KYC AND CLUSTER FINANCING

KYC
ABSTRACT
In todays world, KYC guidelines are laid down to prevent banks from being used,
intentionally or unintentionally, by criminal elements for money laundering or terrorist
financing activities.
KYC (Know Your Customer) is becoming a critical gatekeeper process for financial
institutions, the world over, to safeguard against financial frauds, terrorist funding and money
laundering. It involves collecting basic identity & address information about the customer.
Regulatory agencies have been coming down heavily on defaulting organizations thereby
forcing many of them to invest in state of the art financial transaction surveillance systems.
RBI also simplified various KYC norms to minimized frauds and risks end protect banks
reputation. RBI has also accepted e-KYC through aadhaar to reduce document risk and frauds
and reduce cost. Banking Regulation Act was amended and gave powers to RBI to impose a
penalty for single violation. Elements of KYC policy are customer acceptance and customer
severance, customer identification procedures, monitoring of transaction and risk
management.
This report attempts to study Know Your Customer process, challenges involved and
highlights the benefits of effectively implementing KYC guidelines.
INTRODUCTION
KYC means Know Your Customer. It is a process by which banks obtain information about
the identity and address of the customers. This process helps to ensure that banks services
are not misused. The KYC procedure is to be completed by the banks while opening accounts
and also periodically update the same.
To establish the identity of the client : This means identifying the customer and verifying his/
her identity by using reliable, independent source documents, data or information. For
individuals, bank will obtain identification data to verify the identity of the customer, his
address/ location and also his recent photograph. This will be done for the joint holders and
mandate holders as well. For non-individuals, bank will obtain identification data to:

verify the legal status of the legal person/ entity

verify identity of the authorized signatories and

verify identity of the Beneficial owners/ controllers of the account

To ensure that sufficient information is obtained on the nature of employment/business that
the customer does / expects to undertake and the purpose of the account.
OBJECTIVE
Money laundering is a growing menace and it not only poses serious threat to the stability
and integrity of the financial system but also to the sovereignty and safety of nations
worldwide. In the coming days, challenges before banks would primarily lie in saving
themselves from the growing threat of money laundering. Hence, the objective of KYC
guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal
elements for money laundering activities. Related procedures also enable banks to better
understand their customers and their

LITERATURE REVIEW
In India, prevention of money laundering act (PMLA) was passed in 2002 and it has been
aligned with the financial action task force (FATF) recommendations in 2009. Further, India
has become a member of FATF in 2010. Banks are being extensively sensitised about money
laundering and KYC norms. In India Banks were advised to follow certain customer
identification procedure for opening of accounts and monitoring transactions of a suspicious
nature for the purpose of reporting it to appropriate authority. These Know Your Customer
guidelines have been revisited time to time in the context of the Recommendations made by
the Financial Action Task Force (FATF) on Anti Money Laundering (AML) standards and on
Combating Financing of Terrorism (CFT). These standards have become the international
benchmark for framing Anti Money Laundering and combating financing of terrorism
policies by the regulatory authorities. Compliance with these standards both by the
banks/financial institutions and the country have become necessary for international financial
relationships. India-On Path of Unified KYC KYC discipline assumes critical importance

especially in the light of our concerted efforts to widen the reach of banking as part of
financial inclusion initiatives. Banks have to ensure a very high degree of KYC compliance
and a very robust AML regime. Once these standards are achieved, a unified KYC for
banking system could be thought of. In 2011, SEBI said that it would also come out with
Homogenous norms for setting up a uniform Know Your Customer (KYC) Regulation
Authority. It will relieve the burden comparable on the intermediaries as well as the common
man, seeking to make investments. This mechanism once set would make certain that KYC
exercise is undertaken only once and enabling all intermediaries to access a prospective
clients number for getting his KYC status. Factsheet: Know Your Customer (KYC) Know
Your Customer (KYC) is the due diligence and bank regulation that financial institutions and
other regulated companies must perform to identify their clients and ascertain relevant
information pertinent to doing financial business with them. Know your customer policies are
becoming increasingly important globally to prevent identity theft fraud, money laundering
and terrorist financing. Beyond name matching, a key aspect of KYC controls is to monitor
transactions of a customer against their recorded profile, history on the customers account(s)
and with peers. Banks doing KYC monitoring for anti-money laundering (AML) and checks
relating to combating the financing of terrorism (CFT) increasingly use specialized
transaction monitoring software, particularly names analysis software and trend monitoring
software. The generated alerts identify unusual activity which is then subject to due diligence
or enhanced due diligence (EDD) processes that use internal and external sources of
information on the subject, including the internet. This helps to determine whether a
transaction or activity is suspicious and requires reporting to the authorities. Some specialist
consultancies help multinational companies and SMEs conduct Know Your Customer
processes when entering new markets. The Reserve Bank of India introduced KYC guidelines
for all banks in 2002. In 2004, RBI directed that all banks ensure that they are fully compliant
with the KYC provisions before December 31, 2005. The purpose was to prevent money
laundering, terrorist financing and theft. KYC and Damodaran Committee The committee,
headed by former SEBI chief M Damodaran, has proposed a slew of consumer-friendly
measures. The committee was set up by RBI and if the recommendations are accepted, Bank
account holders can expect better standards of service and more secure ways of doing
business. (all important recommendations here) In context with KYC, the committee
recommended third-party Know Your Customer data bank. KRA In January 2012, the
Capital markets regulator SEBIs Chairman, Mr. U.K. Sinha, launched Indias first Know
Your Customer Registration Agency KRA at Bombay Stock Exchange. The system avoids

duplication of customer details and is interoperable, which means that other market
participants can share the data and bring in more uniformity.
financial dealings. This helps them manage their risks prudently.

