complete in all respects and is accompanied by documents as per ‘check list’ provided. However, every effort should be taken to reduce further the time taken to process and dispose of MSE loan applications.

The Code does not replace or supersede regulatory or supervisory instructions issued by the Reserve Bank of India (RBI) and banks will comply with such instructions /directions issued by the RBI from time to time.

5.4.1 Objectives of the BCSBI Code

The Code is developed to:

(a) Give a positive thrust to the MSE sector by providing easy access to efficient banking services.

(b) Promote good and fair banking practices by setting minimum standards in dealing with MSE.

(c) Increase transparency to enable a better understanding of what can reasonably be expected of the services.

(d) Improve understanding of business through effective communication.

(e) Encourage market forces, through competition, to achieve higher operating standards.

(f) Promote a fair and cordial relationship between MSE and banks and also ensure timely and quick response to banking needs.

(g) Foster confidence in the banking system.

The complete text of the Code is available at the BCSBI's website (www.bcsbi.org.in)

5.5 Micro and Small Enterprises Sector – The imperative of Financial Literacy and consultancy support

Keeping in view the high extent of financial exclusion in the MSME sector, it is imperative for banks that the excluded units are brought within the fold of the formal banking sector. The lack of financial literacy, operational skills, including accounting and finance, business planning etc. represent formidable challenge for MSE borrowers underscoring the need for facilitation by banks in these critical financial areas. Moreover, MSE enterprises are further handicapped in this regard by absence of scale and size. To effectively and decisively address these handicaps, Scheduled commercial banks were advised vide our circular RPCD.MSME & NFS.BC.No.20/06.02.31/2012-13 dated August 1, 2012 that they could either separately set up special cells at their branches, or vertically integrate this function in the Financial Literacy Centres (FLCs) set up by them, as per their comparative advantage. The bank staff should also be trained through customised training programs to meet the specific needs of the sector.

Further, Financial Literacy Centres operated by Scheduled commercial Banks have been advised vide our circular FIDD.FLC.BC.No.22/12.01.018/2016-17 dated March 2, 2017 to conduct target specific financial literacy camps, where one of the target groups is small entrepreneurs.

5.6 Cluster Approach

All SLBC Convenor banks are advised to incorporate in their Annual Credit Plans, the credit requirement in the clusters identified by the Ministry of Micro, Small and Medium Enterprises, Government of India. They are also encouraged to extend banking services in such clusters / agglomerations which have come up and identified subsequently by SLBC / DCC members.

(i) As per Ganguly Committee recommendations (September 4, 2004), banks are advised that a full-service approach to cater to the diverse needs of the SSI sector (now MSE sector) may be achieved through extending banking services to recognized MSE clusters by adopting a 4-C approach namely, Customer focus, Cost control, Cross sell and Contain risk. A cluster based approach to lending may be more beneficial:

(a) in dealing with well-defined and recognized groups;

(b) for making available of appropriate information for risk assessment and

(c) for monitoring by the lending institutions.

Clusters may be identified based on factors such as trade record, competitiveness and growth prospects and/or other cluster specific data.

(ii) All SLBC Convenor banks were advised vide letter RPCD.PLNFS.No.10416/06.02.31/2006-07 dated May 8, 2007 to review their institutional arrangements for delivering credit to the MSME sector, especially in 388 clusters identified by United Nations Industrial Development Organisation (UNIDO) spread over 21 states in various parts of the country. A list of SME clusters as identified by UNIDO has been furnished in Annex II.

(iii) The Ministry of Micro, Small and Medium Enterprises has approved a list of clusters under the Scheme of Fund for Regeneration of Traditional Industries (SFURTI) and Micro and Small Enterprises Cluster Development Programme (MSE-CDP) located in 121 Minority Concentration Districts. Accordingly, appropriate measures have been taken to improve the credit flow to the identified clusters of micro and small entrepreneurs from the Minority Communities residing in the minority concentrated districts of the country.

(iv) In terms of recommendations of the Prime Minister’s Task Force on MSMEs banks should open more MSE focused branch offices at different MSE clusters which can also act as Counselling Centres for MSEs. Each lead bank of a district may adopt at least one MSE cluster.

5.7 Delayed Payment

In the Micro, Small and Medium Enterprises Development (MSMED), Act 2006, the provisions of the Interest on Delayed Payment Act, 1998 to Small Scale and Ancillary Industrial Undertakings, have been strengthened as under:

(i) The buyer has to make payment to the supplier on or before the date agreed upon between him and the supplier in writing or, in case of no agreement, before the appointed day. The period agreed upon between the supplier and the buyer shall not exceed forty five days from the date of acceptance or the day of deemed acceptance.

(ii) In case the buyer fails to make payment of the amount to the supplier, he shall be liable to pay compound interest with monthly rests to the supplier on the amount from the appointed day or, on the date agreed on, at three times of the Bank Rate notified by Reserve Bank.

(iii) For any goods supplied or services rendered by the supplier, the buyer shall be liable to pay the interest as advised at (ii) above.

(iv) In case of dispute with regard to any amount due, a reference shall be made to the Micro and Small Enterprises Facilitation Council, constituted by the respective State Government.

Further, banks are 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 MSMEs.

