MSME Sector in India- An overview of the policy ecosystem

D.MISHRAMANAGING PARTNER

ABHYUTTHANA FINANCIAL LEARNING CENTRE LLP

BHUBANESWARJUNE 24, 2016

MSME Sector in India An overview of

Policy Eco System

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MSME-Economic Significance

Micro, Small and Medium Enterprises (MSMEs) play a major role in economic development, particularly in emerging countries.

MSMEs : Contributes to the economic growth, Enormous potential for growth Potential for employment and income generation

for vast masses of the country. Government pronouncements about “Make in

India” are fundamentally based on these convictions.

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There is heightened attention by the international community on MSME sector.

This is primarily because of the critical importance of job creation in the recovery cycle following the recent financial crisis, and the MSME’s potentials in that respect.

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MSME-Economic SignificanceIn Indian economy, MSME sector contribute :

45 % of the manufacturing output.40 % of the exports.There are 467.56 lakh enterprises in the MSME

sector.Provide the largest share of the employment

after agriculture. Employment opportunities to 10.62 crore people across the country.

[ Source: Speech by Shri SS Mundra, Deputy Governor RBI at CAB , Pune on August 7, 2015].

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MSMEs develop a diverse range of products and services to meet the needs of the local market, global market, national and international value chains.

A look at the details reveal that only 1.25 crore people find employment in large industries , whereas small enterprises employ 11 crore people.

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MSME Sector- Statutory Foundation

Govt of India enacted Micro, Small and Medium Enterprises Development ( MSMED) Act, 2006 in June, 2006. ( Notified on October 2, 2006) to address policy issues in the MSME Sector.

Paradigm Shift New Definition of MSME Inclusion of the services sector in the definition of

MSME Extending the scope to Medium Enterprise.

[RBI vide circular dated April 4, 2007 advised banks to adopt the new definition for lending purpose.]

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MSME- Definition

Manufacturing Enterprises engaged in the manufacture or production, processing or preservation of goods :

(i) A micro enterprise is an enterprise where investment in plant and machinery does not exceed Rs. 25 lakh;

(ii) A small enterprise is an enterprise where the investment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore; and

(iii) A medium enterprise is an enterprise where the investment in plant and machinery is more than Rs.5 crore but does not exceed Rs.10 crore.

In case of the above enterprises, investment in plant and machinery is the original cost excluding land and building.

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MSME- Definition

Service Enterprises engaged in providing or rendering of services and whose investment in equipment :

(i) A micro enterprise is an enterprise where the investment in equipment does not exceed Rs. 10 lakh;

(ii) A small enterprise is an enterprise where the investment in equipment is more than Rs.10 lakh but does not exceed Rs. 2 crore; and

(iii) A medium enterprise is an enterprise where the investment in equipment is more than Rs. 2 crore but does not exceed Rs. 5 crore.

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Priority Sector Guidelines to MSME Sector

Manufacturing EnterprisesMSMEs engaged in the manufacture or

production of goods to any industry specified in First schedule of Industries (Development and regulation) Act, 1951 and notified by the Govt .

Service EnterprisesBank loans up to Rs 5.00 crore per borrower for

MSE and Rs 10.00 crore to Medium Enterprises.

Bank Loans to food and agro processing units will form part of agriculture.

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Priority Sector Guidelines

Other Finance to MSMEs Loans to entities involved in assisting the

decentralised sector in the supply of inputs to and marketing of outputs of artisans , village and cottage industries.

Loans to MFIs for on-lending to MSME sector as per conditions specified.

Credit outstanding under GCC for non-farm entrepreneurial credit needs of individuals.

Outstanding deposits with SIDBI on account of priority sector shortfalls.

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MSME Sector- Targets for Lending

Advances to MSME sector are reckoned in computing achievements under ovrerall priority sector target of 40 %.

Domestic commercial banks are required to achieve a sub-target of 7.5 % of ANBC or Credit equivalent of OBS exposure, which ever is higher for lending to Micro-enterprises in a phased manner 7 % by March 2016 and 7.5 % by March 2017.

Foreign banks with more than 20 branches: this sub-target would be applicable in March 2018.

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Prime Minister’s Task Force Recommendations on MSME

Banks have been advised to achieve :

60 % of the total lending to MSE sector to Micro-enterprises.

20 % y-o-y growth in credit to small enterprises.

10 % annual growth in the number of micro-enterprise accounts.

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MSME sector- Key guidelines

Issue of Acknowledgement of Loan Application to MSMEs- Mandatory.

Collateral : No collateral security in cases of loans up to Rs 10 lakh extended to MSE sector. Banks may increase it to Rs.25 lakhs, on the basis of good track record and financial position.

