CREDIT - THE LIFELINE OF BUSINESS
Of all the elements that go into a business, credit is perhaps
the most crucial. The best of plans can come to naught if
adequate finance is not available at the right time. MSEs
need credit support not only for running the enterprise &
operational requirements but also for diversification, modernization/upgradation
of facilities, capacity expansion, etc. In respect of MSEs,
the problem of credit becomes all the more critical whenever
any episodic event occurs such as a large order, rejection
of consignment, inordinate delay in payment, etc. In general,
MSEs operate on tight budgets, often financed through owner’s
own contribution, loans from friends and relatives and some
Government of India recognized the need for a focused credit
policy for MSEs in the early days of promotion of MSEs. This
in turn led to a credit policy with the following components:-
Priority Sector Lending: Credit to the
MSE sector is ensured as part of the priority sector lending
by banks. Banks are required to compulsorily ensure that specified
percentage (currently 40% for domestic commercial banks and
32% for foreign banks) of their overall lending is made to
priority sectors as classified by Government. These sectors
include agriculture, small enterprises, retail trade, etc.
Institutional Arrangement: Small Industries Development
Bank of India (SIDBI) is the principal financial institution
for promotion, financing and development of the MSE sector.
Apart from extending financial assistance to the sector, it
coordinates the functions of institutions engaged in similar
activities. SIDBI’s major operations are in the areas
of (i) refinance assistance (ii) direct lending and (iii)
development and support services. The commercial banks are
important channels of credit dispensation to the sector and
play a pivotal role in financing the working capital requirements,
besides providing term loans (in the form of composite loans).
State Financial Corporations (SFCs) and twin-function State
Industrial Development Corporations (SIDCs) at the State level
are the main sources of long-term finance for the MSE sector.
With the liberalization of the Indian economy, greater emphasis
was placed on meeting the credit needs of MSEs. This was manifest
through the following initiatives:
- Earmarking of credit for micro enterprises within overall
lending to micro and small enterprises.
2. Opening of specialized SME branches.
3. Enhancement in the limit for computation of the aggregate
working capital requirements on the basis of minimum 20%
of the projected annual turnover.
4. Enhancement of composite loan to Rs.1 crore (Rs.10
5. No collateral security for loans up to Rs.5 lakh (Rs.0.5
million) [Banks may on the basis of good track record
and financial position of the units, increase the limit
of dispensation of collateral requirement for loans up
to Rs.25 lakh (2.5 million)]
Credit to MSE sector from Public Sector Banks
The table below gives the status of credit
flow to the micro and small enterprises (MSE) sector from
the public sector banks since 2000:
Source: RBI (P) Provisional
As at the end
Net Bank Credit (NBC)
Credit to MSEs
% to NBC
Credit to Micro Enterprises sector
The table below gives the status of credit flow to micro enterprises sector
the public sector banks since 2000:
As at the end
Net bank credit to micro sector
Micro credit as % of MSE credit
Source: RBI (P): Provisional
Policy Package for Stepping up Credit to SMEs
announced a ‘Policy Package for Stepping up Credit to
Small and Medium Enterprises (SMEs)’on 10 August 2005.
The measures in the Policy Package to increase the quantum
of credit to SMEs (including micro and small enterprises –
• Public sector banks to fix
their own targets for funding SMEs in order to achieve a minimum
20 per cent year-on-year growth in credit to the SME sector.
• Public sector banks to follow
a transparent rating system with cost of credit linked to
the credit rating of the enterprise.
• Commercial banks to make concerted
efforts to provide credit cover on an average to at least
5 new tiny, small and medium enterprises at each of their
semi-urban / urban branches per year.
• The Reserve Bank of India
(RBI) to issue detailed guidelines relating to debt restructuring
mechanism so as to ensure restructuring of debt of all eligible
small and medium enterprises.
• Introduction of a one-time
settlement scheme to apply to small scale Non-Performing Asset
(NPA) accounts in the books of the banks as on March
• Taking the existing RBI guidelines
as indicative minimum, banks to formulate a comprehensive
and more liberal policy relating to advances to the SME
• Banks to adopt cluster based
approach for SME financing.
• The RBI to constitute empowered
committees with the Regional Director of RBI as the Chairman
to review the progress in SME financing and rehabilitation
of sick small (SSI) and medium units.
• Boards of banks to review
the progress in achieving the self-set targets as also rehabilitation
and restructuring of SME accounts on a quarterly basis.
The RBI issued circular dated
19 August 2005 to all the public sector banks and 25 August
2005 to all private sector banks/ foreign banks/ Regional
Rural Banks (RRBs), advising them to implement the measures
announced in the Policy Package.
The RBI has issued a Master
Circular dated 1 July 2008 on Lending to Micro, Small and
Medium Enterprises (MSME) sector to all Scheduled Commercial
Banks incorporating the existing guidelines/instructions in
this regard. Further, a Master Circular dated 1 July 2008
on Lending to Priority Sector has also been issued by the
RBI. These Master Circulars are available on the RBI’s
web site: www.rbi.org.in
CBDT reiterates non allowance of interest on delayed payments
on Flow of Institutional Credit to MSE sector
IBA's advisory on interest rates
Interest rates on Priority Sector
SME Finance and Credit-National
Indian Bank Charters