CHAPTER - VI

6 Committees on flow of Credit to MSE sector

Scheduled Commercial Banks may be guided by the contents of the following circulars while extending credit to MSE sector:

6.1 Report of the High Level Committee on Credit to SSI (now MSE) (Kapur Committee)

All scheduled commercial banks were advised vide our circular RPCD. No. PLNFS.BC.22/06.02.31/98-99 dated August 28, 1998 to implement the Kapur Committee Recommendations.

6.2 Report of the Committee to Examine the Adequacy of Institutional Credit to SSI Sector (now MSE) and Related Aspects (Nayak Committee)

All scheduled commercial banks were advised vide our circular RPCD.PLNFS.BC.No. 61/06.0262/2000-01 dated March 2, 2001 to implement the Nayak Committee Recommendations.

6.3 Report of the Working Group on Flow of Credit to SSI (now MSE) Sector (Ganguly Committee)

The recommendations of the Committee was communicated to banks for implementation vide circular RPCD.PLNFS.BC.28/06.02.31(WG)/2004-05 dated September 4, 2004.

6.4 Working Group on Rehabilitation of Sick SMEs (Chairman: Dr. K.C. Chakrabarty)

Banks were advised vide circular dated RPCD.SME&NFS.BC.No.102/06.04.01/2008-09 dated May 4, 2009 to consider implementation of the recommendations, inter alia, that lending in case of all advances upto Rs. 2 crores may be done on the basis of scoring model. Banks have further been advised vide circular DBOD.Dir.BC.No.106/13.03.00/2013-14 dated April 15, 2014 to undertake a review of their loan policy governing extension of credit facilities to the MSE sector, with a view to using Board approved credit scoring models in their evaluation of the loan proposals of MSE borrowers.

6.5 Prime Minister’s Task Force on Micro, Small and Medium Enterprises

A High Level Task Force was constituted by the Government of India (Chairman: Shri T K A Nair), in January 2010, to consider various issues raised by Micro, Small and Medium Enterprises (MSMEs). The Task Force recommended several measures having a bearing on the functioning of MSMEs, viz., credit, marketing, labour, exit policy, infrastructure/technology/skill development and taxation. The comprehensive recommendations cover measures that need immediate action as well as medium term institutional measures along with legal and regulatory structures and recommendations for North-Eastern States and Jammu & Kashmir.

Banks are urged to keep in view the recommendations made by the Task Force and take effective steps to increase the flow of credit to the MSE sector, particularly to the micro enterprises.

A circular was issued to all scheduled commercial banks vide RPCD.SME&NFS BC.No. 90/06.02.31/2009-10 dated June 29, 2010 advising implementation of the recommendations of the Prime Minister’s Task Force on MSMEs.

6.6 Working Group to Review the Credit Guarantee Scheme for Micro and Small Enterprises

A Working Group was constituted by the Reserve Bank of India under the Chairmanship of Shri V.K. Sharma, Executive Director, to review the working of the Credit Guarantee Scheme (CGS) of CGTMSE and suggest measures to enhance its usage and facilitate increased flow of collateral free loans to MSEs.

The recommendations of the Working Group included, inter alia, mandatory doubling of the limit for collateral free loans to micro and small enterprises (MSEs) sector from Rs.5 lakh to Rs.10 lakh and enjoining upon the Chief Executive Officers of banks to strongly encourage the branch level functionaries to avail of the CGS cover and making performance in this regard a criterion in the evaluation of their field staff, etc. have been advised to all banks.

A circular to this effect was issued to all scheduled commercial banks vide RPCD.SME&NFS.BC.No.79/06.02.31/2009-10 dated May 6, 2010.

Annex I

MINISTRY OF SMALL SCALE INDUSTRIES
NOTIFICATION
New Delhi, the 5th October, 2006

S.O. 1722(E) – In exercise of the powers conferred by sub-section (1) of Section 7 of the MSMED Act, 2006 (27 of 2006) herein referred to as the said Act, the Central Government hereby specifies the following items, the cost of which shall be excluded while calculating the investment in plant and machinery in the case of the enterprises mentioned in Section 7(1) (a) of the said Act, namely:

(i) equipment such as tools, jigs, dyes, moulds and spare parts for maintenance and the cost of consumables stores;

(ii) installation of plant and machinery;

(iii) research and development equipment and pollution controlled equipment

(iv) power generation set and extra transformer installed by the enterprise as per regulations of the State Electricity Board;

(v) bank charges and service charges paid to the National Small Industries Corporation or the State Small Industries Corporation;

(vi) procurement or installation of cables, wiring, bus bars, electrical control panels (not mounted on individual machines), oil circuit breakers or miniature circuit breakers which are necessarily to be used for providing electrical power to the plant and machinery or for safety measures;

(vii) gas producer plants;

(viii) transportation charges (excluding sales-tax or value added tax and excise duty) for indigenous machinery from the place of their manufacture to the site of the enterprise;

(ix) charges paid for technical know-how for erection of plant and machinery;

(x) such storage tanks which store raw material and finished products and are not linked with the manufacturing process; and

(xi) firefighting equipment.

2. While calculating the investment in plant and machinery referred to in paragraph 1, the original price thereof, irrespective of whether the plant and machinery are new or second hand, shall be taken into account provided that in the case of imported machinery, the following shall be included in calculating the value, namely;

(i) Import duty (excluding miscellaneous expenses such as transportation from the port to the site of the factory, demurrage paid at the port);

(ii) Shipping charges;

(iii) Customs clearance charges; and

(iv) Sales tax or value added tax.

