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.
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.
In 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.
2. MSME-Economic Significance
2
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.
3. MSME-Economic Significance
3
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.
4. MSME-Economic Significance
4In 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].
5. MSME-Economic Significance
5
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.
6. MSME Sector- Statutory Foundation
6
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.]
7. MSME- Definition
7
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.
8. MSME- Definition
8
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.
9. Priority Sector Guidelines to MSME Sector
9
Manufacturing Enterprises
MSMEs 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 Enterprises
Bank 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.
10. Priority Sector Guidelines
10
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.
11. MSME Sector- Targets for Lending
11
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.
12. Prime Minister’s Task Force
Recommendations on MSME
12
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.
13. MSME sector- Key guidelines
13
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.
14. MSME sector- Key guidelines
14
Specialised MSME branches
PSBs 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.
15. MSME sector- Key Policies
15
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.
16. MSME sector- Key Policies
16
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.
17. MSME sector- Key Policies
17
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.
18. MSME sector- Key Policies
18
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.
19. MSME sector- Key Policies
19
Credit Guarantee Scheme for MSEs
Government 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)
20. Policy Horizon
20
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.
21. Policy Horizon
21
Objectives of MUDRA
To 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’.
22. New Policy Initiatives
22
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.
23. MSME Sector- Challenges
23
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
24. MSME Sector- Challenges
24
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.
25. MSME Sector- Challenges
25
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.
26. Small Finance Banks
26
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.