CIRCULAR ON MSME & EXPOSURE NORMS:

MSME:

Definition of Micro, Small and Medium Enterprises

(a) Manufacturing Enterprises i.e. Enterprises engaged in the
manufacture or production,processing or preservation of goods
as specified below:
(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.
(b) Service Enterprises i.e. Enterprises engaged in providing or
rendering of services

(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.
To ensure that MSMEs do not remain small and medium units
merely to remain eligible for priority sector status, the MSME
units will continue to enjoy the priority sector lending status up
to three years after they grow out of the MSME category
concerned. Advances to Micro, Small and Medium Enterprises

(MSME) sector shall be reckoned in computing achievement

under the overall Priority Sector target of 40 percent of Adjusted
Net Bank Credit (ANBC) or credit equivalent amount of OffBalance Sheet Exposure, whichever is higher.

In terms of the recommendations of the Prime Ministers Task

Force on MSMEs, banks are advised to achieve:
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(i) 20 per cent year-on-year growth in credit to micro and small

enterprises,

(ii) 10 per cent annual growth in the number of micro enterprise

accounts and
(ii) 60% of total lending to MSE sector as on preceding March
st
31 to Micro enterprises.
A composite loan limit of Rs.1 crore can be sanctioned by
banks to enable the MSE entrepreneurs to avail of their working
capital and term loan requirement through Single Window.
Public sector banks have been advised to open at least one
specialised branch in each district.
As per the new guidelines, a Micro or Small Enterprise (as
defined in the MSMED Act 2006) may be said to have become
Sick, if (a) any of the borrowal account of the enterprise remains
NPA for three months or more OR (b) 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.
Due to decelaration in credit growth to MSME sector ,an Indian banking Led Subcommittee was set up, which provided the following recommendations to banks:

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1.strengthen their existing systems of monitoring credit growth

to the sector and put in place a system-driven comprehensive
performance management information system .

2.
put in place a system of e-tracking of MSE loan
applications and monitor the loan application disposal process in
banks, giving branch-wise, region-wise, zone-wise and Statewise positions.

3.

monitor timely rehabilitation of sick MSE units.

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Cluster Approach
All SLBC Convenor banks have been advised to
incorporate in their Annual Credit Plans, the credit
requirement in the clusters identified by the Ministry of
Micro, Small and Medium Enterprises, Government of
India.
As per Ganguly Committee recommendations (September
4, 2004), banks have been advised that a full-service
approach to cater to the diverse needs of the SSI sector
(now MSE sector) may be achieved through extending
banking services to recognized MSE clusters by adopting a
4-C approach namely, Customer focus, Cost control, Cross
sell and Contain risk.

The Banking Codes and Standard Board of India (BCSBI)

has formulated a Code of Bank's Commitment to Micro and
Small Enterprises. This is a voluntary Code, which sets
minimum standards of banking practices for banks to follow
when they are dealing with Micro and Small Enterprises
(MSEs).
Recommendations of the High Level Committee on Credit
to SSI (now MSE)(Kapur Committee):
.

(i) Delegation of more powers to branch managers to grant adhoc limits;

(ii) Simplification of application forms;

(iii) Freedom to banks to decide their own norms for

assessment of credit requirements;

(iv) Opening of more specialised SSI branches;

(v) Enhancement in the limit for composite loans to Rs. 5 lakh.

(since enhanced to Rs.1 crore);

(vi) Strengthening the recovery mechanism;

(vii) Banks to pay more attention to the backward states;

Recommendations by Nayak Committee(to examine adequacy of institutional
credit provided):

(i) give preference to village industries, tiny industries and

other small scale units in that order, while meeting the credit
requirements of the small scale sector;

(ii) grant working capital credit limits to SSI (now MSE) units
computed on the basis of minimum 20% of their estimated
annual turnover whose credit limit in individual cases is upto
Rs.2 crore [ since raised to Rs.5 crore ];

(iii) prepare annual credit budget on the bottom-up basis to

ensure that the legitimate requirements of SSI (now MSE) sector
are met in full;
Recommendations of Ganguly Committee ( group formed on flow of credit):