METHODOLOGY
The present study is based on secondary method of data collection. Different aspects related
to KYC norms are studied. A detailed study of RBI guidelines is made. Data was collected
from different Websites of RBI and other Websites.
SCOPE OF STUDY
KYC means Know Your Customer. It is a process by which banks obtain information about
the identity and address of the customers. This process helps to ensure that banks services
are not misused. The KYC procedure is to be completed by the banks while opening accounts
and also periodically update the same. The objective of KYC/AML/CFT guidelines is to
prevent banks from being used, intentionally or unintentionally, by criminal elements for
money laundering or terrorist financing activities. KYC procedures also enable banks to
know/understand their customers and their financial dealings better which in turn help them
manage their risks prudently. A main scope of understanding of the KYC help the bankers to
understand their customers and thereby control fraudulent activities in banking sector.

For the purpose KYC policy, a Customer is defined as:

a person or entity that maintains an account and/or has a business relationship with the

bank;

one on whose behalf the account is maintained (i.e. the beneficial owner). [Ref:
Government of India Notification dated February 12, 2010 - Rule 9, sub-rule (1A) of PMLA
Rules - 'Beneficial Owner' means the natural person who ultimately owns or controls a client
and or the person on whose behalf a transaction is being conducted, and includes a person
who exercise ultimate effective control over a juridical person]

beneficiaries of transactions conducted by professional intermediaries, such as Stock

Brokers, Chartered Accountants, Solicitors etc. as permitted under the law, and
any person or entity connected with a financial transaction which can pose significant

reputational or other risks to the bank, say, a wire transfer or issue of a high value demand
draft as a single transaction.
OFFICIALY VALID DOCUMENTS FOR KYC
In case of individual
The Government of India has notified six documents as Officially Valid Documents (OVDs)
for the purpose of producing proof of identity. These six documents are Passport, Driving
Licence, Voters Identity Card, PAN Card, Aadhaar Card issued by UIDAI and NREGA Card.
You need to submit any one of these documents as proof of identity. If these documents also
contain your address details, then it would be accepted as as proof of address. If the
document submitted by you for proof of identity does not contain address details, then you
will have to submit another officially valid document which contains address details

For a company
(i)
(ii)

Certificate of incorporation and Memorandum & Articles of Association

Resolution of the Board of Directors to open an account and identification of
those who have authority to operate the account

(iii)

Power of Attorney granted to its managers, officers or employees to transact

business on its behalf

(iv)

Copy of PAN allotment letter

FOR A PATNERSHIP FIRM

I) Registration certificate, if registered
(ii) Partnership deed

(iii) Power of Attorney granted to a partner or an employee of the firm to transact business
on its behalf
(iv) Any officially valid document identifying the partners and the persons holding the Power
of Attorney and their addresses
(v)

Telephone bill in the name of firm/partners.

IN CASE OF A TRUST
Certificate of registration, if registered b) Trust deed; and (ii) Power of Attorney granted to
transact business on its behalf (iii) Any officially valid document to identify the trustees,
settlors, beneficiaries and those holding Power of Attorney, founders/managers/ directors and
their addresses c) An officially valid document in respect of the person holding a power of
attorney to transact on its behalf.
(iv) Resolution of the managing body of the foundation/ association (v) Telephone bill

THE MAJOR GUIDELINES TO ALL BANKS AS PER RBI CIRCULAR IS THAT

Banks should keep in mind that the information collected from the customer for the purpose
of opening of account is to be treated as confidential and details thereof are not to be divulged
for cross selling or any other like purposes. Banks should, therefore, ensure that information
sought from the customer is relevant to the perceived risk, is not intrusive, and is in
conformity with the guidelines issued in this regard. Any other information from the customer
should be sought separately with his/her consent and after opening the account.
Also all the customers who do not have accounts with the banks (known as walk-in
customers) have to produce proof of identity and address while purchasing third party
products from banks if the transaction is for Rs.50,000 and above. KYC exercise may not be
necessary for banks own customers for purchasing third party products. However,
instructions to make payment by debit to customers accounts or against cheques for
remittance of funds/issue of travellers cheques, sale of gold/silver/platinum and the
requirement of quoting PAN number for transactions of Rs.50,000 and above would be

applicable to purchase of third party products from banks by banks customers as also to
walk-in customers.
Banks are required to periodically update KYC records. This is a part of their ongoing due
diligence on bank accounts. The periodicity of such updation would vary from account to
account or categories of accounts depending on the banks perception of risk. Periodical
updation of records also helps prevent frauds in customer accounts.
NOT have any of the documents listed above to show the proof of identity, can still
open a bank account
known as Small Account by submitting your recent photograph and putting your signature
or thumb impression in the presence of the bank official. The Small Accounts have certain
limitations such as:

balance in such accounts at any point of time should not exceed Rs.50,000

total credits in one year should not exceed Rs.1,00,000

total withdrawal and transfers should not exceed Rs.10,000 in a month.

Foreign remittances cannot be credited to such accounts.

Such accounts remain operational initially for a period of twelve months and thereafter, for a
further period of twelve months, if the holder of such an account provides evidence to the
bank of having applied for any of the officially valid documents within twelve months of the
opening of such account. The bank will review such account after twenty four months to see
if it requires such relaxation.
AS PER THE RBI GUIDELINESS THE Banks should frame their KYC policies
incorporating the following four key elements:

i.

Customer Acceptance Policy;

ii.

Customer Identification Procedures;

iii.

Monitoring of Transactions; and

iv.

