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SME FINANCING- BANKING SECTOR
- Varun Chandak
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PRESENTATION PLAN Introduction Reasons for SME Growth Concerns of SME Bank’s Approach to SME Financing SME from Banking Sector Term Loan / Demand loan / Deferred Payment Gu
arantee Working Capital by way of Cash Credit, Overdraft Bank Guarantee Lease Rent Discounting Financing Special Institutions SME Collateral Free Loan (SMECFL)
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Credit Guarantee Fund Scheme (CGFS) Compliance to be followed by Banks Targets prescribed for banks to lending to MS
MEs Factors affecting SME Finance- Banker’s Persp
ective Sick Units Revival of sick units Guidance to MSE entrepreneurs
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INTRODUCTION SME play a vital role for growth of Indian
Economy by contributing 45% of Industrial outputs, 40% of exports and employing 60 million people and produce more than 5000 quality products.
SME classification in India under MSMED Act,2006 is based on the investment in plant and machinery (for manufacturing enterprises) and on equipments (for enterprises providing or rendering services).
These enterprises are estimated to grow at rate of 20% per year for upcoming years.
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Enterprise Classification
Criteria for Manufacturing Enterprises
Criteria for Service Enterprises
Micro Enterprise
investment in plant and machinery does not exceed Rs. 25 lakh
investment in equipment does not exceed Rs. 10 lakh
Small Enterprise
investment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore
investment in equipment is more than Rs.10 lakh but does not exceed Rs. 2 crore
Medium Enterprise
investment in plant and machinery is more than Rs.5 crore but does not exceed Rs.10 crore
investment in equipment is more than Rs. 2 crore but does not exceed Rs. 5 crore
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REASONS FOR SME GROWTH Foreign and local fund providers are taking
huge interest in the small and medium enterprises of India.
Banking sector has also shown a keen interest in lending credit to these enterprises.
Many recent mergers have taken place in the sector.
The sector has significantly contributed towards the domestic production as well as the export earnings.
Low investment is required to start and maintain these enterprises
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CONCERNS OF SMES high cost of credit requirements of collateral limited access to equity capital lack of access to global markets absence of a mechanism for the revival of
sick enterprises
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BANK’S APPROACH TO SME SECTOR SMEs are growth engines for development of
Economy. Banks have therefore for internal purposes given
focused attention to finance all Commercial enterprises i.e. enterprises which may be outside the purview of regulatory definition of SME but having turnover upto Rs 150.00 crores and new infrastructure and real estate projects where the project cost is upto Rs. 50/- crores by treating them as part of SME segment.
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FINANCING SME FROM BANKING SECTOR SME Units may be granted a variety of credit
facilities for their different needs which will include the following: Term Loan / Demand loan / Deferred Payment
Guarantee Working Capital by way of Cash Credit, Overdraft Bills Purchase / Discounting under L/c or outside L/c Export Credit facilities like Packing Credit, FBP /
UFBP Foreign/Inland Letter of Credit on sight/usance basis
for purchase of raw material/capital goods Lease Rent Discounting Bank Guarantees Stand-by Letter of Credit
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TERM LOAN / DEMAND LOAN / DEFERRED PAYMENT GUARANTEE
General Purpose Term Loan for SSI Sector for any general commercial purpose such as
shoring up of Net Working capital, substitution of high cost debt, R&D, ISO certification etc, subject to disbursement being made in line with the specific purpose approved.
Open Term Loan provides option of multiple disbursements for
multiple purposes like expansion/modernization, substitution of high cost debt, up-gradation of technology, energy conservation system, acquisition of software, hardware, visits abroad for acquiring technology, finalizing deals, participation in fairs, market promotion etc.
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WORKING CAPITAL BY WAY OF CASH CREDIT, OVERDRAFT Working Capital limit by way of cash credit,
packing credit and bills discounting against stock, receivables to meet contingencies like bunching of orders, delay in shipment, sudden increase in raw material prices, mismatch in cash flows.
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BANK GUARANTEE Contract to perform the liability of a third
person in case of default. Available only to old customers of the bank
enjoying any type of fund based credit facility
On invocation of the guarantee the sum as mentioned in the guarantee is paid by the bank to the third party and duly recovered fro the customer.
