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Banking Made Easy
MSME BANKING
Certificate Examination in
SME Finance for Bankers
Version 1.0
(For Jan 2017 – IIBF & Other Exams.)
COMPILED BY
Sanjay Kumar Trivedy (Divisional Manager )

Canara Bank, Government Link Cell, Nagpur, PGNS Complex, Modi No. 3, First Floor,
Sitabuldi, Nagpur-440012, : 0712 – 2522271,2522272 / 07774069639
E-mail: linkcellnagpur@canarabank.com; sanjaytrivedy@canarabank.com
INDEX
SI. No CONTENTS Page No.
1. About Certificate. Examination in SME Finance for Bankers 02-03

2. Syllabus 04-04
3. Indian Economy & Role of MSME 05-08
4. Priority Sector Advances and MSME 09-37
5. Setting up SME 37-48
6. SMEs: Policy, Regulatory and Legal Framework 48-55

7. Institutional Framework & SME Financing 55-75
8. Financing Options & Modes 75-103
9. SME Development 104-105
10. Clusters and Cluster Development 106-114
11. SME: Recovry & Rehabilitation 114-131
12. Future of SMEs 132-133
13. Memory Based Recalled Question 134-146
14. Test Your Self : Practice Test 147-180
15. Case Studies 181-188
16. ABCD of MSME Credit 188-192
The best way to find yourself is to lose yourself in the service of others
Mahatma Gandhi
Compiled by Sanjay Kumar Trivedy, Divisional Manager, Canara Bank, Govt. Link Cell, Nagpur 1|Page
1.About Certificate Examination in SME Finance for Bankers
IIBF Certificate Examination

OBJECTIVE
Considering the growing importance of SME finance in the Banking Industry, this course is intended to
equip practicing banking and finance professionals to have in depth knowledge in the field of SME finance.
ELIGIBILITY : Any Graduate of a recognized university will be eligible for admission
MEDIUM OF EXAMINATION: Examination will be conducted in English only.
Cut-off Date of Guidelines / Important Developments for Examinations

In respect of the exams to be conducted by the Institute during May / June of a calendar year, instructions /
guidelines issued by the regulator(s) and important developments in banking and finance up to 31st December of
the previous year will only be considered for the purpose of inclusion in the question papers. In respect of the exams
to be conducted by the Institute during November / December of a calendar year, instructions / guidelines issued by
the regulator(s) and important developments in banking and finance up to 30 June of that year will only be the
considered for the purpose of inclusion in the question papers.
DURATION OF EXAMINATION: The duration of the examination will be of 2 hours.
Pass: Minimum marks for pass in every subject - 50 out of 100 marks.
PATTERN OF EXAMINATION: (i) Question Paper will contain 120 objective type multiple choice questions
for 100 marks. (ii) The examination will be held in Online Mode only, (iii) There will NOT be negative marking
for wrong answers. (iv) Questions for 20 marks each will be from Module A, B and C. Question for 40
marks will be from Module D of the syllabus
TYPES OF QUESTIONS
120 Objective Type Multiple Choice Questions - carrying 100 marks – 120 minutes and question will be based on
Knowledge Testing, Conceptual Grasp, Analytical / Logical Exposition, Problem Solving & Case Analysis
A. MULTIPLE CHOICE ( Each Questions 0.5 Marks )– QUESTIONS & ANSWERS ( 70-74QUES )
B. MULTIPLE CHOICE – ( Each Questions 01 Marks )– PROBLEMS & SOLUTIONS (18-20QUES)
C. MULTIPLE CHOICE – ( Each Questions 02 Marks )– APPLIED THEORY – QUES. & ANS.
(10 -14 QUES)
D. MULTIPLE CHOICE – ( Each Questions 02 Marks )– CASE STUDIES & CASE LETS (PROBLEMS
& SOLUTIONS ) ( 12-15QUES )
QUESTIONS MODELS : TYPES OF QUESTIONS

Type – A: MULTIPLE CHOICE – QUESTIONS & ANSWERS
The Best Method for assessing working capital limit used by the bank for seasonal Industries is :
1. Operating Cycle Method, 2. Projected Networking Method, 3. Projected Turn over Method & 4. Cash
Budget Method
Type – B: MULTIPLE CHOICE – PROBLEMS & SOLUTIONS
Mr. Ram Kumar is having overdraft account with Canara bank upto Rs.100,000. The present Debit Balance in
the account was Rs. 80550.00. The bank has received attachment order from Income tax deptt. For Rs. 16,200.00.
What can the bank do in this situation ?
- Unless the bank is a debtor, there can be no attachment and an unutilized overdraft account does not render
the bank a debtor ( but creditor ) & hence can not attach.
Type – C: MULTIPLE CHOICE – APPLIED THEORY – QUES. & ANS

Financial Institution wish to have the money lent by them repaid in time. Secured advances sanctioned by banks
possess what kind of security ?
- Secured Advances have impersonal security i.e. Tangible Security
Type –D : MULTIPLE CHOICE – CASE STUDIES & CASE LETS (PROBLEMS & SOLUTIONS )
Economic development of a country to a large extent depends upon Agril. & Industrial sectors. Development of
agril. Depends upon irrigation facilities while industrial development on availability of power,good transport and
fast communication facilities. All these are called infrastructure. Read the caselet & explain which industries
constitute infrastructure?
a. Energy, Transport & Communication
b. Irrigation, construction of bridges & dams over Rivers & stable govt. at Centre.
c. Availability of Funds for PMEGP , SJSRY & Indira Awas Yojana
Type of Questions – Basically four types of Multiple Choice Questions asked in Exam of
Which Type – A : Concept based Straight Questions ( 70-71 QUES - 0.5 MARKS EACH ) ;
Type – B : Problems & Solutions (20-25 QUES - 1.0 MARKS EACH); Type – C : Applied
theory based Questions (10-15 QUES - 2.0 MARKS EACH) ; Type – D : Case Study & Case-
lets based Questions ( 10-15 QUES - 2.0 MARKS EACH )
PERIODICITY AND EXAMINATION CENTRES

a) Examination will be conducted on pre-announced dates published on IIBF Web Site. Institute conducts
examination on Half yearly basis, however periodicity of the examination may be changed depending upon the
requirement of banking industry.
b) List of Examination centers will be available on the website. (Institute will conduct examination in those centers
where there are 20 or more candidates.)
PROCEDURE FOR APPLYING FOR EXAMINATION

Application for examination should be registered online from the Institute’s website www.iibf.org.in. The schedule
of examination and dates for registration will be published on IIBF website.
PROOF OF IDENTITY
Non-members applying for Institute’s examinations/courses are required to attach/ submit a copy of any one of the
following documents containing Name, Photo and Signature at the time of registration of Examination Application.
Application without the same shall be liable to be rejected.
1) Photo I/Card issued by Employer or 2) PAN Card or 3) Driving Licencse or 4) Election Voter’s I/Card or 5)
Passport 6) Aadhaar Card
TIME
Examination Date
08/01/2017 Sunday Will be given in the admit Letter
Last Date for receipt of Change of Centre Requests at the respective Zonal Offices for the
Examinations scheduled for Jan. 2017 : 24th Nov 2016
Examination Fees Exclusive SERVICE TAX @15.50%

(Examination Eligible for Members and Non-Members)
For For Non-
Sr. No. Name of the Exam Attempts
Members(Rs) Members(Rs)
Certificate Exam In
1 Customer Service & First Attempt 1000 1500
BCS
Subsequent each attempt 1000 1500
2. Syllabus
Certificate Examination in SME Finance for Bankers
The details of the prescribed syllabus which is indicative are furnished below. The Institute however,
also reserves to itself the right to vary the syllabus / rules / fee structure from time to time. Any
alterations made will be notified.
1. Setting up SME
Evolution, Definition of SMEs, Characteristics, Role in Economic Development., Needs of SMEs,Forms of
Organisations; Proprietary, Partnership, HUFs, Company etc., Establishing SMEs : Environmental
Scanning, Market Assessment, Technology, Selection of Site, etc., - Organisational Structures - Rules &
Regulations - Gender & Entrepreneurial Development.
2. SMEs: Policy, Regulatory and Legal Framework

Policy Framework for SMEs - Policy Shifts since 1991 - Regulatory Framework - Laws and Regulations
for SMEs - SME Development Bill, 2005 - LLPAct, Changing Policy Framework & SME Strategies
3. Institutional Framework & SME Financing

Institutions - Central Government - SSI Board, SIDO, SISI, PPDCs, RTCs, CFTI, NISIET, NIESBUD,
NSIC - State Government : Directorate of Industries, DICs, SFCs, SIDC / SIIC, SSIDC - Financial
Institutions & Banks; SIDBI, Commercial Banks, RRBs and Co-op. Banks etc., - Enterprise Perspective -
Banker’s Perspective.
4. Financing Options & Modes

Sources of finance and methods of financing SMEs, relevance of quasi capital and own money in
business - Venture Capital, Hybrid Capital, special financial products for SMEs, Assessment of Term
Finance / Working Capital for SMEs - Credit Risk Management of SMEs - Appraisal, assessment,
collaterals, documentation, inspection, follow-up and monitoring and review, Credit Scoring models,
Standing and liquidity assessment, Credit pricing of SMEs
5. SME Development
Business Development Service Providers - Role & Responsibilities - Improving Competitiveness of SMEs
through Enhancing Productivity - Market Promotion and Development - technological Development in
SMEs - Environmental Impact Assessment, Modernisation issues (technological and quality
upgradation), Role and Functions of Credit Guarantee Trust for small industries (CGTSI)
6. Clusters and Cluster Development

What are Clusters? - Why Clusters - Types of Clusters - Advantages and Disadvantages - Role of
Clusters - Setting up of Clusters - Approaches to Develop Cluster Strategies - Measuring Cluster
Development - Critical Success Factors (lending economics to clusters from the angle of bankers and
borrowers) - Policy Environment - Successful Clusters; India and Global.
7. SME: Rehabilitation
Sickness-symptoms, warning signals, diagnosis and prescriptions, rehabilitation, restructuring, holding
on operations, work out, NPA management, recovery options, legal aspects / options, securitization
and exit options / alternatives
8. Future of SMEs
Micro Finance Approach to SMEs - Linkages with Agriculture and industry - IT and SMEs - Relationship
banking and its impact in SME development - WTO issues, impact on SMEs - BASEL NORMS -
globalizationissues, impact, intermediation opportunities and Emerging issues affecting SMEs.
3.Role and Contribution of SMEs in Indian Economy
The estimated contribution of Micro, Small and Medium Enterprises (MSME) sector, including service
segment, to the country’s GDP during 2012-13 was 37.54 per cent; while the total employment in the
sector is 805.24 lakh; and the share of MSMEs in India’s total export for the year 2014-15 was 44.70
per cent, the Parliament was informed.
Union Minister of MSME Kalraj Mishra gave this information in a written reply to a question in Lok
Sabha.
As per the revised methodology suggested by Central Statistics Office (CSO), Ministry of Statistics and
Programme Implementation (MoSPI), on the basis of the data on Gross Domestic Product
(GDP) published by CSO, MoSPI and final results of the latest Census (Fourth Census), conducted (with
base reference year 2006-07), wherein the data was collected till 2009 and results published in 2011-
12, the estimated contribution of MSME sector (including service segment) to GDP during 2010-11,
2011-12 & 2012-13 are 36.69 per cent, 37.97 per cent & 37.54 per cent respectively, said the Minister.
The Government monitors the employment in the MSME sector in the country by conducting All
India Census of the sector, periodically. As per the latest Census (Fourth Census), conducted (with
base reference year 2006-07), wherein the data was collected till 2009 and results published in 2011-12,
as well as data extracted from Economic Census 2005 conducted by CSO, MoSPI, for activities
excluded from Fourth Census, namely wholesale/retail trade, legal, educational & social services, hotel
& restaurants, transports and storage & warehousing (except cold storage), the total employment in
the MSME sector is 805.24 lakh.
Based on the export data maintained by Director General of Commercial Intelligence & Statistics,
Ministry of Commerce and the information available with this Ministry about MSME products having
significant export, the share of MSMEs in India’s total export, for the year 2012-13, 2013-14 and 2014-
15, has been estimated as 43.00 per cent, 42.38 per cent and 44.70 per cent respectively.
Meanwhile, as per the Fourth Census as well as data extracted from Economic Census 2005 the total
employment in the sector increased to 805.24 lakh as compared to 249.33 lakh in the Third All India
Census of Small Scale Industries, conducted with reference year 2001-02, which is seen growing at
26.42 per cent annually, taking into account additional coverage under the sector.
Under the PMEGP Programme, which generates income and employment, 5851 projects were assisted
during the year 2014-15, and the estimated employment generated was 40, 915 while the Margin
Money Subsidy released and utilized was Rs 1,01,900 lakh and Rs 14,474.87 lakh respectively.
HIGHLIGHTS OF THE SIXTH MSME ECONOMIC CENSUS