Risk Management.
1. Customer Acceptance Policy (CAP)
a) Every bank should develop a clear Customer Acceptance Policy laying down
explicit criteria for acceptance of customers
i) No account is opened in anonymous or fictitious/benami name.
ii) Parameters of risk perception are clearly defined in terms of the nature of business
activity, location of customer and his clients, mode of payments, volume of turnover,
social and financial status etc. to enable categorisation of customers into low, medium
and high risk (). Customers requiring very high level of monitoring, e.g. Politically
Exposed Persons (PEPs) may, if considered necessary, be categorised even higher;
iii) Documentation requirements and other information to be collected in respect of
different categories of customers depending on perceived risk and keeping in mind the
requirements of PML Act, 2002 and instructions/guidelines issued by Reserve Bank from
time to time;
iv) Not to open an account where the bank is unable to apply appropriate customer due
diligence measures, i.e., bank is unable to verify the identity and /or obtain documents
required as per the risk categorisation due to non-cooperation of the customer or nonreliability of the data/information furnished to the bank. Circumstances, in which a
customer is permitted to act on behalf of another person/entity, should be clearly spelt out
in conformity with the established law and practice of banking as there could be
occasions when an account is operated by a mandate holder or where an account is
opened by an intermediary in fiduciary capacity and
vi) Necessary checks before opening a new account so as to ensure that the identity of
the customer does not match with any person with known criminal background or
with banned entities such as individual terrorists or terrorist organisations etc.
b) Banks should prepare a profile for each new customer based on risk categorisation.
The customer profile may contain information relating to customers identity,
social/financial status, nature of business activity, information about his clients
business and their location etc.
c) For the purpose of risk categorisation, individuals (other than High Net Worth) and
entities whose identities and sources of wealth can be easily identified and
transactions in whose accounts by and large conform to the known profile, may be

categorised as low risk. met. Customers that are likely to pose a higher than average
risk to the bank should be categorised as medium or high risk depending on
customer's background, nature and location of activity, country of origin, sources of
funds and his client profile, etc. Banks should apply enhanced due diligence measures
based on the risk assessment, thereby requiring intensive due diligence for higher
risk customers, especially those for whom the sources of funds are not clear..
d) In addition to what has been indicated above, banks/FIs should take steps to
identify and assess their ML/TF risk for customers, countries and geographical areas
as also for products/ services/ transactions/delivery channels.
e) It is important to bear in mind that the adoption of customer acceptance policy and
its implementation should not become too restrictive and must not result in denial of
banking services to general public, especially to those, who are financially or socially
disadvantaged.

2. Customer Identification Procedure (CIP)

a.

The policy approved by the Board of banks should clearly spell out the Customer
Identification Procedure to be carried out at different stages, i.e., while establishing a banking
relationship; carrying out a financial transaction or when the bank has a doubt about the
authenticity/veracity or the adequacy of the previously obtained customer identification data.
Customer identification means identifying the customer and verifying his/her identity by
using reliable, independent source documents, data or information.

b.

Banks may seek mandatory information required for KYC purpose which the
customer is obliged to give while opening an account or during periodic updation. Other
optional customer details/additional information, if required may be obtained separately
after the account is opened only with the explicit consent of the customer. The customer has a
right to know what is the information required for KYC that she/he is obliged to give, and
what is the additional information sought by the bank that is optional.

c.

The increasing complexity and volume of financial transactions necessitate that

customers do not have multiple identities within a bank, across the banking system and across
the financial system. This can be achieved by introducing a unique identification code for
each customer.

d.

When there are suspicions of money laundering or financing of the activities relating
to terrorism or where there are doubts about the adequacy or veracity of previously obtained
customer identification data, banks should review the due diligence measures including
verifying again the identity of the client and obtaining information on the purpose and
intended nature of the business relationship.

e.

Norms for furnishing proof of address have been relaxed to allow submitting only one
documentary proof of address (either current or permanent) while opening a bank account or
while undergoing periodic updation. In case the address mentioned as per proof of address
undergoes a change, fresh proof of address may be submitted to the branch within a period of
six months.

F..Banks should carry out periodical updation of KYC information of every customer.

Customer Identification Requirements Indicative Guidelines

a) Walk-in Customers
In case of transactions carried out by a non-account based customer, that is a walk-in
customer, where the amount of transaction is equal to or exceeds rupees fifty thousand,
whether conducted as a single transaction or several transactions that appear to be connected,
the customer's identity and address should be verified. if a bank has reason to believe that a
customer is intentionally structuring a transaction into a series of transactions below the
threshold of Rs.50,000/- the bank should verify the identity and address of the customer
b) Salaried Employees
In case of salaried employees, it is clarified that with a view to containing the risk of fraud,
banks should rely on certificate/letter of identity and/or address issued only from corporate
and other entities of repute and should be aware of the competent authority designated by the
concerned employer to issue such certificate/letter.
c) Trust/Nominee or Fiduciary Accounts

There exists the possibility that trust/nominee or fiduciary accounts can be used to
circumvent the customer identification procedures. Banks should determine whether the
customer is acting on behalf of another person as trustee/nominee or any other intermediary.
If so, banks should insist on receipt of satisfactory evidence of the identity of the
intermediaries and of the persons on whose behalf they are acting,
d) Accounts of companies and firms
Banks need to be vigilant against business entities being used by individuals as a front for
maintaining accounts with banks. Banks should examine the control structure of the entity,
determine the source of funds and identify the natural persons who have a controlling interest
and who comprise the management. These requirements may be moderated according to the
risk perception e.g. in the case of a public company it will not be necessary to identify all the
shareholders.
e) Client accounts opened by professional intermediaries
When the bank has knowledge or reason to believe that the client account opened by a
professional intermediary is on behalf of a single client, that client must be identified. Banks
may hold 'pooled' accounts managed by professional intermediaries on behalf of entities like
mutual funds, pension funds or other types of funds. Banks also maintain 'pooled' accounts
managed by lawyers/chartered accountants or stockbrokers for funds held 'on deposit' or 'in
escrow' for a range of clients. Where funds held by the intermediaries are not co-mingled at the
bank and there are 'sub-accounts', each of them attributable to a beneficial owner, all the
beneficial owners must be identified. Where such funds are co-mingled at the bank, the bank
should still look through to the beneficial owners. Where the banks rely on the 'customer due
diligence' (CDD) done by an intermediary, they should satisfy themselves that the intermediary
is regulated and supervised and has adequate systems in place to comply with the KYC
requirements. It should be understood that the ultimate responsibility for knowing the customer
lies with the bank.
f) Accounts of Politically Exposed Persons (PEPs) resident outside India
Politically exposed persons are individuals who are or have been entrusted with prominent
public functions in a foreign country, e.g., Heads of States or of Governments, senior

