3. Specialised SME Branches 

All the then-existing Specialised SSI Branches at 32 Centers were re-designated as SME Branches as per Board Approval dated 30/06/2005 with a view to increase the credit flow to SME segment in these Centers by giving a special thrust on marketing. Further, 20 additional general banking branches have been re-designated as SME branches with thrust on SME lending. The number of SME branches as of now is 50 after delisting 2 branches from the original list of 32 branches and addition of 20 branches as mentioned hereinabove.

4. SME Cells at Zonal Offices

Specialised SME Credit Cells have been set up at Zonal Offices in all key centres having good potential for SME advances, with the following functions:

• Processing of all proposals where the limits are beyond the Branch Manager’s delegated authority. Branches would forward all related papers for an evaluation at SME Cell with their recommendations. Branches should own responsibility for the borrower’s credentials and activity and ensure existing procedures/processes to continue if proposal falls within the Branch Manager’s Delegated Authority;
• Branches would be free from processing of such proposals and sanction formalities and be responsible only for obtention of security documents from the borrower and for perfection of other securities as well as monitoring of the unit’s operations.
• Proposals processed by the Cell would be dealt directly at the Zonal Office, without any intervening authority;
• Turnaround time would thus be reduced, ensuring that stipulated time schedules are strictly followed by both- Branches and SME Cell;
• The critical parameter for measuring the Cell’s performance would be the reduced Turnaround time and SME business growth with the introduction of the centralised processing at the SME Cell.

5. Credit Thrust
In terms of the extant RBI Guidelines credit is made available to all segments of the SSI sector, as under:

• 40% of the total credit to small scale industry goes to Village Industries, Artisans, and Tiny Industries with investment in plant and machinery up to Rs.5 lakhs,
• 20% of the total credit goes to SSI units with investment in plant and machinery between Rs.5 lakhs and Rs.25 lakhs and
• The remaining 40% goes to SSI units with investments in Plant and Machinery exceeding Rs.25 lakhs.

Since the investment criteria has undergone a revision under MSMED Act, some of the erstwhile Medium Enterprises would be shifted to Small Enterprises(Manufacturing) and scope of the latter (former SSI) has increased whereas in case of Tiny sector now called Micro Enterprises, the investment in Plant & Machinery/Equipment has remained the same (i.e. up to Rs.5 lakhs and Rs.25 Lakhs in both the segments. In tune with RBI Directives to increase the outreach of formal credit to the SME sector, our semi-urban and Urban branches were advised to make concerted efforts to provide credit cover on an average every year to at least 5 new micro/small/medium enterprises each.

6. Cluster-Based Lending Approach

Cluster based approach for financing SMEs is expected to result in less transaction costs, and risk mitigation, besides providing an appropriate scale for improvement in infrastructure. Of the 388 UNIDO-identified clusters for intensive development, 61 clusters were identified for active financing by us at centres where we are already represented. Besides these 61 identified clusters, Bank will also formulate any other schemes under the cluster approach such as ginning mills (Ahmedabad), Carpet Weaving (Varanasi), Ganesh Idols (Raigad Thane), etc.

The SME branches would also have adequate operational flexibility to extend finance/render other services to other sectors/borrowers.
SIDBI has already initiated the process of establishing Small Enterprises Financial Centres (SEFCs) in select clusters. Risk profiles of each cluster will be studied by a professional credit rating agency and such risk profile reports when made available to Bank(s) would enable us to consider adoption of the cluster for comprehensive credit saturation.

7. Credit Tenure

The Bank’s Term Loan exposure to SME sector would generally have a 7-10 year maturity.