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LEASE RENT DISCOUNTING discounting the future receivables and providing
an upfront loan to the landlord, thus extending immediate liquidity against prospective inflows
Rent receipts are payable by the tenant directly to an escrow account with the bank.
basic documents required for applying for the facility Lease agreement Bank statements for last 6 months 2 year financials including Profit & Loss (P&L)
Statement , Balance Sheet and Income Tax returns. Documents related to establishment of entity, identity
and address proof documents. Property title documents
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FINANCING SPECIAL INSTITUTIONS Educational Institutions
loan against fee receivables overdraft facility to meet day to day working capital
finance requirements term loans, including short term loans to keep pace with
the educational needs of our nation for expansion and establishment of additional capacities for existing educational institutes
bank guarantees for meeting performance and financial obligations
extends loans to Goods suppliers and service providers to schools such as Books publishers and traders Uniform providers Hardware, software and digital content providers Furniture and equipment providers Other service providers
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Health Institutions Asset / Medical Equipment Finance: For the
purchase of standard medical equipment including CT Scanners, Colour Dopplers, Sonography Machines, MRI Machines, X-Ray Machines and other medical equipments.
Infrastructure Loan: For the purchase/construction of new premises to set up of Clinics, Diagnostic Centers or Hospitals
Working Capital Finance: Working capital facilities by way of Cash Credits, Overdrafts or Demand Loans to fund day-to-day operational requirements like the purchase of consumables, maintenance expenses and payment of salaries, etc
Loans to Medical Practitioners for setting up clinics/ nursing homes, Pathological Labs, drug stores, ambulances, computers, vehicles including expansion/ renovation of existing premises
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Food IndustryLoans to the Owners of Restaurants and Fast
food chains for purchase of kitchen equipments, investment in interior decoration, purchase of furniture and fixtures, purchase of land and construction of buildings etc.
Term loan for acquisition of machinery/factory building for modernization/ expansion and working capital needs of Rice Mills engaged in milling, sorting, grading and polishing.
Term loan for Dal mill owners for acquisition of machinery, factory building, modernization and all working capital needs.
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Transport OperatorsTerm loans for purchase of new transport
vehicles at cost on road basis and working capital facilities against the receivables. Loans are available for surface transport operators owning more than 10 well maintained and road worthy vehicles including trucks, tankers, tippers, luxury buses.
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Loans to Women Entrepreneur For women entrepreneurs in Retail trade,
Business enterprises, Professionals and self employed, small scale units or tiny units where the women entrepreneur’s stake is more than 51%, Term Loan & Working Capital facility is available.
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Other Loan facilitiesLoans for purchase of passenger cars,
jeeps, multi utility vehicles etc., to the promoter/partner/senior executives of the SME units having borrowing arrangements with the Bank/ either in their own name or the units name.
Term Loan for purchase of construction equipments viz. loaders, excavators, cranes etc., for contractors and firms engaged in construction activity
Loan given for purchase of residential house and for office space.
Loans to Artisans to meet their credit requirements both for investments as well as working capital
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SME COLLATERAL FREE LOAN (SMECFL) Collateral free loan for viable projects of micro
and small enterprises in manufacturing and service sector with maximum guarantee cover up to Rs.1.00 crore under CGTMSE guarantee scheme for working capital & Term Loan (FB+NFB) facilities.
banks are mandated not to accept collateral security in the case of loans upto Rs 10 lakh extended to units in the MSE sector. banks may, on the basis of good track record and financial position of MSE units, increase the limit of dispensation of collateral requirement for loans up to Rs.25 lakh with the approval of the appropriate authority.
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CREDIT GUARANTEE FUND SCHEME (CGFS)
launched by the Government of India to make available collateral-free credit to the micro and small enterprise sector.
established a Trust named Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) to implement the Credit Guarantee Fund Scheme for Micro and Small Enterprises.
Eligible Lending Institutions scheduled commercial banks (Public Sector
Banks/Private Sector Banks/Foreign Banks) Regional Rural Banks (which have been classified
under 'Sustainable Viable' category by NABARD) National Small Industries Corporation Ltd. (NSIC) North Eastern Development Finance Corporation
Ltd. (NEDFi) Small Industries Development Bank of India (SIDBI)
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Eligible Credit Facility both term loans and working capital facility up to
Rs.100 lakh per borrowing unit, extended without any collateral security or third party guarantee, to a new or existing micro and small enterprise.
