Policy on Financing to MSME Version 1 POLICY ON FINANCING TO MICRO, SMALL AND MEDIUM ENTERPRISES. Micro, Small and Medium Enterprises (MSME) :

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1 Policy on Financing to MSME Version 1 POLICY ON FINANCING TO MICRO, SMALL AND MEDIUM ENTERPRISES Micro, Small and Medium Enterprises (MSME) : Category MICRO ENTERPRISES MICRO ENTERPRISES (SERVICE) DEFINITION Enterprises engaged in the manufacture/ production, processing or preservation of goods and whose investment in Plant and Machinery, does not exceed Rs.25Lacs. i. Enterprises engaged in the providing/rendering of services and whose investment in Equipment does not exceed Rs.10 Lacs. SMALL ENTERPRISES (MANUFACTURIN G) SMALL ENTERPRISES (SERVICE) MEDIUM ENTERPRISES (MANUFACTURIN G) MEDIUM ENTERPRISES(SE RVICE) ii. Small Road & water Transport Operator (SRWTO), Professional and Self Employed (PSEP), Small Business and all other service enterprises whose investment in equipment does not exceed Rs.10Lacs. Enterprises engaged in the manufacture/ production, processing or preservation of goods and whose investment in Plant and Machinery is above Rs.25 Lacs to Rs.5Crore. i. Enterprises engaged in the providing/rendering of services and whose investment in Equipment is above Rs.10Lacs to Rs.2Crore. ii. Small Road & water Transport Operator (SRWTO), Professional and Self Employed (PSEP), Small Business and all other service enterprises, whose investment in equipment is above Rs.10Lacs to Rs.2Crore. Enterprises engaged in the manufacture/ production, processing or preservation of goods and whose investment in Plant and Machinery is more than Rs.5Crore but does not exceed Rs.10Crore. i. Enterprises engaged in the providing/rendering of services and whose investment in Equipment (Original cost excluding Land and building and furniture, fittings and such items as per ) is more than Rs.2Crore but does not exceed Rs.5Crore. ii. The Medium Enterprises (Service) shall include Road Transport Operator (RTO), Professional and Self Employed (PSEP), Business and all other service enterprises, whose investment in equipment is above Rs.2Crore to Rs.5Crore. (Original cost excluding Land and building and the items

2 Stipulated Growth Target{Micro,S mall and Medium Enterprises (MSME)} Small Enterprises Micro Enterprises within small enterprises sector Classification of advances to Micro and Small Enterprises within Priority Sector and Non Priority Sector specified by the Ministry of Small Scale Industries vide its notification no. S.O.1722 (E) dated October 5, 2006) a. As per Policy package of the Honorable Finance Minister, there has to be a growth of 20% year on year basis thereby doubling the Outstanding credit under MSME sector in 5 years i.e., by Banks have been advised to fix self-targets in this regard. b. Also, all banks have been asked to provide credit to at least 5 new small/medium enterprises at each of their semi urban/ urban branches per year. c. In our Bank, Business Head, BBG will finalize Zone wise targets for financing to this sector based on Bank s business objective/government of India/RBI Guidelines received from time to time. Small Enterprises: Advances to small enterprises sector will be reckoned in computing performance under the overall Priority Sector Credit target of 40% of ANBC or credit equivalent amount of off-balance sheet exposure, whichever is higher. (i) 40 percent of total advances to small enterprises sector should go to Micro (manufacturing) enterprises having investment in plant and machinery (original cost) upto Rs.5.00 lakh and micro (service) enterprises having investment in equipment upto Rs.2.00 lakh (ii) 20 per cent of total advances to small enterprises sector should go to micro (manufacturing) enterprises with investment in plant and machineries above Rs.5.00 lakh and upto Rs lakh, micro (service) enterprises with investment in equipment above Rs lakh and upto Rs lakh (Thus, 60 percent of Small enterprises advances should go to the Micro enterprises). The Micro and Small Enterprises (manufacturing and service) will be Classified under Priority Sector. The Small and Micro (Service) enterprises shall include Small Road and Water Transport Operator, Small Business, Professional and Self-employed Persons and all other service enterprises. Retail Trade will not be classified under Micro and Small enterprises (service sector). Small Road and Water Transport Operator (SRWTO), Small Business, Professional and Self Employed Persons (PSEP) will be classified as per the original cost of equipments either under Micro or Small Enterprises (service) sector instead of earlier classification/definition of 10 vehicles in case of SRWTO and working capital and /or Term loan limits