ESTABLISHMENTS
• As per the Sixth Economic Census (2013), 58.5 million establishments were found to be in operation. 34.8 million
establishments (59.48%) were found in rural areas and nearly 23.7 million establishments (40.52%) were found to be
located in urban areas.
• Out of 58.5 million establishments, about 77.6% establishments (45.36 million) were engaged in non-agricultural
activities (excluding public administration, defence and compulsory social security activities) while the remaining
22.4% establishments (13.13 million) were found to be engaged in agricultural activities (excluding crop production and
plantation).
• Over an intervening period of about 8 years between Fifth EC and Sixth EC, the total number of establishments in the
country increased from 41.25 million in 2005 (EC2005) to 58.5 million in 2013 (EC2013), registering a growth of
41.79% during the period. The growth was 38.37% in rural areas and 47.13% in urban areas.
• During the period between the two Economic Censuses (2005 & 2013), non-agricultural establishments grew at the
rate of 28.97%, while agricultural establishments grew at the rate of 115.98%.
Out of the total establishments, 22.6% belong to primary sector of which agriculture sector constitutes 22.45%, mining
and quarrying constitutes 0.15%, 19.72% belongs to secondary sector (including construction which contributes 1.66%)
and 57.68% pertain to tertiary sector
• 41.97 million (71.74%) were Own Account Establishments (i.e. establishments without any hired worker) and the
remaining 16.53 million (28.26%) were establishments with at least one hired worker. Own Account Establishments
grew at the rate of 56.02% while the growth of establishments with hired workers was 15.11%, since 2005.
• Out of 58.50 million establishments, around 96.4% establishments were under private ownership and remaining 3.6%
establishments reported their ownership as Government or PSU. Proprietary establishments were 89.39%.
• More than one third (36.19%) of all the establishments in the country were home based establishments i.e. inside
household. Another 18.44% establishments were operating from outside household without fixed structure, and the
remaining 45.37% establishments were operating from outside households with fixed structure.
• Majority of the establishments (93.0%) were perennial in nature. Around 5.9% of the establishments were seasonal
and remaining 1.1 % of the establishments were casual.
• Top five States viz. Uttar Pradesh (11.43%), Maharashtra (10.49%), West Bengal (10.10%), Tamil Nadu (8.60%) and
Andhra Pradesh (7.25%) together accounted for about 50% of the total number of establishments in the country.
• Livestock was the major economic activity (86.74%) of agricultural sector. Retail Trade (35.41%) followed by
Manufacturing (22.77%) were the dominant ones within the nonagricultural sector.
• Among the States, maximum growth rate of establishments during 2005-2013 was observed in Manipur (121.07%)
followed by Assam (107.99%) and Sikkim (100.07%).
PROPRIETARY ESTABLISHMENTS
• 89.39% of the establishments were owned by proprietors.
• Among the proprietary establishments, 15.4% were owned by females.
• 73.70% of the establishments were owned by Hindus, 13.8% by the followers of Islam, 2.60% by Christians and the
rest (9.90%) by the followers of other religions.
EMPLOYMENT
• Around 131.29 million persons were found employed in 58.5 million establishments. Out of the total 131.29 million
persons, 67.89 million persons (51.71%) were employed in rural areas and
• 63.4 million persons (48.29%) in urban areas. While employment in Own Account Establishments was of the order
of 58.15 million persons (44.29%), the employment in establishments with at least one hired worker was about 73.14
million persons (55.71%). Agricultural establishments provided employment to around 22.88 million persons (17.42%)
and the non-agricultural establishments provided employment to around 108.41 million persons (82.58%).
• The growth rate of employment since 2005 was of the order of 38.13%.
• Out of the total employment of 131.29 million persons, 98.25 million persons (74.83%) were male and 33.04 million
persons (25.17%) were female.
• 7.2% of the workers were employed in Government or Public Sector Undertakings, 78.5% of the workers in
proprietary establishments and rest 14.3% in Private Companies/SHGs/Cooperatives etc.
• Around 57.14 million persons (43.53%) were hired workers and the remaining 74.14 million persons (56.47%) were
not-hired workers. Among the total workers, 74.83% were male and 25.17% female.
• Manufacturing sector was the largest employer providing employment to 30.3 million (23.1%) persons. This was
followed by retail trade employing 27.19 million persons (20.7%) and livestock sector employing 19.4 million persons
(14.8 %).
• Distribution of establishments by size class of employment reveals that around 55.86 million establishments
(95.50%) were having 1-5 workers, around 1.83 million establishments (3.13%) were having 6-9 workers, while 0.8
million establishments (1.37%) employed 10 or more workers.
• The top five States viz. Maharashtra (11.05%), Uttar Pradesh (10.75%), West Bengal (9.07%), Tamil Nadu (8.91%)
and Gujarat (7.32%) accounted for almost half of the total employment in the country.
• Highest growth rate of employment was, however, observed in Manipur (93.57%), followed by Assam (89.32%) and
Uttar Pradesh (79.94%).
• Overall average employment per establishment in Sixth EC was 2.24, as against 2.30 in Fifth EC. Average
employment per establishment in Sixth EC was 1.39 for Own Account Establishments and 4.42 in case of
establishments with at least one hired worker.
WOMEN ENTREPRENEURS
• Total number of establishments owned by women entrepreneurs was 8.05 million (13.76%). These establishments
provided employment to 13.45 million persons (10.24%), out of which 83.19% were without hired workers. About
88.8% of the workers were employed in the establishments hiring less than 10 workers. Total number of Self Help
Groups (SHGs) were 0.19 million out of which all women Own Account Establishments were 89%.
• Out of establishments under women entrepreneurs, about 34.3% belonged to agricultural activities, with livestock
dominating therein having a share of 31.6%. Among non-agricultural activities owned by women entrepreneurs,
manufacturing and retail trade were the dominant ones with corresponding percentages being 29.8% and 17.8%
respectively.
• Out of the total establishments under women entrepreneurs, percentage share of various social and religious groups
was as follows: OBC: 40.60%, SC: 12.18%, ST: 6.97% and Others (40.25%); Hindus: 65.6%, Muslim: 12.84% and
Christian: 5.2%.
• Among the states, the largest share in number of establishments under women entrepreneurship was held by Tamil
Nadu (13.51%) followed by Kerala (11.35%), Andhra Pradesh (10.56%), West Bengal (10.33%) and Maharashtra
(8.25%).
• Average employment per establishment for women owned establishments was found to be 1.67.
HANDICRAFT/HANDLOOM ESTABLISHMENTS
• Total number of Handicraft/Handloom establishments was 1.87 million (1.71%). These establishments provided
employment to 4.20 million persons (3.12%). Out of the total establishments, 78.9% were without hired workers. About
67.0% of the handicraft/handloom establishments were outside the household without fixed structure or inside
household.
• Majority of establishments i.e. 96.6% were owned by proprietors. Further, 21.89% establishments were owned by
females while 77.74% establishments were owned by males. Nearly 68.22% of proprietary establishments of
handicrafts/handloom were owned by Hindus, 24.78% of these by followers of Islam and 1.88% by Christians. Out of
these proprietary establishments, 47.6% were owned by OBCs, 13.87% by SCs and 6.51% by STs.
• Among the States, West Bengal had the largest share (17.62%) in total number of Handicraft/Handloom
establishments followed by Uttar Pradesh (16.55%), Odisha (7.80%), Andhra Pradesh (7.54%) and Tamil Nadu
(6.80%).
• Average employment per establishment for handicraft/handloom establishments was found to be 2.24.
Measures Taken For MSMEs Growth

Some of the measures taken by government to improve the performance of MSMEs are as under –
• Government has set up an India Opportunities Venture Fund with SIDBI worth INR 50 bn to provide equity
to the MSME sector.
• Under the Public Procurement Policy for Micro and Small Enterprises (MSEs), government organizations
and Central Public Sector Enterprises(CPSEs) are required to make a minimum of 20% of their annual
purchase from MSMEs. Of this purchase, 4% to be earmarked for procurement from MSEs owned by SC/ST
entrepreneurs.
• To improve the productivity, competitiveness and capacity building of MSMEs, the Government of India
has adopted a cluster based approach.
• Credit disbursed to micro and small enterprises is considered part of priority sector lending by banks.
• Around 20 items have been reserved for exclusive manufacturing by MSMEs. Large scale enterprises cannot
produce these items.
• In order to build the capacity of MSMEs, central government has initiated National Manufacturing
Competitiveness Programme (NMCP). It would help them in facing stiff competition from global MNCs.
• Apart from the aforesaid measures, the most important prerequisite for the unbridled growth of SMEs is
ensuring the availability of enabling environment and requisite infrastructure. If government can ensure the
double digit growth for the SMEs, it would definitely help in achieving the long cherished goals of equality of
income and promoting the growth in rural hinterlands and stop the avoidable migration to the urban areas.
MSMEs and the Future of India’s Economy

A lot of conversation today with regard economic development in the country revolves around the
Government’s Make in India programme. In many ways, the Micro, Small and Medium Enterprises (or
MSMEs) can very well be considered the spine of the Make in India initiative. MSMEs are both the
target and the expected catalysts of this initiative.
As per the Report of the Working Group on Micro, Small and Medium Enterprises (MSMEs) Growth for
12th Five Year Plan (2012-2017), the sector accounts 45% of the manufacturing output and 40% of
total exports of the country. Currently, the Sector consisting of 36 million units, and as of this year,
provides employment to over 80 million persons.More than 6000 products ranging from traditional to
high-tech items are being manufactured by the MSMEs in the country.
Two things that make the MSMEs crucial to ‘Make in India’ are the factors that firstly the labour to
capital ratio in MSMEs and the overall growth in the sector is much higher than in the large industries,
and secondly, the geographic distribution of the MSMEs is also more even than in the case of large
industries, which are located in certain pockets of the country. Thus, growth in the MSMEs can directly
lead to better equity and inclusion in the Indian Economy. However, before such targets can actually
reach fruition, there are certain steps that the government must take immediately.
Firstly, let us take the case of banking facilities for MSMEs. Several experts have raised the issue of
proper banking system that is needed to cater to the MSMEs. They suggested that regular banks do not
lend sufficient credit to MSME industries, and the Regional Rural Banks need to be systemised in order
to incubate MSMEs. It has also been suggested that there should be special banks that only cater to
this sector.This is a viable alternative since the MSME sector is poised to play a key role in ‘Make in
India’ and Skill development and employment generation.
To check the validity of this argument, let us take the Prime Minister’s Employment Generation
Programme, for 2014-15. 142584 applications all over India were forwarded to banks by the Ministry of
MSME, involving margin money of Rs. 3270.43 crores. As on 16.01.2015, only 39307 applications had
been sanctioned by banks involving margin money of Rs. 892.81 crores. Balance of 103227
applications involving margin money of Rs. 2386.62 crore were still pending with banks for sanction. If
this backlog continues, the boost that the MSME sector requires in order to generate a healthy
economy will only remain a pipeline dream.
Yet another issue with both potential and risks is the Defence Procurement Policy, and the opportunity
it has opened up for the MSME sector.
The Defence Procurement Policy 2013 and the Make in India campaign have purportedly created a
Rs.18,000 crore ($3 billion) opportunity for the Indian defence MSME (micro, small and medium)
sector. This is the result of the plan that numerous offsets in the three wings of the armed forces are to
be executed in the coming five years. Reportedly, 20% of the overall projection for the defence sector
is going to come to the MSME sector. The government has been encouraging the medium and small
enterprises to enter the DPP and deal to produce ground based equipment, a lot of them involving
technology and reverse engineering. In this case, the government must go ahead with this initiative
but it should also take care to ensure the quality and safety of such products and ensure extra
mechanisms in place to ensure that there are no faulty equipment.
It is important to not be cynical about this sector, for it holds immense potential and if regulated
properly, can be one of the biggest factors ion propelling our economy. With regard to this, we must
also appreciate the improvements taking place in the MSME sector. In terms of achievements, the
margin money utilised for the Prime Minister’s Employment Generation Programme in 2013-14 was Rs.
183.57 crore all over India ( 2014-15 shows a 233% increase over 2013-14) and the total projects
sanctions country-wide was 7838 (2014-15 shows a 231% increase).
With the imminent legislations pending in the Parliament, like the MSME Development (Amendment)
Bill, 2015, one can hope that soon, many more enterprises will benefit from the boosts this sector is
poised to receive. The government must however not delay in plugging the loopholes in the system, so
that the change is effective and sustained over a period of time, and not just a statistical burst of
growth that dies down soon.
4. Priority Sector Lending & MSME
PRIORITY SECTOR LENDING
History : At a meeting of the National Credit Council held in July 1968, it was emphasised that
commercial banks should increase their involvement in the financing of priority sectors, viz., agriculture
and small scale industries. The description of the priority sectors was later formalised in 1972 on the
basis of the report submitted by an RBI's Informal Study Group. Initially no specific target were fixed
but in Nov.1974, the banks were advised to raise the share of priority sector in their aggregate
advances to the level of 33 1/3 % by March 1979. Subsequently, on the basis, of the recommendations
of the Working Group on the Modalities of Implementation of Priority Sector Lending and the Twenty
Point Economic Programme by Banks (Chairman: Dr. K. S. Krishnaswamy), all commercial banks were
advised to achieve the target of priority sector lending at 40 %. of aggregate bank advances by 1985.
Sub-targets were also specified for lending to agriculture and the weaker sections within the priority
sector. The guidelines on Priority sector were revised in the year 2007 based on the recommendations
of the Working Group headed by Shri C. S. Murthy. The Sub-Committee headed by Shri Y. H. Malegam
constituted to study issues and concerns in the Micro Finance institutions (MFI) sector, also
recommended review of the guidelines on priority sector lending. In August 2011, RBI set up a
Committee headed by Shri M V Nair, to suggest revised guidelines with regard to Priority Sector
lending classification and related issues with effect from July 20, 2012. The priority sector loans
sanctioned under the guidelines issued prior to these guidelines will continue to be classified under
priority sector till maturity / renewal. RBI revised the priority sector lending guidelines with effect from
April 23rd 2015 on the basis of recommendations of an Internal Working Group (IWG) headed by Ms Lily
Vadera. The salient features of the guidelines are as under:-
(i) Categories of the priority sector: Medium Enterprises, Social Infrastructure and Renewable Energy
will form part of priority sector, in addition to the existing categories.
(ii) Agriculture: The distinction between direct and indirect agriculture is dispensed with.
(iii) Small and Marginal Farmers: A target of 8 percent of ANBC or CEOBE, whichever is higher, has
been prescribed for Small and Marginal Farmers within agriculture.
(iv) Micro Enterprises: A target of 7.5% of ANBC or CEOBE, whichever is higher, has been prescribed
for Micro Enterprises.
(v) Weaker Section: There is no change in the target of 10% of ANBC or CEOBE, whichever is higher.
(vi) Target for Foreign Banks: Foreign Banks with 20 branches and above already have priority sector
targets and sub-targets for Agriculture and Weaker Sections, which are to be achieved by March 31,
2018. Foreign banks with less than 20 branches will move to Total Priority Sector Target of 40% of
ANBC or CEOBE, whichever is higher, on par with other banks by 2019-20.
(vii) Bank loans to food and agro processing units will form part of Agriculture.
(viii) Export credit: Export credit upto 32% of ANBC or CEOBE, whichever is higher, will be eligible as
part of priority sector for foreign banks with less than 20 branches. For other banks, the incremental
export credit over corresponding date of the preceding year will be reckoned upto 2 percent of ANBC or
CEOBE, whichever is higher.
(ix) The loan limits for housing loans and MFI loans qualifying under priority sector have been revised.
(x) The priority sector non-achievement will be assessed on quarterly average basis at the end of the
respective year from 2016-17 onwards, instead of annual basis as at present.
(xi) The revised guidelines are operational with effect from 23 April 2015.
Categories under priority sector
1. Agriculture , 2.Micro, Small and Medium Enterprises, 3.Export Credit, 4.Education, 5.Housing, 6.Social
Infrastructure, 7. Renewable Energy, 8.Others
Targets /Sub-targets for Priority sector Domestic scheduled commercial banks and Foreign
banks with 20 branches and above
Total Priority Sector: 40% of Adjusted Net Bank Credit (ANBC) or Credit Equivalent Amount of Off-
Balance Sheet Exposure (CEOBE), whichever is higher.
Agriculture: 18% of ANBC or CEOBE, whichever is higher. Small and Marginal Farmers: Within the 18%
target for agriculture, target for Small and Marginal Farmers will be 8% of ANBC or CEOBE, whichever
is higher. This target to be achieved in a phased manner i.e., 7% by March 2016 and 8% by March
2017
Micro Enterprises: 7.5% of ANBC or CEOBE, whichever is higher to be achieved in a phased manner i.e.
7% by March 2016 and 7.5% by March 2017.
Advances to Weaker Sections: 10% of ANBC or CEOBE, whichever is higher.
Achievement of Targets by foreign banks: Foreign banks with 20 branches and above have to achieve
the Total Priority Sector Target, Agriculture Target, Weaker Section Target within a maximum period of
five years starting from April 1, 2013 and ending on March 31, 2018. The sub-target for Small and
Marginal farmers and for Micro enterprises would be made applicable post 2018 after a review in 2017.
Foreign banks with less than 20 branches
Total Priority Sector: 40% of ANBC or CEOBE, whichever is higher to be achieved in a phased manner
by March 2012 – (32% by 2015-16, 34% by 2016-17, 36% by 2017-18, 38% by 2018-19, 40% by
2019-20. The additional priority sector lending target of 2% of ANBC each year from 2016-17 to 2019-
20 to be achieved by lending to sectors other than exports. The sub targets, if to be made applicable
post 2020, would be decided in due course.
Computation of Adjusted Net Bank Credit (ANBC
Bank Credit in India [Item No.VI of Form ‘A’ under Section 42 (2) of the RBI Act, I
1934].
Bills Rediscounted with RBI and other approved Financial Institutions II
Net Bank Credit (NBC) - For the purpose of priority sector computation only III (I-II)
Bonds/debentures in Non-SLR categories under HTM category+ other investments
eligible to be treated as priority sector +Outstanding Deposits under RIDF and
IV
other eligible funds with NABARD, NHB and SIDBI on account of priority sector
shortfall + outstanding PSLCs
Eligible amount for exemptions on issuance of long-term bonds for infrastructure
and affordable housing V
Eligible advances extended in India against the incremental FCNR (B)/NRE

