Some relevant #Credit Schemes for #MSMEs

MSME - CLASSIFICATION

CUSTOMER SPECTRUM FOR BANKS / NBFCS
Small and Medium Enterprises
Corporate BankingRetail
Consumers
26 million MSMEs as per 2006-07 census (projected to have
increased to 31 million in 2010-11) comprising of – micro
(94.54%), small (4.89%) and medium (0.17%) enterprises
92.7% MSMEs do not have access to institutional finance
IIP growth rate in MSMEs > organised sector growth rate
Partnership &
Family Owned
Businesses
(4%)
Small & Medium
Companies &
others (1%)
Top Tier
Local and Global
Corporates
Large Local
Corporates
Individuals in
Business
(90%)
Individual
Consumers

MSME CLASSIFICATION AS PER MSMED ACT, 2006
Enterprise
type
Manufacturing Service
Investment in Plant & Machinery Investment in Equipments
Micro Rs. 25 lakhs Rs. 10 lakhs
Small Rs. 5 crore Rs. 2 crore
Medium Rs. 10 crore Rs. 5 crore
Registration required for availing benefits of MSME schemes
a) File EM-I / EM-II with DIC, or
b) Online registration – Udyog Aadhar No. http://udyogaadhaar.gov.in/UA/UdyogAadhar-New.aspx
(instant registration possible – free of cost)

SOME RELEVANT CREDIT SCHEMES

CREDIT LINKED CAPITAL SUBSIDY SCHEME
• Eligible banks – Canara Bank, NABARD, SIDBI, BOB, BOI, PNB, TIIC, SBBJ, NSIC &
Andhra Bank. Other banks can avail through the eligible banks. Eligible micro and
small enterprises (existing and new) as per MSME Development Act, 2006
• Approved Technology – listed at http://www.dcmsme.gov.in/schemes/sccredit.htm#appendixI
• Eligible amount – lower of:
• 15% of the cost of eligible plant and machinery
• Rs. 15 lakh
Micro and Small enterprises having already availed of CLCSS can avail subject to a maximum
of Rs. 15 lakh in its life
• Ineligible items –
• Replacement of existing equipment / technology with same equipment / technology
• upgrading with second hand machinery
• tools, jigs, dies, moulds & maintenance spare parts & consumable stores;
• cost of installation

CREDIT GUARANTEE FOR MICRO & SMALL INDUSTRIES
• Eligibility – micro and small enterprises (not medium) as per MSMED Act,
2006. Application for guarantee cover to be made by lender. Lender to agree
for availing guarantee.
• For working capital, once availed by one Bank, the same amount cannot be
availed by another Bank. Similarly, once availed for term loan, cannot be
availed again after repayment
• Maximum guarantee available –
• 85% for credit exposure of upto Rs. 5 lakh and for women entrepreneurs and for
enterprises in NER
• 75% for credit exposure upto Rs. 50 lakh
• 50% for credit exposure in excess of Rs. 50 lakh and upto Rs. 1 crore
• Guarantee Fee – 1.5% initially and 0.75% annually (1% & 0.5% for credit
exposure less than Rs. 5 lakhs)

SIDBI MAKE IN INDIA SOFT LOAN FUND FOR MSMES (SMILE)

SMILE CONTINUES
• Permitted sectors mentioned at http://www.makeinindia.com/sectors
• Objective - To provide soft loan (10% of the project cost), in the nature of quasi-
equity, and term loan on relatively soft term.
• Eligibility – New as well as existing MSMEs in the manufacturing as well as services
sector; undertaking expansion, modernization, technology upgradation or other
projects for growing their Business.
• Promoter’s Contribution - Minimum 15% of project cost for project up to Rs. 1
crore and 20% projects having project cost in excess of ₨. 2 crore
• Term Loan – upto 75% of the project cost (maximum DER of 3:1) including soft loan
of 10% of project cost (15% for SC/ST/Women/ Persons with disability) subject to
maximum of ₨. 20 lakhs
• Minimum Term Loan – ₨. 25 lakhs
• Repayment period – 7 years
• Interest rate – 9.35% p.a. for soft loan and regular loan 9.45% - 9.95% for the first 3
years. After 1st 3 years, entire loan would be charged normal rate of interest @
11.70% to 14.20% p.a. Upfront fee of 0.5% + taxes