3 Classification of Advances to Micro, Small and Medium Enterprises Sector within Priority Sector in case of Small Business/Professional and Self employed persons. Bank s lending to Medium enterprises will not be included under Priority Sector DIRECT FINANCE: i. All loans granted to Small Enterprises including Micro Enterprises (both Manufacturing and Services) will be classified under Direct Finance to Micro and Small Enterprises Sector. ii. Khadi and Village Industries Sector (KVI): a. All advances granted to units in the KVI sector, irrespective of their size of operation, location and amount of original investment in Plant and Machinery, will be eligible for consideration under the Sub Target (60 percent) of the Small Enterprises segment within the Priority Sector. 4.2 INDIRECT FINANCE: Indirect Finance to the Small (manufacturing as well as service) Enterprises sector will include credit to: i. Persons involved in assisting the decentralized sector in the supply of inputs to and marketing of outputs of artisans, village and cottage industries. ii. Advances to cooperatives of producers in the decentralized sector viz., artisans, village and cottage industries. iii. Existing investments as on 31st March, 2007, made by banks in special bonds issued by NABARD with the objective of financing exclusively non-farm sector may be classified as Indirect finance to Small Enterprise sector till the date of maturity of such bonds of March 31, 2010, whichever is earlier. Investment in such special bonds made subsequent to March 31, 2007 will, however, not be eligible for such classification CALCULATION OF INVESTMENT FOR PLANT AND MACHINERY iv. Loans granted by banks to NBFCs for on lending to Small and Micro enterprises (manufacturing as well as service). i. In calculating the value of plant and machinery for the purpose of calculating investment limit, the original price thereof, irrespective of whether the plant and machinery are new or second hand shall be taken into account. ii. The List of Plant and Machinery to be Excluded or included is enclosed per annexure- A.

4 Processing of Applications iii. It is further clarified that cost of Pollution Control, research and development, industrial safety devices and such other items as may be specified by notification, shall be excluded. Banks Policy i. Loan Application Simplified application form will be used for Micro and Small Enterprise. The existing loan Application form will be applicable to all loans irrespective of limit for Medium Enterprises sector. ii. Issue of Acknowledgement of Loan Applications: Bank will issue an acknowledgement for loan applications received from the borrowers towards financing under this sector and maintain the record of the same. iii. Disposal of Applications: In case of Loans up to Rs /- : Within 2 week In case of Loans above Rs : Within 4 Weeks (Provided the loan applications are complete in all respects and accompanied by a 'check list' enclosed to the application form). iv. Register of Receipt/Sanction/Rejection of Applications: a. A register should be maintained at each zone wherein the date of receipt, sanction /disbursement, rejection with reasons, should be recorded. The register should be made available to facilitate verification by the Bank s officials including Zonal Heads/ Business Head/ BU Head during visit to the branch. b. The Sanctioning Authority as per Scheme may reject application (except in respect of SC/ST). In the case of proposals from SC/ST, rejection should be done at a level higher than Sanctioning Authority as per Scheme of Delegation of Powers c. The reason for rejection will be communicated to the borrower in line with stipulation mentioned in Bank s Lenders Fair Practice Code. d Disbursement Composite Loan Time limit for disbursement of loan would be 2 days from the compliance of the sanction terms. A composite loan with maximum limit upto Rs.1.00 crore may be considered by bank to enable the Micro and Small