VI
deposits, qualifying for exemption from CRR/SLR requirements.
ANBC III+IV-VVI
For calculation of Credit Equivalent Amount of Off-Balance Sheet Exposures, banks to follow Master
Circular on Exposure Norms.
Micro, Small and Medium Enterprises (MSMEs)
2.1. The limits for investment in plant and machinery/equipment for manufacturing / service
enterprise, as notified by Ministry of Micro, Small and Medium Enterprises, vide S.O.1642(E) dated
September 9, 2006 are as under:-
Manufacturing Sector
Investment in plant and
Enterprises
machinery
Micro Enterprises Does not exceed twenty five lakh rupees
More than twenty five lakh rupees but does not exceed five
Small Enterprises crore rupees
More than five crore rupees but does not exceed ten crore
Medium Enterprises
rupees
Service Sector
Enterprises Investment in equipment
Micro Enterprises Does not exceed ten lakh rupees
More than ten lakh rupees but does not exceed two crore
Small Enterprises
rupees
More than two crore rupees but does not exceed five crore
Medium Enterprises
rupees
Eligibility of enterprises for PS classification:
Manufacturing Enterprises: Bank loan to Micro, Small and Medium Enterprises irrespective of amount of
loan.
Service Enterprises: Bank loans up to Rs 5 crore per unit to Micro and Small Enterprises and Rs 10
crore to Medium Enterprises engaged in providing or rendering of services.
Khadi and Village Industries Sector (KVI): All loans to units in the KVI sector will be eligible for
classification as Micro enterprise under the sub-target of 7 percent /7.5 percent prescribed for Micro
Enterprises under priority sector.
Compiled by Sanjay Kumar Trivedy, Divisional Manager, Canara Bank, Govt. Link Cell, Nagpur 10 | P a g e
Other Finance to MSMEs
1. Loans to entities involved in assisting the decentralized sector in the supply of inputs to and
marketing of outputs of artisans, village and cottage industries.
2. Loans to co-operatives of producers in the decentralized sector viz. artisans, village and cottage
industries.
3. Loans sanctioned by banks to MFIs for on-lending to MSME sector
4. Credit outstanding under General Credit Cards (including Artisan Credit Card, Laghu Udyami Card,
Swarojgar Credit Card, and Weaver’s Card etc. catering to the non-farm entrepreneurial credit
needs of individuals)
5. Outstanding deposits with SIDBI on account of priority sector shortfall.
Sub categorization of Micro enterprises: The earlier sub-categorization within the definition of micro
enterprises (i.e. investment up to Rs 10 lac in plant and machinery and up to Rs 4 lakh in equipment)
has been dispensed with.
Continuation of MSME status: The MSME units will continue to enjoy the priority sector lending status
up to three years after they grow out of the MSME category concerned.
3. Export Credit
Domestic banks: Incremental export credit over corresponding date of the preceding year, up to 2% of
ANBC or CEOBE, whichever is higher, effective from April 1, 2015 subject to a sanctioned limit of ₹ 25
crore per borrower to units having turnover of up to ₹ 100 crore. For foreign banks with 20 or more
branches in India, this will be effective from April 1, 2017.
Foreign banks with less than 20 branches: Export credit will be allowed up to 32 percent of ANBC or
CEOBE, whichever is higher.
5. Education
Loans to individuals for educational purposes including vocational courses upto Rs 10 lakh irrespective
of the sanctioned amount will be considered as eligible for priority sector. Now even for education
abroad loans up to Rs 10 lakh will be eligible for coverage under priority sector.
6. Housing
1. Loan for purchase/construction of a dwelling unit per family: up to Rs 28 lakh in metropolitan
centres (with population of ten lakh and above) and loans up to Rs 20 lakh in other centres
provided the overall cost of the dwelling unit in the metropolitan centre and at other centres should
not exceed Rs 35 lakh and Rs 25 lakh respectively. The housing loans to banks’ own employees will
be excluded. Housing loans backed by long term bonds which are exempt from ANBC should either
be included as loans to individuals up to Rs 28 lakh in metropolitan centres and Rs 20 lakh in other
centres under priority sector or take benefit of exemption from ANBC, but not both.
2. Loans for repairs to damaged dwelling units: up to Rs 5 lakh in metropolitan centres and up to Rs 2
lakh in other centres.
3. Bank loans to any governmental agency for construction of dwelling units or for slum clearance and
rehabilitation of slum dwellers subject to a ceiling of Rs 10 lakh per dwelling unit.
4. Housing projects for EWS or LIG: Loans for housing projects exclusively for the purpose of
construction of houses for economically weaker sections and low income groups, the total cost of
which does not exceed Rs 10 lakh per dwelling unit. For the purpose of identifying the economically
weaker sections and low income groups, the family income limit of Rs 2 lakh per annum,
irrespective of the location, is prescribed.
Bank loans to Housing Finance Companies (HFCs), approved by NHB for their refinance, for on-
lending for the purpose of purchase/construction/reconstruction of individual dwelling units or for
slum clearance and rehabilitation of slum dwellers, subject to an aggregate loan limit of Rs 10 lakh
per borrower. The eligibility under priority sector loans to HFCs is restricted to 5% of the individual
bank’s total priority sector lending. The maturity of bank loans should be co-terminus with average
maturity of loans extended by HFCs.
5. Outstanding deposits with NHB on account of priority sector shortfall.
6. Social infrastructure
Bank loans up to a limit of Rs 5 crore per borrower for building social infrastructure for activities
namely schools, health care facilities, drinking water facilities and sanitation facilities in Tier II to Tier
VI centres.
7. Renewable Energy
Bank loans up to a limit of Rs 15 crore to borrowers for purposes like solar based power generators,
biomass based power generators, wind mills, micro-hydel plants and for non-conventional energy
based public utilities viz. street lighting systems, and remote village electrification. For individual
households, the loan limit will be Rs 10 lakh per borrower.
8. Others
1. Loans not exceeding Rs 50,000/- per borrower provided directly by banks to individuals and their
SHG/JLG, provided the individual borrower’s household annual income in rural areas does not
exceed Rs 100,000/- and for non-rural areas it does not exceed Rs 1,60,000/-.
2. Loans to distressed persons [other than farmers) not exceeding Rs 100,000/- per borrower to
prepay their debt to non-institutional lenders.
3. Overdrafts extended by banks upto Rs 5,000/- under Pradhan Mantri Jan-DhanYojana (PMJDY)
accounts provided the borrowers household annual income does not exceed Rs 100,000/- for rural
areas and Rs 1,60,000/- for non-rural areas.
4. Loans sanctioned to State Sponsored Organisations for Scheduled Castes/ Scheduled Tribes for the
specific purpose of purchase and supply of inputs and/or the marketing of the outputs of the
beneficiaries of these organisations.
IV. Weaker Sections
1. Small and Marginal Farmers
2. Artisans, village and cottage industries where individual credit limits do not exceed Rs 1 lakh
3. Beneficiaries under Government Sponsored Schemes such as National Rural Livelihoods Mission
(NRLM), National Urban Livelihood Mission (NULM) and Self Employment Scheme for Rehabilitation
of Manual Scavengers (SRMS)
4. Scheduled Castes and Scheduled Tribes
5. Beneficiaries of Differential Rate of Interest (DRI) scheme
6. Self Help Groups
7. Distressed farmers indebted to non-institutional lenders
8. Distressed persons other than farmers, with loan amount not exceeding Rs 1 lakh per borrower to
prepay their debt to non-institutional lenders
9. Individual women beneficiaries up to Rs 1 lakh per borrower
10. Persons with disabilities
11. Overdrafts upto Rs 5,000/- under Pradhan Mantri JanDhanYojana (PMJDY) accounts, provided the
borrowers’ household annual income does not exceed Rs 100,000/- for rural areas and Rs
1,60,000/- for non-rural areas
12. Minority communities as may be notified by Government of India from time to time
Monitoring of Priority Sector Lending targets To ensure continuous flow of credit to priority
sector, the monitoring will be on ‘quarterly’ basis instead of annual basis. The data on priority sector
advances have to be furnished by banks at quarterly and annual intervals.
Non-achievement of Priority Sector targets
Scheduled Commercial Banks having any shortfall in lending to priority sector shall be allocated
amounts for contribution to the Rural Infrastructure Development Fund (RIDF) established with
NABARD and other Funds with NABARD/NHB/SIDBI, as decided by RBI from time to time. For the year
2015-16, the shortfall in achieving priority sector target/sub-targets will be assessed based on the
position as on March 31, 2016. From financial year 2016-17 onwards, the achievement will be arrived
at the end of financial year based on the average of priority sector target /sub-target achievement as
at the end of each quarter. The interest rates on banks’ contribution to RIDF or any other Funds,
tenure of deposits, etc. shall be fixed by RBI. The misclassifications reported by the Reserve Bank’s
Department of Banking Supervision would be adjusted/ reduced from the achievement of that year, to
which the amount of declassification/ misclassification pertains, for allocation to various funds in
subsequent years. Non-achievement of priority sector targets and sub-targets will be taken into
account while granting regulatory clearances/approvals for various purposes
Common guidelines for priority sector loans
1. Rate of interest: As per directives issued by RBI.
2. Service charges: No loan related and adhoc service charges/inspection charges on priority sector
loans up to Rs 25,000.
3. Receipt, Sanction/Rejection/Disbursement Register: A register/ electronic record should be
maintained by the bank, wherein the date of receipt,
sanction/rejection/disbursement with reasons thereof, etc., should be recorded.
4. Issue of Acknowledgement of Loan Applications: Banks should provide acknowledgement for loan
applications received under priority sector loans. Bank Boards should prescribe a time limit within
which the bank communicates its decision in writing to the applicants.
Bank loans to MFIs for on-lending
(a) Bank credit to MFIs extended for on-lending to individuals and also to members of SHGs / JLGs will
be eligible for categorisation as priority sector advance under respective categories viz., Agriculture,
Micro, Small and Medium Enterprises, and 'Others', as indirect finance, provided not less than 85% of
total assets of MFI (other than cash, balances with banks and financial institutions, government
securities and money market instruments) are in the nature of “qualifying assets”. Aggregate amount
of loan, extended for income generating activity, should be not less than 50% of the total loans given
by MFIs.
(b) A “qualifying asset” shall mean a loan disbursed by MFI, which satisfies the following criteria:
(i) The loan is to be extended to a borrower whose household annual income in rural areas does not
exceed Rs 1,00,000/- while for non-rural areas it should not exceed Rs 1,60,000/-.
(ii) Loan does not exceed Rs 60,000/- in the first cycle and Rs 100,000/- in the subsequent cycles.
(iii) Total indebtedness of the borrower does not exceed Rs 1,00,000/-.
(iv) Tenure of loan is not less than 24 months when loan amount exceeds Rs 15,000/- with right to
borrower of prepayment without penalty.
(v) The loan is without collateral.
(vi) Loan is repayable by weekly, fortnightly or monthly installments at the choice of the borrower.
(c) Caps on margin and interest rate
(i) Margin cap: The margin cap should not exceed 10% for MFIs having loan portfolio exceeding Rs
100 crore and 12% for others. The interest cost is to be calculated on average fortnightly balances of
outstanding borrowings and interest income is to be calculated on average fortnightly balances of
outstanding loan portfolio of qualifying assets.
(ii) Interest cap on individual loans: Interest rate on individual loans will be the average Base Rate of
five largest commercial banks by assets multiplied by 2.75% or cost of funds plus margin cap,
whichever is less. The average of the Base Rate shall be advised by Reserve Bank of India.
(iii) Components are to be included in pricing of loans viz., (a) a processing fee not exceeding 1% of the
gross loan amount, (b) interest charge and (c) the insurance premium.
The processing fee is not to be included in the margin cap or the interest cap. Only the actual cost of
insurance i.e. actual cost of group insurance for life, health and livestock for borrower and spouse can
be recovered; administrative charges may be recovered as per IRDA guidelines. There should not be
any penalty for delayed payment. No Security Deposit/ Margin are to be taken
Terms and Conditions for Priority Sector Advances

