Notes

Micro, Small & Medium Enterprises

(MSME)
The Banking Tutor

2022
A book from The Banking Tutor
47 Sekhar Pariti

\\
+91 9440641014
 Introduction
Micro, Small, Medium Enterprises (MSME‘s) are entities that are
involved in production, manufacturing and processing of goods and
commodities.

The concept of MSME was first introduced by the government of

India through the Micro, Small & Medium Enterprises Development
(MSMED) Act, 2006.

The Ministry of Micro, Small and Medium Enterprises, a branch of

the Government of India, is the apex executive body for the
formulation and administration of rules, regulations and laws
relating to micro, small and medium enterprises in India.

Under the Micro, Small and Medium Enterprises Development Act,

2006, the Government of India established The National Board for
Micro, Small and Medium Enterprises (NBMSME) to examine the
factors affecting promotion and development of MSME. This board
also reviews the existing policies and suggests recommendations to
the Government for the growth of the MSME sector.

The services provided by the Ministry of MSME are as follows:

Facilities for testing, training for entrepreneurship

development
Preparation of project and product profiles
Technical and managerial consultancy
Assistance for exports
Pollution and energy audits.

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Importance and Features of MSMEs
The MSME sector is considered the backbone of the Indian
economy that has contributed substantially to the economic
development of the nation. It generates employment opportunities
and works in the development of backward and rural areas. India
has approximately 6.3 crore MSMEs.
In addition, due to the following features, they are considered a
viable source of income for those looking to venture into the
manufacturing industry
Export Promotion and potential for Indian products
Funding – Finance & Subsidies
Government‘s Promotion and Support
Growth in demand in the domestic market
Less Capital required
Manpower Training
Project Profiles
Raw Material and Machinery Procurement
MSMEs contribute to approximately 8% of India‘s GDP, employ over
60 million people, have an enormous share of 40% in the exports
market and 45% in the manufacturing sector. Hence, they are of
paramount importance for overall economic development of India.
This Book contains 8 Units
I sincerely Thank my Friend Mr Lalit Verma, Chief Manager, Canara
Bank, New Delhi who has helped me in many ways in bringing out
this Book in this way.
05-09-2022
Sekhar Pariti
+91 94406 41014

Page 3 of 83
 INDEX

Unit No Topics covered

01 MSME (Micro, Small and Medium Enterprises) – RBI

Guidelines ; New definition of MSME; Points related to
Assessment of W C limits to MSME; RSETIs; Cluster Approach,
target for MSME ; PSL Status for MSME Credit; CGTMSE;
External Rating for MSME; TReDS ; Certified Credit Counsellors
(CCC) Scheme; The Champions Control Rooms.

02 MSME SAMADHAAN; MSME Sambandh; Udyami Mitra Portal

:Ready Borrower & Trainee Borrower.

03 Digital MSME Scheme

04 INSPIRE; SFURTI; MSECDP; Common Facility Centre (CFC);

Infrastructure Development Centre (ID); ASPIRE; Livelihood
Business Incubation (LBI); Technology Business Incubation
(TBI); Start-up Promotion through Small Industries
Development Bank of India (SIDBI)

05 National Manufacturing Competitiveness Programme (NMCP);

DESIGN; Marketing assistance & technology upgradation
scheme in MSMEs; Technology and Quality Upgradation
(TEQUP) Scheme; Promotion of Information &
Communication Technology (ICT) in Indian MSME Sector;
MSME Sustainable (ZED) Certification Scheme (New ZED
certification scheme); Zero Defect Zero Effect Scheme; CLCSS;
PMEGP; PMEGP 2nd Loan; Stand-up India Scheme; Start-up
India Campaign; PM SVANidhi (CGS-PMS).

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06 Issues related to Lending to MSME; Grant of composite loans
by banks; RBI guidelines on interest rates for loans disbursed
by the commercial banks.; Credit Rating for the MSE
borrowers; Payment Obligations of Large Corporates to MSEs;
Identification of incipient stress in MSME account; Salient
features of the guidelines on ‗Framework for Revival and
Rehabilitation of Micro, Small and Medium Enterprises
(MSMEs); Rural Self Employment Training Institutes (RSETIs);
Financial Literacy and Consultancy Support (FLCS); Timely and
adequate credit flow during ‗Life Cycle‘ of MSEs; Role of SIDBI
in supporting MSMEs; Training Facilities at CAB of RBI

07 Committees related to MSMEs - Dehejia Committee ; Chore

Committee; Tandon Committee; Nayak Committee; Marathe
Committee; Chakravarty Committee; Kannan Committee; S S
Kohli Committee; S L Kapur Committee; Vaz Committee.

08 Sources of finance and methods of financing SMEs - The

business angel; Trade credit; Factoring and invoice
discounting; Leasing; Bank finance; The venture capitalist;
Listing; Supply Chain Financing; Crowdfunding; Support from
Government; National Equity Fund Scheme; Venture Capital
by SIDBI Venture Capital Ltd. (SVLC); Fund scheme for textile
and Jute industries-TUF Scheme (Technology Upgradation
Fund Scheme); Revised Restructure Technology Upgradation
Fund Scheme (RR_TUFS) features

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 Unit 01
MSME (Micro, Small and Medium Enterprises) – RBI Guidelines

01. New definition of MSME effective from 01-07-2020. As per new

definition, a composite criterion of investment and turnover shall apply
for classification of an enterprise as micro, small or medium.
02. Micro enterprise is an enterprise where the investment in plant and
machinery or equipment does not exceed ₹1 crore and turnover does
not exceed ₹5 crore;

(ii) A small enterprise is an enterprise where the investment in plant and

machinery or equipment does not exceed ₹10 crore and turnover does
not exceed ₹50 crore; and

(iii) A medium enterprise is an enterprise where the investment in plant

and machinery or equipment does not exceed ₹50 crore and turnover
does not exceed ₹250 crore.

03. To be recognised as a Micro, Small or Medium Enterprise (MSME) :

(a) Any person who intends to establish a MSME may file Udyam
Registration online in the Udyam Registration portal, based on self-
declaration with no requirement to upload documents, papers,
certificates or proof.
(b) On Registration, an enterprise ( referred to as ―Udyam in the Udyam
Registration portal) will be assigned a permanent identity number to
be known as Udyam Registration Number (URN).

(c) An e-certificate, namely, ―Udyam Registration Certificate‖(URC) shall

be issued on completion of the registration process.

04. 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 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.

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05. 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.

06. 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.

07. 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.
08. The expression ‗‘plant and machinery or equipment‘‘ of the
enterprise, shall include all tangible assets (other than land and building,
furniture and fittings).

09. 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.

10. The cost of certain items specified in the Act shall be excluded from
the calculation of the amount of investment in plant and machinery.

Calculation of turnover

11. 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.

12. Information as regards turnover and exports turnover for an

enterprise shall be linked to the Income Tax Act or the Central Goods
and Services Act (CGST Act) and the GSTIN.

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13. The turnover related figures of such enterprise which do not have
PAN will be considered on self-declaration basis for a period up to 31st
March, 2021 and thereafter, PAN and GSTIN shall be mandatory.
14. 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.

15. 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.

16. As per Nayak Committee Report, working capital limits to SSI units is
computed on the basis of minimum 20% of their estimated turnover up
to credit limit of ₹5 crore.
17. A composite loan limit of ₹1 crore can be sanctioned by banks to
enable the MSME entrepreneurs to avail of their working capital and
term loan requirement through Single Window.

18. Cluster based approach to lending is intended to provide a full-

service approach to cater to the diverse needs of the MSE sector which
may be achieved through extending banking services to recognized MSE
clusters.
19. A cluster-based approach may be more beneficial (a) in dealing with
well-defined and recognized groups (b) availability of appropriate
information for risk assessment (c) monitoring by the lending institutions
and (d) reduction in costs.

20. To improve the transmission of monetary policy rates, it has been

decided that with effect from April 01, 2020, loans to Medium Enterprises
shall be linked to external benchmark.

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21. Banks are mandated not to accept collateral security in the case of
loans upto Rs 10 lakh extended to units in the MSE sector.

22. The CGTMSE would provide cover for credit facility up to ₹200 lakh
which have been extended by lending institutions without any collateral
security and /or third-party guarantees.

23. The credit rating by external rating agencies is not compulsory from
regulatory capital perspective, if the maximum aggregate exposure to
one counterparty does not exceed the threshold limit of Rs 7.5 crore,
subject to meeting certain other conditions.
24. With the enactment of the MSMED Act 2006, for the goods and
services supplied by the MSME units, payments have to be made by the
buyers as under:
(i) The buyer is to make payment on or before the date agreed on
between him and the supplier in writing or, in case of no agreement,
before the appointed day. The agreement between seller and buyer shall
not exceed more than 45 days.
(ii) If 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.

25. To take care of the payment obligations of large corporate borrowers

to MSEs, banks have been advised that while sanctioning/renewing
credit limits to their large corporate borrowers (i.e. borrowers enjoying
working capital limits of ₹10 crore and above from the banking system),
to fix separate sub-limits, within the overall limits, specifically for meeting
payment obligations in respect of purchases from MSEs either on cash
basis or on bill basis.

26. Rural Self Employment Training Institutes (RSETIs) have been set up
by various banks all over the country to conduct various short duration
(ranging preferably from 1 to 6 weeks) skill upgradation programmes to
help the existing entrepreneurs compete in this ever-changing global
market.
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27. Financial Literacy Centres (FLCs) are set up by Banks to provide
assistance to the MSE entrepreneurs in regard to financial literacy,
operational skills, including accounting and finance, business planning
etc.

28. Guidelines on ‗Streamlining flow of credit to Micro and Small

Enterprises (MSEs) for facilitating timely and adequate credit flow during
their ‗Life Cycle‘

(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 MSEs, every year based
on the actual sales of the previous year.

(iv) Timelines for Credit Decisions.

29. Trade Receivables Discounting System (TReDS)

The objective of TReDS is to create Electronic Bill Factoring Exchanges

which could electronically accept and settle bills so that MSMEs could
encash their receivables without delay. This will not only give them
greater access to finance but will also put greater discipline on
corporates to pay their dues on time.

30. Certified Credit Counsellors (CCC) Scheme

As per the scheme, Certified Credit Counsellors are institutions or
individuals registered with SIDBI who shall assist MSMEs in preparing
project reports in a professional manner which would, in turn, help banks
make more informed credit decisions.

31. All enterprises are required to register online on Udyam Registration

Portal and obtain ‗Udyam Registration Certificate‘.

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32. Vide Notification dated 7th July 2021, RBI included Retail Trade and
Wholesale Trade as MSME for Priority Sector Classification (except
Vehicles and Motor Cycles) and they would be allowed to be registered
on Udyam Registration Portal.

33. Based on the new definition, the earlier criteria regarding continuity
of PSL status for three years even after an enterprise grows out of the
MSME category concerned, is no longer valid.

34. Though there is no specific target for MSME as such, target for Micro
Enterprises 7.5 % of ANBC or CEOBE, whichever is higher is fixed.
35. No enterprise shall file more than one Udyam Registration: Provided
that any number of activities including manufacturing or service or both
may be specified or added in one Udyam Registration.
36. The Champions Control Rooms functioning in various institutions
and offices of the Ministry of Micro, Small and Medium Enterprises
including the Development Institutes (MSME-DI) shall act as Single
Window Systems for facilitating the registration process and further
handholding the micro, small and medium enterprises in all possible
manner.

(Source – The Gazette of India dated 26th June 2020 & RBI‘s FAQ on
MSME Updated as on October 1, 2021)

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 Unit 02

Schemes to Support MSME Part 01

In this Unit, I am making an attempt to briefly introduce certain Schemes

formulated by Government to support MSMEs.

MSME SAMADHAAN

The Micro, Small and Medium Enterprise Development (MSMED) Act,

2006 contains provisions of Delayed Payment to Micro and Small
Enterprise (MSEs). (Section 15- 24). State Governments to establish Micro
and Small Enterprise Facilitation Council (MSEFC) for settlement of
disputes on getting references/filing on Delayed payments. (Section 20
and 21).

Any Micro or small enterprise having valid Udyog Aadhar(UAM) can

apply. MSEFC of the State after examining the case filed by MSE unit will
issue directions to the buyer unit for payment of due amount along with
interest as per the provisions under the MSMED Act 2006.
The buyer is liable to pay compound interest with the monthly rests to
the supplier on the amount at the three times of the bank rate notified
by RBI in case he does not make payment to the supplier for his supplies
of goods or services within 45 days of the acceptance of the
goods/service rendered. (Section 16).

Every reference made to MSEFC shall be decided within a period of

ninety days from the date of making such a reference as per provisions
laid in the Act.

If the Appellant (not being the supplier) wants to file an appeal, no

application for setting aside any decree or award by the MSEFC shall be
entertained by any court unless the appellant (not being supplier) has
deposited with it, the 75% of the award amount. (Section 19)

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MSME Sambandh

The Ministry of Micro, Small and Medium Enterprises (MSME) launched

Public Procurement Portal ‗MSME Sambandh‘ for Public Procurement
Portal for MSMEs. The objective of the portal is to monitor the
implementation of the Public Procurement from MSEs by Central Public
Sector Enterprises (CPSEs). It will help MSMEs in participating in the
procurement process. Besides, it .. Besides, it will help Ministries and the
CPSEs can assess their performance in procurement process as stipulated
in Procurement Policy, 2012.