politicians, senior government/judicial/military officers, senior executives of state-owned

corporations, important political party officials, etc. Banks should gather sufficient
information on any person/customer of this category intending to establish a relationship and
check all the information available on the person in the public domain. Banks should verify
the identity of the person and seek information about the sources of funds before accepting
the PEP as a customer. The decision to open an account for a PEP should be taken at a senior
level which should be clearly spelt out in Customer Acceptance Policy
g) Accounts of non-face-to-face customers
With the introduction of telephone and electronic banking, increasingly accounts are being
opened by banks for customers without the need for the customer to visit the bank branch. In
the case of non-face-to-face customers, apart from applying the usual customer identification
procedures, there must be specific and adequate procedures to mitigate the higher risk
involved. Certification of all the documents presented should be insisted upon and, if
necessary, additional documents may be called for
h) Accounts of proprietary concerns
Apart from following the extant guidelines on customer identification procedure as applicable
to the proprietor, banks should call for and verify the following documents before opening of
accounts in the name of a proprietary concern:
Proof of the name, address and activity of the concern, like registration certificate (in the case
of a registered concern), certificate/licence issued by the Municipal authorities under Shop &
Establishment Act, sales and income tax returns, CST/VAT certificate, certificate/registration
document issued by Sales Tax/Service Tax/Professional Tax authorities, Licence issued by the
Registering authority like Certificate of Practice issued by Institute of Chartered Accountants
of India, Institute of Cost Accountants of India, Institute of Company Secretaries of India,
Indian Medical Council, Food and Drug Control Authorities, registration/licensing document
issued in the name of the proprietary concern by the Central Government or State
Government Authority/Departments.
j) Procedure to be followed in respect of foreign students:
Banks may follow the following procedure for foreign students studying in India.

Banks may open a Non Resident Ordinary (NRO) bank account of a foreign student on the
basis of his/her passport (with appropriate visa & immigration endorsement) which contains
the proof of identity and address in the home country along with a photograph and a letter
offering admission from the educational institution.
k) Selling Third party products
When banks sell third party products as agents, the responsibility for ensuring compliance
with KYC/AML/CFT regulations lies with the third party. However, to mitigate reputational
risk to bank and to enable a holistic view of a customers transactions, banks are advised as
follows:
a.

Even while selling third party products as agents, banks should verify the identity and
address of the walk-in customer.

b.

Banks should also maintain transaction details with regard to sale of third party
products and related records for a period and in the manner prescribed

c.

Banks AML software should be able to capture, generate and analyse alerts for the
purpose of filing CTR/STR in respect of transactions relating to third party products with
customers including walk-in customers.

d.

Sale of third party products by banks as agents to customers, including walk-in

customers, for Rs.50,000 and above must be (a) by debit to customers account or against
cheques and (b) obtention & verification of the PAN given by the account based as well as
walk-in customers. This instruction would also apply to sale of banks own products, payment
of dues of credit cards/sale and reloading of prepaid/travel cards and any other product for
Rs. 50,000/- and above.
L) Due Diligence in correspondent banking relationship
Some commercial banks have arrangements with co-operative banks wherein the latter open
current accounts with the commercial banks and use the cheque book facility to issue at par
cheques to their constituents and walk-in- customers for facilitating their remittances and
payments. Since the at par facility offered by commercial banks to co-operative banks is in
the nature of correspondent banking arrangements, banks should monitor and review such

arrangements to assess the risks including credit risk and reputational risk arising therefrom.
For this purpose, banks should retain the right to verify the records maintained by the client
cooperative banks/ societies for compliance with the extant instructions on KYC and AML
under such arrangements.
.

3.Monitoring of Transactions
a.

Ongoing monitoring is an essential element of effective KYC procedures. Banks can

effectively control and reduce their risk only if they have an understanding of the normal and
reasonable activity of the customer so that they have the means of identifying transactions
that fall outside the regular pattern of activity. However, the extent of monitoring will depend
on the risk sensitivity of the account. Banks should pay special attention to all complex,
unusually large transactions and all unusual patterns which have no apparent economic or
visible lawful purpose. Banks may prescribe threshold limits for a particular category of
accounts and pay particular attention to the transactions which exceed these limits.
Transactions that involve large amounts of cash inconsistent with the normal and expected
activity of the customer should particularly attract the attention of the bank. Very high
account turnover inconsistent with the size of the balance maintained may indicate that funds
are being 'washed' through the account. High-risk accounts have to be subjected to intensified
monitoring. Every bank should set key indicators for such accounts, taking note of the
background of the customer, such as the country of origin, sources of funds, the type of
transactions involved and other risk factors..

b.

THE BANnk should carefully analyse such data and in case they find such unusual
operations in accounts, the matter should be immediately reported to Reserve Bank and other
appropriate authorities such as Financial Intelligence Unit India (FIU-Ind) under Department
of Revenue, Ministry of Finance.

c.

Banks should exercise ongoing due diligence with respect to the business relationship
with every client and closely examine the transactions in order to ensure that they are
consistent with their knowledge of the client, his business and risk profile

d.

The risk categorization of customers as also compilation and periodic updation of

customer profiles and monitoring and closure of alerts in accounts by banks are extremely
important for effective implementation of KYC/AML/CFT measures. 2.14. Closure of
accounts
Where the bank is unable to apply appropriate KYC measures due to non-furnishing of
information and /or non-cooperation by the customer, the bank should consider closing the
account or terminating the banking/business relationship after issuing due notice to the
customer explaining the reasons for taking such a decision. Such decisions need to be taken at
a reasonably senior level.
4. Risk Management

a.

The Board of Directors of the bank should ensure that an effective KYC programme
is put in place by establishing appropriate procedures and ensuring their effective
implementation. It should cover proper management oversight, systems and controls,
segregation of duties, training and other related matters. Responsibility should be explicitly
allocated within the bank for ensuring that the banks policies and procedures are
implemented effectively. Banks should, in consultation with their boards, devise procedures
for creating risk profiles of their existing and new customers, assess risk in dealing with
various countries, geographical areas and also the risk of various products, services,
transactions, delivery channels, etc. Banks policies should address effectively managing and
mitigating these risks adopting a risk-based approach

b.