1. Loans up to Rs 25,000 in PS there is no margin, no collateral security, no penal interest on
advance, no processing fees and no inspection charge.
2. Loan more than Rs 25,000, the margin will be from 15% to 25%. For Loans beyond Rs 25,000,
bank can ask for TPG/collateral security or both.
3. Loan application disposal norms : As decided by Bank's Board of Directors
4. COLLATERAL SECURITY :
For agriculture: NIL In case of: Up to Rs.100000 : nil
Up to Rs.3 lac in case of recovery tie-up
Other priority sector Up to Rs.25000 : nil

Micro & Small Enterprises: Not to be insisted upon: Up to Rs.10 lac
-normal accounts -good track record a/c -accounts Up to Rs.25 lac
guaranteed under CGF guarantee up to Rs.100 lac Up to Rs.5 lac — nil
Agro clinics & business centres
SGSY:
-Individual up to Rs.100000 Not to be obtained up to this amount
-Group up to Rs. 10 lac
SISRY Not to be obtained

Education loan up to Rs.7.50 lac Not to be obtained up to this amount.
PROCESSING/INSPECTION FEE, SERVICE CHARGE, PENAL INIT IN PRIORITY SECTOR ADVANCES

1.For loans up to Rs.25000 No charges
2.For loans above Rs.25000 Bank discretion
Self Help Groups

1. Objectives: Self Help Group is a homogeneous group of persons below poverty line who have joined for
savings, mutual help, developing management skills and not for speculative profit and raising finance is not main
objective.
2. SHGs may be an informal group or registered under Societies Act, State Co-operative Act or a
partnership firm.
3. Number of members: 10 to 20; Difficult areas like deserts, hills: 5 to 20
4. Maximum percentage of above poverty line: 30% but they are not eligible for subsidy
Joint Liability Group
1. Number of members: 4 to 10
2. Max finance per member - Rs 50,000; Max finance per Group - Rs 5,00,000
3. Main objective: raising credit from bank
MINORITY COMMUNITIES
1. Sikhs, Muslims, Christians, Zoroastrians , Buddhists and Jains ( Jan. 2014 ) are part of Minority
community.
2. Margin money scheme of National Minorities Development and Finance Corporation: Loan by
bank: 60% of the project cost. Balance 40% shared by Minorities Corporation, state channeling
agency and the beneficiary in the ratio of 25%, 10% and 5% respectively.
3. As per Govt and RBI guidelines, credit flow to minorities to be monitored in 121 districts
having minimum 25% minority population
Targets for finance to Micro Enterprise & T K A Nair Committee Recommendations

1. Minimum 60% of advance to micro and small enterprises should be made to micro enterprises.
2. Minimum 40% of advance to micro and small enterprises should be made to units with
investment in Plant and Machinery up to Rs 10 lac and in equipments up to Rs 4 lac.
3. Minimum 20% of advance to micro and small enterprises should be made to units with
investment in plant and machinery more than Rs 10 lac up to Rs 25 lac and in equipments more than
Rs 4 lac up to Rs 10 lac.
4. Task Force on Micro, Small and Medium Enterprises (MSMEs) was headed by: Shri T K A Nair.
5. Yearly Growth in credit to MSE should be: 20%
6. Annual growth in number of micro enterprise accounts: 10%
7. The allocation of 60% of the MSE advances to the micro enterprises is to be achieved in stages
viz. 50% in the year 2010-11, 55% in the year 2011-12 and 60% in the year 2012-13.
8. Cluster approach should be adopted for financing MSE
CREDIT GUARANTEE FUND TRUST FOR MICRO & SMALL ENTERPRISES (CGTMSE)
The Fund has been established by Central government and SIDBI on the recommendations of S L
Kapoor Committee. The scheme run by the trust is known as 'Credit Guarantee Fund Scheme for
Micro and Small Enterprises.Credit Guarantee Fund Trust for Micro & Small Enterprises was set up
by Govt. of India and SIDBI in August 2000 to make collateral free credit facilities, available to
MSEs.
Eligible institutions: All scheduled commercial banks and specified RRBs, NS1C, NEDFI, SIDBI
(called Member Lending Institutions (MLIs). Eligible borrowers: New & existing MSE units as per MSME
Dev Act 2006 (except Retail Trade) OR in IT and software industry services or credit facilities to select
activities under Agri-Clinics and Agri-Business Centres Rehabilitation cases : For the unit covered
under CGTSI and becoming sick due to factors beyond the
control of management, assistance for rehabilitation
extended by the lender could also be covered within the overall cap of Rs.100 lac.
Extent of guarantee cover: wef Dec 08 2008):
Women enterprises & North Eastern States
Loan up to Rs.5 lac : 85%* 4.25
Loan up to Rs.50 lac: 80%* 40.00
Loan above Rs.50 lac to Rs.100 lac: 50%* 25.00
Total amount restricted to 50.00
Micro Enterprises
Loan up to Rs.5 lac : 85%* 4.25
Loan up to Rs.50 lac: 75%* 37.50
Loan above Rs.50 lac to Rs.100 lac : 50%* 25.00
Other loans
Loan up to Rs.50 lac : 75%* 37.50
Loan above Rs.50 lac to Rs.100 lac: 50%* 25.00
*as %age of principal outstanding on date of NPA or on date of filing the claim, whichever is lower.
Exclusion from risk cover :Other charges such as penal interest, commitment charge, service charge,
or any other levies/ expenses shall not quay for the guarantee cover.
Conditions for Guarantee Cover
Credit facilities extended by more than one bank and/or financial institution jointly and/or separately to
eligible borrower upto a maximum of Rs.100 lakh per borrower subject to ceiling amount of individual
ML1.
Amount of loans : Rs. 100 lac including fund and non-fund based limits (for RRBs and select financial
institutions, the amount is Rs.50 lac). Collateral security: The credit facility has to be given without
collateral and/or third party guarantee. Loans against guarantee of Govt. or DICGC, not eligible.
Time limit for obtaining guarantee cover: Within the quarter, next to the quarter, during which the
credit facilities are sanctioned.
Composite Fee as % of Women, NE Others

sanctioned loan w.e.f. 1.1.13 States, MSEs
For loan up to Rs.5 lac 0.75% p.a. 1% p.a.

Above Rs.5 lac up to Rs.100 lac 0.85% p.a. 1% p.a.
If fee is not paid on time, CGTMSE may allow payment interest at bank rate + 4%
W.e.f. 1.10.15, for loans above Rs.5 lac, the guarantee fee shall be above Standard Rate +1% if NPA
level of bank is above 20%, SR + 0.5% for NPA level of 15% to 20%, SR + 0.25% for NPA level 12% to
15%, SR for NPA level 12% and below. If bank obtained cover at least for 5 complete years, the fee will
be SR minus 0.25% for NPA level below 6%.
NPA level shall be calculated as a % of guarantees issued on and up to 31't Mar, every year
Invocation of guarantee
If (a) account has been classified as NPA as per RBI guidelines (b) suit has been filed and (c)
guarantee (a) within 2 years from date of NPA NPA is after lock in period or (b) within 2 yeilr from date
of completion of 18 month lock period. (lock-in period of 18 months from tIL: date of last disbursement
of the loan or the date of payment of the guarantee fee whichever is later) Payment of the claim
amount : The trust shall pay 75 % of the guaranteed amount on preferrin, of eligible claim by the
lending institution, within 30 days. For delay beyond 30 days, trust shall interest on the eligible claim
amount at the prevailing bank rate. The balance 25 % will be paid on conclusion of recovery
proceedings 'b:,; the lending institution or within 3 years from date of decree, whichever is earlier.
Sharing of recovery: Recovery shall be first appropriated towards cost of recovery, balance amount
for recovery of fee and other charges of CGTMSE and balance amount on prorate basi1/4 i.e. 85:15,
80:20, or 75:25.
Delay in sharing recovery : Every amount recovered and due to be paid to the trust shall be paid
without delay, and if any amount due to the trust remains unpaid beyond a period of 30 days from
the date on which it was first recovered, interest shall be payable to the trust by the lending
institution at the rate which is 4% above bank rate for the period for which payment remains
outstanding after the expiry of the said period of 30 days.
Misc. aspects
Promoters' Personal guarantee can be obtained. Commencement of guarantee cover : The guarantee
cover will commence from the date of payment of guarantee fee by the lender. Date of payment will
be the date on which the fee is credited to the Trust's A/c.
DRI for MSEs with guarantee cover of CGTMSE As per RBI guidelines dated Apr 15, 2014,
banks can provide differential interest rate for MSE borrowers, having guarantee cover from CGTMSE.
But such rate of interest should not be below the Base Rate.
Credit Guarantee Fund for Micro Units (CGFMU)
The scheme was notified by Ministry of Finance, Govt. of India, on 18.04.16. The guarantee is offered by
National Credit Guarantee Trust Company. Eligible Loans : Loans sanctioned under PM Mudra Yojna
(PMMY) since 08.04.2015 (date of launching of PMMY) by commercial banks, MFIs and NBFCs (called
Member Lending Institution - MLI) to new or existing micro enterprises (as per MSME Development Act
2006), up to Rs.10 lac named as Shishu (Loans up to Rs.50000), Kishor (above Rs.50000 up to Rs.5
lac) & Tarun (above Rs.5 lac and up to Rs.10 lac) and overdraft up to Rs.5000 under PM Jan Dhan
Yojna. In these loans, the MLI should not obtain any collateral security or 3rd party guarantee.
Interest rate: MLI shall fix the rate, as per guidelines of the regulator. Procedure to obtain guarantee
: MLI shall collate all eligible disbursed loans as at end of the quarter into a batch and submit information
on quarterly basis before end of next quarter to NCGTC for guarantee cover.
Guarantee Fee Rate: (1) It has 3 components namely, standard basic rate (SBR) of 1% of sanctioned
amount + Risk premium on NPAs in the guaranteed portfolio + Risk premium on claim payout ratio. The
risk premium is in the range of 0% to 25% of SBR for commercial banks which changes annually.
(2) For 1st year, the fee is paid on the sanctioned amount corresponding to the outstanding balance of
quarterly build up of balance for full year or broken period i.e. March 31. For subsequent year, the fee is
paid on the sanctioned amount for full year, which is valid up to end of the financial year. Fee shall be paid
on pro-rata basis for 1st and last year and for full year for intervening years. Fee in case of NPA accounts
will be payable till lodgement of claim.
(3) MLI shall pay the fee within 16 days (7 days from end of the quarter, for submission of
Management Certificate by MLI, 3 days for issue of notice by NCGTC for payment of fee and 3 days for
payment of fee by MLI) from end of the quarter, in which the credit facility was sanctioned / renewed.
If due fee is not paid on time, the guarantee cover shall not be available.
Guarantee cover : (1) Guarantee is in the nature of ‘First Loss Portfolio Guarantee’ where first loss of
5% of the crystallized portfolio is borne by MLI. (2) For the remaining amount, the extent of cover is
50% of amount in default in the portfolio (amount in default means NPA for more than 6 months).
Claim : It can be lodged in respect of amount in default.
Lock-in period : It is one year from date of crystallization of the portfolio (which is March 31 of the
year in which the portfolio was built).
Claim payment : Trust shall pay the amount within 60 days. In case of delay in payment beyond 60
days, it will pay interest at Bank Rate.
Recovery after payment of claim : MLI shall pay amount to the Trust within 30 days. For delay, MLI
shall pay interest fixed by Management Committee. Definitions :
Portfolio : It means cumulative build up of quarterly outstanding balance of eligible micro loans.
Portfolio comprising the corresponding sanction amount, would get crystallized at end of the financial
year, in which the portfolio was built up.
Currency of portfolio : 3 complete financial years from end of crystallization of portfolio. The portfolio at
the end of 3rd year from date of crystallization will be finally settled and terminated. The outstanding
balance in the terminated portfolio shall be a new portfolio and could be merged with current portfolio of
that year
National Equity Fund of SIDBI
1. It is a soft loan window of SIDBI to provide margin money assistance to Small Manufacturing
enterprises.
2. Maximum project cost: Rs 50 lakh.
3. Margin money assistance: 25% of the project cost with a maximum of Rs 10 lakh.
4. Promoter's contribution: minimum 10% of the project cost and Debt equity ratio should be 2:1.
5. Repayment period: 7 years including moratorium of 3 years.
Differential Rate of Interest Scheme (DRI)
1. Family in-come of borrower should not exceed Rs. 24,000/- p.a. in Metro/urban/semi-urban areas
and Rs. 18,000/- p.a. in rural areas.
2. For Rousing, loan can be granted up to Rs 20,000 to SC/ST
3. Other than housing loan to SC/ST, maximum loan amount is Rs. 15,000/- Besides production credit,
loan can be sanctioned to physically handicapped for purchase of artificial limbs, hearing aids, wheel-chair etc
to the extent of Rs 5000.
4. Rate of interest is only 4% p.a. simple
5. Maximum repayment period is 5 years including initial moratorium of 2 years
Prime Minister's Employment Generation Programme (PMEGP)