The Procurement Policy launched in 2012 mandates the Central

Government Departments, CPSEs to procure necessarily from MSEs. It
means that every Central Ministry, Department, PSU shall set an annual
goal for procurement from MSE sector at beginning of year. Its objective
is to achieve overall procurement goal of minimum of 20% of the total
annual purchases of the products or services produced or rendered by
MSEs.
Udyami Mitra Portal :

Udyami Mitra Portal is an enabling platform, aims to provide 'End to End'

solutions not only for credit delivery but also for the host of credit plus
services by way of handholding support, application tracking, multiple
interface with stakeholders (i.e. lenders, service providers, applicants).

Small Industries Development Bank of India (SIDBI) which is the Principal

Financial Institution for Promotion, Financing and Development of the
Micro, Small and Medium Enterprise (MSME) sector as well as for co-
ordination of functions of institutions engaged in similar activities in the
country.

The portal provides access to both financial (1.25 lakh lender branches)
and non financial services (17000+ handholding agencies) with three
distinct features viz. seek handholding support; select and apply for
loans to preferred banks; enable faster loan processing.

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Further, New age lenders viz. Fintechs, NBFCs, Small Finance Banks, MFIs
are being on-boarded on the platform for enhancing the flow of credit
to MSMEs.
Apart from linking prospective borrowers to lenders for loans, the web
portal also provides handholding support through a network of agencies
engaged in application filling/ report preparation, financial training, skill
development, mentoring, entrepreneurship development programmes,
work shed and subsidy schemes.
Matchmaking platform- It provides a unique match making platform to
MSME loan seekers, lenders as also handholding agencies. The portal
has designed capability to accept varied MSME loan applications.
Presently loans up-to 10 crore can be accessed.

On entering Portal, the user is guided for registration and login. Based
on information furnished by a prospective entrepreneur the system
categorizes the applicants into ‗trainee‘ (those needing training or other
help before they are ready for entrepreneurship) and ‗ready‘ borrowers
(borrower feels he/she is ready to approach lenders for loan). It then
guides them to access handholding support or direct loan application
module as per their requirement.
Ready Borrower can submit its loan application online with instant
acknowledgement through SMS/email. The submitted application flows
to the preferred bank as selected by the loan applicant with online
notification to the Nodal Officer of the bank as also Lead District
Managers.
It facilitates Access to Non Financial Services - The applicant may search
for contact details of the required handholding agency in the vicinity of
his place of proposed enterprise (based on the state and district given at
the time of registration) to avail services. The portal has mapped hand
holding agencies in different areas of expertise viz. financial training, skill
development, project report preparation, application filing, work sheds
and access to margin money/subsidy support being operated by various
state/central organizations/corporations.

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The aim is to evolve this as a portal attending to the entrepreneurs need
during entire enterprise development cycle.

The portal has a Market Place where bankers would be able to compete
themselves in their loan delivery mechanism.

The Portal is designed to obtain application forms, gather and provide

information, enable registration, provide links for handholding and assist
in tracking request for handholding or loan. At the loan market place, a
preferred banker or any other banker who are active, undertake P3
(peruse, pick and process) on the loan applications offline as also mark
their sanctions and rejections online. Applications from the virtual loan
market are picked up by lenders and disposal of the applications are
expected to be ensured as per Code of Commitment for its Customers
adopted by respective banks.
All submitted applications will be available at virtual market place for
credit access to entrepreneurs and status visible to all stakeholders viz.
lenders, handholding agencies, applicants, SIDBI and Govt. agencies till
the same is disbursed by one of the lenders.
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 Unit 03

Schemes to Promote MSME Part 02

Digital MSME Scheme : It involves usage of Cloud Computing where

MSMEs use the internet to access common as well as tailor-made IT
infrastructure.

The Ministry of Micro, Small & Medium Enterprises is implementing a

"Digital MSME" Scheme for promotion of Information & Communication
Technology (ICT) in MSME Sector and motivate MSMEs to adopt ICT
tools and applications in their business processes.
The scheme is revolving around Cloud Computing which is emerging as
a cost effective and viable alternative in comparison to in-house IT
infrastructure installed by MSMEs. In cloud computing, MSMEs use the
internet to access common as well as tailor-made IT infrastructure
including Applications/Services which can greatly help MSMEs in almost
every facet of their business. The scheme also has provision to give
subsidy of Rs. 1 lakh per unit for user charges for a period of 2 years.

Objective of Digital MSME Scheme

The MSME sector is the backbone of the Indian Economy and one of the
prime drivers of employment. Despite its apparent success in the last
couple of years, Indian MSME sector is facing many challenges. Apart
from the traditional problems, they are also increasingly exposed to
international competition. Therefore, MSMEs in India – as everywhere
else - need to improve their competitiveness by taking a variety of
measures. The use of Information and Communication Technologies
(ICT) is one of the important measures, which can greatly help MSMEs in
almost every facet of their business.

In general, ICT applications have become essential for any enterprise that
has to sustain or grow in a global environment.
There is no registration fee in this scheme for MSMEs.

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The Digital MSME Scheme cover all MSME sectors/ Cluster.
Following four applications will be made available to MSMEs through
various service providers:

1. ERP
2. Accounting
3. Manufacturing/ Design

4. Regulatory Compliances including GST

The mandatory requirements for enrolling in this Scheme :

Udyog Aadhaar Memorandum (UAM) Number is mandatorily

requirement for registration on Digital MSME ICT Scheme.
Subsidy under Digital MSME Scheme

To encourage MSMEs to use Cloud Computing for ICT applications, it is

proposed to provide subsidy of Rs. 1 lakh per unit for user charges for a
period of 2 years.

Cloud Computing services will be provided in three categories:

a) With Subsidy – Max. Subsidy of Rs. 1 lakh per unit will be disbursed
over a period of 2 years to Micro and Small Enterprises.

b) Without Subsidy - Services through Cloud at ultra low cost will be

offered to the desirous Micro, Small and Medium Enterprises.

c) Market Cost – Services through cloud at Market Cost will be offered to

the desirous Micro, Small and Medium Enterprises.
MSMEs initially will make full payment to Cloud Service Providers.
Subsidy as per guidelines will be disbursed to in the account of MSMEs
through DBT route.
For apply the subsidy, MSME‘s have to login on Digital MSMEICT Web
Portal. After scrutiny, TCIL will transfer the Subsidy amount to the MSMEs
account.

All the necessary training will be provided.

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MSMEs will have the option to select the Application/Service provider
from the empanelled Cloud Service Providers list.

MSMEs can exit from scheme at any time and MSMEs will get their data
in prescribed format.

There is No penalty clause to MSMEs for exiting or Stop using

Application/service.

The Scheme is a voluntary scheme and it is not mandatory.

The scheme is applicable for all states/UTs of India.

TCIL is acting as Implementing Agency (IA) and the core component of
the Scheme i.e. Cloud Computing will be implemented by TCIL, under
the overall directions of O/o Development Commissioner MSME.

Additional 10% Subsidy will be provided for women, Divyang, SC/ST.

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 Unit 04

Schemes to Promote MSME Part 03

Infrastructure Support and Promotion of Industries and Rural

Enterprises (INSPIRE)
Industries / Artisans require quality infrastructure support to meet
customer expectation, survival in competitive market and to be ready for
export by absorbing technology balance. The fragmented approach of
infrastructure creation for artisans and enterprises has not been very
conducive for promoting entrepreneurship and bringing market fit
product from existing enterprises. After due consultations with
stakeholders, State Governments and as a part of ease of doing business,
making scheme simpler, deliverable, transparent, monitorable and DBT
compliant, the existing schemes have been revised for convergence and
simplified to bring clarity of goals and role.
This scheme, therefore, will support MSMEs in provisioning of
Infrastructure for their development through following 2 components:

a Scheme of Funds for Regeneration of Traditional Industries (SFURTI).

b Micro and Small Enterprises-Cluster Development Programme
(MSECDP).

These components are having objective of providing infrastructure

facilities for growth of MSMEs.

SFURTI

Traditional industries have been broadly categorized as under:

a) Khadi Industries;

b) Village Industries; and

c) Coir Industries.
The SFURTI Scheme would cover three types of interventions namely
‗soft interventions‘, ‗hard interventions‘ and ‗thematic interventions‘.
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Soft Interventions
Soft Interventions under the project would consist of activities such as
General awareness, counselling, motivation and trust building; Skill
development and capacity building for the entire value chain different
skills need to be imparted; Institution development; Exposure visits;
Market promotion initiatives; Design and product development;
Participation in seminars, workshops and training programmes on
technology up-gradation, etc.
Hard Interventions will include creation of following facilities - Multiple
facilities for multiple products and packaging wherever needed;
Common facility centres (CFCs); Raw material banks (RMBs); Up-
gradation of production infrastructure; Tools and technological up-
gradation such as charkha upgradation, tool-kit distribution, etc.
Warehousing facility; Training centre; Value addition and processing
centre/multi-products.

Thematic interventions primarily include - Brand building and

promotion campaign; New media marketing; e-Commerce initiatives;
Innovation; Research & development initiatives; and Developing
institutional linkages with the existing & proposed clusters
The scheme will have Nodal Agencies (NAs) which are national level
institutions with sectoral expertise in the major sub-sectors of the
Traditional Industries.

Khadi & Village Industries Commission (KVIC) shall be the NA for Khadi
and Village Industry clusters and Coir Board (CB) shall be the NA for Coir
based clusters.
Micro & Small Enterprises Cluster Development Programme (MSE-CDP)

The Government has approved New Guidelines of Micro & Small

Enterprises Cluster Development Programme (MSE-CDP), which will be
implemented during 15th Finance Commission Cycle (2021-22 to 2025-
26).

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The Ministry of Micro, Small and Medium Enterprises (MSME),
Government of India (GoI) has adopted the Cluster Development
approach as a key strategy for enhancing the productivity and
competitiveness and capacity building of Micro and Small Enterprises
(MSEs) in the country.
A cluster is a group of enterprises located within a contiguous area or a
value chain producing same/similar products/complementary
products/services, linked together by common physical infrastructure
facilities.

The essential characteristics of enterprises in a cluster are:

a) Similarity or complementarity in the methods of production, quality

control & testing, energy consumption, pollution control, etc.,
b) Similar level of technology & marketing strategies/practices,

c) Similar channels for communication among the members of the

cluster,
d) Common market & skill needs and/or

e) Common challenges & opportunities that the cluster faces.

Objectives

a) To support the sustainability and growth of MSEs by addressing

common issues such as improvement of technology, skills and quality,
market access, access to capital, etc.
b) To build capacity of MSEs for common supportive action through
formation of self help groups, consortia, upgradation of associations, etc.

To create/upgrade infrastructural facilities in the new/existing industrial

areas/ clusters of MSEs.

c) To set up common facility centres (for testing, training centre, raw

material depot, effluent treatment, complementing production
processes, etc).

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Strategy and Approach
MSE-CDP scheme aims at addressing the needs of the industries,
through well defined clusters and geographical areas.

This will enable achieving the economies of scale in terms of deployment

of resources as well as focusing on the specific needs of similar
industries.

The capacity building of associations, setting up of special purpose

vehicles (SPVs), consortia, etc. which are integral part of the scheme
would enable the MSEs to leverage their resources and also to have
better access to public resources, linkages to credit and enhance their
marketing competitiveness.
Soft Interventions

This will lead to creation of general awareness, counselling, motivation

and trust building, exposure visits, market development including
exports, participation in seminars, workshops and training programmes
on technology upgradation, etc.
Common Facility Centre (CFC)
This will lead to creation of tangible ―assets‖ as Common Facility Centers
(CFCs) like Common Production/Processing Centre (for
balancing/correcting/improving production line that cannot be
undertaken by individual units), Design Centres, Testing Facilities,
Training Centre, Marketing Display/Selling Centre, Common Logistics
Centre, Common Raw Material Bank/Sales Depot, etc.
Infrastructure Development Centre (ID)
This will lead to creation of infrastructural facilities like power distribution
network, water, telecommunication, drainage and pollution control
facilities, roads, storage and marketing outlets, common service facilities
and technological backup services for MSEs.

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ASPIRE - A Scheme for Promotion of Innovation, Rural Industries
and Entrepreneurship
ASPIRE aims to impart the necessary skill set required for setting up a
business enterprise and assist during their critical period to ensure self-
sustainability. This scheme also facilitates the available market linkages
to the entrepreneurs. It was launched keeping in mind the ‗Make in India‘
call, which identifies and creates a favourable ecosystem for encouraging
start-ups and driving the manufacturing units and sustained
employment opportunities.

ASPIRE was launched to set up a network of technology centres and to

set up incubation centres to accelerate entrepreneur-ship and also to
promote start-ups for innovation in agro-industry.
The main objectives of the scheme are to:

a) Create new jobs and reduce unemployment

b) Promote entrepreneurship culture in India

c) Grassroots economic development at district level.

d) Facilitate innovative business solution for un-met social needs.

e) Promote innovation to further strengthen the competitiveness of

MSME sector.
Nature of Assistance

80 Livelihood business incubators (2014-2016) to be set up by NSIC,

KVIC or Coir Board or any other Institution/agency of GoI/State Govt. on
its own or by any of the agency/Scheme for promotion of Innovation,
Entrepreneurship and Agro-Industry organisation of the M/o MSME,
one-time grant of 100% of cost of Plant & Machinery other than the land
and infrastructure or an amount up to Rs.100 lakhs whichever is less to
be provided.

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In case of incubation centres to be set up under PPP mode with NSIC,
KVIC or Coir Board or any other Institution/agency of GoI/State Govt.,
one- time grant of 50% of cost of Plant & Machinery other than the land
and infrastructure or Rs.50.00 lakhs, whichever is less to be provided.

Assistance towards the training cost of incubates will be met out of the
ATI scheme of the Ministry as far as possible for both centres.

ASPIRE has three major components:

a) Livelihood Business Incubators (LBI),

b) Technology Business Incubators (TBI),
c) A fund to be managed by Small Industries Bank of India (SIDBI).