For those units covered under the guarantee scheme, which may become sick owing to factors beyond the control of management, rehabilitation assistance extended by the lender could also be covered under the guarantee scheme
fee payable to the Trust under the scheme is one-time guarantee fee of 1.5% and annual service fee of 0.75% on the credit facilities sanctioned. For loans up to Rs.5 lakh, the one-time guarantee fee and annual service fee is 1% and 0.5% respectively. Further, for loans in the North-East Region, the one-time guarantee fee is only 0.75%
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Eligible borrowers New and existing Micro and Small Enterprises
engaged in manufacturing or service activity excluding Retail Trade, Educational Institutions, Agriculture, Training Institutions
a borrower is required to obtain IT PAN number prior to availing of credit facility from the eligible lending institution
All proposals for sanction of guarantee approvals for credit facilities above Rs. 50 lakh and upto Rs.100 lakh will have to be rated internally by the member lending instituions (MLI) and should be of investment grade
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Guarantee Cover The extent of the guarantee cover admissible is
shown below:Borrower Category
Maximum extent of Guarantee where credit facility isupto Rs.5 lakh
above Rs.5lakh uptoRs.50 lakh
above Rs.50 lakhupto Rs.100 lakh
Micro Enterprises
85% of the amount in default subject to a maximum of Rs.4.25 lakh
75% of the amount in default subject to maximum of Rs.37.50 lakh
Rs.37.50 lakh plus 50% of amount in default above Rs.50 lakh subject to overall ceiling of Rs.62.50 lakh
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Women entrepreneurs/ Units located in North East Region (including Sikkim) other than credit facility upto Rs.5 lakh to micro enterprises
80% of the amount in default subject to a maximum of Rs.40 lakh
Rs.40 lakh plus 50% of amount in default above Rs.50 lakh subject to overall ceiling of Rs.65 lakh
All other category of borrowers
75% of the amount in default subject to maximum of Rs.37.50 lakh
Rs.37.50 lakh plus 50% of amount in default above Rs.50 lakh subject to overall ceiling of Rs.62.50 lakh
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Operational Highlights of CGTMSE As on March 31, 2010, 3,00,105 proposals from
micro and small enterprises have been approved for guarantee cover for aggregate credit of Rs.11550.61 crore, extended by 85 institutions in 35 States/UTs.
A year-wise growth position is indicated in the table below:
Period No. of Proposals Approved
Credit Amount Approved (Rs. In
crores.}2000-01 951 6.062001-02 2296 29.522002-03 4955 58.672003-04 6603 117.602004-05 9516 326.77
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Period No. of Proposals Approved
Credit Amount Approved (Rs. In
crores.)2005-06 16284 461.912006-07 27457 704.532007-08 30825 1055.842008-09 53708 2199.402009-10 151387 6875.11
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COMPLIANCE TO BE FOLLOWED BY BANKS Banks to make available free of cost, simple,
standardized and easy to understand application forms for loans to MSEs
All loan applications should be acknowledged in writing
All loan applications should be disposed off within the stipulated time as under from the date of receipt of application complete in all respects and accompanied by documents as per the check list :For credit limits upto Rs. 2/- lacs Within 2 weeksFor credit limits upto Rs. 5/- lacs Within 4 weeks For credit limits exceeding Rs. 5/- lacs
Within a reasonable time frame (4 weeks)
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It should be ensured that sanctioned loans are disbursed within 2 working days from the date of compliance of all terms and conditions of sanction/documentation.
In case of rejection of application, reasons for rejection should be conveyed in writing to the applicant for credit facilities.
No collateral security should be insisted upon for credit limits upto Rs. 10/- lacs.
To provide collateral free loans up to Rs. One crore secured by CGTMSE guarantee which is highly liquid at par with cash security as compared to any other collateral in loan accounts
To provide working capital limits to Micro & Small Enterprises (Manufacturing) on the basis of minimum of 20% of projected turnover.
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No processing charges to be recovered if loan upto Rs. 5/- lacs is not sanctioned.
To permit prepayment of loans upto Rs.5/- lacs without levying any pre-payment penalty.