1. Created by: merger of Rural Employment Generation Programme ( REGP) with Prime Minister
Rozgar Yoj a n a (PM RY).
2. Applicability: Throughout India.
3. Objectives: To generate employment opportunities in rural as well as urban areas of the country
through setting up of new micro enterprises.
4. Eligibility: (a) Age: Any individual, above 18 years of age (b) Income: No income ceiling
5. Educational Qualification: No minimum or maximum qualification for projects up to Rs 10 lakh in the
case of industry and up to Rs 5 lakh for business or service sector. In case project cost is more than Rs 10
lakh in the manufacturing sector and above Rs. 5 lakh in the business or service sector, the beneficiaries
should be at least VII! standard pass.
6. Assistance under the Scheme is available only for new _projects.
7. Only one person from one family is eligible for obtaining financial assistance for setting up of
projects under PMEGP. The 'family' includes self and spouse.
8. Project cost: (a) Maximum cost of the project under manufacturing sector is Rs. 25 lakh and under
business/service sector is Rs. 10 lakh.
9. Subsidy (Margin Money):
a. General category borrowers: 15% of project cost in urban areas and 25% in rural areas;
b. Special category: 25% in urban areas and 35% in rural areas. (Special category means including
SC / ST, OBC, Minorities, Women, Ex servicemen, Physically handicapped, NER, Hill and Border areas etc.
c. Subsidy provided by KVIC
d. Subsidy should be kept in the Term Deposit Receipt of three years at branch level
e. No interest will be paid on the TDR and no interest will be charged on loan to the corresponding
amount of TDR.
f. Margin money (subsidy) will be credited to the Borrowers loan account after three years from
the date of first disbursement to the borrower/institution, by the Bank.
g. In case the Bank's advance goes 'bad' before the three year period, due to reasons, beyond the
control of the beneficiary, the Margin Money (subsidy) will be adjusted by the Bank to liquidate the loan
liability of the borrower either in part or full.
h. Margin Money (subsidy) will be 'one time assistance', from Government. For any enhancement of
credit limit or for expansion/modernization of the project, margin money (subsidy) assistance is not
available.
i. Margin Money (subsidy) assistance is available only for new projects sanctioned specifically
under the PMEGP. 10_ Borrower's Margin: 10% in general category and 5% in special category.
11. Collateral Security: No collateral security for projects involving loan upto Rs. 10 lakh.
12. Repayment schedule may range between 3 to 7 years after an initial moratorium as may be
prescribed by the concerned bank/financial institution.
13. Implementing Agencies: PMEGP will be a central sector scheme to be administered by the Ministry
of Micro, Small and Medium Enterprises (MoMSME). The Scheme will be implemented by Khadi and
Village Industries Commission (KVIC) which will be the single nodal agency at the national level.
14. Identification of beneficiaries: The identification of beneficiaries will be done at the district level by a
Task Force consisting of representatives from KVIC/State KVIB and State DICs and Banks
Loans to MSMEs
The amount of loan to MSMEs in the form of term loans, working capital and non-fund based loans
is need based.But for servicing enterprises, the amount is restricted to Rs.5 cr for micro and small
enterprises and Rs.10 cr for medium enterprises. Further, composite loan under single window is
restricted to Rs.100 cr.
Registration
For all micro or small enterprises and for medium enterprise engaged in providing or rendering of services,
registration is optional. But for a medium enterprise engaged in manufacture or production of goods
registration is compulsory, with such authority as specified by the State Govt. or Central Govt.
Delayed payment to MSEs
The existing provisions of the Interest on Delayed Payment Act, 1998 to Small Scale and Andllary Industrial
Undertakings, have been strengthened under the MSMED Act as under:
(i) The buyer to make payment on or before the date agreed on between him_ and the supplier in writing or,
in case of no agreement before the appointed day. The agreement between seller and buyer shall not exceed
more than 45 days.
(II) If the buyer fails to make payment of the amount to the supplier, he shall be liable to pay compounded
interest with monthly rests to the supplier on the amount from appointed day or, on the date agreed on, at 3
times of the Bank Rate notified by Reserve Bank.
Decentralised Sector
Such units include artisans, Khadi & Village Industries, handlooms, sericulture, handicrafts, coir
etc. which have been categorised as Village Industries under Govt.'s SSI policy (Aug 1991).
Artisans, Village And Cottage Industry
It is defined as Artisans (irrespective of location) or small industrial activities in villages and small towns
with a population not exceeding 50000, involving utilisation of locally available natural resources and / or
human skills where individual credit requirements do not exceed Rs.50000.
Cottage industry is run by family members on full or part time basis. It possesses negligible capital
investment. There is hand made production and no wage earning person is employed in cottage
industry.
Village industries is established in rural areas with population below 10000 and with less than Rs.50000 as
fixed capital investment per worker.
Ancillary Units
An undertaking which is engaged in the manufacturing or production of parts, components, sub-assemblies,
tooling or intermediates or the rendering of services and undertaking supplies or proposes to supply or
renders, at least 50% of its production or services, to one or more other industrial undertakings.
Investment criteria in plant and machinery, is same as in case of MSEs.
Women Enterprises For MSEs
An MSE unit related service or business enterprise, managed by one or more women entrepreneurs in the
proprietary concerns or in which she/they individually or jointly have a share capital of not less than 51% as
partners/shareholders/directors of private limited Company/Members of Co-operative society is known as
Women Entrepreneurs' Enterprise.
OPERATIONAL GUIDELINES on MSEs Collateral security

General exemption from collateral is up to an amount of Rs.10 lac. For units having good track
record, the exemption limit is Rs.25 lac. Above these levels, the banks are free to determine on
the merits of each case. As per RBI directions, the proposals, otherwise viable, should not be turned down
merely for want of such collateral security or 3rd party guarantees.
Rejection of loan applications in MSE sector: As per RBI, a reference to higher authorities of loan
proposals of MSE units being rejected/curtailed should be made before the decision is conveyed to
the applicant. All cases of rejection/curtailment of limits are to be put up to the next higher authority so
as to ensure that the entrepreneurs are not put to unnecessary hardship.
Banks' Code for MSEs

Banking Codes and Standards Board of India prepared voluntary code put in place in 2008. It sets minimum
standards of banking practices for banks to follow, while dealing with MSEs.
Code and Regulatory guidelines: Where code sets higher standards than indicated in the RBI instructions,
such higher standards will prevail. Changes in interest rates: Banks will inform the change within 7 days,
by writing to MSEs, placing notice at the branch and on website. Changes in Fees & Charges : Notify
change 30 days prior to, revised charges becoming effective. Changes to Terms & Conditions: It is to be
conveyed within 30 days. If it is to MSE's disadvantage, MSE may within 60 days and without notice, close
/switch the account without paying extra charges or interest. If banks make many minor changes in any
one year, banks should give MSEs, a copy of terms & conditions. Additional information : MSE to be
contract for additional information within 7 working days from receipt of application.
Processing fee : No fee will be recovered for loans up to Rs.5 lakh if the loan is not sanctioned. Amount of
bank limit: The banks will provide working capital limits computed at minimum of 20 % of projected annual
turnover.
Sanction: Banks will supply authenticated copies of all the loan documents executed with. The banks will
permit pre-payment of loans up to Rs.5 lakh without levying any prepayment penalty. Disbursement : Within
2 working days from the date of compliance with all terms and conditions. Drawing power: Banks will grant
increase in the DP within 24 hours of lodgment of security. Transfer of accounts and release of securities:
Banks will convey their consent or otherwise, within 2 'weeks of receipt of a request for transfer of the
borrowal account and release all securities on receiving repayment of loan immediately and in any case not
later than 2 weeks.
Financial Difficulties: Banks will consider a debt restructuring program if a/c remains substandard for over 6
months or MSE unit is considered to be sick. Banks will work out a package and implement it within a
maximum period of 60 days from the date of receipt of request.
Recovery: Bank representatives will contact MSEs between 0700 hrs and 1900 hrs.
Complaint: The banks will send final response within 6 weeks of receipt of complaint.
Banking Ombudsman Scheme: Within 30 days of lodging a complaint with the bank, if MSEs do not get a
satisfactory response from a bank and MSEs wish to pursue other avenues it may approach Banking
Ombudsman.
MSEs National Equity Fund is administered by SIDBI in participation with Govt. Eligible
concerns
• New as well as existing entrepreneurs in the MSE sector are eligible for assistance.
• Sanction of refinance in respect of term loan for the projects by SIDBI is a pre-requisite for equity
type assistance under the scheme.
• The complete requirement of the projects in the form of equity assistance, the term loan and working capital
will be provided by one agency i.e. the nationalised bank/SFCs.
Project cost
Projects costing up to Rs. 50 lac (inclusive of working capital margin) MSE Sector
Amount of assistance :
Equity type assistance under 25% of the project cost subject to a maximum of Rs.10 lac.
Debt equity ratio : Minimum promoters' contribution 10% of project cost. DER will be 1.875:1 (excluding
State subsidy for meeting working capital)
Type of assistance : Equity type assistance in the form of Soft Loan. Interest The service charges are
payable at the rate of 5% per annum on soft loan.
Repayment period : 7 years inclusive of moratorium up to 3 years.
Security : The primary lending institutions are to provide equity type soft loan under the scheme to eligible
units as agents of SIDBI. The credit risk in respect of soft loan is borne by SIDBI. Hence no security/collateral
for the soft loan nor coverage under DICGC guarantee scheme is needed.
CREDIT CARD FOR MSEs

The outstanding balance in following credit cards is to be classified as part of MSE advances:
1. General Credit Card
2. Weaver's credit Card
3. Laghu Udhmy Credit Card
4. Swairozgar Credit Card.
GENERAL CREDIT CARD SCHEME 2013

RBI revised the scheme (Dec 02, 2013) to enhance the coverage to ensure greater credit linkage for all
productive activities within Priority sector guidelines and to capture all loan by banks to individuals for non-
farm entrepreneurial activity.
1. Objectives : To increase flow of credit to individuals for entrepreneurial activity in the nonfarm
sector provided through GCC.
2. Eligibility: All non-farm entrepreneurial credit extended to individuals, which is eligible for classification
under the priority sector guidelines.
3. Coverage: Entire country.
4. Nature of financial accommodation: Credit , facility extended would include working capital and term
loan. The GCC may be issued as a Smart card / Debit card (Biometric smart card compatible for use in
the ATMs / Hand held Swipe Machines and capable of storing adequate information on entrepreneur's
identity, assets and credit profile etc.). Wherever the accounts are not digitized, the GCC may be issued
as a card/pass book or a credit card cum pass book incorporating the name, address, photograph of the
holder, particulars of borrowing limit, validity period etc. for the time being which will serve both as an
identity card as well as facilitate recording of the transactions on an ongoing basis.
5. Quantum of credit limit: Need based limits on the basis of risk assessment on a case to case basis.
6. Security: As per RBI guidelines on collateral free lending for MSE units.
7. Rate of Interest: To be decided by banks.
Any other Credit Card (e.g. Artisan Credit Card, Laghu Udyami Card, Swarojgar Credit Card, and Weaver's
Card etc.) in existence and catering to the non-farm entrepreneurial credit needs of individuals should be
included for reporting of credit extended through GCC under Financial Inclusion Plans. The consumption credit
extended to individuals should not be reported under GCC.
Banks can issue any other credit card for consumption needs which is to be reported separately as
Overdraft (OD)/consumption credit in the FIP reporting format prescribed by RBI.
LAGHU UDHAMI CREDIT CARD (LUCC) SCHEME

Govt. launched Laghu Udhyami Credit Card Scheme (Nov 12, 2001), with following features:
• The objective is to provide hassle-free credit facilities to small business, retail traders, artisans,
professionals, self-employed persons and small industrial units.
• Existing customers with a 3 year satisfactory track record with working capital limits upto Rs.10
lac are eligible for card.
• The credit card limits are fixed at 20% of the annual turnover declared for tax purposes in the
case of artisans, businessmen, traders and small entrepreneurs.
• In case of professionals, it is 50% of the gross annual income.
• Maximum per party credit limit is Rs.10 lac.The credit limit will be valid for 3 years and the
bank will conduct internal reviews annually.
SWAROzGAR CREDIT CARD SCHEME Scheme prepared by NABARD is implemented by

