To ensure formal finance to priority sectors such as agriculture and MSME, Priority Sector Lending guidelines have been in place for commercial banks since 1972. Under these guidelines, domestic commercial banks are required to allocate 40 percent of the net bank credit for priority sectors (32 percent norm for foreign banks.

1. Policies of Financial
Regulator
Part 5
Empowering MSMEs Role of Banks & Financial
Institutions, IT, Skill Development & Rating Agencies

2. Policies of Financial Regulator
To ensure formal finance to priority sectors such as agriculture and MSME,
Priority Sector Lending guidelines have been in place for commercial banks
since 1972. Under these guidelines, domestic commercial banks are required
to allocate 40 percent of the net bank credit for priority sectors (32 percent
norm for foreign banks.
• Lending to micro and small enterprises is covered under priority sector.
While domestic public and private banks do not have any sub-targets, foreign
banks are required to allocate 10 percent of the net bank credit to these
enterprises.

3. Policies of Financial Regulator
• With regards to PSL in MSE, the RBI has accepted all the recommendations
of the Prime Minister’s Task Force Report. Key measures include: (a)
commercial banks to achieve 20 percent annual growth in credit to the sector,
(b) 60 percent of the portfolio to be allocated to micro enterprise segment,
and (c) 10 percent annual growth in unique micro-enterprise accounts.
• In a recent development, the Nair Committee on Priority Sector Lending has
recommended that 7 percent of net bank credit should be allocated to micro
enterprises (applicable for both domestic and foreign banks). The Committee
has also recommended that banks should increase micro enterprise
customers at the rate of 15 percent per annum.

4. Policies of Financial Regulator
• In order to ensure that banks adhere to the priority sector lending guidelines,
the RBI requires banks to deposit unutilized priority sector funds with a special
fund managed by SIDBI and NABARD. The provision works as penalty because
the yield on the special fund is much lower than the potential yield on other PSL-
approved sectors.

5. Policies of Financial Regulator
• Policy incentives for MSME finance by banks
I. Prescribed provisioning requirement for ‘standard advances’ under SME
advances is merely 0.25% as against 1.00% in case of real estate and 0.40%
for other advances, which is a reward for banks to make lower provision
towards buffer capital on SME advances
II. Collateral free loans up to Rs. One crore are secured by CGTMSE guarantee
which is highly liquid at par with cash security as compared to any other
collateral in loan accounts
III. Allocation of zero risk weight to SME loans guaranteed by CGTMSE for
capital adequacy requirement
IV. Simplified computation of working capital limit for MSE units of their
estimated annual turnover up to the limit of Rs.500 lacs.

6. Policies of Financial Regulator
• In order to ensure the flow of equity to the sector, capital markets regulator
Securities and Exchange Board of India (SEBI), in consultation with the
Ministry of Finance, has framed a set of guidelines to set up a dedicated stock
exchange for small and medium enterprises. Both Bombay Stock Exchange
(BSE) and National Stock Exchange (NSE) have set up and launched SME stock
exchanges in 2011.

7. Policies of Financial Regulator
The government provides financing support to the sector through the Small
Industries Development Bank of India (SIDBI)
• SIDBI provides wholesale financing support to small financial institutions
such as NBFCs that operate in the MSME sector.
• SIDBI also provides retail finance support to MSMEs, particularly in the
growth stage through schemes such as Growth capital and Equity assistance
for MSME (GEMS).
• In addition to providing debt finance, SIDBI has also set up SIDBI Venture
Capital Limited to supply equity to the MSME sector..

8. Policies of Financial Regulator
• To minimize the effect of immovable collateral on access to finance for
MSMEs, the government and SIDBI have co-funded a credit guarantee fund,
Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE). Financial
assistance from SIDBI – SIDBI has created a corpus Fund of INR 60 Cr for
providing financial support to MSMES with special focus on technology
enterprises. Credit Guarantee Fund Trust for Micro and Small Enterprise
(CGTMSE) scheme was launched by the GOI in 2000 to strengthen credit
delivery system and facilitate flow of credit to the MSME sector. To
operationalize the scheme, GOI and SIDBI set up the Credit Guarantee Fund
Trust for MSMEs. The scheme provides collateral free funding up to INR 1
Crore for individual MSMEs. The CGTMSE Scheme is operated through a
network of Banks and FIs called Member Lending Institutions (MLIs).

9. Policies of Financial Regulator
Credit Linked Capital Subsidy Scheme –
• This scheme aims at facilitating technology up-gradation of MSMEs by
providing 15 % capital subsidy for purchase of Plant & Machinery / Improved
technology. Maximum limit of eligible loan for calculation of subsidy under
the scheme is Rs.100 lakhs. At present, more than 1500 well
established/improved technologies under 51 sub-sectors have been approved
under the Scheme.
• ISO 9000/ISO 14001 Certification Reimbursement scheme for MSMEs offers
reimbursement of expenses up to 75% (subject to a maximum of INR 75,000)
incurred towards the acquisition of ISO 9000/ISO 14001/HACCP certification.

10. THANK YOU
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