Livelihood Business Incubation (LBI)

The main objective of Livelihood Business Incubation is setting up

business incubators to incubate, provide skill development training to
youth, impart entrepreneurship and facilitate funding for empowering
the entrepreneurs to set up their business enterprises. The main focus of
these incubators is creating jobs at the local level and reducing
unemployment. These incubators create a favourable ecosystem for the
development of entrepreneurship in the country. The LBI‘s create
enterprises on a large scale by taking up those commercial activities
which are already established.

Technology Business Incubation (TBI)

Technology Business Incubators are an effective economic development

tool. TBI promotes the growth of an enterprise through the application
of technology, innovation and supporting economic development
strategies for small business development. They also encourage growth
in local economies and provide mechanisms for technology transfer.

The TBI‘s mainly focus on those technologies that require support for
commercialisation and future proliferation. The programmes under TBI
include support and setting up incubation centres, incubation of ideas,
creation of business enterprises out of innovative ideas and accelerator
programmes for incubators.

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Start-up Promotion through Small Industries Development Bank of
India (SIDBI)

The Small Industries Development Bank of India (SIDBI) enables

ideas/innovations that have creativity and scalability to come ahead and
convert these into commercially viable enterprises within a specified
period with specific outcomes through innovative means of finance. The
innovative means of finance of SIDBI include equity, quasi-equity,
venture capital fund, angel fund, challenge fund, impact fund, etc. A fund
of funds is also created under SIDBI for achieving the purpose of
converting ideas/innovations into commercially viable enterprises.

This component targets knowledge initiatives which require support and

nurture to succeed in the development of technology. It also targets the
business enterprises in the areas of innovation, accelerator support in
Agro-based Industry vertices, entrepreneurship and forward-backwards
linkage with multiple value chains of manufacturing and service delivery.

The nature of assistance provided under ASPIRE are-

For the LBI which is to be set up by – National Small Industries
Corporation (NSIC) or – Coir Board or – Khadi and Village Industries
Commission (KVIC) or – Any other institution or agency of the
Government of India/ State Government on its own or by any agency a
one time grant of 100% of the cost of Plant and Machinery other than
infrastructure and land or an amount of up to Rs.100 lakh, whichever is
less is provided.
For setting up of incubation centres under PPP mode with – National
Small Industries Corporation (NSIC) or – Coir Board or – Khadi and
Village Industries Commission (KVIC) or – Any other institution or agency
of the Government of India/ State Government on its own or by any
agency.

A one time grant of 50% of the cost of Plant and Machinery other than
infrastructure and land or an amount of up to Rs.50 lakh, whichever is
less is provided.
Page 25 of 83
For supporting existing incubation centres under TBI by various
Ministries or Departments or Government funded institutions such as –
Department of Science & Technology – Department of Biotechnology –
The International Crops Research Institute for the Semi-Arid Tropics
(ICRISAT) – The Indian Council of Agricultural Research (ICAR).
A one time grant of 50% of Plant and Machinery other than
infrastructure and land or an amount of up to Rs.30 lakh, whichever is
less is provided to set up centres dedicated to enterprise creation and
incubation in the area of Agro-based Industry.

For setting up of new incubation centres under TBI by eligible agencies

dedicated to enterprise creation and incubation in the area of Agro-
based Industry, a one time grant of 50% of Plant and Machinery other
than infrastructure and land or an amount of up to Rs.100 lakh,
whichever is less is provided.

@@@

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 Unit 05
Schemes to Promote MSME Part 04

National Manufacturing Competitiveness Programme (NMCP)

The Government has announced formulation of a National

Manufacturing Competitiveness Programme (NMCP) with an aim to
support the Micro, Small and Medium Enterprises (MSMEs) in their
endeavor to become competitive. The objective of NMCP is to develop
global competitiveness among Indian MSMEs.

Design clinic scheme for design expertise to MSMEs manufacturing

sector (DESIGN) ( under NMCP Schemes).
To bring the MSME sector and design expertise on a common platform
and to provide expert advice and solutions on design problems, resulting
in continuous improvement and value addition for existing products.

Marketing assistance & technology upgradation scheme in MSMEs

Marketing Assistance and Technology Upgradation Programme is a

strategic initiative for adoption of Modern Marketing techniques by
MSMEs consistent with the requirement of global market. It involves
eight sub components for which Government of India (GOI) funding
assistance will be available.
The objectives of the scheme will be achieved by performing the
following major activities for MSMEs through Government of India
financial assistance in the manner laid down in these guidelines.

I. Technology Upgradation in Packaging.

II. Skill Upgradation/ Development for modern marketing techniques.
III. Competition studies.
IV. Special component for North Eastern Region.
V. New markets through State/District level local exhibitions/Trade
fairs.
VI. Corporate Governance practices.
VII. Marketing Hubs.
VIII. Reimbursement to ISO 18000/22000/27000 certification.
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Technology and Quality Upgradation (TEQUP) Scheme

TEQUP scheme is implemented by Ministry of MSME for energy efficient

technology for technology and quality upgradation support to MSMEs
under the scheme of Technology and Quality upgradation support to
MSMEs (TEQUP). This is one of the components of National
Manufacturing Competitiveness Programme (NMCP). The main objective
of the scheme is to sensitise the Indian MSMEs to upgrade their
manufacturing processes towards the usage of Energy Efficient
Technologies (EET). Our Bank is nominated by the Ministry of MSME as
one of the implementing agencies for the said scheme.

The Government of India will provide financial support to the extent of

25% of the project cost, for implementation of Energy Efficient
Technologies (Energy saving minimum 15%) as per the approved
Detailed Project Report (DPR) subject to maximum of Rs.10 lakhs per
project.

Promotion of Information & Communication Technology (ICT) in Indian

MSME Sector

The manufacturing industry is witnessing an increasing turbulent,

dynamic and complex business scenario. The lowest entry barriers across
countries, complex cost structures and relentless pursuit of customer
satisfaction in response to rising expectations and adoption of
Information and Communication Technology (ICT) compared to other
nation and this has resulted in loss of global competitive advantage.
Objective of ICT

The objective of this programme envisages that some of those clusters

of MSMEs, which has quality production and export potential, shall be
identified & encouraged and assisted in adopting ICT application to
achieve competitiveness in National & International markets. The total
GOI contribution during 11th Plan is stipulated as Rs 160 crore
(approximately) for the scheme.

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MSME Sustainable (ZED) Certification Scheme (New ZED
certification scheme)

Ministry for Micro, Small and Medium Enterprises has launched the
MSME (Micro, Small and Medium Enterprises) Sustainable (ZED-Zero
Defect Zero Effect) Certification Scheme.

This Scheme is an extensive drive to enable and facilitate MSMEs adopt

ZED practices and motivate and incentivize them for ZED Certification
while also encouraging them to become MSME Champions.
MSME Sustainable (ZED) Certification can be attained in Three Levels
after registering and taking the ZED Pledge:

 Certification Level 1: BRONZE

 Certification Level 2: SILVER
 Certification Level 3: GOLD

After taking the ZED Pledge, the MSME can apply for any Certification
Level if it feels that it can fulfil the requirements mentioned in each level.

The intent of taking a ZED Pledge is to take a ―pre-commitment‖ or a

solemn promise by MSMEs to uphold the values of Zero Defect Zero
Effect in their practices and to urge them to move ahead on the journey
of ZED.

Subsidy:
Under the Scheme, MSMEs get subsidy as per the following structure, on
the cost of ZED certification:

 Micro Enterprises: 80%

 Small Enterprises: 60%
 Medium Enterprises: 50%

A provision of up to Rs. 5 lakhs (per MSME) will be made available for

handholding and consultancy support for MSMEs under ZED
Certification for assisting them to move towards Zero Defect Zero Effect
solutions.

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The MSMEs can also avail themselves of several other incentives offered
for ZED Certification by States & UTs, Financial Institutions etc. and can
also apply for free Certification under the MSME KAWACH (COVID-19
Support) initiative.

Through the journey of ZED Certification, MSMEs can reduce wastages

substantially, increase productivity, enhance environmental
consciousness, save energy, optimally use natural resources, expand their
markets, etc.

Zero Defect Zero Effect Scheme

Launched in 2016 by the Ministry of MSME, the scheme is an integrated

and comprehensive certification system.

The scheme accounts for productivity, quality, pollution mitigation,

energy efficiency, financial status, human resource and technological
depth including design and IPR (Intellectual Property Rights) in both
products and processes.

Its mission is to develop and implement the ‗ZED‘ culture in India based
on the principles of Zero Defect & Zero Effect.

Zero Defect:

 The Zero-defect concept is focusing on the customer.

 Zero non-conformance or non-compliance
 Zero waste

Zero Effect:

 Zero air pollution, liquid discharge, solid waste

 Zero wastage of natural resources

Page 30 of 83
Objectives of the Scheme:
To develop an Ecosystem for Zero Defect Manufacturing in MSMEs.

To promote adaptation of quality tools/systems and energy efficient

manufacturing. Enable MSMEs for manufacturing of quality products.
To encourage MSMEs to constantly upgrade their quality standards in
products and processes.

To develop professionals in the area of ZED manufacturing and

certification.
To support the 'Make in India' campaign.
Credit Linked Capital Subsidy Scheme for Technology Upgradation
(CLCSS)
The objective of the Scheme is to facilitate technology up-gradation in
MSEs by providing an upfront capital subsidy of 15 per cent (on
institutional finance of up-to Rs 1 crore availed by them) for induction of
well-established and improved technology in the specified 51 sub-
sectors/products approved. In other words the major objective is to
upgrade their plant & machinery with state-of-the-art technology, with
or without expansion and also for new MSEs which have set up their
facilities with appropriate eligible and proven technology duly approved
under scheme guidelines.

The Scheme is a demand driven one without any upper limit on overall
annual spending on the subsidy disbursal.

Nature of assistance:

The revised scheme aims at facilitating technology up-gradation by

providing 15% up front capital subsidy to MSEs, including tiny, khadi,
village and coir industrial units, on institutional finance availed by them
for induction of well-established and improved technologies in specified
sub-sectors/products approved under the scheme.

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Prime Minister’s Employment Generation Programme (PMEGP)
PMEGP is formulated by merging the two schemes namely Prime
Minister‘s Rojgar Yojana (PMRY) and Rural Employment Generation
Programme (REGP), for generation of employment opportunities
through establishment of micro enterprises in rural as well as urban
areas.

PMEGP is a Central Sector Scheme administered by the Ministry of

Micro, Small and Medium Enterprises (MoMSME).

Implementing Agencies:
National Level: Khadi & Village Industry Commission (KVIC).
State Level: In Rural Areas: Through State Directorates of KVIC , State
Khadi & Village Industries Boards(KVIB) and District Industries Center
(DICs).

In Urban Areas: State District Industries Center (DICs) only.

Scheme is operational both in Rural and Urban Areas.

Rural & Urban Areas : Any area with population not exceeding exceeds
20000 persons is called as Rural area. Other Areas are classified as Urban
Areas.

Maximum Project cost Rs.25 lakhs for manufacturing sector and Rs.10
lakhs for service activities.

Self Help Group is eligible for getting financial assistance under PMEGP.
Without Capital Expenditure, Loan is not eligible.

Finance under PMEGP is only for new projects.

Business/ Trading activities in the form of sales outlets may be permitted

in North-East Regions (NER), Left Wing Extremist (LWE) affected Districts
and Andaman & Nicobar Islands.

Retail outlets backed by Manufacturing (including Processing) / Service

facilities may be permitted (across the country).

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Individuals, SHGs, Societies, Trusts are eligible. Only one person from
family eligible. (Family includes, self and spouse)

Loan Sanction: Up to 90% of project cost including subsidy (95% in case

of special category borrowers) without any Income Criteria..

Identification of Borrower is by task force consisting of KVIC/KVIB

representative, DIC and banks representatives.

Persons of age above 18 years are only eligible for loan under PMEGP.

For setting project above Rs.10 lakhs in manufacturing sector and above
Rs.5 lakhs in business/service sector, beneficiary under PMEGP should
pass at least 8th standard.
Persons who have undergone at least 2 weeks Entrepreneurship
Development training can submit applications directly to Banks for loan
under PMEGP.

For loan under PMEGP , EDP training of 2 to 3 weeks compulsory before

disbursement of loan. However, those who undergone training earlier
are exempted from Training again.

Margin: General Category minimum 10% of project cost and

Special category beneficiary: 5%of project cost.

Project cost: Cost of land should not be included in the Project cost.

Project cost will include Capital Expenditure and one cycle of Working
Capital.
Projects without Capital Expenditure are not eligible for financing under
the PMEGP Scheme.

Projects costing more than ₹ 5 Lakh, which do not require working

capital, need clearance from the next higher authority.

Subsidy (as a percentage of project cost) under PMEGP Scheme

General Category: Urban 15%, Rural 25%.

Special category beneficiary : Urban: 25%, Rural 35%

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Special category means persons belonging to SC/ST/OBC/ Minorities
/Women, Ex SM, OPH, NER, Hill & Border areas.

The proportionate margin money to be refunded to KVIC for non-

adherence of scheme guidelines are as under:

a) If Bank finance working capital expenditure is in the form of cash

credit, the working capital component should be utilized in such a way
that at one point of time within three years of lock in period of margin
money, the cash credit utilisation touches 100% of the limit of the
sanctioned cash credit and never falls below 75% of the said limit.
b) If it does not touch 100% limit, proportionate amount of the margin
money subsidy is to be recovered and refunded to KVIC at the end of the
third year.
In case the account becomes NPA before the three year lock-in period,
due to reasons, beyond the control of the beneficiary, the Margin Money
(subsidy) will be returned to KVIC along with interest.
Repayment : 3 to 7 years, with repayment holiday up to 6 months.
Area Targets: 50% should be Rural Area Projects.
Social Target - SC-15%, ST-7.5 %,Women-30 % ,Minority -5 %

Village Industry: Fixed Capital Investment per Artisan/worker not to

exceed Rs.1 lakh in plain areas and Rs.1.5 lakhs in Hill Areas.

