RBI Initiatives
Specialised SME Branches
One time NPA Settlement of NPAs and debt restructuring for SMEs
Cluster based Financing Approach
Why Cluster based approach for financing is beneficial to SMEs?
Corporate linked Cluster financing models
Micro credit agencies for SME clusters
Export finance/credit
Gold Card scheme
Venture capital finance
New Policy package for MSMEs
Guarantee cover to Member Lending Institutions (MLIs) like banks for credit to SMEs
Risk Management guidelines
CIBIL for SME financial information dissemination
Specialised SME Branches
The RBI directs specialised SME branches in identified clusters/ centres with preponderance of medium enterprises so as to enable the SME entrepreneurs have easy access to the bank credit and at the same time equip bank personnel to develop requisite expertise. The RBI also desires the existing specialised SSI branches may be also be redesignated as SME branches.
One time NPA Settlement of NPAs and debt restructuring for SMEs
RBI has directed banks to adopt a simplified, non-discretionary and non-discriminatory mechanism for one-time settlement of chronic NPAs below Rs.10 crore in the SME sector.
A debt restructuring mechanism for units in the SME sector has also been put in place by banks as per RBI’s directions for SMEs with outstandings upto Rs. 10 crore. This would help banks assess the SMEs for credit sanctions, which were hitherto not being considered by them. According to the new RBI guidelines, banks could decide the acceptable viability benchmark, consistent with the unit becoming viable in seven years and the repayment period for restructured debt not exceeding 10 years. However, SME accounts classified by banks as “loss assets” would not be eligible for restructuring. Moreover, any additional finance is to be treated as a ‘standard asset’ in all accounts up to a period of one year after the date when first payment of interest or of principal, whichever is earlier, was due. RBI has also asked banks to formulate a debt-restructuring scheme for SMEs.
Cluster Financing Approach
All scheduled commercial banks, (including RRBs) and local area banks (LABs) are constantly advised by the RBI for adoption of cluster-based approach for SME financing, and displaying instructions/guidelines formulated by banks as well as by RBI on their websites.
Banks have been advised to identify and select clusters of SME units which share homogeneity and a critical mass. Thus by looking at SMEs as a cluster and understanding their strong linkages with the help of in-house industry experts, banks have more holistic view of their credit risk, and the need for extending credit by individually assessing their credit risk is thus obviated. Individual assessment of credit risk creates a myopic view of credit assessment by banks because of insufficient database dissemination of the SME financials which can be overcome through improved business dynamics of a cluster based business model. Cluster based approach also offers possibilities of reduction of transaction costs and mitigation of risk for SMEs.
Why Cluster based approach for financing is beneficial to SMEs?
i) Dealing with well-defined and recognized groups
ii) Availability of appropriate information for risk assessment, and
iii) Institutionalized monitoring arrangements available to the lending institutions due to cluster framework.
In order to institutionalize the cluster based financing, SIDBI is establishing Small Enterprises Financial Centers in select clusters. Under this exercise, risk profile of each cluster would be studied by a professional credit rating agency and such risk profile reports would be made available to commercial banks. Each lead bank of a district will consider adoption of at least one cluster.
Corporate linked Cluster financing models
On account of a strong evidence that SSIs linked as suppliers, service providers, etc. to successful large industries are usually successful ventures, RBI has also recommended banks/FIs to promote corporate-linked SME cluster models. Such successful SSI-Large industry linkages provide examples of best practices which can be aggressively extended. Financing SMEs linked to large corporate, covering suppliers, ancillary units, dealers etc. enhances the competitiveness of the corporate as well as the SME participants. Banks linked to large corporate houses are expected to play a catalytic role in promoting this model.
Micro credit agencies for SME clusters
The RBI is also visualizing on promoting and financing Special Purpose Vehicles (SPVs) in the form of micro credit agencies dedicated to servicing SME clusters. It feels that banks can extend wholesale financial assistance to NGOs/MFI and work out innovative models for securitization of the MFI receivable portfolio on the pattern of models in vogue in USA and other countries. Working of such SPVs can be made increasingly viable through extended support of various fiscal/taxation measures by the Government.
