This document discusses financing for micro, small, and medium enterprises (MSMEs) in India. It defines MSMEs based on investment levels and classifies them under priority sectors. It outlines various manufacturing and service activities eligible for MSME financing. It also describes the types of credit facilities available to MSMEs, including term loans, cash credits, and letters of credit. Processing procedures for loan applications are explained, along with guidelines on maintaining application registers and rejecting proposals.

1. FINANCING MICRO AND SMALL
ENTERPRISES
-PROBLEMS AND PROSPECTS
Made By:
Group 18
Anshal Chaturvedi
Riya Chhabria
Apurva Kulkarni

2. Introduction
MSME stands for Micro, Small and Medium
Enterprises also known as ‘Town and Village’
Enterprises.
SME’s are mainly skill oriented.
This sector contains an element of “Welfare of
Masses”.
Different parameters in Different countries,
like Man power, Turn over, Working
Hours….etc.

3. Definition of MSMEs
Type Manufacturing Service
Enterprise Enterprise
Micro Upto Rs. 25 Lakhs Up to Rs. 10 Lakhs
Small Rs 25 Lakhs to 5 Rs. 10 Lakhs to Rs.
Crore 2 Crores
Medium Rs. 5 Crores to Rs. Rs 2 Crores to Rs
10 Crores 5 Crores

4. Classification Of MSME Within
The Priority Sector
The Micro and Small Enterprises
(manufacturing and service) will be
Classified under Priority Sector.
The Micro and Small (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).

5. Classification Of MSME Within
The Priority 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 in case of
SmallBusiness/ Professional and Self

6. Classification Of MSME Within
The Priority Sector
If the following Storage Units, registered
as SSI Unit/Micro or Small Enterprises,
the loans granted to such units may be
classified as Small Enterprises Sector
“Loans for construction and running of
storage facilities (warehouse, market
yards, godowns and silos), including Cold
Storage Units designed to store
agriculture produce/ products,
irrespective of location”.
Lending to Medium Enterprises will not
be included under Priority Sector.

7. Manufacturing Activities
 Medical Equipment and Ayurvedic Product
 Composite unit of Bacon Processing and
Piggery Farm
 Tobacco Processing
 Beedi/Cigarette manufacturing and other
tobacco Products
 Extraction of Agave Spirit from Agave
juice; (imported medicinal plant )
extraction of Agave

8. Manufacturing Activities
 Manufacture of Bio-Fertilizer
 Piggery Farm without bacon processing
as this is a farming activity.
 The activity of “Bee-Keeping” being
farming allied activity.

9. DIRECT FINANACE:
1. 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.
2. Khadi and Village Industries Sector (KVI):
All advances granted to units in the KVI sector,
Irrespective of Sector 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.

10. INDIRECT FINANCE
1. 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.

11. INDIRECT FINANCE
3. 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 fiancé 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 .
4. Loans granted by banks to NBFCs for on
lending to Small and Micro enterprises
(manufacturing as well as service).

12. MSMED Act 2006
 In India, the MSMED Act 2006 has
come into force on 02nd Oct. 2006 which
facilitates:
(i) Promotion and Development of SMEs
(ii) Enhancing their competitiveness.
(iii) Generation of Employment.
(iv) Generation of income/profit to boost
GDP.
(v) Increasing Exports.

13. Overview
The world over there has been a significant
thrust for growth of Micro and Small
Enterprises mainly due to sector’s ability to
deliver quality products /services at cheaper
and to provide large scale employment.

14. CALCULATION OF INVESTMENT
FOR PLANT & MACHINERY
 In case of MSME advances, if the branches are unable to
assess original investment criteria, a certificate with regard
to investment in plant and machinery / equipment should
be obtained from a Chartered Accountant.
 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. In case the Branch is unable to assess the
original investment criteria, a certificate with regard to
investment in plant/machinery/equipment etc. would be
obtained from a Chartered Accountant.
 The investment in 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 are to be included in the
investment in plant and machinery.

15. Processing of Loan Application
Application Format:
 Revised Simplified Loan Application Form
prescribed by IBA alongwih check list and
undertaking of the applicant, will be
applicable for Micro and Small Enterprises
(MSEs)
 For loan beyond Rs.25Lacs, branches may
obtain additional information from the
borrower, as deemed necessary, as
incorporated in the checklist enclosed to the
loan application form.
 Loan Application Form (ADV-Comm) and
Checklist enclosed will be applicable for
Medium Enterprises only.

16. Processing of Loan Application
 Fair Practice Code for Lenders Liabilities
 Before handing over the Application Forms to
applicant, the modification / addition as
applicable under guidelines on Fair Practice
Code for Lender’s Liabilities will be complied as
under:
(a) Information regarding Processing Fee,
Service Charges, and Refund etc. will be
annexed as a part of application form.
(b) An undertaking to be obtained from the
prospective borrower while accepting
application that he has been briefed about and
convinced about the charges, bank will levy on
pre/post sanction of the loan.

17. Processing of Loan Application
 Issue of Acknowledgement of Loan
Applications :
Each branch will issue an acknowledgement for
loan applications received from the borrowers
towards financing under this sector and
maintain the record of the same.

18. Processing of Loan Application
 Disposal of Applications:
In case of Loans up to Rs.25000/- :
Within 2 weeks
In case of Loans above Rs.25000/- :
Within 4 Weeks
(Provided the loan applications are complete
in all respects and accompanied by a 'check
list' enclosed to the application form)

19. Processing of Loan Application
 Register of Receipt/Sanction/Rejection of
Applications:
a. A register should be maintained at branch
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 Manager during visit to the branch.
b. Branch Manager 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 Branch Manager.
c. The reason for rejection will be communicated to
the borrower in line with stipulation mentioned in
the Fair Practice Lenders Code.