Collateral Security: No collateral security/Third Party Guarantee for loans

upto Rs.10 lakhs to MSEs including units financed under the Prime
Minister Employment Generation Programme (PMEGP) of KVIC.
However, such loans shall invariably be covered under appropriate credit
guarantee scheme, as per extant guidelines, to safeguard the interest of
the Bank. CGMSE coverage to be ensured wherever applicable.
Moreover, the PMEGP beneficiaries can also avail loans up to Rs. 25 lakhs
without furnishing collateral securities. However, such loans shall be
invariably covered under the credit guarantee scheme of CGTMSE.

Page 34 of 83
Disposal of loan applications under PMEGP scheme to be ensured within
the stipulated time frames of 30 days in respect of loan quantum above
Rs. 5 lakhs and within 15 days for loan quantum up to Rs. 5 lakhs.
Decision for rejection of credit proposals under the scheme shall be
taken by appropriate Authorities.

Applications for credit facilities from SC / ST customers shall not be

rejected at branch level and such rejections shall be by the next higher
authority.

Whenever applications for loans under govt. sponsored schemes are

rejected by the Branch Manager for valid reasons, the same has to be
recorded in a register maintained to this effect which shall be examined
by the controlling authorities during their branch visits.
Rejection of credit proposals from MSMEs is subject to concurrence of
the next higher authority.

Turn Around Time (TAT) within 30 days for loan quantum above Rs. 5
lakhs and within 15 days for loan quantum uptoRs.5 Lacs.
Online applications will be mandatory and no manual applications will be
allowed.
There will be two separate online application forms for individuals and
institutional applicants available on the portal.

Sanction will be issued based on the online sanction letter and copies of
the sanction order will be sent to the applicant (by e-mail/hard copy) as
well as to KVIC/ KVIB/ DIC within 30 days from the receipt of District
Level Task Force committee (DLTFC) recommended application from the
District Agencies.

The applicant will deposit his own contribution and copy of EDP training
certificate to the financing bank within 10 working days of receiving the
communication of sanction of loan.

Banks should ensure that PMEGP applications are received through the
e-tracking system of KVIC.

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Negative List of activities (Not to be financed under PMEGP):

Business activities like opening of grocery and stationery shops etc.,

involving no manufacturing process and value addition; Farm related
activities like Goat rearing, Piggery, Poultry etc., Business connected with
meat, intoxicated items, animal husbandry; Manufacturing of polythene
carry bags of less than 5 micron thickness and manufacturing of carry
bags/containers of recycled plastic are not permitted.

Urban / Rural transport activities except: (a) Auto Rickshaw, Tourist boat
and house boat in A & N Islands. (b) The House boat, Shikara and tourist
boat in J & K. (c) Cycle rickshaw.
Any industry / business connected with cultivation of crops/plantation
like Tea, Coffee, Rubber etc., Sericulture (Cocoon rearing), Horticulture,
and Floriculture. Value addition under these will be allowed under
PMEGP.
Ministry of MSME has introduced an online system for quick disposal of
the margin money subsidy claims.

The online claim form will be automatically checked for the fulfilment of
two conditions:
a) The date of release of first instalment is prior to the date of filing of
Margin Money subsidy claim and

b) The amount of first instalment released is more than the Margin

Money subsidy amount claimed.

On receipt of Margin Money (subsidy) in favour of the loanee on the

same day, branch should keep it in Zero Interest Term Deposit for a
period of three years (Lock-in period) in the name of the
beneficiary/Institution, duly noting Bank‘s lien on the deposit to the loan
account in the CBS system.

Page 36 of 83
PMEGP 2nd Loan Norms
Objectives of PMEGP Second Loam
a) to fulfil the need of additional financial assistance for upgrading and
expansion to the successful / well-performing units.
b) to cater to the need of the entrepreneurs for bringing new
technology/automation so as to modernize the existing unit.
c) to enhance the productivity of the existing units with the inclusion of
additional dose of funding.
d) to enhance the capacity of the existing unit with the additional
financial assistance assuring additional wage employment.
Quantum and Nature of financial assistance:
a) Beneficiary Contribution - All categories 10% (of proposed expansion/
up-gradation cost).
b) Rate of Subsidy (Project Cost) - All categories 15% (20% in NER and
Hill States).
The maximum cost of the project / unit admissible under manufacturing
sector for up-gradation is Rs.1.00 Crore, and the maximum subsidy
would be Rs.15 lakhs (Rs.20 lakhs for NER and Hill States).
The maximum cost of the project/unit admissible under Service /Trading
sector for up-gradation is Rs.25 lakhs, and the maximum subsidy would
be Rs. 3.75 lakhs (Rs. 5 lakhs for NER and Hill States).
Assistance under PMEGP 2nd Loan will be provided by bank as term
loan. The applicant can utilize the loan amount for investment on fixed
assets i.e. for construction of building/purchase of required new
machineries/Installation of machinery etc.
Under the term loan component (construction of building/industrial
shed, machinery & equipment etc.), the construction of own building
may be included and ceiling of construction should not exceed 25% of
the ) The capital expenditure component including cost of construction
should be up to 60% of the total project cost.

Page 37 of 83
The working capital cost would be up to 40%. However, the financing
bank can decide the criteria at the time of sanction of loan based on the
nature of the project.
All existing units financed under PMEGP/MUDRA Scheme whose margin
money claim has been adjusted and the first loan availed should have
been repaid in stipulated time are eligible to avail the benefits under
PMEGP 2nd Loan Scheme.
The unit should have been making profit for the last three years to be
eligible for loan under PMEGP 2nd Loan Scheme.
Beneficiary may apply to the same financing bank, which provided first
loan, or to any other bank, which is willing to extend credit facility for
second loan, in respect of PMEGP 2nd Loan Scheme.
Registration of Udyog Aadhaar Memorandum (UAM) is mandatory for
loan under PMEGP 2nd Loan Scheme.
The PMEGP 2nd loan should lead to additional employment generation.
Stand-up India Scheme
The objective of the Stand-Up India scheme is to facilitate bank loans
between Rs 10 lakh and Rs 1 Crore to at least one Scheduled Caste (SC)
or Scheduled Tribe (ST) borrower and at least one woman borrower per
bank branch for setting up a greenfield enterprise.
The enterprise that is supported under Stand-up India Scheme may be
in manufacturing, services or the trading sector. In case of non-individual
enterprises at least 51% of the shareholding and controlling stake should
be held by either an SC/ST or Woman entrepreneur.
The Stand-up India Scheme is for setting up a new enterprise in
manufacturing, trading or services sector by SC/ST/Women
entrepreneur. To give thrust on reaching out to hitherto underserved
segment of society and seek to strengthen the growth environment.
The Target Group under Stand-Up India Scheme is SC/ST and/or
Women entrepreneurs setting up new enterprises are eligible for availing
loans under Stand-Up India Scheme.

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Under Stand-up India Scheme loan by way of Composite loan
(combination of term loan and working capital) between Rs 10 lakh and
Rs 100 lakh will be sanctioned.
For loans under Stand-up India Scheme, in addition to
mortgage/hypothecation of Primary Asset acquired out of loan, the loan
may also be secured by collateral security or guarantee of Credit
Guarantee Scheme for Stand-Up India Loans (CGSSI) as decided by the
banks.
For loans under Stand-up India Scheme, the repayment period of the
composite loan is to be fixed depending upon nature of activity and
useful life of assets purchased with bank loan but not to exceed 7 years
with a maximum moratorium period of 18 months.
Stand-Up India Loans are eligible for coverage under CGFSIL of NCGTC.
Annual Guarantee Fee (AGF) of 0.85% p.a. on the credit facility
sanctioned (composite loan). Guarantee Fee shall be paid upfront to the
Trust by the eligible institution availing of the guarantee and to be
shared equally between bank and the borrower.
Under Stand-up India Scheme, apart from linking prospective borrowers
to banks for loans , the web portal designed by SIDBI for Stand-Up India
Scheme also provides handholding support.
Under Stand-up India Scheme the beneficiaries could be walk-in
customers for a bank, online applicants or trainees from, various
government and non-government agencies engaged in providing
vocation training Entrepreneurship Development Programs, Financial
training etc.
Under Stand-up India Scheme, the Applicants for the loan has to furnish
details in the Portal created by SIDBI. The approach of this Stand-Up
India Portal, for handholding is based on obtaining answers to a set of
relevant questions at the initial stage. Based on the response, the
applicants (prospective borrowers) are categorised as Ready Borrower or
Trainee Borrower.
The Applicant who needs handholding support he is known as Trainee
Borrower and the one who does not require handholding support is
known as Ready Borrower.

Page 39 of 83
Start-up India Campaign
Start-up India is a flagship initiative of the Government of India, intended
to catalyse start-up culture and build a strong and inclusive ecosystem
for innovation and entrepreneurship in India. Start-up India was a
campaign that was first addressed by the PM Narendra Modi on 15th
August 2015 at Red Fort, New Delhi. Start-up India campaign was
launched on 16th January, 2016.

Stand-Up India Scheme is intended to support SC/ST/Women

entrepreneurs to set up a green field projects through bank branches in
India while Start Up India Scheme aims to boost innovative and
technology led enterprises for new/existing enterprises.

Main objective of Start-up India Campaign is to support entrepreneurs,

and transforming India into a country of job creators instead of job
seekers. Start-up India Campaign was introduced as an initiative to
develop over 75 start-up support hubs in the country.

The Start-up India scheme is based majorly on three pillars which are
mentioned below:
a) Providing funding support and incentives to the various start-ups of
the country.

b) To provide Industry-Academia Partnership and Incubation.

c) Simplification and Handholding.

The broad scope of Start-up India‘s programs is managed by a dedicated

Start-up India Team, which reports to the Department for Industrial
Policy and Promotion (DPIIT).
The 19-Point Action Plan envisages the following forms of support for
Start-ups, and more:
a) Enhanced infrastructure including incubation centres

b) Easier IPR facilitation, including easier patent filing

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c) A better regulatory environment including tax benefits, easier
compliance, improved of setting up a company, faster exit
mechanisms and more
d) An economic stimulus in the form a INR 10,000 crore Fund of Funds
managed by SIDBI, with the goal of increasing funding opportunities.

The Start-up India Portal is an online platform for start-ups and

entrepreneurs. It houses one of the largest networks in the Indian Start-
up Ecosystem, connecting tens of thousands of key stakeholders such as
start-ups, investors, incubators) on a single platform and allowing them
to discover and collaborate with each other.

The Portal also aims to reduce knowledge asymmetry and better equip
entrepreneurs for success by providing them with essential information,
online courses, a database of government schemes, market research
reports, free software applications and other useful resources.

The portal is one of the programs mandated under the Start-up India
Initiative.
PM SVANidhi (CGS-PMS)

PM SVANidhi is a Scheme of Ministry of Housing & Urban Affairs

(MoHUA) for sanction of working capital loan upto Rs. 10,000 to street
vendors through the Lending Institutions.

02. Credit Guarantee Scheme for PM SVANidhi is the graded guarantee

scheme under which the credit product / loan would be guaranteed by
CGTMSE. The CGS-PMS is a portfolio guarantee provided by CGTMSE to
Member Lending Institutions (MLIs) for facilitating sanction of Working
Capital (WC) loan of upto Rs.10,000/- to individual street vendors.

The objective of the PM SVANidhi Scheme is to provide portfolio-based

guarantee coverage to the Member Lending Institutions (MLIs) of
CGTMSE to facilitate sanction of working capital loan up to Rs.10,000/-

Under PM SVANidhi Scheme, beneficiary is eligible for Initial working

capital loan up-to Rs.10,000/- (Rupees Ten Thousands only).

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Under PM SVANidhi Scheme, beneficiary is eligible subsequent loan on
timely or early repayment of initial loan, with an enhanced limit of a
maximum of 200% of the earlier loan, subject to a ceiling of Rs 20,000/-
(Rs Twenty Thousands only).

Under PM SVANidhi Scheme tenure of the loan will be maximum of 1

year.PM SVANidhi Scheme is available to all street vendors engaged in
vending in urban areas as on or before March 24, 2020.

Loans sanctioned to Street Vendors loans sanctioned on and after July

02, 2020 under PM SVANidhi Scheme are eligible for guarantee
coverage. Other loans to Vendors are not eligible for Guarantee cover.