Banks internal audit and compliance functions have an important role in evaluating
and ensuring adherence to the KYC policies and procedures. As a general rule, the
compliance function should provide an independent evaluation of the banks own policies and
procedures, including legal and regulatory requirements. Banks should ensure that their audit
machinery is staffed adequately with individuals who are well-versed in such policies and
procedures. Concurrent/ Internal Auditors should specifically check and verify the application
of KYC procedures at the branches and comment on the lapses observed in this regard. The
compliance in this regard should be put up before the Audit Committee of the Board on
quarterly intervals.

E KYC
KYC is possible only for those who have Aadhaar numbers. While using e-KYC service, you
have to authorise the Unique Identification Authority of India (UIDAI), by explicit consent,
to

release

your

identity/address

through

biometric

authentication

to

the

bank

branches/business correspondent (BC). The UIDAI then transfers your data comprising name,
age, gender, and photograph of the individual, electronically to the bank/BC. Information
thus provided through e-KYC process is permitted to be treated as an Officially Valid
Document under PML Rules and is a valid process for KYC verification.
IF

CUSTOMER UNABLE TO PROVIDE KYC DOCUMENTS ON PERIODIC

REVIEW
r KYC documents at the time of periodic updation bank has the option to close your account.
Before closing the account, the bank may, however, impose partial freezing (i.e. initially
allowing all credits and disallowing all debits while giving an option to you to close the
account and take your money back). Later even all credits also would not be allowed. The
partial freezing however, would be exercised by the bank after giving you due notice.
Partial freezing is imposed in the following ways:

While imposing partial freezing, banks have to give due notice of three months
initially to the customers before exercising the option of partial freezing.

After that a reminder for further period of three months would be issued.

Thereafter, banks may impose partial freezing by allowing all credits and
disallowing all debits with the freedom to close the accounts.

If the accounts are still KYC non-compliant after six months of imposing initial
partial freezing banks may disallow all debits and credits from/to the accounts, rendering
them inoperative.

Thus, one year after the account is due for updating, if you do not provide the
necessary documents/information, your account would become fully inoperative i.e, neither
credits nor debits would be allowed in the account.

Meanwhile, the account holders can revive accounts by submitting the KYC documents.
BIBILOGRAPHY

CLUSTER FINANCE
Abstract:
The emergence of enterprise cluster is an innovation of industrial organization, but for SMEs,
financing is still a problem for cluster development, which is closely related to various
restrictions on exerting its comparative advantage of enterprise cluster financing. It puts
forward an inherent requirement for the conformity between enterprise cluster and modern
financial system that financing difference of cluster enterprise. India has faced with the slow
development of SMEs, which is mainly resulted from the restriction of cluster financing
bottleneck. Therefore, it is badly in need of resolution at this stage that how to play Indias
resource advantage to focus on promoting financing mechanism innovation of enterprise
cluster, and make SMEs cluster economy achieve rapid development, especially building a
system including a series of policies which adapt to multi-level market structure, financial
system, financing model of SMEs cluster development and are matched with the financial
support.
INTRODUCTION
Cluster based approach to lending is intended to provide a full-service approach to cater to
the diverse needs of the MSE sector which may be achieved through extending banking
services to recognized MSE clusters. A cluster based approach may be more beneficial (a) in
dealing with well-defined and recognized groups (b) availability of appropriate information
for risk assessment (c) monitoring by the lending institutions and (d) reduction in costs.
The banks have, therefore, been advised to treat it as a thrust area and increasingly adopt the
same for SME financing. United Nations Industrial Development Organisation (UNIDO) has
identified 388 clusters spread over 21 states in various parts of the country. The Ministry of

Micro, Small and Medium Enterprises has also approved a list of clusters under the Scheme
of Fund for Regeneration of Traditional Industries (SFURTI) and Micro and Small
Enterprises Cluster Development Programme (MSE-CDP) located in 121 Minority
Concentration Districts. Accordingly, banks have been advised to take appropriate measures
to improve the credit flow to the identified clusters.
Importance of Clusters in the Indian Contex
With a contribution of 40% to the country's industrial output and 35% to direct exports, the
Small and Medium Industry (SME) sector has achieved significant milestones for the
industrial development of India. Within this sector, an important role is played by the
numerous clusters that have been in existence for decades and sometimes even for centuries.
India has the richest diversity of clusters. The clusters are categorized as:

Artisanal Clusters ,Industrial Clusters

The products covered by artisanal clusters include textile, handlooms, handicrafts,

woodcrafts, metal and stone crafts, jewellery, leather, pottery & clay, etc. The industrial
clusters include processed food, rice milling, readymade garments, terry towel, wet grinder,
engineering, machine tools, hand tools, foundry, brass parts, rubber and pharmaceuticals
cluster.
There are more than 6500 industrial, artisan and micro enterprise clusters. These clusters
represent the socio economic heritage of India, where some towns or villages are known for a
specific product for decades and centuries. It is estimated that these clusters contribute 60%
of the manufactured exports from India. The clusters in India are estimated to have a
significantly high share in employment generation.
Cluster Development Initiatives in India
Several institutions in India have taken up Cluster Projects besides various government
initiatives. They have been involved in promoting Small-Scale and Cottage Industries, and
Regional Cluster Development by removing policy impediments; financial support;
technology, skills and quality upgrading; market support and improving links between small
and large firms. Some of the institutions working in this area are:

Central Government

SICDP Cell, Development Commissioner (SSI), Ministry of Small Scale Industries

National Small Industrial Corporation Ltd (NSIC)
Development Commissioner (Handicrafts), Ministry of Textiles
Department of Science & Technology, Ministry of Science & Technology
Textiles Committee of India, Ministry of Textiles
Khadi and Village Industries Commission (KVIC)
Coir Board

National Support Institutions

Small Industries Development Bank of India (SIDBI) Technology Upgradation

Programme
State Bank of India (SBI) UPTECH Programme
National Bank for Agriculture & Rural Development (NABARD)

International Agencies

UNIDO
MSME
WASME

Micro, Small and Medium Enterprises

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.