(F.No.4(1)/2006-MSME- Policy)

JAWHAR SIRCAR, Addl. Secy.

Annex II

Appendix

List of Circulars consolidated by the Master Direction

RBI/FIDD/2017-2018/56
Master Direction FIDD.MSME & NFS.12/06.02.31/2017-18

July 24, 2017

The Chairman / Managing Director / Chief Executive Officer
All Scheduled Commercial Banks
(excluding Regional Rural Banks)

Dear Sir/Madam,

Master Direction - Lending to Micro, Small & Medium Enterprises (MSME) Sector

As you are aware, the Reserve Bank of India has, from time to time, issued a number of guidelines / instructions / circulars / directives to banks in the matters relating to lending to Micro, Small & Medium Enterprises Sector. The Master Direction enclosed incorporates the updated guidelines / instructions / circulars on the subject. The list of circulars consolidated in this Master Direction is indicated in the Appendix. The Direction will be updated from time to time as and when fresh instructions are issued. This Master Direction has been placed on the RBI website at www.rbi.org.in.

2. Please acknowledge receipt.

Yours faithfully

(Uma Shankar)
Chief General Manager- in- Charge

Master Direction – Reserve Bank of India [Lending to Micro, Small & Medium Enterprises (MSME) Sector] - Directions, 2017

In exercise of the powers conferred by Sections 21 and 35 A of the Banking Regulation Act, 1949, the Reserve Bank of India, being satisfied that it is necessary and expedient in the public interest to do so, hereby, issues the Directions hereinafter specified.

CHAPTER – I

PRELIMINARY

1.1 Short Title and Commencement

(a) These Directions shall be called the Reserve Bank of India [Lending to Micro, Small & Medium Enterprises (MSME) Sector] Directions, 2017.

(b) These Directions shall come into effect on the day they are placed on the official website of the Reserve Bank of India.

1.2 Applicability

The provisions of these Directions shall apply to every Scheduled Commercial Bank {excluding Regional Rural Banks (RRBs)} licensed to operate in India by the Reserve Bank of India.

1.3 Definitions/ Clarifications

In these Directions, unless the context otherwise requires, the terms herein shall bear the meanings assigned to them as below:

(a) The MSMED Act, 2006 means ‘Micro, Small and Medium Enterprises Development (MSMED) Act, 2006’ as notified by the Government of India on June 16, 2006 and the amendments, if any, carried out therein by the Government of India from time to time.

(b) ‘Micro, Small and Medium Enterprises’ mean the enterprises as defined in the MSMED Act, 2006 and the amendments, if any, carried out therein by the Government of India from time to time.

(c) ‘Manufacturing’ and ‘Service’ Enterprises mean the enterprises as defined in the MSMED Act, 2006 or as notified by the Government of India, Ministry of MSME under the MSMED Act, 2006 from time to time.

(d) ‘Priority Sector’ means the sectors as defined in Master Direction - Reserve Bank of India (Priority Sector Lending –Targets and Classification) Directions, 2016 dated July 07, 2016 or as modified from time to time.

(e) ‘Adjusted Net Bank Credit (ANBC)’ would mean Adjusted Net Bank Credit (ANBC) as defined in Master Direction - Reserve Bank of India (Priority Sector Lending–Targets and Classification) Directions, 2016 dated July 07, 2016 or as modified from time to time.

CHAPTER – II

2 Micro, Small & Medium Enterprises Development (MSMED) Act, 2006

The Government of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 and notified the same vide Gazette Notification dated June 16, 2006. With the enactment of MSMED Act 2006, the paradigm shift that has taken place is the inclusion of the services sector in the definition of Micro, Small & Medium enterprises, apart from extending the scope to medium enterprises. The MSMED Act, 2006 has modified the definition of micro, small and medium enterprises engaged in manufacturing or production and providing or rendering of services. The Reserve Bank has notified the changes to all scheduled commercial banks. Further, the definition, as per the Act, has been adopted for purposes of bank credit vide RBI circular ref. RPCD.PLNFS. BC.No.63/06.02.31/2006-07 dated April 4, 2007.

2.1 Definition of Micro, Small and Medium Enterprises

(a) Manufacturing Enterprises i.e. Subject to the definition in MSMED Act, 2006, manufacturing enterprises would mean enterprises engaged in the manufacture or production of goods as specified below:

(i) A micro enterprise is an enterprise where investment in plant and machinery does not exceed Rs. 25 lakh;

(ii) A small enterprise is an enterprise where the investment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore; and

(iii) A medium enterprise is an enterprise where the investment in plant and machinery is more than Rs.5 crore but does not exceed Rs.10 crore.

In case of the above enterprises, investment in plant and machinery is the original cost excluding land and building and the items specified by the Ministry of Small Scale Industries vide its notification No.S.O. 1722(E) dated October 5, 2006 (Annex I).

(b) Service Enterprises i.e. Enterprises engaged in providing or rendering of services and whose investment in equipment (original cost excluding land and building and furniture, fittings and other items not directly related to the service rendered or as may be notified under the MSMED Act, 2006) as specified below:

(i) A micro enterprise is an enterprise where the investment in equipment does not exceed Rs. 10 lakh;

(ii) A small enterprise is an enterprise where the investment in equipment is more than Rs.10 lakh but does not exceed Rs. 2 crore; and

(iii) A medium enterprise is an enterprise where the investment in equipment is more than Rs. 2 crore but does not exceed Rs. 5 crore.