TECHNOLOGY INNOVATION FUND - SRIJAN SCHEME
• Technology Information, Forecasting & Assessment Council, (TIFAC) GOI
fund, implemented by SIDBI
• Eligibility - New/ existing MSME units
• Promoters contribution – Minimum 20% of the project cost
• Loan Amount – 80% of the project cost subject to maximum of Rs. 100
lakh
• Interest Rate – not more than 5% p.a. and upfront fee - 0.5% of
sanctioned amount plus applicable service tax
• Repayment Period – 6 year including moratorium period from the date
of completion of the project

4E SCHEME – END-TO-END ENERGY EFFICIENCY INVESTMENT
• Objective – for meeting capital expenditure including equipment cost,
commissioning of project and other expenditure related to achieving
energy efficiency measures. Other expenditure limited to 50% of
equipment costs. Land and Civil works costs excluded
• Eligibility – only for existing MSME units of more than 3 yrs
• Promoters contribution – 10% of the project cost
• Loan Amount – 90% of the project cost subject to minimax of Rs. 10
lakh and ₨. 150 lakh; subject to 20% of turnover
• Interest Rate – below 2.5% of normal rate
• Repayment Period – moratorium period of 6 months; total repayment
period – 3 years for loans upto ₨. 100 lakhs and 5 yrs for loans
exceeding ₨. 100 lakhs

SIDBI - GENERAL PURPOSE TERM LOAN
• Objective
• Setting up of new MSME unit,
• Expansion/Diversification / Modernization/ technology upgradation/ quality
certification of existing units by MSMEs,
• acquisition of additional machinery / equipments,
• marketing related activities by MSMEs.
• Promotor Contribution - 33 % of Project Cost in new project and 25%
in existing well performing units
• Loan amount – Minimum Rs. 10 Lakh with security margin of 1.3 to 1.4
• Loan Period - 8-10 years including moratorium period up to 18 months
• Interest Rate – normal interest rate charged by SIDBI and upfront fee of
1% of the term loan sanctioned

SIDBI – GEMS / GROWTH CAPITAL & EQUITY ASSISTANCE
FOR MSMES
• Objective – to bridge finance gap for expansion, modernisation and scaling up,
margin money for working capital, financing for business growth including for
intangibles like R&D, marketing, energy efficiency etc.
• Eligibility – existing MSMEs in existence for more than 3 years
• Type of assistance –
• Optionally Convertible Cumulative Preference Share
• Subordinated debt
• Loans with royalty or equity participation
• Promotor Contribution - 33 % of Project Cost in new project and 25% in existing
well performing units
• Loan amount – 50% of the tangible networth
• Loan Period - 7 years for loans; equity components – suitable exit options are
anticipated
• Interest Rate – normal interest rate, generally 2%-3% above SIDBI’s PLR
• Security – generally with assets created out of the assistance

SIDBI – PRIVILEGED CUSTOMER SCHEME (PCS)
• Objective - for general (non-specific investment plan)
• Loan Amount - Maximum of ₨. 1 cr subject to a maximum of
• 20% of Annual Sales, for manufacturing and service sector enterprises
• 40% of Annual Sales, for entities operating purely on job work basis
• Eligibility
• Existing SIDBI customer with good track record of repayment
• Should not be in negative industry list
• Should not be in default to other banks
• SIDBI’s internal rating - SB6 or better
• Promotor Contribution - not asked (DER should preferably be low on
overall business basis to enjoy better rating and qualify under this scheme)
• Period of loan - flexible based on need
• Interest Rate – normal interest rate based on internal credit rating

