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 bank credit.

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:

    1. 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 million).
      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:

As at the end of March

  2000 2001 2002 2003 2004 2005 2006 2007 (P)

Net Bank Credit (NBC)



3,96,954 4,77,899 5,58,849 7,18,722 10,17,614


Credit to MSEs



49,743 52,988 58,278 67,634 82,492


% to NBC



12.5 11.1 10.4 9.4 8.1


Source: RBI (P) Provisional

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 of March

  2000 2001 2002 2003 2004 2005 2006 2007 (P)

Net bank credit to micro sector



27,030 26,937 30,826 34,315 33,314


Micro credit as % of MSE credit



54.3 50.8 52.9 50.7 40.4


Source: RBI (P): Provisional


Policy Package for Stepping up Credit to SMEs

       The Government 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 – MSEs) include:

    • 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 31, 2004.
    • Taking the existing RBI guidelines as indicative minimum, banks to formulate a comprehensive and more liberal policy relating to advances to the         SME sector.
    • 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: .

Related Links:

CBDT reiterates non allowance of interest on delayed payments
R.B.I. Circulars
SAC 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