SME Segment

SME Segment

Policy for stepping up credit to the SME Sector

1. Coverage of SME Sector

   1. Current SSI / Tiny industries definition will continue.

   2. Units with investment in plant and machinery in excess of SSI limit and upto Rs.10.00 crore will be treated as Medium Enterprises.

   3. Only SSI financing will be included in priority sector.
        

2. Credit Target for the SME Sector

   1. 10% of the total advance will be deployed in the SME Sector.

   2. Advances to the SME Sector will be doubled by 2009-2010 with minimum 20% year on year growth in credit in this sector.

3. Lending Norms.

   1. Working Capital requirement of the SME with projected annual turnover upto Rs.5.00 crore will continue to be assessed on the basis of the Nayak Committee recommendations.

   2. Composite loan limits upto Rs.1.00 crore may be sanctioned to an eligible unit to enable it to avail working capital and term loan requirement through ‘single window’.

   3. For credit limits upto Rs.5.00 lac to an SME there will be no stipulation of any collateral security. In respect of accounts with good track record and sound financials requirement of collateral may be dispensed for loans upto Rs.15.00 lac.

   4. Greater availment of the Credit Guarantee Fund Scheme for Small Industries for increasing credit to the sector.

4. Delivery Channels

   1. One branch in each lead district will be designated as a specialised SME branch.

   2. Each urban / semi urban branch will be required to extend credit to at least five (5) new tiny, small and medium enterprises every year.

   3. The bank will increasingly adopt cluster based approach for SME financing. In each district where the bank has lead district responsibility at least one cluster will be adopted by the bank.

   4. Better co-ordination between the branches of the bank and the branches of SIDBI located at 50 clusters under the scheme for Small Enterprises Financing Centres.

   5. The bank will encourage the SMEs to have their units rated by the accredited Credit Rating Agencies under the scheme launched by NSIC. The units obtaining better credit rating will receive better credit support from the bank.

5. Disposal of credit proposals

   1. All loan applications for limits upto Rs.50,000/- shall be disposed within 2 weeks, those upto Rs.15.00 lac within 3 weeks and those beyond Rs.15.00 lac within 4 to 6 weeks.

   2. Each branch will maintain a register recording the date of receipt, sanction, rejection and disbursement of the loan proposals received from the SMEs.

   3. No fresh proposal will be rejected without the approval of the next higher authority.

6. Rate of Interest

   a. The rate of interest for all fresh advances to be made to the SMEs will be as under

   (i) The structure of rate of interest for limits upto Rs.1.00 crore (w.e.f.19.02.2007)

   Upto Rs. 25,000/-:	9.00% p.a.
   Above Rs.25000/- to Rs.50000/- :	9.50% p.a.
   Above Rs.50000/- to Rs. 1.00 lac :	10.50% p.a.
   Above Rs. 1.00 lac to Rs. 2.00 lac    :	10.50% p.a.
   Above Rs. 2.00 lac to Rs.5.00 lac :	11.25% p.a.
   Above Rs. 5.00 lac to Rs.15.00 lac :	11.75% p.a.
   Above Rs. 15.00 lac to Rs.25.00 lac :	12.25% p.a.
   Above Rs.25.00 lac to Rs.1.00 crore :	As per Credit Risk Rating
   Above Rs. 1.00 crore	(Min:10.50% Max:14.50%)

   (ii) For secured advances above Rs.1.00 crore the rate of interest will be determined by their risk rating within the band of 2% above and below the Prime Lending rate subject to (i) above. The structure will be as under :

   UBICRO : 10.50%
   UBICR 1 : 11.50%
   UBICR 2 :  13.50%
   UBICR 3 :  14.50%

   b. The rate of interest on all existing advances to the SMEs will be same as stipulated in (a) above. However, the rate for the SME account with credit rating of UBICR 4 and UBICR 5 will be 14.50% .

   c. Further relaxation for the specific segments in the SME Sectors like Rice Mill, Cold Storages etc. will be considered on merit.

   d. Units rated by accredited Credit Rating Agencies and enjoying credit limit above Rs.25.00 lac will be given further relaxation in the rate of interest as provided below :

   (i) Highest rating : Reduction of interest by 0.50%

   (ii) 2nd highest rating : Reduction of interest by 0.25%

   e. Any further relaxation in the rate of interest will be approved by Head Office in terms of the existing delegation in this regard.

7. Debt Restructuring of the SMEs

   The proposed Debt Restructuring mechanism for the SMEs based on the guidelines issued by the Reserve Bank of India vide DBOD.BC.No.34 / 21.04.132 / 2005-06 dated 8.9.2005 is as under:

   1. Objective

      To ensure timely and transparent mechanism for restructuring of SMEs which are viable or potentially viable, affected by certain internal and external factors.

