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DENA GUJARAT GRAMIN BANK, HEAD OFFICE, GANDHINAGAR

MICRO, SMALL AND MEDIUM ENTERPRISES SECTOR – LOAN POLICY

1.0 INTRODUCTION

Micro, Small & Medium Enterprises are the growth engines of the Indian economy due

to their ability to create jobs, foster entrepreneurship and to provide depth to the

industrial base of the economy. MSMEs are contributing to the process of economic

growth, employment generation and helping in more equitable distribution of national

income. The major advantage of the sector is its employment potential at low Capital

cost. MSMEs are second only to agriculture in the field of employment. It is estimated

that, in terms of value, MSME sector accounts for about 45% of the manufacturing

output and around 40% of the total export of the country.

Thus SME plays a very significant role in the socio-economic development of the

country. With the opening up of the Indian economy due to globalization and

Liberalization, this vital sector of the economy is facing a lot of challenges and

competition from the domestic as well as multinational corporations. This is an issue of

serious concern.

2.0 Problems & Challenges

The problems and challenges faced by the SMEs and the factors responsible

for their sickness are summarized as under :

a) Increased competition from cheap imports

b) Infrastructural constraints/bottlenecks

c) Delayed realisation of receivables

d) Delayed/inadequate credit

e) High cost of funds

f) Insistence on collateral/margin

g) Complicated and cumbersome procedures of banks

h) Limited financial resources

i) Non availability of adequate promoters' contribution / equity

j) Obsolete technology. Low R & D and technology upgradation effort

k) Inadequate managerial competence

l) Lack of marketing skills I Poor marketing

m) Inadequacy of inputs and skills

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n) Government policies

o) Financial problems

p) Low quality image (Low ability perceived)

q) Difficulty in dealing with Govt. buying system

3.0 Problems Identified by Banks

a) High sickness / NPA level

b) Lack of entrepreneurship

c) Infrastructural constraints

d) Competition / lack of marketing skills

e) Lack of credit information / Asymmetry of information

f) Lack of knowledge of promoters

g) Obsolete technology / inertia to technological upgradation

h) Multiple agencies overseeing the development of MSME sector

i) Diversion of funds / overtrading

j) Inadequate reach of banks

4.0 Major Strengths of SME sector

a) Ability to produce specialized products

b) Can offer instant service

c) Ability for quick action - can cash in on opportunities

d) Relatively low overheads

e) Flexibility in operation - can jump from one product to another

f) Enjoys tax/duty advantage

5.0 What SME Sector wants

Growth and better returns on capital employed

Not lose an opportunity I bag maximum orders

Financial requirements

Timely credit

Adequate credit

At competitive terms

Latest technology for competitive edge

Better infrastructure

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Information symmetry

Now SME is the driving force for the long term growth of Indian economy,

contributing over 45% of the country's industrial production and around 40% of

the total exports. 26.1 million MSMEs in India employ over 59.7 million people.

SME remains the buzz word and many more initiatives are being taken at various

levels including Govt. of India, State Govts, Banks & financial institutions and

industry associations to ensure a steep growth path for the SME sector.

Emphasis is given on the growth of SME sector considering its growth potential. In

the changed scenario, the small and medium enterprises are also gaining the

confidence of the Banks due to :

Better yield

Higher utilization of credit

Spread of risks

Cross-selling opportunities

A healthy growth of SME sector would definitely ensure sustenance and

acceleration of Indian economy, in general, and industrial growth, in particular.

6.0 MSMED Act

In line with the announcements in the policy package Govt. of India brought in a

special act called 'THE MICRO, SMALL AND MEDIUM ENTERPRISES

DEVELOPMENT ACT, 2006’ which was passed on 16th June, 2006 to provide for

facilitating the promotion and development and enhancing the competitiveness of

Micro, Small and Medium Enterprises and for matters connected therewith or

incidental thereto. The Act has come in force w.e.f. 2nd October, 2006.