5 Types of Loans Enterprises {both for manufacturing and service sector} to avail of their working capital and Term loan requirement through Single Window. The Bank may provide all types of funded and non funded facilities to the borrower under this sector viz, Term Loan, Cash Credit, Letter of Credit, Bank guarantee, etc. Margin Loan Size Minimum Margin Up to Rs Nil Above Rs As per lending policy of the Bank i. While considering proposals under MSME sector, the book debt upto six months may be treated as a current assets, for the purpose of computation of permissible bank finance. ii. The margin on the book debts may also be considered at 20% to 25%/40%/50 % on merit of the case. iii. In regard to age of the book debts, a certificate preferably from Auditors /Chartered Accountant to be obtained. Security iv. All book debts more than 180 days are to be treated as Non-current asset. Stock and Book Debts to be hypothecated in bank s favour. Adequate Insurance cover to be taken for such stock The Bank, on its own, will sanction loans with no collateral or Third party guarantee for advances up to Rs.5.00 Lacs(including those units financed under the Prime Minister Employment Generation Programme of KVIC.) Collateral security shall not be insisted upon in those cases where the RBI directives specifically advised the banks not to insist on obtaining Collateral security /third party guarantee, in certain priority sector credit or Government sponsored schemes. The other guidelines/amendments as per lending policy of the Banks should be closely observed. Risk Rating, Pricing & Other In all other cases, collateral cover will be decided as per Bank s loan Policy/product guideline on the merits of each case. Risk Rating

6 Service Charges i. The RBI has directed to Banks to take steps to rationalize the cost of loans to SME sector by adopting a transparent rating system. ii. The rating of account may be done under internal RAM rating system/scoring Model for Business Banking Segment iii. The Bank will move to a Credit Scoring Model for Loans upto Rs. 200 lacs b. Rating from outside rating Agencies: i. Our Bank has entered/ will enter into MOU with rating agencies, for getting the SME borrowers rated by them. ii. The National Small and Industries Corporation (NSIC) has been appointed as nodal agency which provides subsidy to the units obtaining Credit rating from any of the empanelled agencies with them. NSIC reimburse 75% of the rating fee of the empanelled agencies to the Micro and Small Enterprises {manufacturing sector i.e. earlier SSI units}. Pricing Other Service / Inspection Charges: Eligible Type of borrowers Age of promoter Banking History Defaulter checklist CIBIL Check iii. Validation of the rating will be done as per extant guidelines of the Risk Management Department. The rate of interest to the borrower classified under Micro, Small and Medium Enterprises will be charged as per Bank s policy / RBI Guidelines The charges will be realized as per RBI/ Bank guidelines. Sole Proprietorships, Registered Firms, Private and Public Limited Companies (HUF Firms and partnership firms where HUF is a partner to be excluded) Min = 25 years Max = 70 years Credit T/O in the bank statement should be commensurate with the sales T/O. Entity/ Group entities as well as all directors should not be part of RBI / ECGC defaulters list / Adverse credit history report Borrowers/guarantors names should not be appearing in the consumer/commercial

7 Methodology for calculation of Bank Finance 11.1 Working Capital Loan: i) Working capital credit limits to Micro, Small and Medium Enterprises in individual cases up to Rs.5.00 Crore (Manufacturing sector) and upto Rs.2.00 Crore (Service sector) will be computed as per existing guidelines on the basis of minimum 20% of their projected annual turnover (turnover method). However in case of borrower applying for working capital limit higher or lower than the working capital computed on the basis of turnover method shall be assessed as per actual requirement. Broad parameters for eligibility for Working capital finance will be as under Gearing Ratio : <=4 Leverage Ratio : <=6 Current Ratio : >=1 ICOR :>=1.25 Eligibility for Term Loan will be based on minimum Debt Service Ratio of 75% on EBITA and other parameters as per product guidelines. Deviation on the above can be considered on cases to case basis. ii) For assessment of the working capital requirement for borrowers above Rs.5.00 crores (Manufacturing sector) and above Rs.2.00 Crore the method of computing MPBF as per second method of lending will be used.. Broad parameters, as given hereunder, for manufacturing companies will apply to SMEs and other entities. 1. Current Ratio : 1.10 (Minimum) 2. Debt /TNW : 2 (Maximum) 3. Debt/ EBITDA : 4 (Maximum) 4. Interest Cover : 2.5 (Minimum) Term loans (these norms are also applicable for term loans offered to companies in other sectors (service sector/ trading, etc)) (a) Average DSCR (Gross) : 2 (Minimum)