   2. Definition of SMEs

      A Small Scale Industrial Unit is an undertaking in which investment in plant and machinery (original cost), does not exceed Rs. 1.00 crore, except in respect of certain specified items under Hosiery, Hand Tools, Drugs and Pharmaceuticals, Stationery items and Sports Goods, where this investment limit has been enhanced to Rs. 5.00 crore. A comprehensive legislation which would enable paradigm shift from Small Scale Industries to Small and Medium Enterprises is under consideration of Parliament. Pending enactment of the above legislation, current SSI/Tiny Industries definition may continue. Units with investment in plant and machinery, in excess of SSI limit and upto Rs. 10.00 crore and the annual sales turn over should not exceed Rs. 100.00 crore, may be treated as Medium Enterprises (ME).

   3. Eligibility Criteria

      3.1 These guidelines would be applicable to the following entities, which are viable or potentially viable:

      a) All non corporate SMEs irrespective of the level of dues to banks.

      b) All corporate SMEs which are enjoying banking facilities from a single bank, irrespective of the level of dues to the bank.

      c) All corporate SMEs, which have funded and non funded outstanding upto Rs.10.00 crore under multiple/consortium banking arrangement.

      3.2 Accounts involving willful default, fraud and malfeasance will not be eligible for restructuring under these guidelines.

      3.3 Accounts classified by banks as “Loss Assets” will not be eligible for restructuring.

      3.4 In respect of BIFR cases, approval from BIFR is to be obtained before implementation of the package.

      3.5 Any SME will be eligible for restructuring even if it has not become sick. An unit will be considered sick if

      a) any of the borrowal accounts of the unit remains substandard for more than six months and.
      ‘or’

      b) there is erosion in the net worth due to accumulated cash losses to the extent of 50 percent of its net worth during the previous accounting year,

      'and’

      c) the unit has been in commercial production for at least two years.

   4. Viability Criteria

      A unit may be regarded as viable if it would be in a position, after implementation of a relief package spread over a period not exceeding seven years from the commencement of the package, to continue to service its repayment obligation as agreed upon including those forming part of the package, without the help of the concessions. The repayment period for restructured debts should not exceed ten years from the date of implementation of the package.

   5. Financial Parameters – Acceptable viability bench mark levels

      For uniformity in the assessment of viability and drawing up the restructuring package the following financial benchmarks will be required to be adhered:

      1. Debt Service Coverage Ratio (DSCR)

         Average DSCR should be at least 1.25 and minimum 1 for any particular year during the pendancy of the loan may be considered adequate.

      2. Current Ratio

         Current Ratio is to be maintained at the minimum level of 1.17 to satisfy under 1st method of lending during seven years of operation after implementation of the package which is expected to improve at minimum level of 1.33 in the subsequent years.

      3. TOL/TNW

         At the initial stage the ratio may be considered upto 6:1 which is expected to improve gradually over the years to reach desired level of 3:1 at the end of 8th year.

      4. Variation to the extent of 10% benchmark parameters at (a), (b) & (c) above may be considered on merit. Variation beyond 10% requires prior approval of the Head Office.

      5. Tenure of the loan

         The unit becoming viable in seven years and the repayment period of restructured debts not exceeding 10 years.

      6. The unit should contribute at least 10% of the additional fund required for restructuring, 50% of the contribution should be brought in within first six (6) months of implementation of the package and the balance 50% within the next six (6) months.

      7. Gross Profit Margin (GPM)

         Gross profit or profit before interest, depreciation and tax (EBIDTA) is considered a good measure to compare the performance of a company in relation to the industry. The wide variation, if any of the company’s GPM with industry average would require to be explained with qualitative information.

   6. Prudential norms for restructured accounts.

      1. Treatment of ‘standard’ accounts subjected to restructuring.

         a) A rescheduling of the instalments of principal alone, would not cause a standard asset to be classified in the sub-standard category, provided the borrower’s outstanding is fully covered by tangible security. However, the condition of tangible security may not be made applicable in cases where the outstanding is upto Rs. 5.00 lacs, since the collateral requirement for loans upto Rs. 5.00 lacs has been dispensed with for SSI/ Tiny Sector.

         b) A rescheduling of interest element would not cause an asset to be downgraded to sub-standard category subject to the condition that the amount of sacrifice, if any, in the element of interest, measured in present value terms, is either written off or provision is made to the extent of the sacrifice involved.

         c) In case there is a sacrifice involved in the amount of interest in present value terms, as at (b) above, the amount of sacrifice should either be written off or provision made to the extent of the sacrifice involved.

