Policy Package for Stepping up Credit to Small and Medium Enterprises
The small scale industries (SSI) produce about 8000 products, contribute 40% of the country's industrial output and offer the largest employment after agriculture. The sector, therefore, presents an opportunity to the country to harness its local competitive advantages for achieving global dominance. In recognition of these aspects, the National Common Minimum Programme makes the following declaration for accelerating the development of the small scale sector.
 
" Household and artisanal manufacturing will be given greater technological, investment and marketing support. Small-scale industry will be freed from Inspector Raj and given full credit, technological and marketing support. Infrastructure upgradation in major industrial clusters will receive urgent attention."
 
2. From SSI to SME: Defining the New Paradigm
  2.1
Government Policy as well as Credit Policy has so far concentrated on manufacturing units in the small scale sector. The lowering of trade barriers across the globe has increased the minimum viable scale of enterprises. The size of the unit and technology employed for firms to be globally competitive are now of a higher order. The definition of small scale sector needs to be revisited and the policy should consider inclusion of services and trade sectors within its ambit. In keeping with the global practice, there is also a need to broaden the current concept of the sector and include the medium enterprises in a composite sector of Small and Medium Enterprises (SME). A comprehensive legislation which would enable the paradigm shift from small scale industry to small and medium enterprises is under consideration of Parliament. The Reserve Bank of India had meanwhile set up an internal group which has recommended:
   
"Current SSI/tiny industries definition may continue. Units with investment in plant and machinery in excess of SSI limit and up to Rs.10 crore may be treated as Medium Enterprises (ME). The definition may be reviewed after enactment of the Small and Medium Enterprises Development Bill. Only SSI financing will be included in Priority Sector"
  2.2 It is proposed to accept the recommendation with regard to the credit facilities being offered by the banking sector and accordingly request the Reserve Bank of India to advise the banks to frame a policy for enhancing the flow of credit to both small and medium enterprises, within the overall framework of credit policy of banks to small and medium enterprises.
     
  2.3 The challenges faced by the small and medium enterprises may be briefly set out as follows:
   
  a.
Small and medium enterprises (SME), particularly the tiny segment of the small enterprises, have inadequate access to finance due to lack of financial information and non-formal business practices. SMEs also lack access to private equity and venture capital and have a very limited access to secondary market instruments.
     
  b. SMEs face fragmented markets in respect of their inputs as well as products and are vulnerable to market fluctuations.
     
  c. SMEs lack easy inter-State or international market access.
     
  d. The access of SMEs to technology and product innovations is also limited. There is lack of awareness of global best practices.
     
  e. SMEs face considerable delays in the settlement of dues/payment of bills by the large buyers.
     
    With the deregulation of the financial sector, the ability of the banks to service the credit requirements of the SME sector depends on the underlying transaction costs, efficient recovery processes and available security. There is an immediate need for the banking sector to focus on credit and finance requirements of SMEs.

Public Sector Banks will be advised to fix their own targets for funding SMEs in order to achieve a minimum 20% year on year growth in credit to the SME sector. The objective is to double the flow of credit from Rs. 67,600 crore in 2004-05 to Rs.1,35,200 crore to the SME sector by 2009-10, i.e., within a period of five years.

Public Sector Banks will be advised to follow a transparent rating system with cost of credit being linked to the credit rating of the enterprise.

SIDBI in association with Credit Information Bureau (India) Ltd. (CIBIL) will expedite setting up of the credit rating agency.
    SIDBI, in association with Indian Banks' Association (IBA), would collect and pool common data on risks in every identified cluster and evolve an IT enabled application, appraisal and monitoring system for tiny and small enterprises. This would help in reducing transaction costs as well as improve credit flow to the small (including tiny) enterprises in the clusters.
    The National Small Industries Corporation has recently introduced a Credit Rating Scheme for encouraging SSI units to get themselves credit rated by reputed credit rating agencies. Public Sector Banks will be advised to consider these ratings as per availability and wherever appropriate and structure their rates of interest suitably.

SIDBI has developed a Credit Appraisal and Rating Tool (CART) as well as a Risk Assessment Model (RAM) and a comprehensive rating model for risk assessment of credit proposals for SMEs. Public Sector Banks will be advised to take advantage of these models as appropriate and reduce their transaction costs.
 
3. Outreach of Formal Credit: Opening of New Accounts
 
The commercial banks (including regional rural banks with over 67,000 branches) will 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 urbani urban branches per year.
 