Export finance/credit
The RBI Working Group on export finance has opined that while interaction between banks and exporters by way of seminars/meetings / workshops is prevalent in major centers, it is conspicuously absent at smaller centers. Therefore, there is a need to arrange for such meetings with banks and small and medium exporters to sort out the differences and also educate the exporters about various formalities of banks to obviate the difficulties faced by them. For this, export promotion organizations are to interact at state level with the SLBC (State Level Bankers’ Committee) sub-committees and arrange for meetings/seminars etc.
The working group has also recommended that banks should put in place a control and reporting mechanism to ensure that the applications for export credit especially from Small and Medium Exporters are disposed of within the prescribed time frame. It has said that banks should post nodal officers at Regional/Zonal Offices and major branches having substantial export credit for attending to the credit related problems of SME exporters.
Gold Card scheme
A Gold Card Scheme was worked out by RBI (part of EXIM Policy 2003-04) for creditworthy exporters (including SMEs) with good track record for easy availability of export credit on best terms which envisaged certain additional benefits based on the record of performance of the exporters. Since the number of Gold cards issued by banks was low, banks have been advised by RBI to speed up the process of issue of the cards to all the eligible exporters especially the SME exporters and ensure that the process is completed within a period of three months.
Venture capital finance
Since SMEs face obvious difficulties in obtaining finance through the traditional route, the RBI has been increasingly recognizing the role of venture finance for the SME sector. It has recommended in one of its Working Group Reports that a dedicated National level SME Development Fund should be established. For this SIDBI is to promote a NBFC (non–public deposit taking) exclusively for undertaking venture and other development financing activities for SMEs. The Report has also recommended that Banks could also contribute to the corpus created by SIDBI (on risk sharing basis) or alternatively, set up their own venture financing instruments.
New Policy package for MSMEs
RBI envisages under its new policy package for MSMEs for the commercial banks (including regional rural banks) with over 67,000 branches, to make concerted efforts to provide credit cover on an average to at least 5 new tiny, small and medium enterprises at each of their semi urban/urban branches per year. The new policy also stipulates the public sector banks to fix their own targets for funding SMEs in order to achieve a minimum 20% year on year growth in credit to SMEs. The objective is to double the flow of credit from Rs.67,600 crore in 2004-05 to Rs.135,200 crore to the SME sector by 2009-10, i.e. within a period of 5 years.
Guarantee cover to Member Lending Institutions (MLIs) like banks for credit to SMEs
At present, Member Lending Institutions (MLIs), like banks, are provided guarantee cover of 75% of the amount of default by CGTSI in respect of term loan and/or working capital facilities up to Rs.25 lakh extended by the MLIs to new and existing SSI units/IT/software units/small scale service business enterprises (SSSBEs), without collateral security and/or third party guarantee. One-time guarantee fee of 2.5% and annual service fee of 0.75% of the credit facility sanctioned are currently charged by CGTSI from the MLIs. In order to reduce the cost of guarantee to the weaker segments of the borrowers, particularly tiny units, the CGTSI under the new policy package is to reduce the one-time guarantee fee from 2.5% to 1.5% for all (i) loans up to Rs.2 lakh, (ii) eligible women entrepreneurs, and (iii) eligible borrowers located in the North Eastern regions (Sikkim) and Jammu & Kashmir. Further, public sector banks are to be encouraged to absorb the annual service fee in excess of 0.25% in respect of guarantee for all (i) loans up to Rs.2 lakh, (ii) eligible women entrepreneurs, and (iii) eligible borrowers located in the North Eastern regions (Sikkim) and Jammu & Kashmir.
Risk Management guidelines
The Basel II implementation guidelines have been circulated by RBI to be implemented by banks by the FY end 2006-07. Basel II guidelines recognize the element of diversification of risk in the SME sector and have assigned a lower risk weight for retail SME exposure under standardized approach. The non-retail SME exposure would also attract a lower risk weight where they have better external ratings under the standardized approach. Shifting to Basel II, therefore, would be advantageous for the bottom lines of the banks who have significant SME exposure due to lower capital requirements.
CIBIL for SME financial information dissemination
In order to increase the flow of credit and institutionalize appropriate risk management systems for lending, including SME lending, Credit Information Bureau of India Ltd. (CIBIL) has been operationalised by RBI in association with Government of India so that there can be proper and transparent dissemination of the SME financials for easy and objective assessment of their credit quality by banks. This would help in reducing the transaction cost and improving the credit flow to the SME sector.
(Source : RBI Policies and Circulars)