SOME INPUTS START-UPS

FACILITIES FOR STARTUPS
Objective Qualification Criteria
• Incorporated or registered in India (proprietorship, unregistered partnerships, etc.
are excluded). Public Ltd companies not eligible
• Not older than 5 years
• Turnover not exceeding Rs. 25 cr in any of the financial year
Subjective Qualification Criterion
• Innovation, Development, Deployment of New Products, Processes or Services.
• Recommendation letter from recognised incubators
• A minimum of 20% funding from any of the AIFs registered with SEBI or
• Funding received for innovation from GOI / State Govt.
• Patent filed and published in the Journal of the Indian Patent Office

FACILITIES FOR STARTUPS
Benefits
• Can self-certify compliances
• start-ups registered between April 1, 2016 and April 1, 2019 are eligible for tax
exemption for 3 years (s.80IA of the IT Act, 1961)
• Exemption on tax u/s.56(2)(viib) is available for valuation of shares issued above
fair market value
• Can employ apprentices between 2.5% and 10% of the total employee strength
(including contract employees)

SELF CERTIFICATION OF COMPLIANCE FOR START-UPS
Labour Laws:
• The Building and Other Constructions
Workers’ (Regulation of Employment &
Conditions of Service) Act, 1996
• The Inter-State Migrant Workmen
(Regulation of Employment & Conditions
of Service) Act, 1979
• The Payment of Gratuity Act, 1972
• The Contract Labour (Regulation &
Abolition) Act, 1970
• The Employees’ Provident Funds &
Miscellaneous Provisions Act, 1952
• The Employees’ State Insurance Act, 1948
Environment Laws:
• The Water (Prevention & Control of
Pollution) Act, 1974
• The Water (Prevention & Control of
Pollution) Cess (Amendment) Act, 2003
• The Air (Prevention & Control of
Pollution) Act, 1981
In case of the labour laws, no inspections will be conducted for a period of 3 years. Startups may be inspected on
receipt of credible and verifiable complaint of violation, filed in writing and approved by at least one level senior
to the inspecting officer. Startups which fall under the ‘white category’ (as defined by the Central Pollution
Control Board (CPCB)) would be able to self-certify compliance and only random checks would be carried out in
such cases.

PREFERENTIAL MARKET ACCESS TO MSMES
W.e.f. April 1, 2015 at least 20% of the total procurement by
• Central Government,
• State Government and
• PSUs
• have to be mandatorily least 20% from MSMEs, without any
relaxation in quality standards or technical parameters..
Start-ups (in the manufacturing sector) registered with Government
under the Startup India are exempt from the criteria of “prior
experience/ turnover” provided they have their own manufacturing
facility in India.

HOW TO RAISE FINANCE

AVENUES OF FINANCE
TRADITIONAL
• Debt – long term + working capital
• Discounting of hundies, channel
finance, invoice discounting, etc.
• Quasi Equity – unsecured from
friends and relatives
• Equipment finance & lease
EMERGING
• Quasi Equity – long term
convertible instruments
• Alternative Investment Funds –
VCFs, PEs, Angel Investors, etc.
• Factoring of receivables (?)
• SME Exchange / ITP (?)
• Informal exchanges – crowd
funding (???)

UNDERSTANDING THE 4 INTERDEPENDENCIES
Finance
Risk – return
relationship
Purpose &
Tenure
Lenders’/Investors’
expectation
Credibility &
Governance

LENDERS’ OUTLOOK
CREDIT
WORTHINESS
ASSESSMENT
Business Plan
Promoters
Team
LENDING STAGE
Matured and
Stable
Sustainable
Growth
LENDING
PURPOSE
Acquisition of
Long Term Assets
Expansion
through Working
capital finance
EXIT
Timely repayment
of Principal
Timely payment of
interest
Keeping Account
regular

INVESTORS’ OUTLOOK
INVESTMENT
CASE
Business Plan
Promoters
Team
INVESTMENT
STAGE
Seed / Early
Growth
INVESTMENT
PURPOSE
Strategic
Non-strategic
EXIT
OPTIONS
Buyout
Buyback
IPO
INVESTMENT
HORIZON
Purpose
Timing and Life
of Investible
Funds
Exit options