8. Credit Acquisition

Apart from direct/primary credit acquisition, we may also consider take-over of advance accounts from other Banks/FIs if the following minimum financial parameters and conditions are complied with:

• Accounts should be eligible for a credit rating of minimum AA as per our credit rating model treating the account as a new one.
• The accounts to be taken over should be standard accounts with the existing Bank.
• The firm/company continuously registering increasing trend in sales volume and making cash profit for at least last three years.
• Maximum debt equity ratio of 3:1 in the case of Medium Enterprises, and Small Enterprises enjoying working capital limits over Rs.5.00 Crores and 4:1 in the case of Tiny Enterprises, and Small Enterprises enjoying working capital limits up to Rs.5.00 Crores.
• While a benchmark Current Ratio at 1.33:1 is always desirable, it is felt that some relaxations need to be made in this regard in case of SMEs. They may be permitted to maintain a minimum current ratio 1:1 as against 1.25-133:1,, stipulated for others. Deviations from this range to be allowed only by an authority one level higher than the sanctioning authority.
• Minimum Interest Service Coverage Ratio (ISCR) of 1.50:1 as against 1.75:1 prescribed normally.
• If Term Loan is also proposed to be taken over, the minimum Debt:Service Coverage Ratio (DSCR) should be 1.25.
• The Asset Coverage Ratio should not be less than 1.50.

9. Credit Appraisal

Although same appraisal norms cannot be uniformly applied to Micro, Small and Medium Enterprises, broadly the appraisal would involve:

Proper identification of the Proponent(s) and his/her/their antecedents in accordance with KYC Norms/Guidelines, the proponents’ experience, educational and social background, technical/ professional competence, integrity, initiatives, etc,.

• Checking out for Wilful Defaulters’ List of RBI, Specific Approval List (SAL) of ECGC etc,.
• The acceptability of the product manufactured, its popularity/market demand, market competitors.
• Evaluation of State and Central Govt. Policies (enabling environment) with specific reference to the Enterprise in question, Environmental stipulations, Availability of necessary infrastructure-roads, power, labour, raw material and markets.
  
• Techno-economic Appraisal of units where it is felt absolutely necessary by the Zonal Managers.
• Project Cost, the Proponent’s own financial contribution, projections for three years, and other important parameters which would include the BEP, liquidity, solvency, and profitability ratios, etc,.

10. Working Capital Assessment

For working capital limits up to Rs.5 Crores , Turnover Method would be applicable as mandated under Nayak Committee Recommendations for financing working capital needs of the SMEs @ 20% of the projected turnover based on the assumption of a three month operating cycle. It is abundantly clarified that this 20% is the minimum WC limit to be sanctioned even if the proponent’s operating cycle is shorter than 3 months. Branches should, however, ensure to restrict the drawings in such cases to actual drawing power. MPBF method may be resorted in specific cases with longer operating cycle. Branches should obtain and scrutinise latest audited financials of the constituent in all cases of WC limits above Rs.10 lakhs. In case of provisional balance sheets it should be ensured that in the audited financials, the variation is not beyond +/- 5%.

The next year’s sales projections made by the borrower, however, would have to be corroborated by the trend in sales over 2 years, last year actual sales through verification of the following indicative parameters (besides the financial data submitted by the borrower):

• Sales Ledger/Sales Turnover.
• Credit Summation in the account.
• Sales Memos or Invoices/Delivery Challans.
• Sales Tax Paid/Turnover Tax/Excise Register, as applicable,
• Electricity Bills –wherever applicable.
• Orders on hand/expected orders.
• Installed capacity vis-à-vis the projections.
• Overall market trend etc,.

Such projections should be within reasonable limits say 25% over last year’s sales. However, in exceptional cases deviations from this may be allowed if supported by LCs/Firm orders on hand etc,.

10.1.Current Ratio:

While a benchmark Current Ratio at 1.33:1 is always desirable, it is felt that some relaxations need to be made in this regard in case of SMEs. They may be permitted to maintain a minimum current ratio 1:1 as against 1.25-133:1, stipulated for others. Deviations from this range to be permitted by an authority one level higher than the sanctioning authority.
Classification of Current Assets and Current Liabilities under MPBF method would be based on extant RBI/Bank guidelines.

10.2. Debt:Equity Ratio:

The following may be accepted as the benchmark in this regard:

• W/C Limits up to Rs.5 Crores to Micro & Small Enterprises:4:1.
• W/C Limits over Rs.5 Crores to Micro & Small Enterprises: 3:1.
• W/C Limits to Medium Enterprises: 3:1.