The eligible vendors to avail loan under PM SVANidhi Scheme will be

identified as per following criteria:
a) Street vendors in possession of Certificate of Vending / Identity Card
issued by Urban Local Bodies (ULBs);

b) The vendors, who have been identified in the survey but have not
been issued Certificate of Vending / Identity Card;
c) Street Vendors, left out of the ULB led identification survey or who
have started vending after completion of the survey and have been
issued Letter of Recommendation (LoR) to that effect by the ULB / Town
Vending Committee (TVC); and

d) The vendors of surrounding development/ peri-urban / rural areas

vending in the geographical limits of the ULBs and have been issued
Letter of Recommendation (LoR) to that effect by the ULB / TVC.
The CGTMSE Trust issue Guarantee based on the disbursement data
available on the PMSVANIDHI portal. CGTMSE would be issuing
guarantees for all the loans sanctioned and disbursed under PM
SVANidhi Scheme basis PMSVANIDHI portal and the MLIs will not be
required to submit application for guarantee cover to CGTMSE.
Accordingly, MLIs will have to approach CGTMSE only at the time of
claim lodgment, in case of default in loans, by lodging the claim on
CGTMSE portal. (The Trust Cir 179 dated 27th April,2021)

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CGTMSE will not charge any guarantee fee under the Scheme.
The Scheme has a provision of Graded Guarantee Cover for the loans
sanctioned, as indicated below, which will be operated on portfolio basis:
a) First Loss Default (Up to 5%): 100%
b) Second Loss (beyond 5% up to 15%): 75% of default portfolio
c) Maximum guarantee coverage will be 15% of the year portfolio

MLIs are required to invoke the guarantee once the accounts turns into
NPA. MLIs to pool all the accounts in a particular quarter and lodge for
claim during the next quarter. (MLI – Member Lending Institute).
Initiation of legal proceedings is not necessary for loans under PM
SVANidhi Scheme .
The lending institution may invoke the guarantee / lodge claim
application in respect of credit facilities under a portfolio within a
maximum period of 1 year from the NPA date.
On lodgement of claim application by MLI on quarterly basis, CGTMSE
would settle the claim. Trust shall pay in one instalment 100% of the
portfolio guaranteed amount on preferring of eligible claim by the
lending institution within 30 days. Claim settlements would be carried
out quarterly subject to maximum guarantee coverage of 15% of the
year portfolio.
Any recovery made from the NPA portfolio against which claim has been
settled by CGTMSE will be allowed to be adjusted against future claim, if
any, else will be returned to CGTMSE by the concerned lending
institutions.
CGTMSE reserves the right to inspect cases covered under the PM
SVANidhi Scheme at any given time.
Lending under the Prime Minister Street Vendor‘s AtmaNirbhar Nidhi
(PM SVANidhi) continues beyond March 2022 till December 2024, with
focus on enhanced collateral free affordable loan corpus, increased
adoption of digital transactions and holistic socio-economic
development of the Street Vendors and their families.

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Other recent initiatives to promote MSMEs
In June 2019, RBI committee headed by former SEBI Chairman UK Sinha
suggested a Rs 5,000 crore stressed asset fund for the MSME sector to
provide relief to small businesses hurt by demonetisation, GST, and an
ongoing liquidity crisis.

It has also recommended doubling the cap on collateral-free loans to Rs

20 lakh from the current Rs 10 lakh extended to borrowers falling under
the Mudra scheme, self-help groups, and MSMEs.

MSME Ministry announced in June 2019 to lift the ban on entry of

corporates and private players in the MSME sector to pave way for the
formation of 700 clusters to reduce dependence on imports as well as
for job creation.
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 Unit 06
Issues related to Lending to MSME

Bank‘s lending to the Micro, Small and Medium enterprises as under is

eligible to be reckoned for priority sector advances:
Further, such MSMEs should be engaged in the manufacture or
production of goods, in any manner, pertaining to any industry specified
in the First Schedule to the Industries (Development and Regulation) Act,
1951 or engaged in providing or rendering of any service or services.

All bank loans to MSMEs conforming to the above guidelines qualify for
classification under priority sector lending.
The Ministry of Micro, Small and Medium Enterprises vide Office
Memorandum dated July 2, 2021 has allowed Udyam registration for
retail and wholesale trade.

Grant of composite loans by banks

A composite loan limit of ₹1 crore can be sanctioned by banks to enable

the MSME entrepreneurs to avail of their working capital and term loan
requirement through Single Window in terms of RBI Master Direction
dated July 24, 2017. All scheduled commercial banks were advised vide
RBI Circular dated May 4, 2009 that the banks which have sanctioned
term loan singly or jointly must also sanction working capital (WC) limit
singly (or jointly, in the ratio of term loan) to avoid delay in
commencement of commercial production thereby ensuring that there
are no cases where term loan has been sanctioned and working capital
facilities are yet to be sanctioned.
RBI guidelines on interest rates for loans disbursed by the
commercial banks.
As part of the financial sector liberalisation, all credit related matters of
banks including charging of interest have been deregulated by RBI and
are governed by the banks' own lending policies.

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With a view to improve monetary policy transmission, banks have been
advised to link loans to Micro and Small Enterprises to an external
benchmark from October 01, 2019.
To further improve the transmission of monetary policy rates, it has been
decided that with effect from April 01, 2020, loans to Medium Enterprises
shall be linked to external benchmark.

Collateral free loans from banks.

Vide RBI circular dated May 6, 2010, banks are mandated not to accept
collateral security in the case of loans up-to ₹ 10 lakh extended to units
in the MSE sector.

Credit Rating for the MSE borrowers

The credit rating by external rating agencies is not compulsory from

regulatory capital perspective, if the maximum aggregate exposure to
one counterparty does not exceed the threshold limit of ₹7.5 crore,
subject to meeting certain other conditions.
Credit Rating reflects the payback abilities of individuals or companies.
Credit rating is a numerical representation of the creditworthiness of an
individual or a business.
A credit rating is an assessment of the creditworthiness of a borrower in
general terms or with respect to a particular debt or financial obligation.
It can be assigned to any entity that seeks to borrow money — an
individual, corporation, state or provincial authority, or sovereign
government.
Evaluating the creditworthiness of an instrument comprises of both
qualitative and quantitative assessments, making credit rating far from a
straightforward mathematical calculation. A credit rating agency (CRA)
provides independent evidence and research-based opinion on the
ability and willingness of the issuer to meet debt service obligations.

In India, CRAs are regulated by The Securities and Exchange Board of

India (SEBI). The following CRAs are prominent in Credit Rating Agencies
related to MSMEs.
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SMERA (Small and Medium Enterprises Rating Agency) . It is a joint
enterprise by SIDBI, Dun & Bradstreet Information Services India Private
Limited (D&B), and some chief banks in India.
BWR (Brickwork Ratings) was established in 2007 and is promoted by
Canara Bank. It offers ratings for bank loans, SMEs, corporate
governance rating etc. Brickwork Ratings is recognised as external credit
assessment agency (ECAI) by Reserve Bank of India (RBI) to carry out
credit rating.
Payment Obligations of Large Corporates to MSEs
To take care of the payment obligations of large corporate borrowers to
MSEs, banks have been advised that while sanctioning/renewing credit
limits to their large corporate borrowers (i.e. borrowers enjoying working
capital limits of ₹10 crore and above from the banking system), to fix
separate sub-limits, within the overall limits, specifically for meeting
payment obligations in respect of purchases from MSEs either on cash
basis or on bill basis.
Banks were also advised to closely monitor the operations in the sub-
limits, particularly with reference to their corporate borrowers‘ dues to
MSE units by ascertaining periodically from their corporate borrowers,
the extent of their dues to MSE suppliers and ensuring that the
corporates pay off such dues before the ‗appointed day‘ /agreed date by
using the balance available in the sub-limit so created.
Identification of incipient stress in MSME account
Before a loan account of a Micro, Small and Medium Enterprise 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 following Table.
SMA Basis for classification
Sub-categories
SMA-0 Principal or interest payment not overdue for more than 30
days but account showing signs of incipient stress

SMA-1 Principal or interest payment overdue between 31-60 days

SMA-2 Principal or interest payment overdue between 61-90 days

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Salient features of the guidelines on ‘Framework for Revival and
Rehabilitation of Micro, Small and Medium Enterprises (MSMEs)’

The salient features of the Framework are as under:

a) 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.

b) Any MSME borrower may also voluntarily initiate proceedings under

this Framework.

c) Committee approach to be adopted for deciding corrective action

plan.

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

The provisions made in this framework shall be applicable to MSMEs

having loan limits up to ₹25 crore, including accounts under consortium
or multiple banking arrangement (MBA). The Committee may explore
various options to resolve the stress in the account. The Committee shall
not endeavour to encourage a particular resolution option and may
decide the CAP as per the specific requirements and position of each
case.

The options under CAP by the Committee may include:

a) Rectification;
b) Restructuring;
c) Recovery

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RBI guidelines on One Time Settlement Scheme (OTS) for MSEs for
settlement of their NPAs.
Scheduled commercial banks have been advised by RBI vide circular
dated May 4, 2009 to put in place a non-discretionary One Time
Settlement scheme. The banks have also been advised to give adequate
publicity to their OTS policies.
Apart from the loans and other banking facilities, the banks are advised
by RBI to provide guidance to MSE entrepreneurs. Banks provide
following services to the MSE entrepreneurs:
a) Rural Self Employment Training Institutes (RSETIs)

At the initiative of the Ministry of Rural Development (MoRD), Rural Self

Employment Training Institutes (RSETIs) have been set up by various
banks all over the country. These RSETIs are managed by banks with
active co-operation from the Government of India and State
Governments. RSETIs conduct various short duration (ranging preferably
from 1 to 6 weeks) skill upgradation programmes to help the existing
entrepreneurs compete in this ever-changing global market. RSETIs
ensure that a list of candidates trained by them is sent to all bank
branches of the area and co-ordinate with them for grant of financial
assistance under any Govt. sponsored scheme or direct lending.

b) Financial Literacy and consultancy support:

Banks have been advised to 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.
Through these FLCs, banks provide assistance to the MSE entrepreneurs
in regard to financial literacy, operational skills, including accounting and
finance, business planning etc.

Also, Financial Literacy Centres operated by Scheduled commercial Banks

(including RRBs) have been advised to conduct target specific financial
literacy camps wherein one of the target groups identified is MSEs.

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Timely and adequate credit flow during ‘Life Cycle’ of MSEs

RBI has advised Banks 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:

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

b) Additional working capital to meet with emergent needs of MSE
units
c) 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
MSEs, every year based on the actual sales of the previous year.
d) Timelines for Credit Decisions.

Role of SIDBI in supporting MSMEs

Small Industries Development Bank of India (SIDBI) is the apex institution
for financing, promotion and development of micro, small and medium
enterprises in India. It is under the jurisdiction of Ministry of Finance ,
Government of India headquartered at Lucknow and having its offices all
over the country.

Its purpose is to provide refinance facilities to banks and financial

institutions and engage in term lending and working capital finance to
industries, and serves as the principal financial institution in the Micro,
Small and Medium Enterprises (MSME) sector.

SIDBI also coordinates the functions of institutions engaged in similar

activities like Commercial Banks. It was established on 2 April 1990,
through an Act of Parliament. It is headquartered in Lucknow. SIDBI
operates under the Ministry of Finance , Government of India.

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SIDBI is one of the four All India Financial Institutions regulated and
supervised by the Reserve Bank of India; other three are India Exim Bank,
NABARD and NHB. But recently NHB came under government control by
taking more than 51% stake. They play a statutory role in the financial
markets through credit extension and refinancing operation activities
and cater to the long-term financing needs of the industrial sector.
SIDBI is active in the development of Micro Finance Institutions through
SIDBI Foundation for Micro Credit, and assists in extending microfinance
through the Micro Finance Institution (MFI) route. Its promotion &
development program focuses on rural enterprises promotion and
entrepreneurship development.
In order to increase and support funds flow to the MSE sector, it
operates a refinance program known as Institutional Finance program.
Under this program, SIDBI extends Term Loan assistance to Banks, Small
Finance Banks and Non-Banking Financial Companies. Besides the
refinance operations, SIDBI also lends directly to MSMEs.
Training Facilities at CAB of RBI

To help cooperative banks build capacity among its staff for lending to
rural and agriculture sectors, RBI established the Cooperative Bankers‗
Training College (CBTC) at Pune on September 29, 1969. In 1974, the
College was renamed as the College of Agricultural Banking (CAB) to
bring sharper focus on capacity building in the area of agricultural
lending. Thus, while capacity building of bankers from the co-operative
sector remained a core priority, training officials of all types of banks
associated with agricultural and rural sectors became an added
dimension of the capacity building activities of this College.

With the passage of time, the Micro, Small and Medium Enterprise
(MSME) sector began participating in the overall development of the
country. At this stage, the College also introduced training-cum-
sensitization programmes in the area of MSME financing in order to help
banks to build capacity for lending to that sector which contributes
significantly to India‗s economic development.

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 Unit 07

Committees related to MSMEs

In this Notes, I am going to discuss recommendations of certain

committees related to MSMEs.
Dehejia Committee - Working Capital And Banking Policy

A study group under the chairmanship of V.T. Dehejia was constituted in

1968 in order to determine ―the extent to which credit needs of industry
and trade were inflated and to suggest ways and means of curbing this
phenomenon‖. The committee submitted its reports in September 1969.

The important findings of the committee are given below.

1. Higher growth rate of bank credit to industry than the rise in industrial
output.

2. Banks in general sanctioned working capital loans to the industry

without properly assessing their needs based on projected financial
statements.
3. There was also a tendency on the part of industry to divert short-term
bank credit to some extent for acquiring fixed assets and for other
purposes.

4. The present lending system facilitated industrial units to rely on short-

term bank credit to finance for fixed assets.
Recommendations

1. On the basis of the above findings the following recommendations

were made by Dehejia Committee to bring about improvements in the
lending system:

2. Credit application should be appraised by the bankers with reference

to present and projected total financial position as shown by cash flow
analysis and forecast submitted by borrowers. The total cash credit
requirement is divided into two parts namely

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(i) Hard core components representing the minimum level of raw
materials, finished goods and stores which the industry requires for
maintaining a given level of production and which is made on a formal
term loan basis.

(ii) Short-term components representing the fluctuating part of current

assets.

3. In order to avoid the possibility of multiple financing, a customer

should deal with only one bank. However if the credit requirement is
more the committee recommended the adoption of ―Consortium
arrangement‖.