In terms of Ministry of MSME, GoI, Office Memorandum (OM) F. No. 12(4)/2017-SME dated March 8, 2017, it is clarified that for ascertaining the investment in plant and machinery for classification of an enterprise as Micro, Small and Medium, the following documents could be relied upon:

(i) A copy of the invoice of the purchase of plant and machinery; or

(ii) Gross block for investment in plant and machinery as shown in the audited accounts; or

(iii) A certificate issued by a Chartered Accountant regarding purchase price of plant and machinery.

Further, the Ministry has clarified that for the investment in plant and machinery for the purpose of classification of an enterprise as Micro, Small or Medium, the purchase value of the plant and machinery is to be reckoned and not the book value (purchase value minus depreciation)

The effective date for the above provision would be from the date MSMED Act, 2006 came into force and not prospectively. The above provisions would be applicable to section 7 (1) (a) and section 7 (1) (b) of the MSMED Act, 2006 i.e. enterprises engaged in manufacturing of goods and rendering of services as well. The detailed instructions in this regard were issued to the Scheduled Commercial Banks vide our circular FIDD.MSME & NFS. BC. No. 10/06.02.31/2017-18 dated July 13, 2017.

2.2 Priority Sector Guidelines for MSME sector

In terms of Master Direction FIDD.CO.Plan.1/04.09.01/2016-17 dated July 07, 2016 on ‘Priority Sector Lending - Targets and Classification’, bank loans to Micro, Small and Medium Enterprises, for both Manufacturing and Service sectors are eligible to be classified under the Priority Sector as per the following norms:

2.2.1 Manufacturing Enterprises

The Micro, Small and Medium Enterprises engaged in the manufacture or production of goods to any industry specified in the first schedule to the Industries (Development and Regulation) Act, 1951 and as notified by the Government from time to time. The Manufacturing Enterprises are defined in terms of investment in plant and machinery.

2.2.2 Service Enterprises

Bank loans up to Rs.5 crore per borrower / unit to Micro and Small Enterprises and Rs.10 crore to Medium Enterprises engaged in providing or rendering of services and defined in terms of investment in equipment under MSMED Act, 2006.

2.3 Khadi and Village Industries Sector (KVI)

All loans to units in the KVI sector will be eligible for classification under the sub-target of 7.5 percent prescribed for Micro Enterprises under priority sector.

2.4 Bank loans to food and agro processing units shall form part of agriculture.

2.5 Other Finance to MSMEs

(i) Loans to entities involved in assisting the decentralized sector in the supply of inputs to and marketing of outputs of artisans, village and cottage industries.

(ii) Loans to co-operatives of producers in the decentralized sector viz. artisans, village and cottage industries.

(iii) Loans sanctioned by banks to MFIs for on-lending to MSME sector as per the conditions specified in the extant Master Direction on ‘Priority Sector Lending - Targets and Classification’.

(iv) Credit outstanding under General Credit Cards (including Artisan Credit Card, Laghu Udyami Card, Swarojgar Credit Card, and Weaver’s Card etc. in existence and catering to the non-farm entrepreneurial credit needs of individuals).

(v) Overdrafts extended by banks after April 8, 2015 up to Rs.5,000/- under Pradhan Mantri Jan Dhan Yojana (PMJDY) accounts provided the borrower’s household annual income does not exceed Rs.100,000/- for rural areas and Rs.1,60,000/- for non-rural areas. These overdrafts will qualify as achievement of the target for lending to Micro Enterprises.

(vi) Outstanding deposits with SIDBI and MUDRA Ltd. on account of priority sector shortfall.

2.6 To ensure that MSMEs do not remain small and medium units merely to remain eligible for priority sector status, the MSME units shall continue to enjoy the priority sector lending status up to three years after they grow out of the MSME category concerned.

2.7 As the MSMED Act, 2006 does not provide for clubbing of investments of different enterprises set up by same person / company for the purpose of classification as Micro, Small and Medium enterprises, therefore, the Gazette Notification No. S.O.2 (E) dated January 1, 1993 on clubbing of investments of two or more enterprises under the same ownership for the purpose of classification of industrial undertakings as SSI has been rescinded vide GOI Notification No. S.O. 563 (E) dated February 27, 2009.

CHAPTER - III

3 Targets / sub-targets for lending to Micro, Small and Medium Enterprises (MSME) sector by Domestic Commercial Banks and Foreign Banks operating in India

3.1 Advances to Micro, Small and Medium Enterprises (MSME) sector shall be reckoned in computing achievement under the overall Priority Sector target of 40 percent of Adjusted Net Bank Credit (ANBC) or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher, as per the extant guidelines on priority sector lending.

3.2 Domestic Commercial Banks are required to achieve a sub-target of 7.5 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher, for lending to Micro Enterprises. The sub-target for Micro Enterprises for foreign banks with 20 branches and above operating in India would be made applicable post 2018 after a review in 2017. However, this sub-target for lending to Micro Enterprises is not applicable to foreign banks with less than 20 branches operating in India.