In case of the above enterprises, investment in plant and machinery is the original cost
excluding land and building and the items specified by the Ministry of Small Scale Industries
(b) Service Enterprises i.e. Enterprises engaged in providing or rendering of services and
whose investment in equipment (original cost excluding land and building and furniture,
fittings and other items not directly related to the service rendered or as may be notified under
the MSMED Act, 2006) are specified below.
(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.
Bank Loans to Micro and Small enterprises, both Manufacturing and Service are
eligible to be classified under Priority Sector advance as per the following:
Direct Finance
Manufacturing Enterprises
The Micro and Small enterprises engaged in the manufacture or production of goods to any
industry specified in the first schedule to the Industries (Development and regulation) Act,
1951 and notified by the Government from time to time. The manufacturing enterprises are
defined in terms of investment in plant and machinery.
. Loans for food and agro processing
Loans for food and agro processing will be classified under Micro and Small Enterprises,
provided the units satisfy investments criteria prescribed for Micro and Small Enterprises, as
provided in MSMED Act, 2006.

Service Enterprises
Bank loans up to Rs.5 crores per borrower / unit to Micro and Small Enterprises engaged in
providing or rendering of services and defined in terms of investment in equipment under
MSMED Act, 2006.
Export Credit
Export credit to MSE units (both manufacturing and services) for export of goods/services
produced / rendered by them.
Khadi and Village Industries Sector (KVI)
All loans sanctioned to units in the KVI sector, irrespective of their size of operations and
location and amount of original investment in plant and machinery. Such loans will be
eligible for classification under the sub-target of 60 percent prescribed for micro enterprises
within the micro and small enterprises segment under priority sector.
If the loans under General credit Card (GCC) are sanctioned to Micro and Small Enterprises,
such loans should be classified under respective categories of Micro and Small Enterprises.
Indirect Finance
(i) Loans to persons involved in assisting the decentralised sector in the supply of inputs to
and marketing of outputs of artisans, village and cottage industries.
(ii) Loans to cooperatives of producers in the decentralised sector viz. artisans village and
cottage industries.
(iii) Loans sanctioned by banks to MFIs for on-lending to MSE sector as per the conditions
specified in extant Master Circular on Priority Sector Lending.
Lending by banks to medium enterprises will not be included for the purpose of reckoning of
advances under the priority sector.
Since the MSMED Act, 2006 does not provide for clubbing of investments of different
enterprises set up by same person / company for the purpose of classification as Micro, Small

and Medium enterprises, the Gazette Notification No. S.O.2 (E) dated January 1, 1993 on
clubbing of investments of two or more enterprises under the same ownership for the purpose
of classification of industrial undertakings as SSI has been rescinded vide GOI Notification
No. S.O. 563 (E) dated February 27, 2009.
Common Guidelines / Instructions for Lending to MSME Sector
1 Issue of Acknowledgement of Loan Applications to MSME borrowers
Banks have been advised to mandatorily acknowledge all loan applications, submitted
manually or online, by their MSME borrowers and ensure that a running serial number is
recorded on the application form as well as on the acknowledgement receipt. Banks are
further encouraged to start Central Registration of loan applications.
2 Collateral
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 are also advised to extend collateral-free loans
upto Rs. 10 lakh to all units financed under the Prime Minister Employment Generation
Programme of KVIC.
Banks may, on the basis of good track record and financial position of the MSE units,
increase the limit of dispensation of collateral requirement for loans up to Rs.25 lakhs (with
the approval of the appropriate authority).
3 Composite loan
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.
4 Specialised MSME branches
Public sector banks have been advised to open at least one specialised branch in each district.
Further, banks have been permitted to categorise their MSME general banking branches
having 60% or more of their advances to MSME sector in order to encourage them to open
more specialised MSME branches for providing better service to this sector as a whole.

5 Delayed Payment
Under the Amendment Act, 1998 of Interest on Delayed Payment to Small Scale and
Ancillary Industrial Undertakings, penal provisions have been incorporated to take care of
delayed payments to MSME units. After the enactment of the Micro, Small and Medium
Enterprises Development (MSMED), Act 2006, the existing provisions of the Interest on
Delayed Payment Act, 1998 to Small Scale and Ancillary Industrial Undertakings, have been
strengthened as under:
(i) In case the buyer to make payment on or before the date agreed on between him and the
supplier in writing or, in case of no agreement before the appointed day. The agreement
between seller and buyer shall not exceed more than 45 days.
(ii) In case the buyer fails to make payment of the amount to the supplier, he shall be liable to
pay compound interest with monthly rests to the supplier on the amount from the appointed
day or, on the date agreed on, at three times of the Bank Rate notified by Reserve Bank.
(iii) For any goods supplied or services rendered by the supplier, the buyer shall be liable to
pay the interest as advised at (ii) above.
(iv) In case of dispute with regard to any amount due, a reference shall be made to the Micro
and Small Enterprises Facilitation Council, constituted by the respective State Government.
Further, banks have been advised to fix sub-limits within the overall working capital limits to
the large borrowers specifically for meeting the payment obligation in respect of purchases
from MSMEs.
6 Revised Guidelines for Rehabilitation of Sick Micro and Small Enterprises
In view of the recommendations of Working Group on rehabilitation of potentially viable sick
units regarding changing the definition of sickness and the procedure for assessing the
viability of sick MSE units, a Committee was set up. Based on the recommendation of the
Committee, revised guidelines for rehabilitation of sick units in the MSE sector have been
issued..The objective of the revised guidelines is to hasten the process of identification of a
unit as sick, early detection of incipient sickness, and to lay down a procedure to be adopted
by banks before declaring a unit as unviable.