8 (b) Minimum DSCR (Gross) : 1.5 (c) Asset Cover : 1.2* (Minimum) (d) Tenor : Not exceeding 7 years (e) Margin : Minimum 20% * Valuation as per details given in Annexure-A Financial covenants for term loans: (a) Debt /TNW : 2 (Maximum) (b) Debt/ EBITDA : 4 (Maximum) (c) Promoters should retain their shareholding in the company during tenure of the loan Covenant testing would be done on an annual basis In case of additional comfort in the form of escrow arrangement for identified cash flows, exclusive security and other such credit enhancements the eligibility and other parameters could be relaxed. 1. Current Ratio : 1.10 (Minimum) 2. Debt/TNW : 2.50 (Maximum) 3. Interest Cover : 2.0 (Minimum) (For Term Loans) 4. Average DSCR (Gross): 1.5 (Minimum) Minimum DSCR (Gross): Tenor : Not exceeding 5 years 6. Margin (Term loans) : 20% (Minimum) MACHINERY TO LOOK INTO COMPLAINTS 7. Margin for working capital facilities : Stocks & Book debts : Minimum 25% LC & BG : Minimum 10% Each Zonal office will form a Committee headed by the Zonal Head (BBG/CBG) at the Zone. level to look into the complaints and their time bound disposal. The Zonal Head will be the Nodal Officer at Z.O. level for redressal of complaints. The Committee will verify periodically that the guidelines under Priority Sector in general and MSME sector in particular are complied by the branches and complaints emanated from non-

9 compliance of these guidelines will be taken up for putting back to track. Transfer of account to other bank s/financial institutions Release of securities Prepayment charges Other Aspects The names and addresses with telephone number of the Nodal Officer with whom complaints can be lodged should be displayed on the notice board of every branch. Within two weeks from the date of receipt of notice from the borrower or from the bank/financial institution which proposes to takeover the account Immediately on receiving repayment of loan but in any case not later than one week subject to any legitimate right or lien for any other claim the bank may have against the borrower. No prepayment charges will be levied for loans up to Rs.5.00 lacs The other aspects of the Bank s Credit policy/ guidelines under the relevant products/rbi Guidelines/MSE Code of BCSBI will be applicable. Annexure A Enterprises Manufacturing Enterprises (Calculation of Value of Plant & Machinery) Calculation of Value of Plant & Machinery In calculating the value of plant and machinery for the above purpose, the original price thereof, irrespective of whether the plant and machinery are new or second hand shall be taken into account. In calculating the value of plant and machinery, the following shall be excluded namely: - i. The cost of equipments such as tools, jigs, dies, moulds and spare parts for maintenance and cost of consumable stores. ii. The cost of installation of plant and machinery. iii. The cost of research and development (R&D) equipment and pollution control equipment. iv. The cost of power generation sets, extra transformer, etc. installed by the undertaking as per the regulations of the State Electricity Board. v. The Bank charges and services charges paid to the National Small Industries Corporation or the State Small Industries Corporation. vi. The cost involved in procurement or installation of cables, wiring, bus bars, electrical control panels (not those mounted

10 on individual machines), oil circuit breakers/miniature circuit breakers etc. which are necessarily to be used for providing electrical power to the plant and machinery/safety measures. vii. The cost of Gas producer plant. viii. Transportation charges (excluding of taxes e.g. Sales Tax, Excise etc.) for indigenous machinery from the place of manufacturing to the site of the factory. ix. Charges paid for technical know-how for erection of plant and machinery. x. Cost of such storage tanks which store raw-material, finished goods only and are not linked with the manufacturing process. xi. Cost of fire fighting equipment. xii. Establishing of wind mill/s to generate electricity for captive consumption or partly for captive consumption and remaining power to sell to electricity boards/others. In the case of imported machinery, the following shall be included in calculating the value :- 1. Import duty (Excluding miscellaneous expenses as transportation from the port to the site of the factory, demurrage pad at the port) 2. The shipping charges. 3. Customs clearance charges and 4. Sales Tax or Value Added Tax Under MSMED Act-2006, it is clarified that cost of Pollution Control, research and development, industrial safety devices and such other items as may be specified by notification, shall be excluded.