20. Processing of Loan Application
 Photographs of Borrowers
While there is no objection to take photographs
of the borrowers, for the purpose of
identification, branches themselves should make
arrangements for the photographs and also bear
the cost of photographs of borrowers falling in
the category of Weaker Sections. It should also
be ensured that the procedure does not involve
any delay in loan disbursement.

21. TYPES OF CREDIT FACILITIES
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.
A Composite Loan with maximum limit upto
Rs.1.00 crore may be considered by bank to
enable the Micro and Small Enterprises
{both for manufacturing and service sector}
to avail of their working capital and Term
loan requirement through Single Window.

22. ACTIVITIES OF SME’s
 Any commercial activity permissible
under law i.e. any type of
manufacturing, processing or industrial
activity or trading or allied operations.
Some of few are:
1. Servicing & repairing machinery and
equipment, including agro service units
2. Village and cottage industries
3. Computer software development and
computer services

23. ACTIVITIES OF SME’s
 Medical /Legal transcription activities
 Call Centers
 Event development and animation
 Video film making
 Marketing consultancy.
 Equipment rental & leasing.
 Laundry/X-rays/ pathology/
Tailoring/Studios/Cable TV network.

24. SME’s Financing Features
Involvement of lesser amount of financial
resources.
Lower gestation period.
Wide scope of marketing.
They are mostly run by promoters /Owners.
They are operated mainly in Rural and Semi
Urban areas showing their national
presence.

25. Importance of SME’s
Large-scale generation of wage employment.
Growth in GDP. MSME’s not only account
for 80% of the total number of Industrial
Enterprises in the country but are also the
second largest employment providing sectors
in the country after agriculture.

26. Importance of SME’s
This sector is a growth-driver in the
economy.
It is possible to set up SMEs in large
numbers in a country in order to usher in
rapid progress and growth.
40/50% of output/services originated from
this sector.
30% of Indian Exports are on account of
SMEs.

27. Ganguly Committee
The “Ganguly Committee’ has thoroughly
examined the issues confronting SMEs and
suggested the following:
 Institutional Finance should be made
available on suitable terms.
 Units having linkages with large
corporate as vendors/suppliers should
be extended credit, with an appropriate
tie up to facilitate recovery.

28.  Cluster of SMES based on Trade record.
 SIDBI/Banks to promote national level SME
development fund.
 SIDBI to provide technical support.
 To promote a specific SME Rating Agency to
provide comfort to the banks financing
SMES
 Setting up of Micro Finance Intermediaries
to accelerate the growth of SMEs.

29. Govt. Initiatives
Government of India has initiated the
following steps for the speedy growth of
SMEs.
Ministry of Finance has announced a policy
for doubling of outstanding credit to Micro
and Small Enterprise Sector by the year
2009-10.
A minimum of year-to-year growth of 20% is
to be achieved under outstanding in this
sector.

30. Introduced credit linked capital subsidy
scheme for SME sector
In lines with SME sector introduced various
employment generation schemes to cater to
the needy people from Rural and Urban.
A Technology bureau for SMEs has been set
up as a starting process for promoting
SMEs.

31. Provision for composite Loan limit.
Ensuring that banks extend loan at a lower
rate of interest as against Benchmark rate.
Opening of specialized SME Branches.
Introduced LUCC (Laghu Udyami Credit Card)
A credit guarantee fund trust (CGFT) has
been promoted

32. Concessions to SME’s
Delayed payments to micro and small
enterprises:
Where MSME supply goods or render services,
the buyer shall make payment on or before the
date agreed upon between them in writing
(where not agreed in writing with in 45 days),
else should pay compound interest with
monthly rests from the due date at 3 times the
Bank rate.
Where the buyer contravenes the provision, he
shall be punishable with a fine of not less than
Rs.10,000/-

33. PNB Schemes for SME’s
In PNB there is 20% discount in
processing/upfront fee in case of
applications received on-line in respect of
SME borrowers.
Introduced simplified common loan
application forms
PNB SME Sahayog Scheme
SME borrowers – Employees accounts.

34. Under PNB Mahila Sashtikaran Yojana,
bank is providing loans to women for their
upliftment.
PNB Green Card Facility.
Small Road Transport Operations Scheme
(SRTO).
Credit Linked Capital Subsidy Scheme for
Technology Up-Gradations (CLCSS).
Prime Minister Rural Employment
Generation Programme (PMEGP).

35. BCSBI (Banking Codes and Standards
Board of India) has introduced ‘Code of
Bank’s Commitment to SME in short as
SME Code.
Bank has adopted SME code to give a
positive trust to the SME sector by
providing easy access to banking
services; promote good and fair banking
practices by setting minimum standards
and increase transparency.

36. Besides the above promoters of MSMEs may
be provided necessary training or awareness
programmes on business measurement on
an ongoing basis at industrial training
institute of the government or at the
training centres of public sector banks.

37. Problem for SME Sector
Low capital base and inadequate availability
of institutional funds.
Low technology base.
Absence / Inadequacy of quality control
assessment
Weak/ ineffective management.
Unable to cope with contemporary business
requirements.
Higher NPA’s of Banks in SME sector creates
risk aversion in lending.
Competition from large sized units.
Unable to providing documents required for
bank finance due to lack of awareness.

38. THANK YOU