3.3 Bank loans above Rs.5 crore per borrower / unit to Micro and Small Enterprises and Rs.10 crore to Medium Enterprises engaged in providing or rendering of services and defined in terms of investment in equipment under MSMED Act, 2006, shall not be reckoned in computing achievement under the overall Priority Sector targets as above. However, bank loans above Rs.5 crore per borrower / unit to Micro and Small Enterprises would be taken into account while assessing the performance of the banks with regard to their achievement of targets prescribed by the Prime Minister’s Task Force on MSMEs for lending to MSE sector.

3.4 In terms of the recommendations of the Prime Minister’s Task Force on MSMEs, banks are advised to achieve:

(i) 20 per cent year-on-year growth in credit to micro and small enterprises,

(ii) 10 per cent annual growth in the number of micro enterprise accounts and

(iii) 60 per cent of total lending to MSE sector as on corresponding quarter of the previous year to Micro enterprises.

CHAPTER - IV

4 Common guidelines / instructions for lending to MSME sector

4.1 Issue of Acknowledgement of Loan Applications to MSME borrowers

Banks are advised to mandatorily acknowledge all loan applications, submitted manually or online, by their MSME borrowers and ensure that a running serial number is recorded on the application form as well as on the acknowledgement receipt. Banks are further advised to put in place a system of Central Registration of loan applications, online submission of loan applications and a system of e-tracking of MSE loan applications.

4.2 Collateral

Banks are mandated not to accept collateral security in the case of loans up to Rs.10 lakh extended to units in the MSE sector. Banks are also advised to extend collateral-free loans up to Rs. 10 lakh to all units financed under the Prime Minister Employment Generation Programme (PMEGP) administered by KVIC.

Banks may, on the basis of good track record and financial position of the MSE units, increase the limit to dispense with the collateral requirement for loans up to Rs.25 lakh (with the approval of the appropriate authority).

Banks are advised to strongly encourage their branch level functionaries to avail of the Credit Guarantee Scheme cover, including making performance in this regard a criterion in the evaluation of their field staff.

4.3 Composite loan

A composite loan limit of Rs.1 crore can be sanctioned by banks to enable the MSE entrepreneurs to avail of their working capital and term loan requirement through Single Window.

4.4 Revised General Credit Card (GCC) Scheme

In order to enhance the coverage of GCC Scheme to ensure greater credit linkage for all productive activities within the overall Priority Sector guidelines and to capture all credit extended by banks to individuals for non-farm entrepreneurial activity, the GCC guidelines were revised on December 2, 2013.

4.5 Credit Linked Capital Subsidy Scheme (CLSS)

Government of India, Ministry of Micro, Small and Medium Enterprises had launched Credit Linked Capital Subsidy Scheme (CLSS) for Technology Upgradation of Micro and Small Enterprises subject to the following terms and conditions:

(i) Ceiling on the loan under the scheme is Rs.1 crore.

(ii) The rate of subsidy is 15% for all units of micro and small enterprises up to loan ceiling at Sr. No. (i) above.

(iii) Calculation of admissible subsidy will be done with reference to the purchase price of plant and machinery instead of term loan disbursed to the beneficiary unit.

(iv) SIDBI and NABARD will continue to be implementing agencies of the scheme.

4.6 Streamlining flow of credit to Micro and Small Enterprises (MSEs) for facilitating timely and adequate credit flow during their ‘Life Cycle’:

In order to provide timely financial support to Micro and Small enterprises facing financial difficulties during their ‘Life Cycle’, guidelines were issued to banks vide our circular FIDD.MSME & NFS.BC.No.60/06.02.31/2015-16 dated August 27, 2015 on the captioned subject. Banks are advised to review and tune their existing lending policies to the MSE sector by incorporating therein the following provisions so as to facilitate timely and adequate availability of credit to viable MSE borrowers especially during the need of funds in unforeseen circumstances:

i) To extend standby credit facility in case of term loans

ii) Additional working capital to meet with emergent needs of MSE units

iii) Mid-term review of the regular working capital limits, where banks are convinced that changes in the demand pattern of MSE borrowers require increasing the existing credit limits of the MSMEs, every year based on the actual sales of the previous year.

iv) Timelines for Credit Decisions

4.7 Debt Restructuring Mechanism for MSMEs

(i) All scheduled commercial banks are advised to follow the guidelines / instructions pertaining to SME Debt Restructuring, as contained in circular DBR.No.BP.BC.2/21.04.048/2015-16 dated July 1, 2015 on ‘Master Circular - Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances’ and as updated from time to time.

(ii) All commercial banks are also advised in terms of our circular RPCD.SME&NFS.BC.No. 102/06.04.01/2008-09 dated May 4, 2009 to do the following:

1. put in place loan policies governing extension of credit facilities, Restructuring/Rehabilitation policy for revival of potentially viable sick units / enterprises (now read with guidelines on Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises issued on March 17, 2016) and non- discretionary One Time Settlement scheme for recovery of non-performing loans for the MSE sector, with the approval of the Board of Directors and

2. give wide publicity to the One Time settlement scheme implemented by them, by placing it on the bank’s website and through other possible modes of dissemination. They may allow reasonable time to the borrowers to submit the application and also make payment of the dues in order to extend the benefits of the scheme to eligible borrowers.

3. implement recommendations with regard to timely and adequate flow of credit to the MSE sector.