4. Nursing the Sick Units Back to Health: Debt Restructuring
 
Reserve Bank will issue detailed guidelines relating to debt restructuring mechanism so as to ensure restructuring of debt of all eligible small and medium enterprises at terms which are not less favourable than the Corporate Debt Restructuring mechanism in the banking sector. .The restructuring would follow upon a request to that effect from the borrowing unit. All accounts, except those classified as 'loss assets', will be eligible for restructuring, provided the industrial units are viable or potentially viable.

Based on the Reserve Bank's guidelines, banks may formulate, with the approval of their Board of Directors, more liberal policies relating to the restructuring of accounts. Until the banks formulate their own policies, Reserve Bank's guidelines will be operative.

A one time settlement scheme to apply to small scale NP A accounts in the books of the banks as on March 31, 2004 would be introduced. The scheme would be in force up to March 31, 2006.
 
5. Facilitative Measures
 
Reserve Bank had issued a detailed master circular on --------- the time to be taken for disposing of loan applications of 881 units, the limit up to which banks are obliged to grant collateral free and composite loans, opening up of at least one specialized SSI branch in each district, computation of workingl capital credit limits to SSI units on the basis of minimum 20% of their estimated annual turnover, etc. Based on these instructions, banks will formulate a comprehensive and liberal policy relating to advances to the 8MB sector. Until the banks formulate such a policy, the extant instructions of Reserve Bank will be applicable to advances granted or to be granted by banks to SME units.
 
6. Credit Guarantee Fund Trust for Small Industries (CGTSJ)
 
At present, Member Lending Institutions (MLIs), like banks, are provided guarantee cover of 75% of the amount of default, by CGTSI, in respect of term loan and/or working capital facilities up to Rs.25 lakh, extended by them, to new and existing SSI units/IT/software units/small scale service business enterprises (SSSBEs), without collateral security and/or third party guarantee. A one time guarantee fee of 2.5% and annual service fee of 0.75% of the credit facility sanctioned is currently charged by CGTSI from the MLIs. In order to reduce the burden on the weaker sections of the borrowers, particularly tiny units, it is proposed to reduce the one time guarantee fee from 2.5% to 1.5% for: (i) all loans up to Rs.2 lakh, (ii) All eligible women entrepreneurs, and (iii) all eligible borrowers located in North Eastern region (including Sikkim) and Jammu and Kashmir. Further, public sector banks will be advised to absorb the annual service fee of 0.75% fully in respect of all tiny units.
 
7. Cluster Based Approach
 

Cluster based approach for financing SME sector offers possibilities of reduction of transaction costs and mitigation of risk. About 388 clusters have already been identified. Cluster based financing would now be treated as a thrust area. Banks will increasingly adopt the cluster based approach for SME financing. To broaden the financing options for infrastructure development in clusters through public private partnership, SIDBI will formulate a scheme in consultation with the stakeholders.

SIDBI has already initiated the process of establishing Small Enterprises Financial Centres in select clusters. Risk profile of such cluster would be studied by a professional credit rating agency and such risk profile reports would be made available to commercial banks. Each lead bank of a district will consider adoption of one cluster.
 
8. Setting up Watchdogs: Monitoring and Review

The following supervisory arrangements are to be ensured:

  a.
The existing institutional arrangements for review of credit to SSI sector like the Standing Advisory Committee in Reserve Bank of India and cells at the banks' head office level as also at important regional centres will be made more rigorous and regular. They will also review the flow of credit to small as well as medium enterprises.
     
  b. At the Regional Offices, the Reserve Bank will constitute empowered committees with the Regional Director of the Reserve Bank as the Chairman to review the progress in SME financing and rehabilitation of sick small (SSI) and medium units and to coordinate with other banks/ financial institutions and the State Government in removing bottlenecks, if any, to ensure smooth flow of credit to the sector. The said regional level committees may decide on the need to have similar committees at cluster/district levels.
     
  c. Banks will ensure specialized SME branches in identified clusters/centres with preponderance of small units to enable the entrepreneurs to have easy access to bank credit and to equip bank personnel to develop the requisite expertise. The existing specialized SSI branches will be re-designated as SME branches.
     
  d. Boards of banks will be advised to review the progress in achieving the self-set targets as also rehabilitation and restructuring of SME accounts on a quarterly basis to ensure that the required emphasis is given to this sector.
     
  e.

For easy dissemination and easy accessibility, the policy guidelines formulated by Boards of banks as well as instructions/guidelines issued by Reserve bank will be displayed on a centralized web site………… The banks would also be advised to prominently display all the facilities/schemes offered by them to the small entrepreneurs at each of their branches. Further, the IBA would be a~vised to create a corpus through contributions by member banks for carrying out a sustained awareness campaign, highlighting the facilities offered to small enterprise borrowers by various member banks.

     
 

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