As per the new guidelines, a Micro or Small Enterprise 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.
7 Micro and Small Enterprises Sector The imperative of Financial Literacy and
consultancy support
Keeping in view the high extent of financial exclusion (92 per cent) in the MSME sector, it is
imperative for banks that the excluded units are brought within the fold of the formal banking
sector. The lack of financial literacy, operational skills, including accounting and finance,
business planning etc. represent formidable challenge for MSE borrowers underscoring the
need for facilitation by banks in these critical financial areas. Moreover, MSE enterprises are
further handicapped in this regard by absence of scale and size. To effectively and decisively
address these handicaps, scheduled commercial banks have been advised that the banks could
either separately set up special cells at their branches, or vertically integrate this function in
the Financial Literacy Centres (FLCs) set up by them, as per their comparative advantage.
The bank staff should also be trained through customised training programs to meet the
specific needs of the sector.
8 Structured Mechanism for monitoring the credit growth to the MSE sector
In view of the concerns emerging from the deceleration in credit growth to the MSE sector,
an Indian Banks Association (IBA)-led Sub-Committee was set up to suggest a structured
mechanism to be put in place by banks to monitor the entire gamut of credit related issues
pertaining to the sector. Based on the recommendations of the Committee, banks have been
advised to:

strengthen their existing systems of monitoring credit growth to the sector and put in
place a system-driven comprehensive performance management information system (MIS) at
every supervisory level (branch, region, zone, head office) which should be critically
evaluated on a regular basis;

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. The position in this regard is to be displayed by banks on their websites; and
monitor timely rehabilitation of sick MSE units. The progress in rehabilitation of sick

MSE units is to be made available on the website of banks.

.
9 State Level Inter Institutional Committee
In order to deal with the problems of co-ordination for rehabilitation of sick micro and small
units, State Level Inter-Institutional Committees (SLIICs) have been set up in all the States. It
provides a useful forum for adequate interfacing between the State Government Officials and
State Level Institutions on the one side and the term lending institutions and banks on the
other. It closely monitors timely sanction of working capital to units which have been
provided term loans by SFCs, implementation of special schemes such as Margin Money
Scheme of State Government and reviews general problems faced by industries and sickness
in MSE sector based on the data furnished by banks
10 Empowered Committee on MSMEs
Empowered Committees on MSMEs have been constituted under the Chairmanship of the
Regional Directors with the representatives of SLBC Convenor, senior level officers from
two banks having predominant share in MSME financing in the state, representative of SIDBI
Regional Office, the Director of Industries of the State Government, one or two senior level
representatives from the MSME/SSI Associations in the state, and a senior level officer from
SFC/SIDC as members. The Committee will meet periodically and review the progress in
MSME financing as also rehabilitation of sick Micro, Small and Medium units. It will also
coordinate with other banks/financial institutions and the state government in removing
bottlenecks, if any, to ensure smooth flow of credit to the sector. The committees may decide
the need to have similar committees at cluster/district levels.
11 Debt Restructuring Mechanism for MSMEs

debt restructuring mechanism for units in MSME sector has been formulated by Department
of Banking Operations & Development of Reserve Bank of India and advised all commercial
banks to ensure restructuring of debt of all eligible small and medium enterprises. These
guidelines would be applicable to the following entities, which are viable or potentially
viable:
(a) All non-corporate MSMEs irrespective of the level of dues to banks.
(b) All corporate MSMEs, which are enjoying banking facilities from a single bank,
irrespective of the level of dues to the bank.
(c) All corporate MSMEs, which have funded and non-funded outstanding up to Rs.10 crores
under multiple/ consortium banking arrangement.
(d) Accounts involving wilful default, fraud and malfeasance will not be eligible for
restructuring under these guidelines.
(e) Accounts classified by banks as Loss Assets will not be eligible for restructuring.
For all corporate including MSMEs, which have funded and non-funded outstanding of Rs.10
crores and
(b) implement recommendations with regard to timely and adequate flow of credit to the
MSE sector.
(iii) Banks have been advised to give wide publicity to the One Time settlement scheme
implemented by them, by placing it on the banks website and through other possible modes
of dissemination. They may allow reasonable time to the borrowers to submit the application
and also make payment of the dues in order to extend the benefits of the scheme to eligible
borrowers.
12 Cluster Approach
(i) 60 clusters have been identified by the Ministry of Micro, Small and Medium Enterprises,
Government of India for focused development of Small Enterprises sector. 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 banks have been advised that a full-service
approach to cater to the diverse needs of the 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. A cluster based approach to lending may be
more beneficial:
a.

in dealing with well-defined and recognized groups;

b.

availability of appropriate information for risk assessment and

c.

monitoring by the lending institutions.

Clusters may be identified based on factors such as trade record, competitiveness and growth
prospects and/or other cluster specific data.
(ii) As per announcement made by the Governor all SLBC Convenor banks have been
advised 2007 to review their institutional arrangements for delivering credit to the MSME
sector, especially in 388 clusters identified by United Nations Industrial Development
Organisation (UNIDO) spread over 21 states in various parts of the country.
(iii) The Ministry of Micro, Small and Medium Enterprises has approved a list of clusters
under the Scheme of Fund for Regeneration of Traditional Industries (SFURTI) and Micro
and Small Enterprises Cluster Development Programme (MSE-CDP) located in 121 Minority
Concentration Districts. Accordingly, appropriate measures have been taken to improve the
credit flow to the identified clusters of micro and small entrepreneurs from the Minorities
Communities residing in the minority concentrated districts of the country.
(iv) In terms of recommendations of the Prime Ministers Task Force on MSMEs banks
should open more MSE focused branch offices at different MSE clusters which can also act
as Counselling Centres for MSEs. Each lead bank of a district may adopt at least one MSE
cluster.
13 Credit Linked Capital Subsidy Scheme (CLSS)