(i) adoption of cluster based approach for financing MSME

sector;

(ii) sponsoring specific projects as well as widely publicising

successful working models of NGOs by Lead Banks which
service small and tiny industries and individual entrepreneurs;

(iii) sanctioning of higher working capital limits by banks

operating in the North East region to SSIs (now MSE) , based
on their commercial judgment due to the peculiar situation of
hilly terrain and frequent floods causing hindrance in the
transportation system;

(iv) exploring new instruments by banks for promoting rural

industry and to improve the flow of credit to rural artisans, rural
industries and rural entrepreneurs.

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EXPOSURE NORMS:

As a prudential measure to take care of risks,RBI has advised

banks to fix their limits on exposure to specified sectors and also
regulatory limits on banks exposure to single and group
borrowers in India.

EXPOSURE :

ON SINGLE & GROUP BORROWERS:

The ceiling limit is 15% of capital funds(tier I+tier II) for single
borrowers and 40% for group borrowers.Only exception is
infrastructure sector where the limit can go upto 20% ad 50%
respectively.

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ONNBFC/NBFC-AFC, it should not exceed 10%(15% for infra) and 15%(20% for
infra) respectively.
BILLS DISCOUNTED UNDER LC
In cases where bill discounting/purchasing/negotiating bank and LC issuing bank are
different entities ,then the bills under LC will be treated as an exposure on the LC
issuing bank ,but if the two parties are part of the same bank, then the bills will be
treated as an exposure on the third party.
Exemptions where exposure limits are not applicable:
Rehabilitation of sick/weak industrial units,food credit,where principal and
interest are guaranteed by the govt. of India.
Banks shall calculate their credit exposure arising on account of interest rate, foreign
exchange derivative transactions ,gold through CURRENT EXPOSURE
METHOD:
1.Sum of current credit exposure and potential future credit exposure. Banks may
exclude sold options provided the entire premium has been received.
2.Current credit exposure is the sum of the MTM values of each of these contracts.

3.Potential future cr. exposure is obtained by multiplying notional principal on each

contract by the add-on factor according to the nature and the residual maturity of the
instrument.
4.For contracts with multiple exchanges of principal, add-on factors will be multiplied
by no. of remaining payments.

For FOREIGN CURRENCY LOANS ABOVE $US10 million, banks will have to
examine risks from foreign exchange exposure of their clients.
Components of CAPITAL MARKET EXPOSURE(CME):

Direct investment in equity shares, convertible bonds, debentures, etc.

Advances against shares, bonds.
Loans sanctioned to corporates against security of shares,bonds.
Underwriting commitments taken up by banks.
The AGGREGATE EXPOSURE of a solo as well as a consolidated bank to
the Capital Markets must not exceed 40% of its net worth.
NET WORTH:
PAID-UP CAPITAL+FREE RESERVES(INCLUDING SHARE PREMIUM
BUT EXCLUDING REVALUATION RESERVES)+INVESTMENT
FLUCTUATION RESERVE+CR. BALANCE OF P/L A/C ( DR.
BALANCE OF P/L,ACCUMULATED LOSSES AND INTANGIBLE
ASSETS).
ITEMS EXCLUDED FROM CME:
Banks investment in own subsidiaries, joint ventures.
TIER I and TIER II debt instruments issued by other banks.
Preference shares.
Prudential Norms on INTRA-GROUP EXPOSURES:

SINGLE GROUP ENTITY EXPOSURE:5% of paid up capital and

reserves in case of non-financial and unregulated financial companies
& 10 % in case of regulated financial companies.

AGGREGATE GROUP EXPOSURE:10% in first case & 20 % in the

latter.

In case of IPOS, loans/advances should not exceed Rs. 10 lakhs.

In case of margin trading facilities for brokers, finance extended
should not exceed 40% of the net worth.
Certain SAFETY NET SCHEMES are to be avoided by banks as

under these ,large exposures are assumed and there is no undertaking

from issuers to buy securities.
BUY-BACK COMMITTMENTS should be limited to 25% of owned
funds of banks.