4.8 Framework for Revival and Rehabilitation of MSMEs

The Ministry of Micro, Small and Medium Enterprises, Government of India, vide their Gazette Notification dated May 29, 2015 had notified a ‘Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises’ to provide a simpler and faster mechanism to address the stress in the accounts of MSMEs and to facilitate the promotion and development of MSMEs. After carrying out certain changes in the captioned Framework in consultation with the Government of India, Ministry of MSME so as to make it compatible with the existing regulatory guidelines on ‘Income Recognition, Asset Classification and provisioning pertaining to Advances’ issued to banks by RBI, the guidelines on the captioned Framework along with operating instructions were issued to banks on March 17, 2016. The revival and rehabilitation of MSME units having loan limits up to Rs.25 crore would be undertaken under this Framework. The revised Framework supersedes our earlier Guidelines on Rehabilitation of Sick Micro and Small Enterprises issued vide our circular RPCD.CO.MSME& NFS.BC.40/06.02.31/2012-2013 dated November 1, 2012, except those relating to Reliefs and Concessions for Rehabilitation of Potentially Viable Units and One Time Settlement, mentioned in the said circular.

The salient features of the Framework are as under:

i) Before a loan account of an MSME turns into a Non-Performing Asset (NPA), banks or creditors should identify incipient stress in the account by creating three sub-categories under the Special Mention Account (SMA) category as given in the Framework

ii) Any MSME borrower may also voluntarily initiate proceedings under this Framework

iii) Committee approach to be adopted for deciding corrective action plan

iv) Time lines have been fixed for taking various decisions under the Framework

4.9 Structured Mechanism for monitoring the credit growth to the MSE sector

In view of the concerns emerging from the deceleration in credit growth to the MSE sector, an Indian Banking Association (IBA)-led Sub-Committee (Chairman: Shri K.R. Kamath) was set up to suggest a structured mechanism to be put in place by banks to monitor the entire gamut of credit related issues pertaining to the sector. Based on the recommendations of the Committee, banks are advised to:

• strengthen their existing systems of monitoring credit growth to the sector and put in place a system-driven comprehensive performance management information system (MIS) at every supervisory level (branch, region, zone, head office) which should be critically evaluated on a regular basis;

• put in place a system of e-tracking of MSE loan applications and monitor the loan application disposal process in banks, giving branch-wise, region-wise, zone-wise and State-wise positions. The position in this regard is to be displayed by banks on their websites; and

Detailed guidelines were issued to the scheduled commercial banks vide our circular RPCD. MSME&NFS.BC.No.74/06.02.31/2012-13 dated May 9, 2013.

Chapter - V

5 Institutional arrangements

5.1 Specialised MSME branches

Public sector banks are advised to open at least one specialised branch in each district. Further, banks have been permitted to categorise their general banking branches having 60% or more of their advances to MSME sector as specialized MSME branches in order to encourage them to open more specialised MSME branches for providing better service to this sector as a whole. As per the policy package announced by the Government of India for stepping up credit to MSME sector, the public sector banks would ensure specialized MSME branches in identified clusters/centres with preponderance of small enterprises to enable the entrepreneurs to have easy access to the bank credit and to equip bank personnel to develop requisite expertise. Though their core competence will be utilized for extending finance and other services to MSME sector, they will have operational flexibility to extend finance/render other services to other sectors/borrowers. Banks may take care to train the officials posted in such branches appropriately.

5.2 State Level Inter Institutional Committee (SLIIC)

In order to deal with the problems of co-ordination for rehabilitation of sick micro and small units, State Level Inter-Institutional Committees were set up in the States. However, the matter of continuation or otherwise, of the SLIIC Forum has been left to the individual States / Union Territory.

5.3 Empowered Committee on MSMEs

As part of the announcement made by the Union Finance Minister, Empowered Committees on MSMEs are constituted at the Regional Offices of Reserve Bank of India, under the Chairmanship of the Regional Directors with the representatives of SLBC Convenor, senior level officers from two banks having predominant share in MSME financing in the state, representative of SIDBI Regional Office, the Director of MSME or Industries of the State Government, one or two senior level representatives from the MSME Associations in the state, and a senior level officer from SFC/SIDC as members. The Committee would meet periodically and review the progress in MSME financing as also revival and rehabilitation of stressed Micro, Small and Medium units. It would also coordinate with other banks/financial institutions and the state government in removing bottlenecks, if any, to ensure smooth flow of credit to the sector. The committees may decide the need to have similar committees at cluster/district levels.

5.4 Banking Codes and Standards Board of India (BCSBI)

The Banking Codes and Standards Board of India (BCSBI) has formulated a Code of Bank's Commitment to Micro and Small Enterprises. The Code sets minimum standards of banking practices for banks to follow when they are dealing with Micro and Small Enterprises (MSEs) as defined in the Micro Small and Medium Enterprises Development (MSMED) Act, 2006. It provides protection to MSE and explains how banks are expected to deal with MSE for their day to-day operations and in times of financial difficulty.

The Code also mentions, inter alia, that the banks are expected to dispose of MSE loan application for a credit limit or enhancement in the existing credit limit up to Rs.5 lakh within two weeks; and for credit limit above Rs.5 lakh and up to Rs.25 lakh within 3 weeks; and for credit limit above Rs.25 lakh within 6 weeks from the date of receipt, provided the application is complete in all respects and is accompanied by documents as per ‘check list’ provided. However, every effort should be taken to reduce further the time taken to process and dispose of MSE loan applications.