With the passing of MSMED ACT - 2006 there has been clarity as per the definition of

Micro, Small and Medium Enterprises. Under the provision of the Act, steps are also

being taken to support SME sector with a view to increasing their competitiveness

and also to provide legal protection. With this development in the year 2006 the

growth in SME sector shall be accelerated visibly in the ensuing period.

7.0 OBJECTIVE OF THE POLICY :

The SME sector is growing and in the process there is opening up opportunities for

Bank for lending. Therefore, Banks have been focusing to broaden their SME loan

portfolio because lending to SME is profitable and divides risk of NPAs into number of

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small units. The Policy aims to make Bank's functionary at various level aware of this

fact and also move aggressively to take a fair market share to build up an appropriate

and sound SME portfolio. However, to face the competition and facilitate growth, the

policy shall be constantly evolving measures to foster growth, remain competitive and

also to mitigate risk involved and thus built up a quality portfolio. The Policy also aims

to strengthen the arms of field functionaries to acquire new accounts and thus

increase borrower base. The Policy also aims at helping the operational units / field

functionaries to build up a quality credit portfolio.

8.0 APPLICABILITY OF THE POLICY:

Our Bank's loan policy document covers policy guidelines for sanctioning fund based

credit facilities such as Working Capital Facilities, Term Loan facilities and all Non

Fund Based facilities. In case of advances to Small and Micro units, being a Priority

Sector Advance, RBI guidelines / Govt. of India guidelines are followed. Thus, the

captioned policy shall always act as supplementary and not a substitute for our

Bank's Loan Policy.

9.0 DEFINITION OF SME SECTOR:

MSME Development Act, 2006 has given the definition of Micro, Small & Medium

Enterprises for both sectors i.e. Manufacturing and Service Sector. RBI has issued

last Master Circular No. RPCD.SME&NFS.BC.No.10/06.02.31/2009-10 dated 1st

July, 2009 on guidelines for lending to Small & Medium Enterprises (SMEs) Sector.

The Definition of Micro, Small & Medium Enterprises is as follows :

10.0 SMALL ENTERPRISES:

Small (manufacturing) Enterprises:

Enterprise engaged in the manufacture/production or preservation of goods

and whose investment in plant and machinery (original cost excluding land and

building and the items specified by the Ministry of Small Scale Industries vide

its notification No. S.O. 1722(E) dated October 5, 2006) does not exceed ` 5

crore

Small (service) Enterprises:

Enterprise engaged in the providing/rendering of services and whose

investment in equipment (original cost excluding land and building and

furniture, fittings and other not directly related to the service rendered or as

may be under the Micro, Small and Medium Enterprises Development,

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(MSMED), Act 2006) does not exceed ` 2 crore.

10.01 Micro (manufacturing) Enterprises

Enterprise engaged in the manufacture/production or preservation of goods

and whose investment in plant and machinery (original cost excluding land and

building and such items) does not exceed ` 25 lakh, irrespective of the location

of the unit.

Micro (service) Enterprises

Enterprise engaged in the providing/rendering of services arid whose

investment in equipment (original cost excluding land and building and

furniture, fittings and such items) does not exceed ` 10 lakh.

10.02 Medium (manufacturing) Enterprises

Enterprise engaged in the manufacture/production or preservation of goods

and whose investment in plant and machinery (original cost excluding land and

building and the items specified by the Ministry of small Scale Industries vide

its notification No. S.O. 1722(E) dated October 5, 2006) is more than ` 5 crore

but does not exceed ` 10 crore.

Medium (service) Enterprises

Enterprise engaged in the providing/rendering of services and whose

investment in equipment (original cost excluding land and building and

furniture, fittings and such items) is more than ` 2 crore but does not exceed `

5 crore.

The Small and Micro (Service) enterprises shall include small road & water

transport operators, small business, professional & self-employed persons and

all other service enterprises.

