A precise presentation regarding financing small and medium enterprises through banks.

1. SME FINANCING-
BANKING SECTOR
- Varun Chandak
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2. 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
Guarantee
 Working Capital by way of Cash Credit, Overdraft
 Bank Guarantee
 Lease Rent Discounting
 Financing Special Institutions
 SME Collateral Free Loan (SMECFL) 2

3.  Credit Guarantee Fund Scheme (CGFS)
 Compliance to be followed by Banks
 Targets prescribed for banks to lending to MSMEs
 Factors affecting SME Finance- Banker’s
Perspective
 Sick Units
 Revival of sick units
 Guidance to MSE entrepreneurs
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4. 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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5. Enterprise
Classificatio
n
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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6. 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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7. 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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8. 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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9. 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
9

10. 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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11. 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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12. 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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13. 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 13

14. 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 14

15.  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 15

16.  Food Industry
 Loans 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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17. 17
 Transport Operators
 Term 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.

18.  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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19.  Other Loan facilities
 Loans 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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20. 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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21. 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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22.  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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23.  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
23

24.  Guarantee Cover
 The extent of the guarantee cover admissible is shown
below:
24
Borrower
Category
Maximum extent of Guarantee where credit
facility is
upto 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

25. 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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26.  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:
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Period No. of Proposals
Approved
Credit Amount Approved
(Rs. In crores.}
2000-01 951 6.06
2001-02 2296 29.52
2002-03 4955 58.67
2003-04 6603 117.60
2004-05 9516 326.77

27. Period No. of Proposals
Approved
Credit Amount Approved
(Rs. In crores.)
2005-06 16284 461.91
2006-07 27457 704.53
2007-08 30825 1055.84
2008-09 53708 2199.40
2009-10 151387 6875.11
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28. 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 :
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For credit limits upto Rs. 2/- lacs Within 2 weeks
For credit limits upto Rs. 5/- lacs Within 4 weeks
For credit limits exceeding Rs. 5/-
lacs
Within a reasonable time
frame (4 weeks)

29.  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.
29

30.  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. 30

31. 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
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• Following ratios can be accepted for granting credit facilities to SME
units falling as per regulatory guidelines or SMEs as per expanded
coverage.

32. 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
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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.

33. 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 enterprises
 a 10 per cent annual growth in the number of
micro enterprise accounts
 60% of total lending to MSE sector to Micro
enterprises.
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34.  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
34

35. FACTORS AFFECTING SME FINANCE-
BANKER’S PERSPECTIVE
39%
28%
8%
19%
6%
Lack of
Experience
Poor financials
of Enterprise
No Collateral &
Infrastructure
Smaller Ticket
Size
Others
35

36. 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.
36

37. 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
37

38.  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. 38

39. 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.
39

40. Varun Chandak
Email : vchandak1996@gmail.com
Mobile: 9643803301
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