11 Restructuring/rehabilitation policy for MSME: The objective of the DRS for MSMEs is to ensure timely and transparent mechanism for restructuring the debts of potentially viable entities facing problems for the benefit of all concerned. In particular, the framework will aim at preserving viable MSMEs that are affected by certain internal and external factors and minimize the losses to the creditors and other stakeholders through an orderly and coordinated restructuring programme. ELIGIBILITY CRITERIA OF CASES UNDER MSME-DEBT RESTRUCTURING SCHEME (DRS) Eligibility criteria: The Debt Restructuring guidelines shall be applicable for MSMEs to the following entities, which are viable or potentially viable: CASES, WHICH CANNOT BE CONSIDERED UNDER MSME-DRS Accounts classified as "Loss Assets"., involving fraud or where diversion of funds with malafide intension has been observed. In the case of accounts referred to BIFR, the proposal of restructuring shall be approved by BIFR and any condition stipulated by BIFR should be complied with before implementation of the package. Accounts identified as wilful defaulters will not generally be considered for restructuring. TIME FRAME FOR APPROVAL OF PROPOSALS UNDER MSME-DRS As per the Code of Banks Commitment To Micro and Small Enterprises restructuring package is to be implemented within 60 days from the date of receipt of request, the following time frame has been stipulated for this purpose. Steps to be taken Forwarding of the Restructuring package by Branch to the sanctioning authority with views / recommendations Sanction of the restructuring package Implementation of the restructuring package Time to be taken 20 days 25 days 15 days

12 REJECTION OF CASES UNDER MSME-DRS If the restructuring is not found viable recovery steps will be pursued. STAGES AT WHICH PROPOSALS UNDER MSME-DRS CAN BE CONSIDERED Any account irrespective of present status of irregularity can be considered for restructuring provided it meets the viability criteria as set under para G below. However, if a NPA account is restructured it shall be upgraded only after completion of satisfactory performance for one year. VIABILITY CRITERIA FOR MSME-DRS The following viability criteria are prescribed. PARTICULARS VIABILITY NORMS FOR MSME-DRS Minimum Average DSCR 1.25 Maximum Period within which the unit should 7 years become viable Maximum Repayment period of the restructured 12 years debt Minimum Promoters' Contribution Micro sector -10% (of which at least 50% must come upfront and balance within 6 months) All other sectors - 20% The relief and concessions may be decided as per the cash flow anticipated in the technoeconomic viability report. PROCEDURE The borrowers intending to avail the benefits of restructuring under DRM for MSMEs shall approach the branch with the following papers: a) Request for restructuring of debts. b) Copies of the audited balance sheet and profit and loss account of the borrower for the last three years. c) Unaudited data for the current year. d) For projects under implementation, details of sources and uses of funds since inception. e) Projected Profitability statement covering the period of repayment proposed for the restructured debt along with the calculation of DSCR.

13 f) Projected Balance sheet and Profit and Loss account covering the period of repayment proposed for the restructured debt. g) Techno-economic viability study report to be obtained for exposure of Rs crore and above. h) Statement showing identification of the sources of margin money. i) Statement showing the annual working capital requirement. LEGAL BASIS: While considering restructuring of accounts under MSME sector exchange letters duly signed by borrower/s, co-obligant/s, surety/ies shall be obtained in the cases where there is only simple change in repayment schedule. If the restructuring involves modification of terms of original loan documents beyond simple change in repayment schedule, then revised documents shall be obtained in addition to exchange letters. AUTHORITY FOR CONSIDERING DRS: As per Delegation of Powers.