(Note: Bank’s lending to Medium enterprises will not be included for the

purpose of reckoning under priority sector)

Manufacturing Sector Service Sector

Original Investment in

Plant & Machinery

Original Investment in

Equipments

Micro Enterprises

Up to ` 25.00 lacs Up to ` 10.00 lacs

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Small Enterprises From ` 25.00 lacs to

` 500.00 lacs

From ` 10.00 lacs to

` 200.00 lacs

Medium Enterprises From ` 500.00 lacs to

` 1000.00 lacs

From ` 200.00 lacs to

` 500.00 lacs

Tiny Unit would be Micro Enterprises

SSI would be Small Enterprises.

10.03 DIRECT / INDIRECT ADVANCES

Direct advances to above referred entities shall be considered as direct finance

whereas indirect finance in the Micro and Small Enterprises [MSE] sector will

include credit to :

Persons involved in assisting the decentralized sector in the supply of

inputs and marketing of outputs of artisans, village and cottage

industries.

Cooperatives of producers in the decentralized sectors viz. artisans,

village and cottage industries.

Financing of NBFCs or other intermediaries for on-lending to Small and

Micro Enterprises.

10.04 INVESTMENTS IN SECURITIZED ASSETS

Investments made by banks in securitized assets representing loans to the SE

sector shall be eligible for classification under priority sector [direct or indirect]

depending upon the underlying assets, provided it satisfies the following

conditions:

i) The pooled assets represent direct loans to SE sector and which are

classified under priority sector before securitization.

ii) The securitized loans are originated by banks/financial institutions and

iii) Fulfill the RBI guidelines on securitization.

10.05 Outright purchases of any loan asset eligible to be categorized under

priority sector, shall be eligible for classification under the respective

categories of priority sector [direct or indirect] provided

i) The loans purchased are eligible to be categorized under Priority

sector.

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ii) Assets are purchased [after due diligence and at fair value] from Banks

& Fls, without any recourse to Seller.

iii) Eligible Loan assets are not disposed off, other than by way of

repayment, within a period of 6 months from the date of purchases.

10.06 Investments by Banks in Inter Bank Certificates [IBPCs], on a risk sharing

basis, shall be eligible for classification under the respective categories

of priority sector [direct or indirect] provided

i) The underline assets are eligible to be categorized under Priority sector.

ii) Assets are held for atleast 180 days from the date of investment.

10.07 BANK'S TARGET FOR SME SECTOR:

Though Govt. of India have not fixed any specific target for lending to SME

sector, looking to the opportunity for finance to this sector, our bank has

chosen SME sector as thrust area for finance. Branches/Regional Offices

would explore all possibilities to provide credit to all segments of the SME

sector.

It will be seen that the Government of India is very keen to ensure that the

credit need of Micro Sector and Small Sector are given priority and adequate

financial assistance is made available to Micro & Small Sector. The credit

need of both the sectors can be met within the discretionary power given to

Branch Managers and Regional Managers. Thus, in order to provide

adequate, hassle free and timely credit to MSME Sector, ground level

functionaries will have to pay attention. Special Credit Camps may also

arrange at various centers to step up finance to Micro & Small Sector.

10.08 Strategy to achieve the Target:

The advances to SME sector are planned to increase significantly during the

year 2011-12. To achieve the desired goal, Bank proposes to move

simultaneously into the following directions.

The Credit sanctioned for SME sector has not been satisfactory at Branch

level. The Regional Managers have to activate Branch Managers to canvass

aggressively for acquiring new accounts. Further, the credit requirement of

micro & small enterprises can be easily met by Branches/ROs within their

discretionary powers. Therefore, focused attention will be given to activate

branches to sanction/recommend for sanction credit proposals more in

numbers.

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Branches will be given all support service such as training, skill of credit

appraisal etc. to contribute sizable, growth in SME sector.