The recommendations given by Dehejia Committee could not be

implemented, further in view of unprecedented inflation during 1974 the
demand for bank credit rose sharply. Most of the banks had to freeze the
credit limit and therefore a need was felt to have a close look at the
entire bank credit system. A Committee was, therefore appointed by RBI
in July 1974, under the chairmanship of Shri P.L.Tandon.

Chore Committee
The Reserve Bank of India in March, 1979 appointed another committee
under the chairmanship of Shri K.B. Chore to review the working of cash
credit system in recent years with particular reference to the gap
between sanctioned limits and the extent of their utilisation and also to
suggest alternative type of credit facilities which should ensure greater
credit discipline. The important recommendations of the Committee are
as follows:
The banks should obtain quarterly statements in the prescribed format
from all borrowers having working capital credit limits of Rs. 50 lacs and
above.

The banks should undertake a periodical review of limits of Rs. 10 lacs

and above.

The banks should not bifurcate cash credit accounts into demand loan
and cash credit components.

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If a borrower does not submit the quarterly returns in time the banks
may charge penal interest of one per cent on the total amount
outstanding for the period of default.
Banks should discourage sanction of temporary limits by charging
additional one per cent interest over the normal rate on these limits.

The banks should fix separate credit limits for peak level and non-peak
level, wherever possible.

Banks should take steps to convert cash credit limits into bill limits for
financing sales.
Tandon Committee Report on Working Capital
In 1974, a study group under the chairmanship of Mr. P. L. Tandon was
constituted for framing guidelines for commercial banks for follow-up &
supervision of bank credit for ensuring proper end-use of funds. The
group submitted its report in August 1975, which came to be popularly
known as Tandon Committee Report on Working Capital. Its main
recommendations related to norms for inventory and receivables, the
approach to lending, style of credit, follow ups & information system.

It was a landmark in the history of bank lending in India. With

acceptance of major recommendations by Reserve Bank of India, a new
era of lending began in India.

Breaking away from traditional methods of security oriented lending, the

committee enjoyed upon the banks to move towards need based
lending. The committee pointed out that the best security of bank loan is
a well functioning business enterprise, not the collateral.
Major recommendations of the Tandon committee were as follows:

Assessment of need based credit of the borrower on a rational basis on

the basis of their business plans.

Bank credit would only be supplementary to the borrower‘s resources

and not replace them, i.e. banks would not finance one hundred percent
of borrower‘s working capital requirement.

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Bank should ensure proper end use of bank credit by keeping a closer
watch on the borrower‘s business, and impose financial discipline on
them.
Working capital finance would be available to the borrowers on the basis
of industry wise norms (prescribe first by the Tandon Committee and
then by Reserve Bank of India) for holding different current assets, viz.
Raw material including stores etc. used in manufacturing process ; Stock
in Process ; Finished goods ; Accounts receivables.
Credit would be made available to the borrowers in different
components like cash credit; bills purchased and discounted working
capital, term loan, etc., depending upon nature of holding of various
current assets.

In order to facilitate a close watch under operation of borrowers, bank

would require them to submit at regular intervals, data regarding their
business and financial operations, for both the past and the future
periods.

The Norms
Tandon committee had initially suggested norms for holding various
current assets for fifteen different industries. Many of these norms were
revised and the least extended to cover almost all major industries of the
country.

The norms for holding different current assets were expressed as follows:

Raw materials as so many months‘ consumption. They include stores and

other items used in the process of manufacture. Stock-in-process, as so
many months‘ cost of production. Finished goods and accounts
receivable as so many months‘ cost of sales and sales respectively.

These figures represent only the average levels. Individual items of

finished goods and receivables could be for different periods which
could exceed the indicated norms so long as the overall average level of
finished goods and receivables does not exceed the amounts as
determined in terms of the norm.

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Stock of spares was not included in the norms. In financial terms, these
were considered to be a small part of total operating expenditure. Banks
were expected to assess the requirement of spares on case-by-case
basis. However, they should keep a watchful eye if spares exceed 5% of
total inventories.
The norms were based on average level of holding of a particular current
asset, not on the individual items of a group. For example, if receivables
holding norms of an industry was two months and an unit had satisfied
this norm, calculated by dividing annual sales with average receivables,
then the unit would not be asked to delete some of the accounts
receivable, which were being held for more than two months.

The Tandon committee while laying down the norms for holding various
current assets made it very clear that it was against any rigidity and
straight jacketing. On one hand, the committee said that norms were to
be regarded as the outer limits for holding different current assets, but
these were not to be considered to be entitlements to hold current
assets upto this level. If a borrower had managed with less in the past, he
should continue to do so. On the other hand, the committee held that
allowance must be made for some flexibility under circumstances
justifying a need for re-examination.

The committee itself visualized that there might be deviations of norms

in the following circumstances.

Bunched receipt of raw materials including imports.

Interruption of production due to power cuts, strikes or other
unavoidable circumstances.

Transport delays or bottlenecks.

Accumulation of finished goods due to non-availability of shipping space
for exports or other disruption in sales.

Building up of stocks of finished goods, such as machinery, due to failure

on the part of the purchaser for whom these were specifically designed
and manufactured.

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Need to cover full or substantial requirement of raw materials for specific
export contract of short duration.

While allowing the above exceptions, the committee observed that the
deviations should be for known and specific circumstances and situation,
and allowed only for a limited period to tide over the temporary
difficulty of a borrowing unit. Returns to norms would be automatic
when conditions return to normal.

Methods of Lending
The lending framework proposed by Tandon Committee dominated
commercial bank lending in India for more than 20 years and its
continues to do so despite withdrawal of mandatory provision of Reserve
Bank of India in 1997.

As indicated before, the essence of Tandon Committee‘s

recommendations was to finance only portion of borrowers working
capital needs not the whole of it. It was thought that gradually, the
borrower should depend less on banks to fund its working capital needs.
From this point of view the committee three graduated methods of
lending, which came to be known as maximum permissible bank finance
system or in short MPBF system.

For the purpose of calculating MPBF of a borrowing unit, all the three
methods adopted equation:

Working Capital Gap = Gross Current Assets — Accounts Payable ---….

as a basis which is translated arithmetically as follows:
Gross Current Assets Rs.………………..
Less: Current Liabilities Rs………………..
other than bank borrowings Rs. ……………….
Working Capital Gap Rs. ……………….

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First method of lending

The contribution by the borrowing unit is fixed at a minimum of 25%

working capital gap from long-term funds. In order to reduce the
reliance of the borrowers on bank borrowings by bringing in more
internal cash generation for the purpose, it would be necessary to raise
the share of the contribution from 25% of the working capital gap to a
higher level. The remaining 75% of the working capital gap would be
financed by the bank. This method of lending gives a current ratio of
only 1:1. This is obviously on the low side.

Second method of lending

In order to ensure that the borrowers do enhance their contributions to

working capital and to improve their current ratio, it is necessary to place
them under the second method of lending recommended by the Tandon
committee which would give a minimum current ratio of 1.33:1. The
borrower will have to provide a minimum of 25% of total current assets
from long-term funds. However, total liabilities inclusive of bank finance
would never exceed 75% of gross current assets.

As many of the borrowers may not be immediately in a position to work

under the second method of lending, the excess borrowing should be
segregated and treated as a working capital term loan which should be
made repayable in installments. To induce the borrowers to repay this
loan, it should be charged a higher rate of interest. For the present, the
group recommends that the additional interest may be fixed at 2% per
annum over the rate applicable on the relative cash credit limits. This
procedure should be made compulsory for all borrowers (except sick
units) having aggregate working capital limits of rs.10 lakhs and over.

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Third method of lending
Under the third method, permissible bank finance would be calculated in
the same manner as the second method but only after deducting four
current assets from the gross current assets.
The borrower‘s contribution from long-term funds will be to the extent
of the entire core current assets, as defined, and a minimum of 25% of
the balance current assets, thus strengthening the current ratio further.
This method will provide the largest multiplier of bank finance.
Core portion current assets were presumed to be that permanent level
which would generally vary with the level of the operation of the
business. For example, in case of stocks of materials the core line goes
horizontally below the ordering level so that when stocks are ordered
materials are consumed down the ordering level during the lead time
and touch the core level, but are not allowed to go down further. This
core level provides a safety cushion against any sudden shortage of
materials in the market or lengthening of delivery time. This core level is
considered to be equivalent to fixed assets and hence, was
recommended to be financed from long-term sources.
Nayak Committee
The Reserve Bank of India constituted on 9 December 1991, a Committee
under the Chairmanship of Shri P.R. Nayank, Deputy Governor to
examine the difficulties confronting the small-scale industries (SSI) in the
country in the matter of securing finance.
Nayak Committee has recommended Simplified Turnover Method for
working capital assessment:
The Simplified Turnover Method is normally used by banks in order to
assess the working capital requirement of business enterprises.
Working Capital Loan finance may include cash credits or overdraft
accounts maintained with banks, the bills purchases / discounted, term
loan etc. However, it is really confusing to understand the method in
which the working capital is assessed before sanctioning any working
capital loan to any business.

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According to this method, the working capital requirement of the MSME
unit is calculated at 25% of annual projected turnover. Out of the said
Working Capital requirement, 5% requirement to be met by the
borrower from his own sources and balance 20% to be financed by
lending bank.
Working capital limit is computed as per Turnover method as under:

For example, the projected annual turnover of ABC Company is Rs 100

lakh for the FY 2018-19.

According to turnover method, working capital requirement of the unit is

25% of Rs.100 lakh = Rs.25 lakh

The margin of the borrower will be 5% of the projected sales turnover

(5% of 100) = Rs.5 lakh

Hence, the working capital to be financed by bank is (25-5) – Rs.20 lakh.

However, if projected Net Working Capital of the borrower is more than

Rs.5 lakh, bank finance will be reduced accordingly. For example if
projected NWC is Rs.7 lakh, Bank finance will be (Rs.25 lakh – Rs.7 Lakh)
= Rs.18 lakh.
This is the minimum bank finance for the MSME unit.

As per RBI guidelines, Working capital credit limits should be assessed

both as per projected turnover basis and traditional method. If the credit
requirement based on production/ processing cycle is higher than the
one assessed on projected turnover basis, the same may be sanctioned.
On the other hand if the assessed credit requirement is lower than the
one assessed on projected turnover basis, the credit limit can be
sanctioned at 20 per cent of the projected turnover. Actual drawals may
be allowed on the basis of drawing power to be determined by banks
after excluding unpaid stocks.
The method is applicable for financing MSME units upto Rs.5 crores and
for others upto Rs.2 crores.

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As per RBI guidelines, banks should satisfy themselves about the
reasonableness of the projected annual turnover of the applicants, both
for new as well as existing units, on the basis of annual statements of
accounts or any other documents such as returns filed with sales-
tax/revenue authorities and also ensure that the estimated growth
during the year is realistic.
Reasonableness of the projected turnover may be ascertained on case to
case basis, such as:
 Growth trend in turnover for past 2-3 years.
 Capacity expansion by the borrower.
 Orders in hand or tie ups with customers or marketing
arrangements.
 Current year turnover upto the date of assessment.
The banks may, at their discretion, carryout the assessment based on
projected turnover basis or the traditional method. If the credit
requirement based on traditional production/processing cycle is higher
than the one assessed on projected turnover basis, the same may be
sanctioned, as borrower must be financed upto the extent of minimum
20 per cent of their projected annual turnover.
Since the bank finance is only intended to support need-based
requirement of a borrower if the available NWC (net long term surplus
funds) is more than 5 per cent of the turnover, available NWC should be
reckoned for assessing the extent of the bank finance.
The projected turnover/output value may be interpreted as projected
‗Gross Sales‘ which will include excise duty (now GST) also.
This method was first recommended by the Nayak Committee for Small
Scale Industries. This is mainly recommended for loans to such
enterprises up to a maximum limit of Rs 5 crores, based on the projected
annual turnover of the company.
This method was recommended for calculation of working capital limit in
all the SSIs in the country. The committee also recommended that in
case of technology and software sector, any working capital finance up
to Rs 2 crores should be made on the basis of turnover method.

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The Simplified Turnover Method is useful in some aspects such as:
It gives the opportunity to the borrower to get loan according to the
future growth of the company rather than past or current records.

The calculation involved is very simple to understand and nothing

complicated is there.
This method is useful for the maximum companies in India which are
involved in small scale trading in the country.

Marathe Committee
The Reserve Bank of India, in 1982, appointed a committee under the
chairmanship of Marathe to review the working of Credit Authorisation
Scheme (CAS) and suggest measures for giving meaningful directions to
the credit management function of the Reserve Bank. The
recommendations of the committee have been accepted by the Reserve
Bank of India with minor modifications.

The principal recommendations of the Marathe Committee include:

(i) The committee has declared the Third Method of Lending as

suggested by the Tanden Committee to be dropped. Hence, in future,
the banks would provide credit for working capital according to the
Second Method of Lending.
(ii) The committee has suggested the introduction of the ‗Fast Track
Scheme‘ to improve the quality of credit appraisal in banks. It
recommended that commercial banks can release without prior approval
of the Reserve Bank 50% of the additional credit required by the
borrowers (75% in case of export oriented manufacturing units) where
the following requirements are fulfilled:

(a) The estimates/projections in regard to production, sales, chargeable

current assets, other current assets, current liabilities other than bank
borrowings, and net working capital are reasonable in terms of the past
trends and assumptions regarding most likely trends during the future
projected period.

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(b) The classification of assets and liabilities as ‗current‘ and ‗non-current‘
is in conformity with the guidelines issued by the Reserve Bank of India.

(c) The projected current ratio is not below 1.33 : 1.