The Code does not replace or supersede regulatory or supervisory instructions issued by the Reserve Bank of India (RBI) and banks will comply with such instructions /directions issued by the RBI from time to time.

5.4.1 Objectives of the BCSBI Code

The Code is developed to:

(a) Give a positive thrust to the MSE sector by providing easy access to efficient banking services.

(b) Promote good and fair banking practices by setting minimum standards in dealing with MSE.

(c) Increase transparency to enable a better understanding of what can reasonably be expected of the services.

(d) Improve understanding of business through effective communication.

(e) Encourage market forces, through competition, to achieve higher operating standards.

(f) Promote a fair and cordial relationship between MSE and banks and also ensure timely and quick response to banking needs.

(g) Foster confidence in the banking system.

The complete text of the Code is available at the BCSBI's website (www.bcsbi.org.in)

5.5 Micro and Small Enterprises Sector – The imperative of Financial Literacy and consultancy support

Keeping in view the high extent of financial exclusion in the MSME sector, it is imperative for banks that the excluded units are brought within the fold of the formal banking sector. The lack of financial literacy, operational skills, including accounting and finance, business planning etc. represent formidable challenge for MSE borrowers underscoring the need for facilitation by banks in these critical financial areas. Moreover, MSE enterprises are further handicapped in this regard by absence of scale and size. To effectively and decisively address these handicaps, Scheduled commercial banks were advised vide our circular RPCD.MSME & NFS.BC.No.20/06.02.31/2012-13 dated August 1, 2012 that they could either separately set up special cells at their branches, or vertically integrate this function in the Financial Literacy Centres (FLCs) set up by them, as per their comparative advantage. The bank staff should also be trained through customised training programs to meet the specific needs of the sector.

Further, Financial Literacy Centres operated by Scheduled commercial Banks have been advised vide our circular FIDD.FLC.BC.No.22/12.01.018/2016-17 dated March 2, 2017 to conduct target specific financial literacy camps, where one of the target groups is small entrepreneurs.

5.6 Cluster Approach

All SLBC Convenor banks are advised to incorporate in their Annual Credit Plans, the credit requirement in the clusters identified by the Ministry of Micro, Small and Medium Enterprises, Government of India. They are also encouraged to extend banking services in such clusters / agglomerations which have come up and identified subsequently by SLBC / DCC members.

(i) As per Ganguly Committee recommendations (September 4, 2004), banks are advised that a full-service approach to cater to the diverse needs of the SSI sector (now MSE sector) may be achieved through extending banking services to recognized MSE clusters by adopting a 4-C approach namely, Customer focus, Cost control, Cross sell and Contain risk. A cluster based approach to lending may be more beneficial:

(a) in dealing with well-defined and recognized groups;

(b) for making available of appropriate information for risk assessment and

(c) for monitoring by the lending institutions.

Clusters may be identified based on factors such as trade record, competitiveness and growth prospects and/or other cluster specific data.

(ii) All SLBC Convenor banks were advised vide letter RPCD.PLNFS.No.10416/06.02.31/2006-07 dated May 8, 2007 to review their institutional arrangements for delivering credit to the MSME sector, especially in 388 clusters identified by United Nations Industrial Development Organisation (UNIDO) spread over 21 states in various parts of the country. A list of SME clusters as identified by UNIDO has been furnished in Annex II.

(iii) The Ministry of Micro, Small and Medium Enterprises has approved a list of clusters under the Scheme of Fund for Regeneration of Traditional Industries (SFURTI) and Micro and Small Enterprises Cluster Development Programme (MSE-CDP) located in 121 Minority Concentration Districts. Accordingly, appropriate measures have been taken to improve the credit flow to the identified clusters of micro and small entrepreneurs from the Minority Communities residing in the minority concentrated districts of the country.

(iv) In terms of recommendations of the Prime Minister’s Task Force on MSMEs banks should open more MSE focused branch offices at different MSE clusters which can also act as Counselling Centres for MSEs. Each lead bank of a district may adopt at least one MSE cluster.

5.7 Delayed Payment

In the Micro, Small and Medium Enterprises Development (MSMED), Act 2006, the provisions of the Interest on Delayed Payment Act, 1998 to Small Scale and Ancillary Industrial Undertakings, have been strengthened as under:

(i) The buyer has to make payment to the supplier on or before the date agreed upon between him and the supplier in writing or, in case of no agreement, before the appointed day. The period agreed upon between the supplier and the buyer shall not exceed forty five days from the date of acceptance or the day of deemed acceptance.

(ii) In case the buyer fails to make payment of the amount to the supplier, he shall be liable to pay compound interest with monthly rests to the supplier on the amount from the appointed day or, on the date agreed on, at three times of the Bank Rate notified by Reserve Bank.

(iii) For any goods supplied or services rendered by the supplier, the buyer shall be liable to pay the interest as advised at (ii) above.

(iv) In case of dispute with regard to any amount due, a reference shall be made to the Micro and Small Enterprises Facilitation Council, constituted by the respective State Government.

Further, banks are 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 MSMEs.

CHAPTER - VI

6 Committees on flow of Credit to MSE sector

Scheduled Commercial Banks may be guided by the contents of the following circulars while extending credit to MSE sector:

6.1 Report of the High Level Committee on Credit to SSI (now MSE) (Kapur Committee)

All scheduled commercial banks were advised vide our circular RPCD. No. PLNFS.BC.22/06.02.31/98-99 dated August 28, 1998 to implement the Kapur Committee Recommendations.