      2. Treatment of ‘sub-standard’/’doubtful’ accounts subjected to restructuring.

         a) A rescheduling of the instalments of principal alone, would render a ‘sub-standard’/’doubtful’ category asset eligible to continue in the ‘sub-standard/’doubtful category for the specified period (as defined in paragraph 8 below), provided the borrower’s outstanding is fully covered by tangible security. However, the condition of tangible security may not be made applicable in cases where the outstanding is upto Rs. 5.00 lacs, since the collateral requirement for loans upto Rs. 5.00 lacs has been dispensed with for SSI/tiny sector.

         b) A rescheduling of interest element would render a ‘sub-standard’ / ‘doubtrul’ asset eligible to be continued to be classified in ‘sub-standard’ / ‘doubtful’ category for the specified period subject to the condition that the amount of sacrifice, if any, in the element of interest, measured in present value terms, is either written off or provision is made to the extent of the sacrifice involved.

         c) Even in cases where the sacrifice is by way of write off of the past interest dues, the asset should continue to be treated as ‘sub-standard’ / ‘doubtful’.

      3. Treatment of Provision

         a) Provision made towards interest sacrifice shall be created by debit to Profit & Loss Account and held in a distinct account. For this purpose, the future interest due as per the current BPLR in respect of an account should be discounted to the present value at a rate appropriate to the risk category of the borrower (i.e., current PLR + the appropriate term premium and credit risk premium for the borrower category) and compared with the present value of the dues expected to be received under the restructuring package, discounted on the same basis.

         b) Sacrifice may be re-computed of each Balance Sheet date till satisfactory completion of all repayment obligations and full repayment of the outstanding in the account, so as ot capture the changes in the fair value on account of changes in BPLR, term premium and the credit category of the borrower. Consequently, banks may provide for the shortfall in provision or reverse the amount of excess provision held in the distinct account.

         c) The amount of provision made for NPA, may be reversed when the account is re-classified as a ‘standard asset.’

   7. Additional Finance

      Additional finance, if any, may be treated as ‘standard asset’ in all accounts viz. ‘standard’, ‘sub-standard’, and ‘doubtful accounts’, up to a period of one year after the date when first payment of interest or of principal, whichever is earlier, falls due under the approved restructuring package. If the restructured asset does not qualify for upgradation at the end of the above period, additional finance shall be placed in the same asset classification category as the restructured debt.

   8. Upgradation of restructured accounts.

      The ‘sub-standard’ / ‘doubtful’ accounts at para 6 (ii) (a) & (b) above, which have been subjected to restructuring, whether in respect of principal instalment or interest by whatever modality, would be eligible to be upgraded to the standard category after the specified period, i.e., a period of one year after the date when first payment of interest or of principal, whichever is earlier, falls due under the rescheduled, terms to satisfactory performance during the period.

   9. Asset Classification status.

      During the specified one-year period the asset classification status of rescheduled accounts will not deteriorate if satisfactory performance of the account is demonstrated during the period. In case, however, the satisfactory performance during the one year period is not evidenced, the asset classification of the restructured account would be governed as per the applicable prudential norms with reference to the pre-restructuring payment schedule. The asset classification would be bank specific based on record of recovery of each bank, as per the existing prudential norms applicable to banks.

   10. Repeated restructuring

       The special dispensation for asset classification as available in terms of paragraphs 6, 7, and 8 above, shall be available only when the account is restructured for the first time.

   11. Procedure under consortium / multiple banking

       In case of eligible SMEs which are under consortium/multiple banking arrangements, the bank with the maximum outstanding may work out the restructuring package, along with the bank having the second largest share.

   12. Time Frame

       Banks should work out the restructuring package and implement the same within a maximum period of 60 days from date of receipt of request from the SMEs including submission of all requisite papers / particulars by the SMEs.

   13. Delegation of discretionary power : -

   Restructuring of an account will require approval of the authority one step higher than the sanctioning authority.

8. Monitoring and Review
   Annual Targets for lending to the SME Sector will be allotted to each Region which will in turn set branch-wise targets.

   1. A Nodal Officer will be designated at all the branches for helping the SME entrepreneurs to comply with the bank’s formalities. The name of the Nodal officer will be prominently displayed on the Notice Board of the branch.

   2. The Nodal Officer will also be responsible for identifying Sick SME Units for prompt follow-up action.

   3. An SME Cell will be set up at each Regional Office. The Cell will monitor performance of the branches based on a quarterly return to be collected from the branches.

   4. The SME Cell set up at Credit Department, H.O. will monitor and review implementation of the package for the bank as a whole and submit a quarterly progress report to the Board of Directors.

   5. For wider dissemination and easy accessibility, the bank’s policy guidelines and the credit facilities available for the SMEs will be displayed in the bank’s website.

9. Training & Orientation

   The branch managers and the officers posted at the specialized SME branches and other required to handle SME credit proposals will be exposed to suitable in-house and external training programmes.