RBI guidelines & policies for SME lending

Banks are the major source of external finance for SMEs. The significance of SMEs in private sectors make this subject more interesting for policy makers, financial institutions, and researchers. The Reserve Bank of India has been issuing a number of guidelines to banks, from time to time, as far as to lending to Micro, Small & Medium Enterprises Sector is concerned.

To enable the banks to have the present instructions standardized, RBI has issued a master circular which includes the existing guidelines with regards to SME loans in India. Let’s check out some of the RBI Guidelines and policies for MSME sector lending by commercial banks.

• Targets for lending to Micro and Small enterprises (MSE) sector by Domestic Commercial Banks and Foreign Banks operating in India
• Advances to micro and small enterprises (MSE) sector shall be calculated in computing achievement under the overall Priority Sector target of 40 percent of Adjusted Net Bank Credit (ANBC) or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher.
• Bank loans above Rs.50 million per borrower / unit to MSE sector under MSMED Act, 2006, shall not be reckoned in computing achievement under the overall above Priority Sector targets. But will be used to assess the performance of the banks and with achievement of their targets.
• Banks are advised to achieve a 20 per cent year-on-year growth in credit to micro and small enterprises and a 10 per cent annual growth in the number of micro enterprise accounts.
• In order to make sure that optimum credit is made available to micro enterprises, banks need to ensure that at least 60 per cent of MSE advances should go to the micro enterprises. The target for lending to Micro Enterprises within the MSE sector will be calculated with reference to the outstanding credit to MSE sector as on preceding March 31st.

Issue of Acknowledgement of Loan Applications to MSME borrowers

Banks have been notified to compulsorily accept all applications for business loan in India, submitted manually or online, by their MSME borrowers. They need to make sure that a serial number is documented on the application form as well as on the acknowledgement receipt.

Banks are instructed not to accept collateral security for loans up to Rs.10 lakh extended to the MSE sector. In case the MSE unit has a good track record, banks may extend the limit of allowance of collateral prerequisite for loans up to Rs.25 lakh (after authorized approval).

Banks may sanction a composite loan limit of Rs.1 crore, so that MSE entrepreneurs are able to avail of their working capital and term loan requirement through Single Window.

Public sector banks have been instructed to have minimum one specialised branch in every district. Further, banks have been allowed to classify their MSME banking branches having 60% or more of their advances to MSME sector so as to encourage them to come up with more specialised MSME branches for providing improved service to this unit as a whole.

As far as payment is concerned, 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 further.