commercial banks with following features: Objectives : To provide adequate/timely credit, i.e.,
working capital or block capital or both (including a reasonable component for consumption needs) to
small artisans, handloom weavers, service sector, fishermen, self employed persons, rickshaw owners,
other micro-entrepreneurs, etc., in a flexible, hassle free and cost effective manner.
Nature of financial accommodation : Composite loan including term loan (repayable 5
years) /revolving cash credit.
Ceiling : Rs.25,000 based on initial investment in fixed assets and/or working capital
requirement/recurring expenditure. (banks have discretion to enhance this limit beyond
Rs.25000).
Validity and Issue :
• Valid for 5 years and to be renewed on a yearly basis.
• SHGs may also be issued cards in their name. They would be liable jointly and severally for
repayment.
Renewal of working capital limits : Annual renewal based on the amount credited to the cash credit
account/repayment performance in term loan account.
• The revolving cash credit for working capital repaid within 12 months may be renewed.
• No drawl should be permitted if revolving cash credit remains outstanding for more than 12 months.
Insurance : Beneficiaries would automatically be covered under the group insurance scheme and the premium would
be shared by the bank and the borrower equally.
Security/margin/interest/prudential norms : These norms would be applicable as per the Reserve
Bank's norms.
WEAVERS' CREDIT CARD (WCC) The scheme has been prepared by Ministry of Textiles, vetted by Ministry of
Finance and circulated by IBA during Oct 2011. Important features indude:
1. Type of loan — TL or Working capital in the form of simplified open cash credit.
2. Eligibility — All handloom weavers (preference to identified weavers under 3' Census of Handloom weavers).
3. Amount of loan — up to Rs.2 lac
4. Margin money of Rs.4200 available from Govt. of India.
5. Repayment —max 36 months. WC valid up
to 3 years subject to annual review. WC can be operated.
6. Security : CGTMSE guarantee available.
Interest subvention of 3% available for 3 years from 1' disbursement if account is not NPA.
1.MUDRA BANK
Introduction: Mudra Bank stands for Micro Units Development Refinance Agency (MUDRA). MUDRA
Bank was announced by the Finance Minister Arun Jaitley in his FY 15-16 Budget speech. Micro Units
Development and Refinance Agency Bank (or MUDRA Bank) is a public sector financial institution.
Mudra Bank is being set up through a statutory enactment and will be responsible for developing and
refinancing through a Pradhan Mantri MUDRA Yojana. Although 20% of the country's population is
dependent on 5.7 crore micro and small entrepreneurs, they do not have access to institutional credit.
Since small entreprenuers are businssess are often cut off from banking system because of limited
branch presence, Mudra Bank will partner with local coordinators and provide finance to "Last Mile
Financiers" of small/micro businesses. The aim is to provide financial assistance to the "unfunded"
small entrepreneurs who provide employment to a large number of people. The Government will
ensure that measures to be taken up by MUDRA are targeted towards mainstreaming young, educated
or skilled workers and entrepreneurs including women entrepreneurs. The MUDRA banks will be set up
under the Pradhan Mantri MUDRA Yojana scheme. It will provide its services to small entrepreneurs
outside the service area of regular banks, by using last mile agents. About 5.77 crore (57.7 million)
small business have identified as target clients using the NSSO survey of 2013. Only 4% of these
businesses get finance from regular banks. The bank will also ensure that its clients do not fall into
indebtness and will lend responsibly. The bank will cater to 5.77 crore small business units that are
spread all across India who currently find it difficult to access credit from the regular banking system.
Objectives: The principal objectives of the MUDRA Bank are:
1. Regulate the lender and the borrower of microfinance and bring stability to the microfinance system
through regulation and inclusive participation.
2. Extend finance and credit support to Microfinance Institutions (MFI) and agencies that lend money
to small businesses, retailers, self-help groups and individuals.
3. Register all MFIs and introduce a system of performance rating and accreditation for the first time.
This will help last-mile borrowers of finance to evaluate and approach the MFI that meets their
requirement best and whose past record is most satisfactory. This will also introduce an element of
competitiveness among the MFIs. The ultimate beneficiary will be the borrower.
4. Provide structured guidelines for the borrowers to follow to avoid failure of business or take
corrective steps in time. MUDRA will help in laying down guidelines or acceptable procedures to be
followed by the lenders to recover money in cases of default.
5. Develop the standardised covenants that will form the backbone of the last-mile business in future.
6. Offer a Credit Guarantee scheme for providing guarantees to loans being offered to micro
businesses.
7. Introduce appropriate technologies to assist in the process of efficient lending, borrowing and
monitoring of distributed capital.
8. Build a suitable framework under the Pradhan Mantri MUDRA Yojana for developing an efficient last-
mile credit delivery system to small and micro businesses.
9. Laying down responsible financing practices to ward off indebtedness and ensure proper client
protection principles and methods of recovery.
Major Product Offerings: MUDRA Bank has classified the borrowers into three segments: the
starters, the mid-stage finance seekers and the next level growth seekers. The Bank will nurture small
businesses through different stages of growth and development of businesses termed as Shishu,
Kishor and Tarun.
Shishu: This will be the first step when the business is just starting up. The loan cover in this stage
will be upto Rs 50,000.
Kishor: In this stage, the entreprenuer will be eligible for a loan ranging from Rs 50,000 to Rs 5 lakh.
Tarun: This last and final category will provide loans for upto Rs 10 lakh.
Initially, sector-specific schemes will be confined to “Land Transport, Community, Social & Personal
Services, Food Product and Textile Product sectors”. Over a period of time, new schemes will be
launched to encompass more sectors.
Some of the Offerings Planned for the Future: (a) MUDRA Card; (b) Portfolio Credit Guarantee; (c)
Credit Enhancement
Impact of MUDRA Bank: Majority of Indians are poor and live in rural and interior parts of India. In
case of MUDRA, guidance, support, training and financial assistance will be provided resulting in jump
in GDP. MUDRA Bank is a step by the government that can give birth to a new set of entrepreneurs.
MUDRA Bank will instill a new confidence in the small entrepreneurs that have been to exploitation at
the hands of money lenders so far.
Recovery method: Mudra Bank will ensure clients are properly protected and will lay down principles
and methods of loan recovery in case of a default. The Bank will also rigidly follow "responsible
financing practices" so deter borrowers from indebtedness.
Corpus: The Bank will be set up with a corpus of Rs 20,000 crore and a credit guarantee fund of Rs
3,000 crore.
Organisation: The bank will initially function as a non-banking financial company and a subsidiary of
the Small Industries Development Bank of India (SIDBI). Later, it will be made into a separate
company. It will also serve as a regulator for other micro-finance institutions (MFIs) and provide them
refinancing services. It will provide guidelines for MFIs and give them ratings.
Start Up India Scheme

The Start-up India initiative was launched on Jan 16, 2016 as an action plan for developing an ecosystem
to promote and nurture entrepreneurship in India. This is based on an action plan aimed at promoting
bank financing for start-up ventures and encourage startups with jobs creation.
Start up entity : To be categorized such Entity, following requirements need to be fulfilled:
1. The entity should be a company, partnership or limited liability partnership.
2. It should be
(a) in existence at least for 5 years,
(b) its turnover should not be above Rs.25 cr and it should not be formed by splitting up or
reconstruction of existing entities.
(c) The entity should aim to develop and commercialise, a new product or service or process or a significantly
improved existing product or service or process, that will create or add value for customers. Products,
services or process, which do not have potential for commercialisation or is undifferentiated or have no or
limited incremental value are not eligible.
Certification : To be considered eligible as startup, the entity should be supported by a recommendation
with regard to innovative nature of business, in a format specified by DIPP, from an Incubator recognized by
Govt.
Funding :
1. Rs 10,000 crore fund: Govt. will develop a fund with an initial corpus of Rs 2,500 crore (total corpus of
Rs 10,000 crore over 4 years) to support upcoming start-up enterprises. LIC of India will play a major role
in developing this corpus. A committee of private professionals selected from start-up industry will manage
it.
2. National Credit Guarantee Trust Company : NCGTC is being set up with a budget of Rs 500 crore per
year for the next 4 years to support the flow of funds to start-ups.
3. The loans are available from Rs.10 lac to Rs.1 cr under the scheme.
Advantages :
1. Income Tax exemption is available for 3 years after certification by Inter-Ministerial Board.
2. Self certification : Start-ups will adopt self-certification to reduce regulatory liabilities for payment of
gratuity, labour contract, provident fund management, water pollution acts.
3. In patent costs, it can claim an 80% rebate.
4. Govt. is launching a Mobile App and a portal that will allow companies to register in a day.
5. An All-India Hub will be created as a single contact point to help the entrepreneurs to exchange
knowledge and access financial aid.
6. Startups in manufacturing sector exempted from the criteria of prior ‘experience/ turnover’ without
any relaxation in quality standards or technical parameters in public procurement.
Stand Up India Scheme

Union Cabinet approved the Scheme on January 06, 2016.
Objective : To promote entrepreneurship among SC/ST and Women entrepreneurs for benefiting
atleast 2.5 lakh borrowers within 36 months from the launch of the Scheme.
Methodology : To facilitate at least two such projects per bank branch, on an average, one for each
category of entrepreneur.
Important provisions of the scheme :
1. Refinance window through Small Industries Development Bank of India (SIDBI) with an initial
amount of Rs. 10,000 crore.
2. Handholding support at the pre-loan stage and during operations including increasing their
familiarity with factoring services, registration with online platforms and e-market places as well as
sessions on best practices and problem solving.
3. To leverage the institutional credit structure to reach out to these under-served sectors of the
population by facilitating bank loans repayable up to 7 years and between Rs.10 lakh to Rs.100 lakh for
greenfield enterprises in the non-farm sector.
4. The loans would be appropriately secured and backed by a credit guarantee through a credit
guarantee scheme for which Department of Financial Services would be the settler and National Credit
Guarantee Trustee Company Ltd. (NCGTC) would be the operating agency.
Margin money of the composite loan would be up to 25%. Convergence with State schemes is
expected to reduce the actual requirement of margin money for a number of borrowers.
FINANCIAL INCLUSION
Financial inclusion or inclusive financing is the delivery of financial products, at affordable costs to
sections of disadvantaged and low-income segments of society.
As per United Nations, the goal of financial inclusion is, to ensure access to a full range of fmancial
services, at a reasonable cost, to ensure continuity and certainty of investment.
India : RBI set up the Rangarajan Committee in 2004 to look into financial inclusion. Financial
inclusion first featured in 2005 & Mangalam became the first village in India where all households
were provided banking facilities. RBI initiatives for financial inclusion:
1. Opening of basic saving bank deposit accounts;
2. Relaxation in KYC norms for small deposit accounts;
3. Allowing engaging business correspondents;
4. Effective use of information and communications technology (ICT), to provide doorstep banking
services
5. Implementation of electronic benefit transfer (EBT) by leveraging ICT-based banking
6. Issue of general credit cards
7. Simplified branch authorization for tier III to tier VI centres (population of less than 50,000)
under general permission
RBI Roadmap for Financial Inclusion Under RBI's earlier roadmap (Sep 2010) banks opened
banking outlets in 74,199 (99.7%) villages by March 2012.
New roadmap : To take financial inclusion to the next stage of providing universal coverage and
facilitating Electronic Benefit Transfer, banks were advised to draw up FIP for 2013-16 and
disaggregate the Flips to the controlling office and branch level. On RBI advice State Level Bankers'
Committees prepared a roadmap covering all unbanked villages of population less than 2000 and
notionally allot these villages to banks for providing banking services, in a time-bound manner (Aug
15, 2015) to provide with at least one banking outlet.
Sampoorn Vitteeya Samaveshan (SVS) in Mission
Mode (Comprehensive Financial Inclusion) SVS was launched by Govt. of India, on Aug 15, 2014. SVS
comprises 6 pillars:
1. Universal access to banking facilities — To be achieved by adopting sub-service area approach (i.e. each
bank to have min one fixed point banking outlet to cater to 1000-1500 households). Places without brick
and mortar branches to be covered by deployment of fully enabled business correspondents.
Suggested remuneration for last mile BC agent to be Rs.5000.
2. Financial literacy program : Preparing the people for financial planning and availing credit by
revamping the Financial Literacy & Credit Counseling (FLCC).
3. Providing basic banking account: Such accounts to be opened with zero balance and ATM /
Debit / Rupay card and linked to Aadhaar number. Overdraft of Rs.5000 to be provided on.
completion of financial literacy training. OD will be secured by guarantee of Credit Guarantee Fund.
Rate of interest will be base rate + 3%. Out of this, 1% will be fee for Guarantee cover and 1%
towards, BC fee.
4. Micro credit availability and creation of Credit Guarantee Fund for coverage of defaults in
such accounts : CGF will have initial corpus of Rs.1000 cr to be funded by Financial Inclusion Fund
with NABARD.
S. Micro insurance: IRDA has created a special insurance policies (micro-insurance policy) for
weaker section with a life insurance cover of Rs.50000.
6. Unorganised sector pension scheme on the pattern of Swaviamban by March 2017.
Phased implementation : In the first phase (201415) focus will be on providing universal access to
banking facilities. The 2nd phase (2015-18) will include financial literacy, micro credit availability,
creation of credit guarantee fund and micro Insurance.
Pradhan Mantri Jan Dhan Yojna (PMJDY) PMJDY was launched on Aug 28, 2014. The
implementation has two phases.
1. Aug 15, 2014 to Aug 14, 2015
2. Aug 15, 2015 to Aug 14, 2018
The major shift is that the households in rural as well as urban area, are being targeted instead of
village only targeted in earlier program.
Features of Phase-1 :
(i) Universal access to banking facilities for all households across the country through a bank branch
or a fixed point business correspondent (BC) within a reasonable distance.
(ii) To cover all households with at least one Basic Saving Account.
Account will get Ru Pay Debit Card with inbuilt accident insurance cover of Rs.1 lac. A/c opened up to
Jan 26, 2015 will get life insurance of Rs.30000. Other accounts will get life cover in 2nd phase. A fee
of 50p for each transaction would be charged for the debit card.
Further, an overdraft facility up to Rs.5000 will be permitted to Aadhaar enabled accounts after
satisfactory operation for 6 months.
(iii) Financial literacy program which aims to take financial literary up to village level.
The Mission also envisages expansion of direct benefit transfer (DBT) under various govt. schemes
through bank a/cof beneficiaries,
(iv) The Issuance of Kissan Credit Card as Ru Pay Kissan Card Is also proposed to be covered under
the scheme.
Features of Phase II:
(I) Providing micro-Insurance to the people.
(II) Unorganised sector pension schemes like Swavalamban through the Business Correspondents.
The mission is expected to be Mera Khata Bhagya Vidhaata (My Account - the Creator of Good
Fortune),
DIRECT BENEFIT TRANSFER (DBT) SCHEME DBT is being rolled out in a phased manner (43
districts in the first phase frOm Jan I, 2013 and extended to 78 more districts from July 1, 2013).
Eventually, all districts in the country are to be covered under the DBT scheme.
To facilitate DBT for delivery of social welfare benefits by direct credit to the bank accounts of
beneficiaries, banks were advised by RBI (May 10, 2013) to:
• open accounts for all eligible individuals in camp mode with the support of local government
authorities,
• seed the existing accounts or the new accounts opened with Aadhaar numbers and
• put in place a mechanism to monitor and
review the progress in implementation of DBT. SLBC Convenor Banks and Lead Banks should
institute a monitoring and review mechanism to periodically assess and evaluate the progress
made in the implementation. The SLBC Convenor banks shall submit a monthly statement of
district wise progress made in implementing DBT from the month ended April 30, 2013 by the 10th of
the succeeding month to respective RBI Regional Office
FINANCIAL LITERACY
The financial literacy or financial education stands for ability to know and effectively use financial
resources to enhance the well-being and economic security of oneself, one's family and business. It
enables individuals to take effective action to improve overall wellbeing & avoid financial distress.
Benefits: it promotes financial inclusion and ultimately financial stability.
RBI initiatives : (1) RBI has undertaken a project titled 'Project Financial Literacy' to disseminate information
regarding banking concepts to various target groups, such as, school and college going children, women,
rural and urban poor, defence personnel and senior citizens.
(2) RBI launched a financial education website on November 14, 2007.
(3) RBI circulated a comprehensive Financial Literacy Guide for conduct of Financial Literacy Camps &
Financial Literacy Material as also a Financial Diary and a set of 16 posters.
In terms of RBI circular dated Jun 06, 2012, all the Financial Literacy Centres and rural branches are
required to prepare an annual calendar of locations for conduct of outdoor Financial Literacy Camps.
At every location, the program should be conducted in 3 stages (spread over 3 months), comprising of
3 sessions of minimum 2 hours each plus a visit to ensure timely delivery of cards. 2dd session is to be
conducted a fortnight after first session. After 15 days of the second session, branch officials should
visit the village to ensure delivery of cards to the villagers. They will also make sure that the BC has
started operations and villagers are able to make transactions. 3rd Session is to be conducted, 2
months after holding of second session.
RBI monitoring : Rural branches are to conduct a minimum of one financial literacy camp in a month, &
RBI (Jul 07, 2014) monitors their activities on quarterly basis. SLBC/UTLBCs are to submit quarterly
reports to the respective Regional Offices of RBI within 20 days after the end of each quarter.
COMMITTEES ON ADVANCES & PRIORITY SECTOR

