RBI Master Circular - Lending to Micro, Small & Medium Enterprises                  (MSME) Sector (2nd July 2012)        S...
Micro, Small & Medium Enterprises Development (MSMED) Act, 2006The Government of India has enacted the Micro, Small and Me...
Common Guidelines / Instructions for Lending to MSME SectorDisposal of ApplicationsThe guidelines stipulate that all loan ...
(ii) In case the buyer fails to make payment of the amount to the supplier, he shall beliable to pay compound interest wit...
Considering the above developments, the Relief and Concessions to viable/potentiallyviable sick units under rehabilitation...
non-performing loans for the MSE sector, with the approval of the Board of Directorsand(b) implement recommendations with ...
KNOW KALEWe are a corporate commercial Law Firm dedicated to providing legal services to, localnational and international ...
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Rbi master circular lending to micro, small & medium enterprises (msme) sector (2nd july 2012)kale law office corporate lawyer law fir tax consultants company lawyer 1

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Rbi master circular lending to micro, small & medium enterprises (msme) sector (2nd july 2012)kale law office corporate lawyer law fir tax consultants company lawyer 1

  1. 1. RBI Master Circular - Lending to Micro, Small & Medium Enterprises (MSME) Sector (2nd July 2012) Synopsis of guidelines for Lending to MSME Sector 1|Page
  2. 2. Micro, Small & Medium Enterprises Development (MSMED) Act, 2006The Government of India has enacted the Micro, Small and Medium EnterprisesDevelopment (MSMED) Act, 2006 on June 16, 2006 which was notified on October 2,2006.With the enactment of MSMED Act 2006, the paradigm shift that has taken place isthe inclusion of the services sector in the definition of Micro, Small & Mediumenterprises, apart from extending the scope to medium enterprises.The MSMED Act, 2006 has modified the definition of micro, small and mediumenterprises engaged in manufacturing or production and providing or rendering ofservices. The Reserve Bank has notified the changes to all scheduled commercialbanks. Further, the definition, as per the Act, has been adopted for purposes of bankcredit vide RBI circular ref. RPCD.PLNFS. BC.No.63/ 06.02.31/ 2006-07 dated April4, 2007. Micro Small & Medium Enterprises Manufacture /Production/Processing Providing or Rendering Of Services /Preservation of Goods Investment in plant and machinery Investment in equipments Rs 25 Rs 25 Lakh – 5Cr  Rs 10 Lakh Rs 5 Cr Rs 10 Lakh – Rs 2 Cr -Rs.5 Small Lakh - Rs 2 Cr Cr Micro Micro Rs.10 Cr Small Medium Medium 2|Page
  3. 3. Common Guidelines / Instructions for Lending to MSME SectorDisposal of ApplicationsThe guidelines stipulate that all loan applications for MSE units upto a credit limit ofRs. 25,000/- should be disposed of within 2 weeks and those upto Rs. 5 lakh within 4weeks by a lending bank provided , the loan applications are complete in all respectsand accompanied by a " check list".Issue of Acknowledgement of Loan Applications to MSME borrowersBanks have been advised to mandatorily acknowledge all loan applications, submittedmanually or online, by their MSME borrowers and ensure that a running serialnumber is recorded on the application form as well as on the acknowledgementreceipt.CollateralBanks are mandated not to accept collateral security in the case of loans upto Rs.10lakh extended to units in the MSE sector. Banks have also been advised to extendcollateral-free loans upto Rs. 10 lakh to all units financed under the Prime MinisterEmployment Generation Programme of KVIC.Thr guideline further states that banks may, on the basis of good track record andfinancial position of the MSE units, increase the limit of dispensation of collateralrequirement for loans up to Rs.25 lakh (with the approval of the appropriateauthority).Composite loanA composite loan limit of Rs.1 crore can be sanctioned by banks to enable the MSEentrepreneurs to avail of their working capital and term loan requirement throughSingle Window.Delayed PaymentUnder the Amendment Act, 1998 of Interest on Delayed Payment to Small Scale andAncillary Industrial Undertakings, penal provisions have been incorporated to takecare of delayed payments to MSME units. After the enactment of the Micro, Small andMedium Enterprises Development (MSMED), Act 2006, the existing provisions of theInterest on Delayed Payment Act, 1998 to Small Scale and Ancillary IndustrialUndertakings, have been strengthened as under:(i) In case the buyer to make payment on or before the date agreed on between himand the supplier in writing or, in case of no agreement before the appointed day. Theagreement between seller and buyer shall not exceed more than 45 days. 3|Page