Composite Loans: Limit of Rs 1.00 crore can be sanctioned by banks so that the unit can avail working capital and term loan thru SINGLE WINDOW.

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MSME sector- Key guidelines

Specialised MSME branchesPSBs have been advised to open at least

one specialised branch in each district.Banks have been permitted to categorise

their branches having 60 % or more of their advances to MSME sector as specialised MSME branches.

PSB banks will ensure specialised MSME branches in identified clusters.

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MSME sector- Key Policies

Cluster Based Approach A Cluster based approach to lending – ( Ganguly Committee

on SSI, 2004) is more beneficial : a) in dealing with well-defined and recognised groups; b) availability of more information for risk assessment; c) monitoring by lending institutions. SLBC convener banks have been advised to incorporate in

the Annual Credit Plan, the credit requirements in the clusters identified by Ministry of MSME Enterprises.

Prime Minister’s Task Force recommended : banks should open more MSE focussed branches; each lead bank may adopt at least on MSE cluster.

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Empowered Committee on MSMEs

At the Regional Offices of RBI, empowered committee has been constituted with Regional Director as Chairman.

Other members : the SLBC Convener, senior officers from two banks, Director of Industries, of the State Government, representative from MSME Association.

The Committee reviews the progress in MSME Financing, rehabilitation of sick SME units and co-ordinate for smooth flow of credit to the sector.

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Scheme of Small Enterprises Financial Centre ( SEFC)

As announced by Governor in Annual Policy Statement 2005-06, a scheme for strategic alliance between banks and SIDBI located in clusters named “ Small Enterprises Financial Centre” has been implemented, for co-ordinated approach.

As on date , SIDBI executed MOU with 15 banks.

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Credit Linked Capital Subsidy Scheme ( CLSS)Government of India Scheme for Technological

upgradation of Micro and Small enterprises.Scheme:a) Rate of subsidy @ 15 % for all units of MSE

up to loan of Rs 1.00 crore.b) Computation of subsidy on the purchase

price of plant and machinery c) SIDBI and NABARD : implementing

agencies.

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Credit Guarantee Scheme for MSEsGovernment of India and SIDBI set up the Credit

Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) in 2000.

The WG to review the working of the Credit Guarantee Scheme (CGS) of CGTMSE g Chairman V.K.Sharma).

The Group recommended for doubling the collateral free loans to MSEs sector from Rs 5.00m lakh to Rs 10.00 lakh. ( RBI Circular issued in May 2010)

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Policy Horizon

Micro Units Development and Refinance Agency ( MUDRA) Bank : Launched by Prime Minister on April 8, 2015.

Union Finance Minister in his Budget speech 2015-16 announced formation of MUDRA Bank.

There are 5.77 crore small business units, mostly individual proprietorship, which run small manufacturing, trading and service business. These bottom of pyramid find it difficult for access of credit.

MUDRA will ‘fund the unfunded’MUDRA has been registered as an NBFC , with RBI.

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Policy Horizon

Objectives of MUDRATo be an integrated financial and service

provider for micro enterprises.Creating a good architecture of Last Mile

Financiers to micro business After ‘ banking the unbanked’ with Jan Dhan

Yojana it’s time to ‘ fund the unfunded’.

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New Policy Initiatives

Trade Receivables Discount System ( TReDS) of MSMEs : RBI guidelines December 3, 2014

Institutional mechanism to facilitate the financing of trade receivables of MSMEs from Corporate and other buyers ( including Govt Departments, PSUs), through multiple financiers.

The transactions processed under TReDS will be “ without recourse” to the MSMEs.

To be operationalised soon.

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MSME Sector- Challenges

The challenges to MSME sector are classified under various important verticals to provide theme-based focus, while devising strategy for the sector.

These are (i) finance and credit (ii) technology (iii) infrastructure (iv) marketing and procurement (v) skill development and training

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Quite often, the sector complains about not having to only contend with higher cost of borrowing but also a lack of availability of timely credit.

RBI has advised the banks to assign zero risk weight for capital adequacy purpose for the portion of the loan guaranteed by the CGTMSE for such MSE borrowers.

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There are also issues around the unavailability of credit rating for first time MSME borrowers.

In this context, the banks have been advised to formulate Board approved policy and start using credit scoring models in their evaluation of the loan proposals of MSE borrowers which works on the principles of attributes of similar borrowers rather than on past financials.

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Small Finance Banks

A paradigm shift in financing of MSMEs will happen as and when small finance banks are operationalised. ( As on date 11 banks have been given in principle approval; one started operations since April 2016.)

These will make the financing of MSMEs more competitive in the coming days.

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Thank You

MSME Sector in India- An overview of the policy ecosystem

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