(d) The borrower has been submitting quarterly information and

operating statements (Form I, II and III) for the past six months within the
prescribed time and undertakes to do the same in future also.

(e) The borrower undertakes to submit to the bank his annual account
regularly and promptly, further, the bank is required to review the
borrower‘s facilities at least once in a year even if the borrower does not
need enhancement in credit facilities.

Chakravarty Committee - Financing Working Capital

The Reserve Bank of India appointed another committee under the

chairmanship of Sukhamoy Chakravarty to review the working of the
monetary system of India. The committee submitted its report in April,
1985. The committee made two major recommendations in regard to
the working capital finance:
(i) Penal Interest for Delayed Payments:
The committee has suggested that the government must insist that all
public sector units, large private sector units and government
departments must include penal interest payment clause in their
contracts for payments delayed beyond a specified period. The penal
interest may be fixed at 2 per cent higher than the minimum lending rate
of the supplier‘s bank.
(ii) Classification of Credit Limit Under Three Different Heads:
The committee further suggested that the total credit limit to be
sanctioned to a borrower should be considered under three different
heads:

a) Cash Credit I to include supplies to government,

b) Cash Credit II to cover special circumstances, and

c) Normal Working Capital Limit to cover the balance credit facilities.
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The interest rates proposed for the three heads are also different. Basic
lending rate of the bank should be charged to Cash Credit II, and the
Normal Working Capital Limit be charged as below:
(a) For Cash Credit Portion: Maximum prevailing lending rate of the bank.

(b) For Bill Finance Portion: 2% below the basic lending rate of the bank.
(c) For Loan Portion: The rate may vary between the minimum and
maximum lending rate of the bank.

Kannan Committee - Financing Working Capital

In view of the ongoing liberalization in the financial sector, the Indian
Banks Association (IBA) constituted a committee headed by Shri K.
Kannan, Chairman and Managing Director of Bank of Baroda to examine
all the aspects of working capital finance including assessment of
maximum permissible bank finance (MPBF). The Committee submitted its
report on 25th February, 1997.

It recommended that the arithmetical rigidities imposed by Tandon

Committee (and reinforced by Chore Committee) in the form of MPBF
computation so far been in practice, should be scrapped. The Committee
further recommended that freedom to each bank be given in regard to
evolving its own system of working capital finance for a faster credit
delivery so as to serve various borrowers more effectively.

It also suggested that line of credit system (LCS), as prevalent in many

advanced countries, should replace the existing system of
assessment/fixation of sub-limits within total working capital
requirements.
The Committee proposed to shift emphasis from the Liquidity Level
Lending (Security Based Lending) to the Cash Deficit Lending called
Desirable Bank Finance (DBF). Some of the recommendations of the
committee have already been accepted by the Reserve Bank of India with
suitable modifications.

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The important measures adopted by RBI in this respect are given
below:

(i) Assessment of working capital finance based on the concept of MPBF,

as recommended by Tandon Committee, has been withdrawn. The banks
have been given full freedom to evolve an appropriate system for
assessing working capital needs of the borrowers within the guidelines
and norms already prescribed by Reserve Bank of India.

(ii) The turnover method may continue to be used as a tool to assess the
requirements of small borrowers. For small scale and tiny industries, this
method of assessment has been extended upto total credit limits of Rs 2
crore as against existing limit of 1 crore.
(iii) Banks may now adopt Cash Budgeting System for assessing the
working capital finance in respect of large borrowers.

(iv) The banks have also been allowed to retain the present method of
MPBF with necessary modification or any other system as they deem fit.
(v) Banks should lay down transparent policy and guidelines for credit
dispensation in respect of each broad category of economic activity.
(vi) The RBI‘s instructions relating to directed credit, quantitative limits on
lending and prohibitions of credit shall continue to be in force. The
present reporting system to RBI under the Credit Monitoring
Arrangement (CMA) shall also continue in force.

S S Kohli Committee

The RBI in November 2000 had appointed the working group under the
chairmanship of SS Kohli the chairman of the Indian Bank Association to
review the existing guidelines in regard to rehabilitation of sick units in
the small-scale industrial sector and to recommend the revision of the
guidelines making them transparent.

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High Level Committee on Credit to SSI (S L Kapur Committee)
RBI had appointed a one-man High Level Committee headed by Shri S.L.
Kapur, (IAS, Retd.), Former Secretary, Government of India, Ministry of
Industry to suggest measures for improving the delivery system and
simplification of procedures for credit to SSI sector. The Committee has
submitted its report to the Governor on 30 June 1998. The Committee
has made in all 126 recommendations covering wide range of areas
pertaining to financing of SSI sector. RBI has accepted 35
recommendations, some of which are furnished here under.

a) Delegation of more powers to branch managers to grant ad-hoc

limits.

b) Simplification of application forms

c) Freedom to banks to decide their own norms for assessment of credit
requirements

d) Opening of more specialised SSI branches

e) Enhancement in the limit for composite loans to Rs. 5 lakh

f) Strengthening the recovery mechanism

g) Banks to pay more attention to the backward States

h) Special programmes for training branch managers for appraising small

projects

i) Banks to make customers grievance machinery more transparent and

simplify the procedures for handling complaints and monitoring thereof.

Vaz Committee (Sequel to Tandon Group)

'Tandon Group' suggested norms for 15 different kind of industries

covering a major part of all industries in the country and the norms
related to Raw materials, Stocks in process/semi-finished goods,Finished
goods and Receivables which together make for bulk of the current
assets of any unit.

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Reserve Bank also appointed various "Committees of Direction" to make
recommendations regarding any changes to be brought in the norms
suggested by the Group. With the passage of time it was felt by trade
and industry that these norms have become outdated and needed
immediate review in the changing economic scenario.
An ‗In House Group‘ under the chair person-ship of Ms I.T.Vaz, Executive
Director, Reserve Bank of India, was constituted in January 1993 to
review the need for continuing with the norms for holding of inventory/
receivables as also allocation of credit to industry by fixing Maximum
Permissible Bank Finance (MPBF) based on such norms.
As per the recommendations of the 'In House Group' (Vaz Committee)
accepted by Reserve Bank of India, the banks have been given discretion
to decide the levels of holding of individual items of inventory and of
receivables, which should be supported by bank finance after taking into
account the production/processing cycle of an industry as also other
relevant factors.
The other factors will include the financial parameters of the borrower.
Banks now have the freedom to decide the levels of holding of each item
of inventory as also of receivables which would represent a reasonable
build up of current assets for being supported by Bank finance. Reserve
Bank will not prescribe detailed norms for each item of inventory as also
of receivables; but only advise the overall levels of inventory and
receivables for different industries for the guidance of the banks to serve
as broad indicators. Banks may also frame suitable guidelines for
accepting the projections made by borrowers relating to 'Sundry
Creditors (Goods)', an item included in 'other current liabilities'. The
above guidelines would apply to borrowers enjoying aggregate
fund-based working capital limits of Rs. 1 crore. and above from the
banking system.

@@@

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 Unit 08

Sources of finance and methods of financing SMEs

SMEs often complain that the lack of finance stops them growing and
fully exploiting profitable investment opportunities. This gap between
the finance available to SMEs and the finance that they could
productively use is often known as the ‗funding or financing gap‘.

The SME sector tends to suffer because SMEs are viewed as a less
attractive investment opportunity than many others due to the high
levels of uncertainty and risk they are perceived to have. This perception
of risk is due to a number of reasons including:

SMEs often have a limited track record in raising investment and

providing suitable returns to their investors

SMEs often have non-existent or very limited internal controls.

SMEs often have few external controls. For instance they are unlikely to
be abiding by the rules of any stock exchange and due to their size they
are unlikely to attract much press scrutiny.

SMEs often have one dominant owner-manager whose decisions may

face little questioning.

SMEs often have few tangible assets to offer as security.

As a result of the above, investors are nervous of investing in SMEs as

they are concerned about how their funds might be used and the returns
that they might get. Hence, the easiest thing for an investor is to decline
any opportunity to invest in an SME, especially when there are so many
other investment opportunities available to them.

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Potential Sources of Finance for SMEs
The SME owner, family and friends

This is potentially a very good source of finance because these investors

may be willing to accept a lower return than many other investors as
their motivation to invest is not purely financial. The key limitation is
that, for most of us, the finance that we can raise personally, and from
friends and family, is somewhat limited.

The business angel

A business angel is a wealthy individual willing to take the risk of

investing in SMEs. One limitation is that these individuals are not
common and are very often quite particular about what they are
prepared to invest in. Once a business angel is interested they can
become very useful to the SME, as they will often have great business
acumen themselves and are likely to have many useful contacts.

Trade credit
SMEs, like any company, can take credit from their suppliers. However,
this is only short-term and, indeed, if their suppliers are larger companies
who have identified them as a potentially risky SME the ability to stretch
the credit period may be limited.
Factoring and invoice discounting

Both of these sources of finance effectively let a company raise finance

against the security of their outstanding receivables. Again, this finance is
only short-term and is often more expensive than an overdraft. However,
one of the features of these sources of finance is that, as an SME grows,
their outstanding receivables will grow and so the amount they can
borrow from their factor or from invoice discounting will also grow.
Hence, factoring and invoice discounting are two of the very limited
number of finance sources which grow automatically as the business
grows.

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Leasing
Leasing assets rather than buying them is often very useful for an SME as
it avoids the need to raise the capital cost. However, leasing is only really
possible on tangible assets such as cars, machines, etc.
Bank finance
Banks may be willing to provide an overdraft of some sort and may be
willing to lend in the long term where that lending can be secured on
major assets such as land and buildings. However, raising medium-term
finance to fund operations is often more difficult for SMEs as banks are
traditionally rather conservative. This is understandable as the loss on
one defaulted loan requires many good loans to recover that loss.
Hence, many SMEs end up financing medium-term, and potentially
longer-term assets, with short-term finance such as an overdraft. This is
poor matching and very much less than ideal. This issue is often known
as the ‗maturity gap‘ as there is a mismatch of the maturity of the assets
and liabilities within the business. Furthermore, banks will often require
personal guarantees from the owner-manager of the SME, which means
the owner-manager has to risk his personal wealth in order to fund the
company.
The venture capitalist
A venture capitalist company is very often a subsidiary of a company that
has significant cash holdings that they need to invest. The venture
capitalist subsidiary is a high-risk, potentially high-return part of their
investment portfolio. Hence, many banks will have venture capitalist
subsidiaries. In order to attract venture capital funding an SME has to
have a business idea that may create the high returns the venture
capitalist is seeking. Hence, for many SMEs, operating in regular
business, venture capitalist financing may not be possible. Furthermore,
a venture capitalist rarely wants to remain invested in the long term and,
hence, any proposal to them must show how they will be able to ‗exit‘ or
release their value after a number of years. This is often done by selling
the company to a bigger company operating in the same trade or by
growing the company to such a size that a stock exchange listing is
possible.

Page 70 of 83
Listing
By achieving a listing on a stock exchange an SME would become a
quoted company and, hence, raising finance would become less of an
issue. However, before a listing can be considered the company must
grow to such a size that a listing is feasible. Many SMEs can never hope
to achieve this.

Supply Chain Financing

In supply chain financing (SCF) the finance follows the value as it moves
through the supply chain. SCF is relatively new and is different to
traditional working capital financing methods, such as factoring or
offering settlement discounts, because it promotes collaboration
between buyers and sellers in the supply chain. Traditionally there was
competition as the buyer wanted to take extended credit, and the seller
wanted quick payment. SCF works very well where the buyer has a better
credit rating than the seller.

Technological solutions are used in order to efficiently link the buyer, the
seller and the financial institution. These technological solutions
effectively automate the business and financial process from initiation to
completion.
SCF can bring considerable benefit and can cover more than one step in
the supply chain. It is perhaps of most benefit where considerable value
is constantly moving through the supply chain, such as occurs in the
automotive trade. SCF is only currently used in a relatively small
proportion of companies, but its use is expected to grow significantly. As
with factoring and invoice discounting, this source of finance is only
short term in nature.
Obviously, SCF could be of great help to SMEs that are supplying larger
companies, or even the suppliers of larger companies, with a good credit
rating. As the technological solutions required to make SCF work
become more widespread and SCF grows, more and more SMEs are
likely to benefit.

Page 71 of 83
Crowdfunding
Crowdfunding involves funding a venture by raising finance from a large
number of people (the crowd) and is very often achieved over the
internet. Crowdfunding has grown rapidly and in 2013. The internet
platforms are set up and run by moderating organisations who bring
together the project initiator with the idea, and those organisations and
individuals who are willing to support the idea. Different platforms have
different policies with regard to assessing the ideas seeking support and
checking those willing to provide the finance. Hence, great care is
needed when using these platforms.
Finance provided by crowdfunding may be invested in the debt or the
equity of the ventures seeking the finance. Some crowdfunding is done
on a ‗keep it all‘ basis where any funds raised are kept by the recipient,
whereas some is done on an ‗all or nothing basis‘ where the recipient
only receives the funds if the total required to fund the particular project
is raised within a given time frame. The crowdfunding platform takes a
fee, which is often a percentage of the amount raised.

A feature of crowdfunding is that it lets people search for and invest in

ideas and projects that they have an interest or a belief in. Hence, these
investors are sometimes willing to take bigger risks and/or accept lower
returns than would be usual. A further feature is that, just as in a real
crowd, there is potential for interaction within the crowd. Hence, keen
supporters of a particular idea will very often encourage others to
participate.

Early crowdfunding campaigns very often focused on the arts such as

funding for bands and films. However, all sorts of ideas have now been
funded in this way and there has been much focus on innovation and
new technology.

Crowdfunding has the potential to be very beneficial to SMEs. It allows

them to contact and appeal directly to investors, who may be willing to
take the risk involved in funding the new technologies and innovations,
which SMEs are often so good at producing.