Have regular contact with the borrowers after sanction of facilities and provide credit counseling services that can be of help to the borrower in dealing with their problems.
A composite loan limit of Rs.1crore 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 Circular on lending to the MSME sector dated July 1, 2014.
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Ratio Norms Micro & Small Enterprises under manufacturing sector and Service Sector falling under regulatory guidelines .
Medium Enterprises under manufacturing sector and Service Sector falling under regulatory guidelines.
Units covered under SME Sector as per expanded definition and outside the purview of regulatory definition.
Current Ratio
1.17& above 1.20 & above 1.33 & above.
Debt Equity Ratio (Total Term Liability /Tangible Net Worth)
Below 3:1 Below 3:1 Below 3:1
• Following ratios can be accepted for granting credit facilities to SME units falling as per regulatory guidelines or SMEs as per expanded coverage.
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FACR (Net FA/Term Debts)
Not below 1.25
Not below 1.25
Not below 1.25
Average DSCR for Term Loan
1.75 with a condition that in any one year it should not be below 1.00.
1.75 with a condition that in any one year it should not be below 1.25
1.75 with a condition that in any one year it should not be below 1.25
The above ratios are indicative and deviations can be considered by the sanctioning authority / competent authority on case-to-case basis, depending on industry specific problems of unit, etc. incorporating justification for the same in the sanction note.
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TARGETS PRESCRIBED FOR BANKS TO LENDING TO MSMES In terms of the recommendations of the
Prime Minister’s Task Force on MSMEs,a 20 per cent year-on-year growth in credit
to micro and small enterprisesa 10 per cent annual growth in the number
of micro enterprise accounts60% of total lending to MSE sector to Micro
enterprises.
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In order to ensure that sufficient credit is available to micro enterprises within the MSE sector, banks should ensure that 40 per cent of the total advances to MSE sector
should go to micro (manufacturing) enterprises having investment in plant and machinery up to Rs. 10 lakh and micro (service) enterprises having investment in equipment up to Rs. 4 lakh
20 per cent of the total advances to MSE sector should go to micro (manufacturing) enterprises with investment in plant and machinery above Rs. 10 lakh and up to Rs. 25 lakh, and micro (service) enterprises with investment in equipment above Rs. 4 lakh and up to Rs. 10 lakh. Thus, 60 per cent of MSE advances should go to the micro enterprises
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FACTORS AFFECTING SME FINANCE- BANKER’S PERSPECTIVE
39%
28%
8%
19%6%
Lack of Ex-periencePoor finan-cials of En-terpriseNo Collateral & Infrastruc-tureSmaller Ticket SizeOthers
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SICK UNITS A Micro or Small Enterprise (as defined in the
MSMED Act 2006) may be said to have become Sick, if Any of the borrower account of the enterprise
remains NPA for three months or more There is erosion in the net worth due to
accumulated losses to the extent of 50% of its net worth during the previous accounting year. This criterion enables banks to detect sickness at an early stage and facilitate corrective action for revival of the unit.
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REVIVAL OF SICK UNITS A viable / potentially viable unit may apply
for a debt restructuring if it shows early stage of sickness.
Viable / potentially viable MSE units/enterprises, which turn sick in spite of debt re-structuring would need to be rehabilitated and put under nursing.
rehabilitation package should be fully implemented by banks within six months from the date the unit is declared as potentially viable/viable
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decision on viability of the unit should be taken at the earliest but not later than 3 months of the unit becoming sick under any circumstances by performing viable study.
micro (manufacturing) enterprises, having investment in plant and machinery up to Rs. 5 lakh and micro (service) enterprises having investment in equipment up to Rs. 2 lakh, the Branch Manager may take a decision on viability and record the same, along with the justification.
sick units declared unviable, with credit facilities of Rs. 1 crore and above, a Committee comprising of senior officials of the bank may examine such rehabilitation proposal.
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GUIDANCE TO MSE ENTREPRENEURS Rural Self Employment Training Institutes
(RSETIs) managed by banks with active co-operation from
the Government of India and State Governments 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
Financial Literacy and consultancy support banks provide assistance to the MSE
entrepreneurs in regard to financial literacy, operational skills, including accounting and finance, business planning etc.