  4. 4. (ii) In case the buyer fails to make payment of the amount to the supplier, he shall beliable to pay compound interest with monthly rests to the supplier on the amount fromthe appointed day or, on the date agreed on, at three times of the Bank Rate notifiedby Reserve Bank.(iii) For any goods supplied or services rendered by the supplier, the buyer shall beliable to pay the interest as advised at (ii) above.(iv) In case of dispute with regard to any amount due, a reference shall be made to theMicro and Small Enterprises Facilitation Council, constituted by the respective StateGovernment.Further, banks have been advised to fix sub-limits within the overall working capitallimits to the large borrowers specifically for meeting the payment obligation in respectof purchases from MSMEs.Guidelines on rehabilitation of sick SSI (now MSE) unitsAs per the definition, a unit is considered as sick when any of the borrowal account ofthe unit remains substandard for more than 6 months or there is erosion in the networth due to accumulated cash losses to the extent of 50% of its net worth during theprevious accounting year and the unit has been in commercial production for at leasttwo years. The criteria will enable banks to detect sickness at an early stage andfacilitate corrective action for revival of the unit. As per the guidelines, therehabilitation package should be fully implemented within six months from the datethe unit is declared as potentially viable/viable. During this six months period ofidentifying and implementing rehabilitation package banks/FIs are required to do“holding operation” which will allow the sick unit to draw funds from the cash creditaccount at least to the extent of deposit of sale proceedsA circular was issued to all scheduled commercial banks vide RPCD.No.PLNFS.BC.57/06.04.01/2001-02 dated January 16, 2002 on Guidelines forRehabilitation of Sick Small Scale Industrial UnitsFurther, in the light of the recommendations of the Woking Group on Rehabilitation ofSick SMEs (Chairman: Dr K.C. Chakrabarty) and the Banking Codes Standards Boardof Indias Code of Commitment for the MSE borrowers, all Scheduled CommercialBanks have been advised vide RPCD Circular SME&NFS. BC.No.102/06.04.01/2008-09 dated May 04, 2009, to put in place their own Restructuring/ Rehabilitation policyfor revival of viable/potentially viable sick units/enterprises duly approved by theBoard of Directors.However, consequent upon introduction of Base Rate System with effect from July 1,2010 and in terms of para 2.3.1.3 of Master CircularDBOD.No.Dir.BC.5/13.03.00/2011-12 dated July 1, 2011 on Interest Rates onAdvances, in case of Restructured loans if some of the WCTL, FITL, etc. need to begranted below the Base Rate for the purposes of viability and there are recompenseetc. clauses, such lending by Scheduled Commercial Banks will not be construed to bea violation of the Base Rate guidelines. 4|Page
  5. 5. Considering the above developments, the Relief and Concessions to viable/potentiallyviable sick units under rehabilitation prescribed in Appendix – II of our circular RPCD.NO. PLNFS.BC.57/06.04.01/2001-2002 dated January 16, 2002 stand withdrawnvide our circular RPCD.SME & NFS.BC.No.19/06.02.31/2011-12 dated September 12,2011Debt Restructuring Mechanism for MSMEs(i) As part of announcement made by the Honble Finance Minister for stepping upcredit to small and medium enterprises, a debt restructuring mechanism for units inMSME sector has been formulated by Department of Banking Operations &Development of Reserve Bank of India and advised all commercial banks vide circularDBOD.BP.BC.No. 34/21.04.132/2005-06 dated September 8, 2005. These detailedguidelines have been issued to ensure restructuring of debt of all eligible small andmedium enterprises. These guidelines would be applicable to the following entities,which are viable or potentially viable:(a) All non-corporate MSMEs irrespective of the level of dues to banks.