6.2 Report of the Committee to Examine the Adequacy of Institutional Credit to SSI Sector (now MSE) and Related Aspects (Nayak Committee)

All scheduled commercial banks were advised vide our circular RPCD.PLNFS.BC.No. 61/06.0262/2000-01 dated March 2, 2001 to implement the Nayak Committee Recommendations.

6.3 Report of the Working Group on Flow of Credit to SSI (now MSE) Sector (Ganguly Committee)

The recommendations of the Committee was communicated to banks for implementation vide circular RPCD.PLNFS.BC.28/06.02.31(WG)/2004-05 dated September 4, 2004.

6.4 Working Group on Rehabilitation of Sick SMEs (Chairman: Dr. K.C. Chakrabarty)

Banks were advised vide circular dated RPCD.SME&NFS.BC.No.102/06.04.01/2008-09 dated May 4, 2009 to consider implementation of the recommendations, inter alia, that lending in case of all advances upto Rs. 2 crores may be done on the basis of scoring model. Banks have further been advised vide circular DBOD.Dir.BC.No.106/13.03.00/2013-14 dated April 15, 2014 to undertake a review of their loan policy governing extension of credit facilities to the MSE sector, with a view to using Board approved credit scoring models in their evaluation of the loan proposals of MSE borrowers.

6.5 Prime Minister’s Task Force on Micro, Small and Medium Enterprises

A High Level Task Force was constituted by the Government of India (Chairman: Shri T K A Nair), in January 2010, to consider various issues raised by Micro, Small and Medium Enterprises (MSMEs). The Task Force recommended several measures having a bearing on the functioning of MSMEs, viz., credit, marketing, labour, exit policy, infrastructure/technology/skill development and taxation. The comprehensive recommendations cover measures that need immediate action as well as medium term institutional measures along with legal and regulatory structures and recommendations for North-Eastern States and Jammu & Kashmir.

Banks are urged to keep in view the recommendations made by the Task Force and take effective steps to increase the flow of credit to the MSE sector, particularly to the micro enterprises.

A circular was issued to all scheduled commercial banks vide RPCD.SME&NFS BC.No. 90/06.02.31/2009-10 dated June 29, 2010 advising implementation of the recommendations of the Prime Minister’s Task Force on MSMEs.

6.6 Working Group to Review the Credit Guarantee Scheme for Micro and Small Enterprises

A Working Group was constituted by the Reserve Bank of India under the Chairmanship of Shri V.K. Sharma, Executive Director, to review the working of the Credit Guarantee Scheme (CGS) of CGTMSE and suggest measures to enhance its usage and facilitate increased flow of collateral free loans to MSEs.

The recommendations of the Working Group included, inter alia, mandatory doubling of the limit for collateral free loans to micro and small enterprises (MSEs) sector from Rs.5 lakh to Rs.10 lakh and enjoining upon the Chief Executive Officers of banks to strongly encourage the branch level functionaries to avail of the CGS cover and making performance in this regard a criterion in the evaluation of their field staff, etc. have been advised to all banks.

A circular to this effect was issued to all scheduled commercial banks vide RPCD.SME&NFS.BC.No.79/06.02.31/2009-10 dated May 6, 2010.

Annex I

MINISTRY OF SMALL SCALE INDUSTRIES
NOTIFICATION
New Delhi, the 5th October, 2006

S.O. 1722(E) – In exercise of the powers conferred by sub-section (1) of Section 7 of the MSMED Act, 2006 (27 of 2006) herein referred to as the said Act, the Central Government hereby specifies the following items, the cost of which shall be excluded while calculating the investment in plant and machinery in the case of the enterprises mentioned in Section 7(1) (a) of the said Act, namely:

(i) equipment such as tools, jigs, dyes, moulds and spare parts for maintenance and the cost of consumables stores;

(ii) installation of plant and machinery;

(iii) research and development equipment and pollution controlled equipment

(iv) power generation set and extra transformer installed by the enterprise as per regulations of the State Electricity Board;

(v) bank charges and service charges paid to the National Small Industries Corporation or the State Small Industries Corporation;

(vi) procurement or installation of cables, wiring, bus bars, electrical control panels (not mounted on individual machines), oil circuit breakers or miniature circuit breakers which are necessarily to be used for providing electrical power to the plant and machinery or for safety measures;

(vii) gas producer plants;

(viii) transportation charges (excluding sales-tax or value added tax and excise duty) for indigenous machinery from the place of their manufacture to the site of the enterprise;

(ix) charges paid for technical know-how for erection of plant and machinery;

(x) such storage tanks which store raw material and finished products and are not linked with the manufacturing process; and

(xi) firefighting equipment.

2. While calculating the investment in plant and machinery referred to in paragraph 1, the original price thereof, irrespective of whether the plant and machinery are new or second hand, shall be taken into account provided that in the case of imported machinery, the following shall be included in calculating the value, namely;

(i) Import duty (excluding miscellaneous expenses such as transportation from the port to the site of the factory, demurrage paid at the port);

(ii) Shipping charges;

(iii) Customs clearance charges; and

(iv) Sales tax or value added tax.

(F.No.4(1)/2006-MSME- Policy)

JAWHAR SIRCAR, Addl. Secy.

Annex II

Appendix

List of Circulars consolidated by the Master Direction