a. Committee on Wilful Default 2002 S S Kohli
b. Committee on Corporate Debt restructuring 2005 S Gopinath ( Dec. 2005 )
c. Micro, Small & Medium Enterprises 2010 T K A Nair
d. Rehabilitation of Sick SMEs 2008 Dr. K. C. Chakrabarty
e. Flow of Credit to Agriculture 2004 V S Vyas
f. Service Area Approach (rural & urban area) 1988 PD Ojha
g. Financial Inclusion 2006 C Rangarajan
h. Procedure and Processes of Agricultural Loan 2007 C P Swarnkar
i. Rural Credit and Microfinance 2005 H R Khan
j. Flow of Credit to SSI Sector 2004 A S Ganguly
k. Micro finance 2003 Vepa Kamesam
l. Agricultural Credit Delivery (no Dues Certificate) 1998 R V Gupta
m. Lead Bank Scheme 2009 Usha Thorat
n. Micro Finance Institutions 2011 Y H Malegam
o. Institutional Credit to SSIs 1998 S L Kapoor
p. Institutional Credit to SSIs 1974 PR Nayak
q. Committee on to assist Distressed Farmers : S S Johl
r. SHG Credit Linkage Kalia Committee
s. PRIORITY SECTOR ( SUB TARGET UNDER PRIORITY SECTOR ) - 40% OF ANBC -BY MARCH 1985 –
MR. K. S. KRISHNASWAMI COMMITTEE – 1980, PRIORITY SECTOR & DRI SCHEME - 1972
t. WEAKER SECTION - MR. K. S. KRISHNASWAMI COMMITTEE - 1980
u. PRIORITY SECTOR CLASSIFICATION – C S MURTHY COMMITTEE – 2007 & M V NAIR COMMITTEE –
20.7.12
v. CREDIT GUARANTEE FUND TRUST FOR MSE (CGTMSE ) : MR. V K SHARMA COMMITTEE
w. KISAN CREDIT CARD (1994 ) – MR. R V GUPTA COMMITTEE – effected 1998 & MR. T M BHASIN
COMMITTEE – 2012
x. LEAD BANK SCHEME – DEC. 1969 PROF. GADGIL COMMITTEE & MR. F K P NARIMAN COMMITTEE,
High level committee on Lead bank (2010 ) – Usha Throat ( spl. Thrust on Financial inclusion & all distt.
Including Metropolitan cities as well as bank & state Govt. to work together for Inclusive growth wef
may. 2013 )
y. NRLM – AAJEEVIKA – MR. RADHA KRISHANAN COMMITTEE
z. R J KAMAT COMMITTEE : EDUCATION LOAN IBA MODEL (2001 )
A. Bhartiya mahila Bank : M B N Rao Committee
B. Benchmark Prime Lending Rate (BPLR) & Base Rate : Deepak Mohanty
C. To Review Business Correspondent Model: P Vijaya Bhaskar Rao
D. Technical Advisory Group on Development of Housing Start-Up Index in India: Prof. Amitabh Kundu
E. Cost of ICT Solutions for RRBs: Shri G. Padmanabhan
F. To Review Business Correspondent Model: P Vijaya Bhaskar Rao
G. Task Force on Empowering RRB Boards for Operational Efficiency : Dr. K.G. Karmakar
H. Internal Working Group on RRBs: Shri A V Sardesai
I. Working Group on Warehouse Receipts and Commodity Futures: Shri Prashant Saran
J. Working Group on Regulatory Mechanism for Cards Shri R.Gandhi
K. Task Force on Revival of Cooperative Credit' Institutions: Prof.A.Vaidyanathan
L. Special Group for Formulation of Debt Restructuring Mechanism for Medium Enterprises: Shri
G.Srinivasan
M. A Technical Committee comprising various stakeholders was constituted to examine the feasibility of
a uniform routing code and uniform a/c number across banks. The committee is headed by _______:
Shri Vijay Chugh.
N. A Working Group headed by _____ has been constituted in March 2013 to study the feasibility of
Aadhaar as an additional factor for authentication of card present transactions and other related issues.
Shri Pulak Kumar Sinha.
O. A Working Group was set up to review the existing prudential guidelines on restructuring of
advances by banks/financial institutions. The committee is headed by : ( Shri B. Mahapatra.)
P. The Committee to assess the feasibility of introduction of long-term fixed interest rate loan products
by banks is headed by : Shri K.K. Vohra.
Q. The Reserve Bank constituted an Expert Committee to undertake an in-depth analysis of the Short-
Term Cooperative Credit Structure (STCCS). The committee is headed by : Dr. Prakash Bakshi
R. Legal Aspects of Bank Frauds: Dr. N .L. Mitra
S. Committee, to make a vision for financial inclusion: Nachiket Mor Committee (Committee on
Comprehensive Financial Services for Small Businesses and Low-Income Households).
T. Review Group on Working of the Local Area Bank Scheme : Shri G.Ramachandran
U. Working Group to Examine the Role of Credit Information Bureaus in Collection and Dissemination
of Information on Suit-filed Accounts and Defaulters: Shri S.R. Iyer
V. Working Group for setting up Credit Information Bureau in India: Shri N.H.Siddiqui
W. Free copy of Credit Report ( CIBIL ) & Use of common Data : Aditya Puri ( Chairman – HDFC )
Master Direction - Lending to Micro, Small & Medium Enterprises (MSME) Sector
Master Direction – Reserve Bank of India [Lending to Micro, Small & Medium
Enterprises (MSME) Sector] - Directions, 2016
In exercise of the powers conferred by Sections 21 and 35 A of the Banking Regulation Act, 1949, the
Reserve Bank of India, issued the following updated Directions.
CHAPTER – I: PRELIMINARY
1.1 Short Title and Commencement

Directions are called the “Reserve Bank of India [Lending to Micro, Small & Medium Enterprises (MSME)
Sector] Directions, 2016” and shall come into effect on the day they are placed on the official website
of RBI.
1.2 Applicability
These Directions are applicable to all Scheduled Commercial Bank but excluding RRBs.
1.3 Definitions/ Clarifications

(a) The “MSMED Act, 2006” means ‘Micro, Small and Medium Enterprises Development (MSMED)
Act, 2006’ as notified by the Government of India on June 16, 2006 and the amendments
thereafter, if any, by the Government of India.
(b) ‘Micro, Small and Medium Enterprises’ mean the enterprises as defined in the MSMED Act,
2006 and the amendments, if any, from time to time.
(c) ‘Manufacturing’ and ‘Service’ Enterprises mean the enterprises as defined in the MSMED
Act, 2006 or as notified by the Government of India, Ministry of MSME under the MSMED Act,
2006 from time to time.
(d) ‘Priority Sector’ means the sectors as defined in Master Direction - Reserve Bank of India
(Priority Sector Lending –Targets and Classification) Directions, 2016 dated July 7, 2016 or as
modified from time to time.
(e) ‘Adjusted Net Bank Credit (ANBC)’ would mean Adjusted Net Bank Credit (ANBC) as defined
in Master Direction - Reserve Bank of India (Priority Sector Lending –Targets and Classification)
Directions, 2016 dated July 7, 2016 or as modified from time to time.
CHAPTER – II
2 Micro, Small & Medium Enterprises Development (MSMED) Act, 2006

The Government of India (GOI) has enacted the Micro, Small and Medium Enterprises Development
(MSMED) Act, 2006 and notified the same vide Gazette Notification dated June 16, 2006. With the
enactment of MSMED Act 2006, the paradigm shift that has taken place is the inclusion of the services
sector in the definition of Micro, Small & Medium enterprises, apart from extending the scope to
medium enterprises. The MSMED Act, 2006 has modified the definition of micro, small and medium
enterprises engaged in manufacturing or production and providing or rendering of services.
2.1 Definition of Micro, Small and Medium Enterprises
(a) Manufacturing Enterprises would mean enterprises engaged in the manufacture or production of
goods as specified below:
(i) A micro enterprise is an enterprise where investment in plant and machinery does not
exceed Rs. 25 lakh;
(ii) A small enterprise is an enterprise where the investment in plant and machinery is more
than Rs. 25 lakh but does not exceed Rs. 5 crore; and
(iii) A medium enterprise is an enterprise where the investment in plant and machinery is
more than Rs.5 crore but does not exceed Rs.10 crore. In case of the above enterprises,
investment in plant and machinery is the 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 (Annex I).
(b) Service Enterprises i.e. Enterprises engaged in providing or rendering of services and whose
investment in equipment (original cost excluding land and building and furniture, fittings and other
items not directly related to the service rendered or as may be notified under the MSMED Act,
2006) as specified below:
(i) A micro enterprise is an enterprise where the investment in equipment does not exceed Rs.
10 lakh;
(ii) A small enterprise is an enterprise where the investment in equipment is more than Rs.10
lakh but does not exceed Rs. 2 crore; and
(iii) A medium enterprise is an enterprise where the investment in equipment is more than Rs. 2
crore but does not exceed Rs. 5 crore.
2.2 Priority Sector Guidelines for MSME sector

In terms of Master Direction FIDD.CO.Plan.1/04.09.01/2016-17 dated July 7, 2016 on ‘Priority Sector
Lending - Targets and Classification’, bank loans to Micro, Small and Medium Enterprises, for both
Manufacturing and Service sectors are eligible to be classified under the Priority Sector as per the
following norms:
2.2.1 Manufacturing Enterprises

The Micro, Small and Medium Enterprises engaged in the manufacture or production of goods to any
industry specified in the first schedule to the Industries (Development and Regulation) Act, 1951 and
as notified by the Government from time to time. The Manufacturing Enterprises are defined in terms
of investment in plant and machinery.
2.2.2 Service Enterprises

Bank loans up to Rs.5 crore per borrower / unit to Micro and Small Enterprises and Rs.10 crore to
Medium Enterprises engaged in providing or rendering of services and defined in terms of investment
in equipment under MSMED Act, 2006.
2.3 Khadi and Village Industries Sector (KVI)

All loans to units in the KVI sector will be eligible for classification under the sub-target of 7.5 percent
prescribed for Micro Enterprises under priority sector.
2.4 Bank loans to food and agro processing units shall form part of agriculture.
2.5 Other Finance to MSMEs
(i) Loans to entities involved in assisting the decentralized sector in the supply of inputs to and
marketing of outputs of artisans, village and cottage industries.
(ii) Loans to co-operatives of producers in the decentralized sector viz. artisans, village and
cottage industries.
(iii) Loans sanctioned by banks to MFIs for on-lending to MSME sector as per the conditions
specified in the extant Master Direction on ‘Priority Sector Lending - Targets and
Classification’.
(iv)Credit outstanding under General Credit Cards (including Artisan Credit Card, Laghu Udyami
Card, Swarojgar Credit Card, and Weaver’s Card etc. in existence and catering to the non-
farm entrepreneurial credit needs of individuals).
(v) Overdrafts extended by banks after April 8, 2015 up to Rs.5,000/- under Pradhan Mantri Jan
Dhan Yojana (PMJDY) accounts provided the borrower’s household annual income does not
exceed Rs.100,000/- for rural areas and Rs.1,60,000/- for non-rural areas. These overdrafts
will qualify as achievement of the target for lending to Micro Enterprises.
(vi)Outstanding deposits with SIDBI and MUDRA Ltd. on account of priority sector shortfall.
2.6 MSME units shall continue to enjoy the priority sector lending status up to three years even after
they grow out of the MSME category concerned.
2.7 Since the MSMED Act, 2006 does not provide for clubbing of investments of different enterprises
set up by same person / company for the purpose of classification as Micro, Small and Medium
enterprises, the Gazette Notification No. S.O.2 (E) dated January 1, 1993 on clubbing of investments
of two or more enterprises under the same ownership for the purpose of classification of industrial
undertakings as SSI has been rescinded vide GOI Notification No. S.O. 563 (E) dated February 27,
2009.
CHAPTER - III
3 Targets / sub-targets for lending to Micro, Small and Medium Enterprises (MSME) sector
by Domestic Commercial Banks and Foreign Banks operating in India
3.1 Advances to MSME sector shall be reckoned in computing achievement under the overall Priority
Sector target of 40 percent of Adjusted Net Bank Credit (ANBC) or credit equivalent amount of Off-
Balance Sheet Exposure, whichever is higher, as per the extant guidelines on priority sector lending.
3.2 Domestic Commercial Banks are required to achieve a sub-target of 7.5 percent of ANBC or Credit
Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher, for lending to Micro Enterprises
by March 2017. The sub-target for Micro Enterprises for foreign banks with 20 branches and above
operating in India would be made applicable post 2018 after a review in 2017. However, this sub-
target for lending to Micro Enterprises is not applicable to foreign banks with less than 20 branches
operating in India.
3.3 Bank loans above Rs.5 crore per borrower / unit to Micro and Small Enterprises and Rs.10 crore to
Medium Enterprises engaged in providing or rendering of services and defined in terms of investment
in equipment under MSMED Act, 2006,
shall not be reckoned in computing achievement under the overall Priority Sector targets as above.
However, bank loans above Rs.5 crore per borrower / unit to Micro and Small Enterprises would be
taken into account while assessing the performance of the banks with regard to their achievement of
targets prescribed by the Prime Minister’s Task Force on MSMEs for lending to MSE sector.
3.4 In terms of the recommendations of the Prime Minister’s Task Force on MSMEs, banks are
advised to achieve:
i. 20 per cent year-on-year growth in credit to micro and small enterprises,
ii. 10 per cent annual growth in the number of micro enterprise accounts and
iii. 60% of total lending to MSE sector as on preceding March 31st to Micro enterprises
CHAPTER - IV
4 Common guidelines / instructions for lending to MSME sector
4.1 Issue of Acknowledgement of Loan Applications to MSME borrowers Banks to

mandatorily acknowledge all loan applications, submitted manually or online, by their MSME
borrowers and ensure to record running serial number on the application form and the
acknowledgement receipt. Banks to put in place a system of Central Registration of loan applications,
online submission of loan applications and a system of e-tracking of MSE loan applications.
4.2 Collateral
Banks not to accept collateral security for the loans up to Rs.10 lakh to units in the MSE sector.
Banks to extend collateral-free loans up to Rs. 10 lakh to all units financed under the Prime Minister
Employment Generation Programme (PMEGP) administered by KVIC.
Banks may increase the limit to dispense with the collateral requirement for loans up to Rs.25 lakh
(with the approval of the appropriate authority), on the basis of good track record and financial
position of the MSE units.
Banks to encourage their branch level functionaries to avail of the Credit Guarantee Scheme cover,
including making performance in this regard a criterion in the evaluation of their field staff.
4.3 Composite loan