5CS IN CREDIT-WORTHINESS
Character : to be reflected in conduct and which
leaves an impression on investors, lenders,
customers & other trade parties.
Capacity : ability to repay through
cash generated from the
business. Usually, spelt out in
advance
Capital : money personally invested in the
business by the borrower. A tool to
assess extent of shareholder
commitment in the business. Also acts as
a cushion in uncertain business
environment.
Collateral : an additional assurance provided by
borrower to the credit grantor, to fall- back upon
in the event of capacity to repay falls short. It
could be in the form of guarantees, mortgage of
additional assets, etc..
Conditions : the intended purpose
for which credit is sought. Credit giver
assesses the business scenarios under
which risks are estimated & credit
granted.

6TH C – COMMUNICATION
6th C
Communication
For SMEs 5Cs not enough ‘BECAUSE’
 Perception with regards credit risk is high
 SMEs required to make extra efforts in improving the
perception either through higher collateralization
or better communication
 Communication and demonstration with actual
performance

COMMUNICATE WHAT?
Performance Sustainability
Society
Transparency
Compliance to
investment
/lending terms
Articulating problems -
opportunities

SOME DOS’ AND DON’TS
Transparency
Clarity in communication
Managing within sanctioned
limits
Compliances to conditions
Diversion of funds
Hiding facts of previous defaults
and business failures
Excess utilisation / overdrawal of
credit limits
High frequency of cheque bounces

COMMUNICATION ESSENTIAL FOR
• Delay in commencement of service offering / commercial production, time-cost overrun etc.
• Inordinate delay in submission of anticipated periodic information like quarterly results,
performance and compliance related information, etc.
• Reasons for high incidence of customer complaints, delays in customer commitments, sales
returns, cheque returns, etc.
• Large increase or decrease in business turnover – basis / concerns. Large part of business is
acquired / sold
• Stoppage / suspension of work for an unreasonably long time
• Losses – reasons and likely timeframe for improvement
• Loss of a business partner or co–promoter or a key customer or key employee.
• Possibility of not servicing interest at prescribed intervals; failing to adhere to agreed loan
repayment schedule or investment terms
• When winding-up petition or other legal action is filed against the business

LENDER TOOLS
2. Debt service / interest coverage ratio : EBIT / Interest Expenses
4. Return on capital employed ratio : Operating profit / Capital employed * 100% (to be > Capital Cost)
5. Stock position : Slow or fast moving. (Also, stock carried as a % of Sales)
6. Debtor realisation : Amount, time and certainty in realisation. (Also, realisable debtors as a % of Sales)
1. Cash Flows : ‘Cash is fact, profit an opinion!’
3. Working capital turnover ratio : Cost of goods sold / Net working capital (or gross working capital)

UNDERSTANDING CREDIT SCORE
Credit information
companies (CICs)
Below 540
Poor Credit
300
710+
Excellent Credit
650-709
Above Average Credit
600-649
Good Credit
540-599
Fair Credit
900
Sensitive information of past defaults / suits filed available in
public domain, and cannot be hidden from lenders

INFORMATION RELATING TO DEFAULTS
http://suit.cibil.com/
Choose
Search or summary any one
Date
Click ‘>’ button
If you have chosen summary then you again choose
Credit grantor wise list or state/union territory
If you have chosen search then type ‘name’ about who you want to search.
Click on search.

BANKS INTERNAL RATING
• Banks undertake assessment of credit exposures using their internal rating
models
• Normally 16 to 20 point scale (some have 8 point scale)
• Factors considered
• Financial performance and cash flows generated
• Limit utilization, repayment track record and conduct with Bank
• Security margin available
• Future outlook of the entity and the industry to which it belongs
• Internal Rating assigned can be ascertained from the Bank

DISCUSSIONS / Q&A

www.smebots.com
rdubey@smebots.in
+91 9820797397

Some relevant #Credit Schemes for #MSMEs

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