Banking Awareness forms an important part of Bank exams. Study our Banking Awareness topics to excel in Bank exams. Study all about Micro, Small and Medium Enterprises (MSME). The points in red color are the most important for exams. Questions may be framed from these points.
What are Micro, Small & Medium Enterprises?
The Micro, Small & Medium Enterprises are defined as per the Micro, Small & Medium Enterprises Development (MSMED) Act, 2006. They are of two types. One is Manufacturing Enterprises and other is Service Enterprises.
- Manufacturing Enterprises– These are the enterprises engaged in the manufacture or production of goods pertaining to any industry.
The Manufacturing Enterprise is defined in terms of investment in Plant & Machinery. - Service Enterprises:-The enterprises engaged in providing or rendering of services and are defined in terms of investment in equipment.
The Central Government has made a change in the definition of MSME on June 01, 2020. The new definition is given below. The definition of MSME is now based on “Investment (Capital) And Annual Turnover”.
| Category | New Capital | New TurnOver |
| Micro | Rs 1 Crore | Rs 5 Crore |
| Small | Rs 10 Crore | Rs 50 Crore |
| Medium | Rs 50 Crore | Rs 250 Crore |
The old definition is produced below (only for reference)
| Enterprises | Manufacturing Enterprise (Investment in plant & machinery) |
Service Sector (Investment in equipments) |
| Micro Enterprises | Does not exceed Rs 25 lakh | Does not exceed Rs 10 lakh |
| Small Enterprises | More than Rs 25 lakh but does not exceed Rs 5 crore | More than Rs 10 lakh but does not exceed Rs 2 crore |
| Medium Enterprises | More than Rs 5 crore but does not exceed Rs 10 crore | More than Rs 2 crore but does not exceed Rs 5 crore |
Priority Sector Lending and MSME
The loans given by banks to MSME sector is eligible to be reckoned for priority sector advances. To read about Priority Sector click here.
Targets / sub-targets for lending to Micro, Small and Medium Enterprises (MSME) sector
- As you know the total priority sector lending target for banks is 40%, so the loans given by banks to the 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).
- Also only for micro industries, there is a sub-target of 7.5% of ANBC. This is the minimum loans as a percent of ANBC that is to be given to Micro Industries.
- All loans to units in the Khadi and Village Industries Sector (KVI) sector will be eligible for classification under the sub-target of 7.5 percent prescribed for Micro Enterprises under priority sector.
Targets prescribed for lending by banks to MSMEs
As per the recommendation of Prime Minister’s Task Force on MSMEs (Chairman: Shri T.K.A. Nair, Principal Secretary) banks are advised to achieve:
-
- 20% year-on-year growth in credit to micro and small enterprises,
- 10% annual growth in the number of micro enterprise accounts and
- 60% of total lending to MSE sector as on corresponding quarter of the previous year to Micro enterprises.
Specialised branches for MSME
Public sector banks have been advised to open at least one specialized branch in each district. The banks have been permitted to categorize their MSME general banking branches having 60% or more of their advances to MSME sector, as specialized MSME branches for providing better service to this sector as a whole.
Instructions for lending to MSME sector
Collateral: Collateral is an asset or property that an individual offers to a lender whenever he wants to acquire a loan.
Banks are required to extend collateral-free loans up to Rs. 10 lakh to MSME sector.
Banks may, on the basis of good track record and financial position of the MSE units, increase the limit to dispense with the collateral requirement for loans up to Rs.25 lakh (with the approval of the appropriate authority).
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.
General Credit Card (GCC) Scheme
Non-farm entrepreneurs can obtain credit facilities for both working capital and term loan requirements by getting a General Credit Card
(GCC) from the bank. AGCC is issued as a smart card/debit card (biometric smart card compatible for use in the ATMs/handheld swipe machines and capable of storing adequate information of entrepreneur’s identity, assets and credit profile, etc.).
Loan limit under KCC– There will be no ceiling on the loan amount as long as the loan is for the purpose of non-farm entrepreneurial activity.
