Many of these initiatives were based on the recommendations made by the Nayak Committee, the Kapur Committee and the Dr. S.P. Gupta Study Group.

Credit to MSME Sector From Public Sector Banks

The table below gives the status of credit flow to Village & Small Industries (VSI) Sector since 1991:-

assistance to MSMEs by SFCs

The main objective of State Financial Corporations(SFCs) is to meet Term Loan/Fixed Capital needs of the Small Scale Industries. There are 18 SFCs in the country.
The Table below gives the total assistance and assistance to MSMEs by SFCs:-

Source: IDBI Annual Report

Improving the Credit Flow

Nayak Committee (1991-92)

Nayak Committee set up by the Reserve Bank of India in December 1991 (Report came in September 1992) dealt with aspects of adequacy and timeliness of credit to MSMEs. Nayak Committee found that small scale sector was getting working capital to the extent of 8.1% of its annual output which was less than the normative requirement of 20%. Accordingly, Nayak Committee recommended that the MSME sector should obtain 20% of its annual projected turnover by way of working capital. Based on these, as well as other recommendations of the Nayak Committee, RBI issued a number of guidelines advising the banks to grant working capital to the extent of 20% of the projected annual turnover, timely disposal of loan applications and setting up of specialised bank branches for MSME loaning in areas of higher MSME concentration. This norm is applicable to units with annual turnover up to Rs. 5 crores.

Seven Point Action Plan (1995-96)

As a follow up of Nayak Committee recommendations, the Union Finance Minister in the Budget Speech of 1995-96, announced a Seven Point Action Plan for improving the flow of credit to small scale sector. This included:-

• Setting up of specialised MSME bank branches;
• Adequate delegation of powers at branch and regional levels;
• Conducting sample surveys of their performing MSME accounts by banks;
• Sanction of composite loans as far as possible;
• Regular meeting with MSME entrepreneurs;
• Sensitization of bank managers towards working of MSME Sector; and
• Simplification of procedural formalities by banks.

Action has been taken by banks on the above action plan.

Kapur Committee (1997-98)

Reserve Bank of India (RBI) had in December 1997 appointed a One Man Committee headed by Shri S.L. Kapur, the then Member, Board for Industrial & Financial Reconstruction (BIFR), to review inter-alia:

1. the working of credit delivery system of small scale industries with a view to making the system more effective, simple and efficient to administer ; and
2. to make suggestions for simplification and improvement in system and procedures. The Committee submitted its Report to RBI on 30^th June 1998, which contains 126 recommendations. Out of 126 recommendations, 103 have been examined by RBI and decision taken thereon. Banks/ Financial Institutions and other agencies have already implemented 86 recommendations. Some of the important measures taken pursuant to the Recommendations of the Committee include:-
   
   • Delinking of SIDBI from IDBI.
   • Opening of more specialized branches.
   • Enhancement in the limits of Composite Loan from Rs. 2 lakhs to Rs. 5 lakhs.
   • Setting of DRTs.
   • Introduction of Credit Guarantee Scheme.
   • Raising the exemption limit for collateral security from Rs. 25,000/- to Rs. 5 lakhs.

Other steps taken by Reserve Bank of India to improve credit flow to MSME Sector

1. In order to ensure that credit is available to all segments of MSME sector, RBI has issued instructions that out of the funds normally available to MSME sector, 40% be given to units with investment in plant and machinery up to Rs.5 lakhs, 20% for units with investment between Rs.5 lakhs to Rs.25 lakhs and remaining 40% for other units.
2. Public sector banks have been advised to operationalise more specialised MSME branches at centres where there is a potential for financing many MSME borrowers. As on March 2002, 391 specialised MSME branches are working in the country.
3. Extension of 'Single Window Scheme' to all districts to meet the financial requirements (both term loan & working capital) of MSMEs.
4. With a view to moderating the cost of credit to MSME units, banks have been advised to accord MSME units with a good track record, the benefit of lower spreads over the prime lending.
5. In order to take expeditious decision on credit proposals of MSME units, banks have been advised to delegate enhanced powers to the branch managers of the specialised MSME branches so that most of the credit proposals are decided at the branch level
6. Laghu Udyami Credit Card (LUCC) Scheme launched by Public Sector Banks for providing simplified & borrower friendly Credit facilities to MSME, tiny enterprises retail traders & artisans.
7. An interest rate band of 2% above & below PLR should be applicable to MSMEs.
8. Bank advised to fix self set targets for growth in advances to MSME sector based on previous year's achievements and overall tread in growth of net bank credit.
9. Bank to consider 3 slabs for rate of interest-loans upto Rs.50,000, between Rs.50,000 and Rs.2 lakhs and above Rs.2 lakhs.
10. Composite loan limit to be enhanced to Rs.50 lakhs from Rs.25 lakhs.
11. Limit on collateral free loans to be increased to Rs.25 lakhs in deserving cases.
12. Deposits of foreign banks with SIDBI to earn interest at Bank Rate.
13. Working Group to be set up on flow of credit to MSME sector.

Incorporating credit requirement in the identified clusters in the banks’ Annual Credit Plans for the year 2003- 04:

As a follow up to the decisions of Review Meeting, the Ministry of MSME had forwarded to the RBI a list of 60 identified clusters for focused development of MSMEs to disseminate the information to all public sector banks. As per RBI’s directives, all SLBC Convenor Banks to initiate action for incorporating the credit requirements in the State Credit Annual Plans in respect of 60 clusters identified by the Ministry of MSME for focused development of MSMEs. Further, as decided in the meeting of the Standing Advisory Committee held at RBI, Mumbai on 1st September, 2003, the banks have been advised by the RBI that credit requirement in the identified clusters to be incorporated in the banks’ Annual Credit Plans for the year 2003-04.

As decided in the meeting of Standing Advisory Committee held on 1st September, 2003, the banks have to give adequate publicity to their schemes/facilities like availability of collateral free /composite loans and schemes under TUFs/NEF/KVIC/CGTSI etc.