11. Credit Rating Model

Govt./RBI had advised that Banks may initiate necessary steps to rationalise the cost of loans to SME sector by adopting a transparent rating system with cost of credit being linked to the credit rating of enterprise. The Bank’s Board had already approved on 04/02/2005 adoption of the following credit risk models, developed by ICRA. The entry level requirements prescribed in this new model would be applicable: 

a) Large Corporate Model (Domestic/ECBs/Syndicated Loans) (Fund/Non-Fund-Based limits of Rs.500 Lakhs and above or Turnover Rs.5000 Lakhs);

b) Mid-segment Model (Fund/ Non-Fund-Based limits of Rs.100 Lakhs and above but not exceeding Rs.500 Lakhs and Turnover below Rs.5000 Lakhs);

c) SBS/SSI Model (Fund/ Non-Fund-Based limits of Rs.10 Lakhs and above but not exceeding Rs.100 Lakhs) scoring model);

The Bank had already adopted rating models a & c above. The model for amounts between Rs.1 Crore and Rs.5 Crores is under the process of rollout.
The ratings given by reputed Credit Rating agencies such as SMERA, CRISIL etc, which have been approved by the National Small Industries Corporation, are also considered for granting concessions in the interest rates, in tune with such credit ratings, based on parameters such as turnover, market position, operating efficiency, existing financial position, and management evaluation.

12. Pricing:

Risk of Default in the SME sector is spread amongst a wider base of borrowers and therefore the pricing would be linked to the Credit Rating of the constituent considering also the RBI directives from time to time.
In view of the severe competition in the market, interest rates offered at times may have to be lower than the rate arrived at reckoning the borrower’s credit rating. Taking into view the overall value of the account and the attendant ancillary benefits available to the Bank, the Chairman & Managing Director/Executive Director may, within the authority ceded at Board 13.07.2004, grant authority to Zonal Manager and above, to approve interest concessions, subject to informing ALCO.

13. Exposure Norms:

Bank’s extant exposure norms would be applicable. Accordingly, the Bank’s exposure is not to exceed :

• 15% of Bank’s Capital Funds to Individual Borrowers including PSUs. (20% in case of exposures to Infrastructure Lending).
• 40% of Bank’s Capital Funds to Group Borrowers (50% in case the additional exposure of 10% is on account of Infrastructure projects, i.e. Power, Telecommunications, Roads Ports etc)

14. Collateral Security and Margin Norms:

Credit facilities extended to a single Micro & Small Enterprises, Borrower (i.e. erstwhile SSI), either by way of Term Loan or Working Capital or both, without any collateral security or third party guarantee, will be covered, if eligible, under SIDBI’s Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) Scheme . A composite limit of Rs.1 Crore will be considered by branches to meet working capital and term loan requirements of MSME Units.

As per extant RBI guidelines, Micro & Small Enterprises with limits up to Rs.5 Lakhs (i.e. erstwhile Tiny and SSI) may be sanctioned credit facilities without any collateral security. For customers with good track record, this waiver of collateral security may be for limits up to Rs.100 Lakhs, provided CGTMSE cover is available. However, the issue of collateral security would be addressed on a case-specific basis.

CGFMSE charges one-time Joining fee of 1.50% and Annual Service fee of 0.75% of the sanctioned limits with credit facilities up to Rs 100 Lakhs. This fee has now been reduced to 1% and 0.5% respectively in respect of credit limits upto Rs.5 lakhs. In terms of Board Approvals dated 29/07/2004, the Bank had already decided to absorb 50% of the one-time guarantee fee to its Profit & Loss Account (i.e.0..75%) for limits up to Rs 50 lakhs, with a view to mitigate the burden on the borrowers and encourage them to take the guarantee cover under CGTMSE scheme

Margin requirements, which normally are 25%, would vary depending on the nature of the special Schemes.

15. Time Norms for Disposal of Applications:

With the switchover to the simple Turnover Method for all advances in the SME segment up to Rs.5 Crores, the time for processing of the applications and sanction has to be curtailed as under (from the date of submission of complete papers by the borrower):