Rate of Interest– Decided by the banks.
Credit Guarantee Fund Trust Scheme for MSEs
With a view to facilitate flow of credit to the MSE sector without the need for collaterals the Ministry of MSME, Government of India and SIDBI set up the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).
The CGTMSE would provide cover for credit facility up to Rs. 200 lakh which have been extended by lending institutions without any collateral security.
Credit Linked Capital Subsidy Scheme (CLSS)
The Credit Linked Capital Subsidy Scheme (CLSS) has been launched by Government of India, and Ministry of Micro, Small and Medium Enterprises for Technology Upgradation of Micro and Small Enterprises. The terms and conditions for the same are:
-
- The ceiling on the loan under the scheme is Rs.1 crore.
- The rate of subsidy is 15% for all units of micro and small enterprises up to loan limit of Rs 1 crore
- 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.
- SIDBI and NABARD will continue to be implementing agencies of the scheme.
Debt Restructuring Mechanism for MSMEs
When a loan is given to MSMEs, there is a possibility that it may become NPA. So to mitigate this problem of NPA, the role of Debt Restructuring comes into play where the banks may consider to reschedule the debt for repayment, consider additional funds etc.
Before a loan account of a Micro, Small and Medium Enterprise turns into a Non-Performing Asset (NPA), banks or creditors should identify incipient stress in the account by creating three sub-categories under the Special Mention Account (SMA) category as given in the Table below:
| SMA Sub-categories | Basis for classification |
| SMA-0 | Principal or interest payment not overdue for more than 30 days but account showing signs of incipient stress |
| SMA-1 | Principal or interest payment overdue between 31-60 days |
| SMA-2 | Principal or interest payment overdue between 61-90 days |
Any MSME that falls under the SMA-2 category can be corrected by the 3 R’s
-
- Rectification
- Restructuring
- Recovery
One Time Settlement Scheme (OTS) for MSEs for settlement of their NPAs- Scheduled commercial banks have been advised to put in place a non -discretionary One Time Settlement scheme duly approved by their Boards.
Guidance to MSE entrepreneurs by Banks
Banks provide following services to the MSE entrepreneurs:
(i) Rural Self Employment Training Institutes (RSETIs)
Rural Self Employment Training Institutes (RSETIs) have been set up by various banks all over the country at the initiative of the Ministry of Rural Development (MoRD),. These RSETIs are managed by banks with co-operation from the Government of India and State Governments. RSETIs conduct various short duration courses to help the existing entrepreneurs compete in this ever-changing global market.
(ii) Financial Literacy and consultancy support:
Through the FLCs, banks provide assistance to the MSE entrepreneurs in regard to financial literacy, operational skills, including accounting and finance, business planning etc.
Banking Codes and Standards Board of India (BCSBI) and MSME
The Banking Codes and Standards Board of India (BCSBI) has formulated a Code of Bank’s Commitment to Micro and Small Enterprises. The Code also mentions that the banks are expected to dispose of MSE loan application for a credit limit or enhancement in the existing credit limit
-
- up to Rs.5 lakh within two weeks; and
- for credit limit above Rs.5 lakh and up to Rs.25 lakh within 3 weeks; and
- for credit limit above Rs.25 lakh within 6 weeks from the date of receipt
Trade Receivables Discounting System (TReDS)
TReDS is an online mechanism for facilitating the financing of trade receivables of MSMEs through multiple financiers. It also enables discounting of invoices of MSME sellers raised against large corporate, allowing them to reduce working capital needs.
In simple words, it is a mechanism through which MSME can receive finance against its trade receivable (against the products/services that they provide)
Certified Credit Counsellors (CCC) Scheme
The Certified Credit Counsellors (CCC) scheme was launched by SIDBI in July 2017. As per the scheme, Certified Credit Counsellors are institutions or individuals registered with SIDBI who shall assist MSMEs in preparing project reports in a professional manner which would, in turn, help banks make more informed credit decisions.