Page 72 of 83
Support from Government

Governments are often keen to assist as to the extent that SMEs are
unable to raise finance for their profitable projects, investment
opportunities are potentially lost and, hence, national wealth is lower
than it could be. Additionally, governments are keen to support
innovation, which is one area where SMEs often excel, and are keen to
support the growth of SMEs as this boosts employment.

A number of key ways governments assist include the following:

Providing grants.
Providing tax breaks – for instance, tax incentives may be available to
those willing to take the risk of investing in SMEs.

Providing advice – for instance, in Scotland there is a government-

funded organisation known as ‗Business Gateway‘, which provides
assistance to those setting up and running a business, including advice
on raising finance.

Guaranteeing loans – for instance, for a small fee from the SME, a large
proportion of any loan advanced by a bank is guaranteed by the
government. As this significantly reduces the risk to the bank, they are
potentially more willing to lend.

Providing equity investment – many countries have government-backed

venture capital organisations that are willing to invest in the equity of
SMEs. This is often done on a matching basis, where the organisation will
match any equity investment raised from other sources.
National Equity Fund Scheme

The SIDBI of India has set up the national equity fund scheme which
provides the equity type assistance to entrepreneurs for setting up new
projects which can be classified as SSI units. In this article, we look at the
National Equity Fund Scheme in detail.

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Objective of the Scheme
The objective of the national equity scheme is to empower the SSI units
and thereby improving their acceptability for team financing by primary
lending (PLIs).

To afford equity type support to entrepreneurs for setting up projects in

small scale sectors for undertaking expansion, modernisation,
technology up-gradation and diversification by existing small scale
sector and for rehabilitation of viable sick units in the SSI sector.

Eligibility Criteria
The following are the type of projects that can avail the benefits of
equity fund scheme.

It is applicable for the new projects in tiny and small sectors for the
manufacture, preservation or processing of goods.

It is applicable for the existing tiny and small scale industrial units
including those which have already availed NEF assistance, undertaken
the expansion, modernisation, technology up-gradation, diversification
etc.
It is applicable for all new and existing service enterprises, including
those which have availed of NEF assistance (except road transport
operators). However, in the case of service enterprises, the support under
NEF would be made available only for the acquisition of fixed assets.

It applies to the sick units in the tiny and small scale sectors including
service enterprises which are considered potentially.

It applies to the projects which utilise any margin money or special

capital assistance under the schemes of state or central government,
State financial corporations and banks will not be eligible for assistance.
Availment of refinancing with respect of term loan for the project by
SIDBI is a pre-requisite for extending equity type assistance.

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Eligible Institutions
The following are the eligible institutions from where the assistance can
be obtained.

The State Financial Corporations

The Twin-function industrial development corporations
The Scheduled commercial banks and select urban and
The State co-operative banks.

Project cost - In the case of new projects the project cost including the
margin money for working capital which does not exceed Rs.50 lakh.

In the case of existing units, the entire expenditure, including the

proposed expenditure on expansion /modernisation/technology up-
gradation / diversification or rehabilitation should not exceed Rs. 50 lakh.
Nature of Assistance Equity type of assistance can be availed in the form
of the soft loan.
Terms of Assistance

The assistance which are provided under this scheme are explained
below:
Soft Loan Assistance - Soft loan assistance is permissible upto 25 % of
the project cost subject to the maximum amount of Rs. 10 lakhs per
project.

Interest Rate - The rate of interest to be imposed by banks/SFCs for the

various project will be as per RBI guidelines. The present rate of interest
will be15.5 % per project.

Service Charge -The service charge of 5 % per annum will be imposed on

the soft loan component in which PLIs would continue to maintain
service charge of 1% p.a., remaining 4% per annum should be passed on
to SIDBI.

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Repayment Period - The repayment period for the soft loan will be seven
years. Whenever borrowers are doing repayments/prepayments of term
loan alone, the PLIs may require on repayment of the soft loan and
where-ever soft loan repayments are not received, the
repayments/prepayment so obtained may be proportionately modified
by the PLIs towards term loan and soft loan; payments to SIDBI may
correspondingly be made.

Security - No security (including collateral) is required for the soft loan.

The total fund requirement of the project in the form of equity assistance
under NEF, term loan and working capital is to be issued by a single
agency.

The projects included under the Single Window Scheme (SWS) can also
extend the assistance under the NEF Scheme if it satisfies the criteria
under both the schemes. In such cases, the NEF assistance would be
limited to 25% of the cost of fixed assets.

Credit risk based on the loan assistance out of NEF is shared equally by
GoI and SIDBI.
In the cases of loan proposals where the qualified PLIs are fulfilled with
the eligibility and need to give NEF support, they may make mandatory
provision in this regard ever by redrawing the financing pattern to
provide the required component of equity support out of NEF to all
deserving small scale units.

Similarly, any other interest/charge, service charge has to be collected

from the borrowers by the qualified PLIs and maintained by them. PLIs
are not to distribute with recovery proceedings on account of the
absence of charge on assets etc. and take related steps for recovery of
NEF as in the case of recovery of term loans. SIDBI will entirely bear the
legal expenses incurred for the recovery of arrears of NEF assistance. All
other terms and conditions applicable to a term loan in this regard are
applicable mutatis mutandis to NEF assistance.

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In the case of default in the repayment of installments of the soft loan or
service charge, or any postponement allowed by
SIDBI/Bank/Corporation, such installment(s) unless agreed to by SIDBI,
should carry interest at a rate which should not be more than the interest
rate applicable to standard loans lent (present rate is 15.5% per annum).

The revised NEF Scheme will apply to the loans sanctioned by Primary
Lending Institutions on or after December 21, 2000.

Venture Capital by SIDBI Venture Capital Ltd. (SVLC)

The objective of the scheme is to work for best returns by investing in
deserving entrepreneurial teams using a combination of capital, strategic
mentoring, skills and our vast network of relationships. Under this
scheme Investment is made by way of equity and equity type
instruments.

Financial structuring is done on a case to case basis keeping in view

factors like risk perception, growth potential, equity base and market
condition. SVCL also co-invests with other VC funds. SVCL does not take
a majority stake in a company.

SVCL invests in companies engaged in wide range of growth sectors,

such as life sciences, retailing, light engineering, food processing,
information technology, infrastructure related services, healthcare,
logistics and distribution, etc in the MSME sector.

The Company should have high growth potential so that it can scale up
sufficiently within 3 - 5 years of investment so as to provide a profitable
exit to investors by way an IPO, Strategic Sale, Mergers & Acquisition,
etc.

The scale of support is between INR 5 to INR 25 Crore in form of equity

and convertible instrument payable after 7 years.

Fund wise amount, geography, and sectorial restriction would be

applicable.

Page 77 of 83
Entrepreneur has to send an email on the respective email ids of the
Funds, forwarding a copy of the executive summary of your business
plan including the profile of management team, historical & future
financials and industry information.

On an average it should be possible to complete the full cycle of

processing of the proposal including due diligence, sanction,
documentation etc. between 8 - 12 weeks. However it is difficult to
specify time frames as is depends on a numbers of factors including the
availability of information with the promoters and the speed with which
additional information is furnished.
SVCL invests in companies engaged in wide range of growth sectors,
such as life sciences, retailing, light engineering, food processing,
information technology, infrastructure related services, healthcare,
logistics and distribution, etc in the MSME sector. The Company should
have high growth potential so that it can scale up sufficiently within 3 - 5
years of investment so as to provide a profitable exit to investors by way
an IPO, Strategic Sale, Mergers & Acquisition, etc.

The enterprises must have plans to expand operations.

Fund scheme for textile and Jute industries-TUF Scheme
(Technology Upgradation Fund Scheme)

The Government of India (GoI), Ministry of Textiles (MoT), introduced

Technology Upgradation Fund Scheme (TUFS) for Textile and Jute
Industries on April 1, 1999, for a period of 5 years, subsequently
extended by 3 years to cover sanctions up to March 31, 2007. The
Scheme has been modified w.e.f. April 1, 2007, for a period of 5 years i.e.
to last till FY 2011-12. However, the Scheme was discontinued from June
29, 2010 till April 27, 2011 and loans sanctioned during the said period
to the textile units were not covered under the Scheme.

The Scheme was re-launched w.e.f. April 28, 2011 as Restructured-TUFS

(i.e. R-TUFS) initially for the period upto March 31, 2012, which was
further, continued till March 31, 2013.

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Taking note that the scheme in its R-TUFS form was extended for the
first year of the 12th plan i.e. upto 31.03.2013, GoI continued the TUFS as
Revised Restructured Technology Upgradation Fund Scheme (RR-TUFS)
w.e.f April 1, 2013 to March 31, 2017.

Revised Restructure Technology Upgradation Fund Scheme

(RR_TUFS) features

A reimbursement of 5% on the interest charged by the lending agency

on a project of technology upgradation in conformity with the Scheme.
However, for spinning machinery the Scheme will provide 2% for new
stand alone / replacement / modernisation of spinning machinery; and
5% for spinning units with matching capacity in weaving / knitting /
processing / garmenting.

In weaving - (i) 6% Interest Reimbursement (IR) and 15% Capital Subsidy

(CS) on brand new shuttleless looms or 30% Margin Money Subsidy
(MMS) for powerloom sector. (ii) 2% IR or 8% MMS on second hand
imported shuttleless looms with 10 years vintage and with a residual life
of 10 years; (iii) for 30% MMS- capital ceiling of Rs. 5 crore and subsidy
capp of Rs. 1.5 crore would be adhered to encourage adequate
investment by MSME sector.
Cover for foreign exchange rate fluctuation / forward cover premium not
exceeding 5% for all segments except for new stand alone / replacement
/ modernisation of spinning machinery for which the foreign exchange
rate fluctuation / forward cover premium will be 2%.
An option to MSME textile and jute sector to avail of 15% Margin Money
subsidy in lieu of 5% interest reimbursement ( 2% Interest
Reimbursement for stand Alone spinning machinery ) on investment in
TUF compatible specified machinery subject ceiling on margin money
subsidy of Rs. 75 lakh. A minimum of 15% equity contribution from
beneficiaries will be ensured.

5% interest reimbursement plus 10% capital subsidy for specified

processing, garmenting and technical textile machinery.

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Interest subsidy / capital subsidy / Margin Money subsidy on the basic
value of the machineries excluding the tax component for the purpose of
valuation.
30% capital subsidy in lieu of 5% interest reimbursement on
benchmarked machinery of silk sector as applicable for Handloom
sector.

The Scheme will cover only automatic shuttle less looms of 10 years
vintage and with a residual life of minimum 10 years.

Investments like factory building, pre-operative expenses and margin

money for working capital will be eligible for benefit of reimbursement
under the Scheme meant for apparel sector and handloom with 50%
cap. In case apparel unit / handloom unit is engaged in any other
activity, the eligible investment under this head will only be related to
plant & machinery eligible for manufacturing of apparel / handlooms.

Interest reimbursement will be for a period of 7 years including 2 years

implementation / moratorium period.
The subsidy in restructured cases will be restricted to the quantum
approved in the initial loan repayment schedule by the lending agency
to the Office of the Textile Commissioner.

Common Effluent Treatment Plant (CETP) and other investments like,

energy saving devices, in-house R&D, IT including ERP, TQM including
adoption of ISO / BIS standards, CPP and electrical installations etc. will
not be eligible under RR- TUFS.

Page 80 of 83
 Daily material on Banking, Finance & Insurance

Sharing knowledge for CAIIB, JAIIB and CCP

Exams

where I am sharing
information related to Banking, Finance &
Insurance daily.
Blog Link:

where I am sharing one fancy word

in English daily and Jokes in English once in 10 days (on
5th, 15th and 25th of every month)
Blog Link:

Page 81 of 83
 List of Books compiled by The Banking Tutor
So far the following Books are compiled by me which can be shared by any one free
of cost, without any permission from me or without any intimation to me.
01 Banking Jargon - Vol 01 18 Bankers and Court Verdicts-Vol 01

02 Alerts - Vol 01 19 Inland Bank Guarantees

03 Forex Vol-1 20 The Dirty Dozen

04 Banker and Awareness of Legal 21 SPA (Not related to Banking)

Enactments Vol 1
05 Banker and Fin Statements 22 Banks - Supporting Agencies - Vol 1

06 Confusables Vol. 1 23 Banking Jargon volume 4

07 Banking Jargon Vol 2 24 Banks - Supporting Agencies - Vol 2

08 ABC 25 Banks-supporting Agencies - Vol 3

09 The Can Support_2020 26 JAIIB Notes - PPB

10 The Core Support_2020 27 JAIIB Notes – LRB

11 The Sundries_2020 28 JAIIB Notes – AFB

12 The Soft Support 29 CAIIB Notes – ABM

13 Management of WCC Limits 30 CAIIB Notes BFM

14 The Notes_2021 31 Confusables Vol 3

15 Confusables _Vol 2 32 Banking Jargon Vol 5

16 Banking Information 33 The banking regulations & business laws

17 Banking Jargon Volume 3 34 Accounting & finance for Bankers

35 Bank Financial Management 36 Retail Banking & Wealth Management

37 Concepts for Credit Professional 38 Advance Business Management

39 Principles & Practice of Banking 40 Indian Economy & Indian Financial System

41 Concepts for Credit Professional 42 Less Known Forex Terminology

43 KYC & AML Notes 44 Treasury Management Objective Type
45 Treasury Management Notes 46 Indian Economy & Indian Financial System

47 Micro , Small & Medium Enterprises (MSME)

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 The Banking Tutor

By Sekhar Pariti , Ex Banker

+91 94406 41014

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