(b) All corporate MSMEs, which are enjoying banking facilities from a single bank,irrespective of the level of dues to the bank.(c) All corporate MSMEs, which have funded and non-funded outstanding up to Rs.10crore under multiple/ consortium banking arrangement.(d) Accounts involving willful default, fraud and malfeasance will not be eligible forrestructuring under these guidelines.(e) Accounts classified by banks as “Loss Assets” will not be eligible for restructuring.For all corporate including MSMEs, which have funded and non-funded outstanding ofRs.10 crore and above, Department of Banking Operations & Development has issuedseparate guidelines on Corporate Debt Restructuring Mechanism vide circular DBOD.No.BP.BC.45/ 21.04. 132/2005-06 dated November 10, 2005.Prudential Guidelines on MSME Debt Restructuring by banks have been formulatedand advised to all commercial banks by Department of Banking Operations &Development vide circular DBOD.No.BP.BC.No.37 /21.04.132/2008-09 dated August27, 2008.(ii) In the light of the recommendations of the Working Group on Rehabilitation of SickMSEs (Chairman: Dr. K.C. Chakrabarty), all commercial banks were advised videour circular ref. RPCD. SME & NFS.BC.No. 102/06.04.01/ 2008-09 dated May 4,2009to:(a) put in place loan policies governing extension of credit facilities,Restructuring/Rehabilitation policy for revival of potentially viable sickunits/enterprises and non- discretionary One Time Settlement scheme for recovery of 5|Page
  6. 6. non-performing loans for the MSE sector, with the approval of the Board of Directorsand(b) implement recommendations with regard to timely and adequate flow of credit tothe MSE sector.(iii) Banks have been advised to give wide publicity to the One Time settlement schemeimplemented by them, by placing it on the bank’s website and through other possiblemodes of dissemination. They may allow reasonable time to the borrowers to submitthe application and also make payment of the dues in order to extend the benefits ofthe scheme to eligible borrowers. 6|Page
  7. 7. KNOW KALEWe are a corporate commercial Law Firm dedicated to providing legal services to, localnational and international businesses. The Corporate Lawyers and other consultingprofessionals associated with our Law Firm provide the depth and breadth of expertisenecessary to solve complex business challenges and deliver sound legal services. The firmalso provides ‘one-stop’ transaction services including legal due diligence, drafting, andnegotiating, closing, corporate and regulatory advisory services.As part of the global business community, we as a Law Firm recognize that optimalresults are driven by a spirit of collaboration and a team approach to service. With thatunderstanding our Law Firm collaborates with clients—and each other—every day tohandle the complex transactions, regulatory matters and litigation that businesses face.Our Law Firm is currently offering legal services to clients ranging from emerging startupsto established SMEs in more than 10 practice areas and industry segments, providingLegal Services uniquely suited to each company’s individual needs.Ideologies and ValuesWhen it comes to our clients, Legal Research is our ideology and punctuality andtransparency are our core values. We strongly believe in continuously updating ourknowledge and skill base, which keeps us abreast of the latest developments in law andhelps us provide our clients with creative legal solutions. To achieve this, we regularlyorganize internal Continuing Education (CE) programs where members of the firm makepresentations on specific topics and issuesUnique Selling Point CONTACTS USCommercial awareness is our most added Addressadvantage. The ability of our lawyers tounderstand the clients’ business from a E 45 Lajpat Nagar Part 1commercial standpoint, together with their grasp New Delhiof the applicable laws ensures the effective, Indiasuccessful and timely completion of majortransactions. Following this we have successfully Ph: 011-45123523advised clients on a complete range of business 011-29815213law matters from general corporate advice,evaluating business options, corporate Website: www.kalelawoffice.comgovernance, establishing legal entities or otherforms of business presence in India, restructuring E-mail(s): info@kalelawoffice.comcompanies and businesses, contract law, foreign kalelawoffice@gmail.cominvestment. 7|Page

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