Government of India, Ministry of Micro, Small and Medium Enterprises has conveyed their
approval for continuation of the Credit Linked Capital Subsidy Scheme (CLSS) for
Technology Upgradation of Micro and Small Enterprises subject to the following terms and
conditions:
(i) Ceiling on the loan under the scheme is Rs.1 crore.
(ii) The rate of subsidy is 15% for all units of micro and small enterprises up to loan ceiling at
Sr. No. (i) above.
(iii) Calculation of admissible subsidy will be done with reference to the purchase price of
plant and machinery instead of term loan disbursed to the beneficiary unit.
(iv) SIDBI and NABARD will continue to be implementing agencies of the scheme.
14 Committees on flow of Credit to MSE sector
14.1 Report of the High Level Committee on Credit to SSI (now MSE) (Kapur
Committee)
This committee suggest measures for improving the delivery system and simplification of
procedures for credit to SSI sector. The Committee made 126 recommendations covering
wide range of areas pertaining to financing of SSI sector. These recommendations have been
examined by the RBI and it has been decided to accept 88 recommendations which include
the following important recommendations:
(i) Delegation of more powers to branch managers to grant ad-hoc 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;

(viii) Special programmes for training branch managers for appraising small projects;
(ix) Banks to make customers grievance machinery more transparent and simplify the
procedures for handling complaints and monitoring thereof.
14.2 Report of the Committee to Examine the Adequacy of Institutional Credit to SSI
Sector(now MSE) and Related Aspects (Nayak Committee)
All the major recommendations of the Committee have been accepted and the banks have
been inter-alia advised to:
(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;
(iv) extend Single Window Scheme of SIDBI to all districts to meet the financial
requirements (both working capital and term loan) of SSIs(now MSE);
(v) ensure that there should not be any delay in sanctioning and disbursal of credit. In case of
rejection/curtailment of credit limit of the loan proposal, a reference to higher authorities
should be made;
(vi) not to insist on compulsory deposit as a `quid pro-quo for sanctioning the credit;
(vii) open specialised SSI (now MSE) bank branches or convert those branches which have a
fairly large number of SSI (now MSE) borrowal accounts, into specialised SSI (now MSE)
branches;

(viii) identify sick SSI (now MSE) units and take urgent action to put them on nursing
programmes;
(ix) standardise loan application forms for SSI (now MSE) borrowers; and
(x) impart training to staff working at specialised branches to bring about attitudinal change
in them.
14.3 Report of the Working Group on Flow of Credit to SSI (now MSE) Sector
(Ganguly Committee)
The major recommendation of this committee was
(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, and
(v) revision of tenure as also interest rate structure of deposits kept by foreign banks with
SIDBI for their shortfall in priority sector lending.
14.4 Policy Package for Stepping up Credit to Small and Medium Enterprises Announcements made by the Union Finance Minister on August 10, 2005
The Hon'ble Finance Minister, Government of India had announced on August 10, 2005, a
Policy Package for stepping up credit flow to Small and Medium enterprises. Some of the
salient features of the policy package are as under:
Definition of Small and Medium Enterprises (MSMEs)
Fixing of self-targets for financing to MSME sector by banks

 Measures to rationalize the cost of loans to MSME sector

Measures to increase the outreach of formal credit to the MSME sector
Cluster based approach for financing MSME sector
Constitution of Empowered Committees for MSMEs in the Regional Offices of Reserve
Bank
14.5 Major Instructions issued to Public Sector banks subsequent to the policy
announcements
On the basis of the Policy Package as announced by the Union Finance Minister, some of the
major instructions issued by Reserve Bank to all public sector banks were as under:
Public sector banks were advised to fix their own targets for funding SMEs in order to
achieve a minimum 20% year on year growth in credit to SMEs. Public sector banks were
advised to follow a transparent rating system with cost of credit being linked to the credit
rating of the enterprise.
All banks, may make concerted efforts to provide credit cover on an average to at least 5 new
small/ medium enterprises at each of their semi-urban/ urban branches per year.
The banks may ensure specialized MSME branches in identified clusters/ centres with
preponderance of small Enterprises to enable the entrepreneurs to have easy access to the
bank credit.
14.6 Working Group on Rehabilitation of Sick SMEs (Chairman: Dr. K.C.
Chakrabarty)
The recommendations were,
a)

put

in

place

loan

policies

governing

extension

of

credit

facilities,

Restructuring/Rehabilitation policy for revival of potentially viable sick units/enterprises and

non- discretionary One Time Settlement scheme for recovery of non-performing loans for the
MSE sector, with the approval of the Board of Directors and

b) implement the recommendations with regard to timely and adequate flow of credit to the
MSE sector as detailed in the aforesaid circular.
14.7 Prime Ministers Task Force on Micro, Small and Medium Enterprises
A High Level Task Force was constituted by the Government of India) to consider various
issues raised by Micro, Small and Medium Enterprises (MSMEs).The Task Force
recommended several measures having a bearing on the functioning of MSMEs, viz., credit,
marketing, labour, exit policy, infrastructure/technology/skill development and taxation. The
comprehensive recommendations cover measures that need immediate action as well as
medium term institutional measures along with legal and regulatory structures and
recommendations for North-Eastern States and Jammu & Kashmir.
14.8 Working Group to Review the Credit Guarantee Scheme for Micro and Small
Enterprises
A Working Group was constituted by the Reserve Bank of India under the Chairmanship of
Shri V.K. Sharma, Executive Director, to review the working of the Credit Guarantee Scheme
of CGTMSE and suggest measures to enhance its usage and facilitate increased flow of
collateral free loans to MSEs.
The recommendations of the Working Group included, inter alia, mandatory doubling of the
limit for collateral free loans to micro and small enterprises (MSEs) sector from Rs.5 lakh to
Rs.10 lakh and enjoining upon the Chief Executive Officers of banks to strongly encourage
the branch level functionaries to avail of the CGS cover and making performance in this
regard a criterion in the evaluation of their field staff, etc. have been advised to all banks.
.
15 Banking Codes and Standard Board of India (BCSBI)
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) as defined in the Micro Small and Medium Enterprises
Development (MSMED) Act, 2006. It provides protection to MSE and explains how banks

are expected to deal with MSE for their day to-day operations and in times of financial
difficulty.