Special Schemes may be formulated in Cluster areas as per the needs /

requirements of entrepreneurs. For this purpose, help of Head Office /

Regional Offices may be taken.

Emphasis should be given to the efficient credit delivery system. The advance

should be made available within minimum time. Guidance / assistance may

also be extended in completing Bank's formalities necessary for availing loans.

Credit Department at Head Office to formulate necessary guidelines and

monitor the performance of the SME Sector. Regional Offices would monitor

the growth under SME sector of the branches of their jurisdiction and register

substantial growth, specifically through identified branches of their Regions.

10.09 TAKE OVER OF LOANS:

The Bank is also financing for takeover of loans, wherein selective clients

fulfilling all the criteria, are sanctioned loan so as to takeover the finance

granted by other bank / financial institutions. This is subject to overall

takeover policy of the Bank as per the Bank Loan Policy. In case of takeover

of accounts from other Banks / Fls permission of concerned RM is to be

obtained. RMs and above may give permission for take-over of loans from

other banks / Fls provided the takeover norms have been complied with.

This power is to be exercised on merits on case to case basis.

10.10 Collateral Security:

a. As per RBI guidelines, the exemption limit for all borrowal accounts under

MSME sector (both manufacturing or production & providing or rendering

services) for obtention of collateral security is ` 10.00 lacs.

b. Our bank has been registered as a Member Lending Institution with Credit

Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), which

guarantees collateral free loans upto ` 50.00 lacs. Entrepreneurs facing

problems in availing finance required for their projects due to their inability

to provide collaterals / third party guarantees may alleviate this problem by

covering under CGTMSE. It may help to strengthen credit delivery system

and facilitate flow of credit to the MSE sector.

10.11 CREDIT APPROVAL PROCESS:

Credit approval process is well devised by the bank and all criteria for

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sanctioning of loan i.e. eligibility criteria, limits, type of loan, rate of interest,

purpose for which loan has to be granted, appraisal/assessment, the

delegation of powers, etc. are clearly laid down in circulars issued by Head

Office from time to time. The specially designed Application Forms/Process

formats to be utilized for the purpose. Discretionary powers are vested to

various credit approving authorities. The competent authority as per their

discretionary powers approves the loan.

10.12 Others:

a) General lending methods for working capital would be (a) Turn Over

method (b) Modified MPBF method & (c) Cash flow method. All the fund

based exposures to SME sector upto ` 5.00 crores are to be assessed

with the Turn Over method.

b) Branches / ROs must regularly submit control returns for loan sanctioned

to SME sector by them, as per existing norms.

c) Process fees and other charges as per stipulated guidelines of the bank

from time to time for SME sector to be collected.

d) All necessary steps shall be taken to ensure compliance of terms and

conditions of sanction of loans.

e) Pre/Post sanction inspection would be carried out invariably. Any

discrepancies and irregularities in value of security should be reported/

rectified immediately.

f) Proper execution of documents including timely registration of charge

(wherever applicable) with Competent Authority would be ensured in

accordance with bank’s guidelines from time to time.

g) The end use of funds would be monitored at the branch level. The branch

officials would satisfy themselves regarding antecedents of the suppliers

before disbursement of the loan and same should be recorded at the

branch for verification purpose.

h) Monitoring of regular/standard assets is to be done by branches and any

default/slippage must be closely followed up. If required, such accounts

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must be classified and reported as Standard ‘B’ and plan of action for

recovery of overdue must be clearly mentioned.

i) Provisioning norms will be applicable as per RBI guidelines from time to

time.

j) Regional Offices to keep close watch and monitor the growth made by

branches, take up random inspection of branches and to review at

regular intervals the quality & quantity of credit growth and take corrective

steps as required.

k) For those aspects, which are not specifically covered under this policy,

the broad framework of Bank’s credit policy, Recovery policy and other

guidelines issued by the bank from time to time in respective areas to be

followed. The SME policy is supplementary to the Loan Policy.

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