A composite loan limit of Rs.1 crore can be sanctioned by banks to enable the MSE entrepreneurs to
avail of their working capital and term loan requirement through Single Window.
4.4 Revised General Credit Card (GCC) Scheme

GCC guidelines were revised on December 2, 2013, in order to enhance the coverage of GCC Scheme
to ensure greater credit linkage for all productive activities within the overall Priority Sector
guidelines and to capture all credit extended by banks to individuals for non-farm entrepreneurial
activity.
4.5 Credit Linked Capital Subsidy Scheme (CLSS)
GOI, Ministry of MSME had launched Credit Linked Capital Subsidy Scheme (CLSS) for Technology
Upgradation of Micro and Small Enterprises subject to the following terms and conditions:
(i) Ceiling on the loan under the scheme is Rs.1 crore.
(ii) The rate of subsidy is 15% for all units of micro and small enterprises up to loan ceiling at
Sr. No. (i) above.
(iii) Calculation of admissible subsidy will be done with reference to the purchase price of
plant and machinery instead of term loan disbursed to the beneficiary unit.
(iv)SIDBI and NABARD will continue to be implementing agencies of the scheme. 4.6
Streamlining flow of credit to Micro and Small Enterprises (MSEs) for facilitating timely
and adequate credit flow during their ‘Life Cycle’:
In order to provide timely financial support to Micro and Small enterprises facing financial difficulties
during their ‘Life Cycle’, guidelines were issued to banks vide our circular FIDD.MSME &
NFS.BC.No.60/06.02.31/2015-16 dated August 27, 2015 on the captioned subject. Banks are
advised to review and tune their existing lending policies to the MSE sector by incorporating therein
the following provisions so as to facilitate timely and adequate availability of credit to viable MSE
borrowers especially during the need of funds in unforeseen circumstances:
i) To extend standby credit facility in case of term loans
ii) Additional working capital to meet with emergent needs of MSE units
iii) Mid-term review of the regular working capital limits, where banks are convinced that
changes in the demand pattern of MSE borrowers require increasing the existing credit
limits of the MSMEs, every year based on the actual sales of the previous year.
iv) Timelines for Credit Decisions
4.7 Debt Restructuring Mechanism for MSMEs
(i) All scheduled commercial banks are advised to follow the guidelines / instructions pertaining
to SME Debt Restructuring, as contained in circular DBR.No.BP.BC.2/21.04.048/2015-16
dated July 1, 2015 on ‘Master Circular - Prudential norms on Income Recognition, Asset
Classification (IRAC) and Provisioning pertaining to Advances’ and as updated from time
to time.
(ii) In the light of the recommendations of the Working Group on Rehabilitation of Sick MSEs
(Chairman: Dr. K.C. Chakrabarty), all commercial banks are advised vide our circular
RPCD. SME &NFS.BC.No.102/06.04.01/2008-09 dated May 4, 2009 to:
(a) put in place loan policies governing extension of credit facilities,
Restructuring/Rehabilitation policy for revival of potentially viable sick units /
enterprises (now read with guidelines on Framework for Revival and Rehabilitation of
MSMEs issued on March 17, 2016) and non- discretionary One Time Settlement
scheme (OTS) for recovery of non-performing loans for the MSE sector, with the
approval of the Board of Directors and
(b) implement recommendations with regard to timely and adequate flow of credit to
the MSE sector.
(iii) Banks to give wide publicity to the OTS Scheme implemented by them, through their website
and other possible modes of dissemination. They may allow reasonable time to the
borrowers to submit the application and also make payment of the dues in order to
extend the benefits of the scheme to eligible borrowers.
4.8 Framework for Revival and Rehabilitation of MSMEs

The Ministry of MSME, GOI, vide their Gazette Notification dated May 29, 2015 had notified a
‘Framework for Revival and Rehabilitation of MSME’ to provide a simpler and faster mechanism to
address the stress in the accounts of MSMEs and to facilitate the promotion and development of
MSMEs. The RBI was advised to issue necessary instructions to banks for effective implementation
and monitoring of the said Framework. After carrying out certain changes in the captioned Framework
in consultation with the GOI, Ministry of MSME so as to make it compatible with the existing
regulatory guidelines on ‘IRAC and provisioning pertaining to Advances’ issued to banks by RBI, the
guidelines on the captioned Framework along with operating instructions were issued to banks on
March 17, 2016. The revival and rehabilitation of MSME units having loan limits up to Rs.25 crore
would be undertaken under this Framework. Banks were required to put in place their own Board
approved policy to operationalize the Framework not later than June 30, 2016. The revised
Framework supersedes our earlier Guidelines on Rehabilitation of Sick Micro and Small Enterprises
issued vide our circular RPCD. CO. MSME & NFS.BC.40/06.02.31/2012-2013 dated November 1,
2012, except those relating to Reliefs and Concessions for Rehabilitation of Potentially Viable Units
and One Time Settlement, mentioned in the said circular.
The salient features are as under:
i) Before a loan account of an MSME turns into a NPA, banks or creditors should identify
incipient stress in the account by creating three sub-categories under the Special Mention
Account (SMA) category as given in the Framework
ii) Any MSME borrower may also voluntarily initiate proceedings under this Framework
iii) Committee approach to be adopted for deciding corrective action plan
iv) Time lines have been fixed for taking various decisions under the Framework 4.9
Structured Mechanism for monitoring the credit growth to the MSE sector
In view of the concerns emerging from the deceleration in credit growth to the MSE sector, an IBA-
led Sub-Committee (Chairman: Shri K.R. Kamath) was set up to suggest a structured mechanism to
be put in place by banks to monitor the entire gamut of credit related issues pertaining to the
sector. Based on the recommendations of the Committee, banks are advised to:
• strengthen their existing systems of monitoring credit growth to the sector and put in place a
system-driven comprehensive performance MIS at every supervisory level (branch, region, zone,
head office) which should be critically evaluated on a regular basis;
• put in place a system of e-tracking of MSE loan applications and monitor the loan application
disposal process in banks, giving branch-wise, region-wise, zone-wise and State-wise positions
and to be displayed on their websites; and
• monitor timely rehabilitation of sick MSE units with the progress in rehabilitation of sick MSE units
to be displayed on their websites.
Detailed guidelines were issued to the scheduled commercial banks vide our circular RPCD.
MSME&NFS.BC.No.74/06.02.31/2012-13 dated May 9, 2013.
Chapter - V
5 Institutional arrangements
5.1 Specialised MSME branches

Public sector banks (PSB) are advised to open at least one specialised branch in each district.
Further, banks have been permitted to categorise their general banking branches having 60% or
more of their advances to MSME sector as specialized MSME branches in order to encourage them
to open more specialised MSME branches for providing better service to this sector as a whole. As
per the policy package announced by the GOI for stepping up credit to MSME sector, the PSBs would
ensure specialized MSME branches in identified clusters/centres with preponderance of small
enterprises to enable the entrepreneurs to have easy access to the bank credit and to equip bank
personnel to develop requisite expertise. The existing specialised SSI branches, if any, may also
be re-designated as MSME branches. Though their core competence will be utilized for extending
finance and other services to MSME sector, they will have operational flexibility to extend
finance/render other services to other sectors/borrowers. Banks may take care to train the officials
posted in such branches appropriately.
5.2 State Level Inter Institutional Committee (SLIIC)

In order to deal with the problems of co-ordination for rehabilitation of sick micro and small units,
State Level Inter-Institutional Committees were set up in the States. However, the matter of
continuation or otherwise, of the SLIIC Forum has been left to the individual States / Union
Territory. The meetings of these Committees are convened by Regional Offices of RBI and presided
over by the Secretary, MSME or Industry of the concerned State Government. It provides a useful
forum for adequate interfacing between the State Government Officials and State Level Institutions
on the one side and the term lending institutions and banks on the other. It closely monitors timely
sanction of working capital to units which have been provided term loans by SFCs, implementation
of special schemes such as Margin Money Scheme of State Government and reviews general
problems faced by industries and sickness in MSE sector based on the data furnished by banks.
Among others, the representatives of the local state level MSE associations are invited to the
meetings of SLIIC which are held quarterly.
5.3 Empowered Committee on MSMEs

As part of the announcement made by the Union Finance Minister, at the Regional Offices of RBI,
Empowered Committees on MSMEs are constituted under the Chairmanship of the Regional Directors
with the representatives of SLBC Convenor, senior level officers from two banks having predominant
share in MSME financing in the state, representative of SIDBI Regional Office, the Director of MSME
or Industries of the State Government, one or two senior level representatives from the MSME
Associations in the state, and a senior level officer from SFC/SIDC as members. The Committee
would meet periodically and review the progress in MSME financing as also rehabilitation of sick
Micro, Small and Medium units. It would also
coordinate with other banks/financial institutions and the state government in removing bottlenecks,
if any, to ensure smooth flow of credit to the sector. The committees may decide the need to have
similar committees at cluster/district levels.
5.4 Banking Codes and Standards Board of India (BCSBI)

The Banking Codes and Standards Board of India (BCSBI) has formulated a Code of Bank's
Commitment to Micro and Small Enterprises. This is a voluntary Code, which sets minimum
standards of banking practices for banks to follow when they are dealing with Micro and Small
Enterprises (MSEs) as defined in the Micro Small and Medium Enterprises Development (MSMED)
Act, 2006. It provides protection to MSE and explains how banks are expected to deal with MSE for
their day to-day operations and in times of financial difficulty.
The Code also mentions, inter alia, that the banks are expected to dispose of MSE loan application
for a credit limit or enhancement in the existing credit limit up to Rs.5 lakh within two weeks; and
for credit limit above Rs.5 lakh and up to Rs.25 lakh within 3 weeks; and for credit limit above Rs.25
lakh within 6 weeks from the date of receipt, provided the application is complete in all respects and
is accompanied by documents as per ‘check list’ provided.
While banks may voluntarily adhere to such time limits in the Code, every effort should be taken to
reduce further the time taken to process and dispose of MSE loan applications.
The Code does not replace or supersede regulatory or supervisory instructions issued by the Reserve
Bank of India (RBI) and banks will comply with such instructions /directions issued by the RBI from
time to time.
5.4.1 Objectives of the BCSBI Code The Code

is developed to:
(a) Give a positive thrust to the MSE sector by providing easy access to efficient banking services.
(b) Promote good and fair banking practices by setting minimum standards in dealing with MSE.
(c) Increase transparency so that a better understanding of what can reasonably be expected of the
services.
(d) Improve understanding of business through effective communication.
(e) Encourage market forces, through competition, to achieve higher operating standards.
(f) Promote a fair and cordial relationship between MSE and banks and also ensure timely and
quick response to banking needs.
(g) Foster confidence in the banking system.
The complete text of the Code is available at the BCSBI's website (www.bcsbi.org.in) 5.5 MSME
Sector – The imperative of Financial Literacy and consultancy support
Keeping in view the high extent of financial exclusion in the MSME sector, it is imperative for banks
that the excluded units are brought within the fold of the formal banking sector. The lack of financial
literacy, operational skills, including accounting and finance, business planning etc. represent
formidable challenge for MSE borrowers underscoring the need for facilitation by banks in these
critical financial areas. Moreover, MSE enterprises are further handicapped in this regard by absence
of scale and size. To effectively and decisively address these handicaps, Scheduled
commercial banks were advised vide our circular RPCD.MSME & NFS.BC.No.20/06.02.31/2012-13
dated August 1, 2012 that they could either separately set up special cells at their branches, or
vertically integrate this function in the Financial Literacy Centres (FLCs) set up by them, as per their
comparative advantage. The bank staff should also be trained through customised training programs
to meet the specific needs of the sector.
5.6 Cluster Approach
All SLBC Convenor banks are advised to incorporate in their Annual Credit Plans, the credit
requirement in the clusters identified by the Ministry of Micro, Small and Medium Enterprises,
Government of India. They are also encouraged to extend banking services in such clusters /
agglomerations which have come up and identified subsequently by SLBC / DCC members.
(i) As per Ganguly Committee recommendations (September 4, 2004), banks are advised that a
full-service approach to cater to the diverse needs of the SSI sector (now MSE sector) may be
achieved through extending banking services to recognized MSE clusters by adopting a 4-C
approach namely, Customer focus, Cost control, Cross sell and Contain risk. A cluster based
approach to lending may be more beneficial:
(a) in dealing with well-defined and recognized groups;
(b) availability of appropriate information for risk assessment and
(c) monitoring by the lending institutions.
Clusters may be identified based on factors such as trade record, competitiveness and growth
prospects and/or other cluster specific data.
(ii) All SLBC Convenor banks were advised vide letter
RPCD.PLNFS.No.10416/06.02.31/ 2006-07 dated May 8, 2007 to review their institutional
arrangements for delivering credit to the MSME sector, especially in 388 clusters identified by United
Nations Industrial Development Organisation (UNIDO) spread over 21 states in various parts of the
country. A list of SME clusters as identified by UNIDO has been furnished in Annex II.
(iii) The Ministry of Micro, Small and Medium Enterprises has approved a list of clusters under the
Scheme of Fund for Regeneration of Traditional Industries (SFURTI) and Micro and Small
Enterprises Cluster Development Programme (MSE-CDP) located in 121 Minority Concentration
Districts. Accordingly, appropriate measures have been taken to improve the credit flow to the
identified clusters of micro and small entrepreneurs from the Minority Communities residing in
the minority concentrated districts of the country.
(iv)In terms of recommendations of the Prime Minister’s Task Force on MSMEs banks should open
more MSE focused branch offices at different MSE clusters which can also act as Counselling
Centres for MSEs. Each lead bank of a district may adopt at least one MSE cluster.
5.7 Delayed Payment
In the Micro, Small and Medium Enterprises Development (MSMED), Act 2006, the provisions of the
Interest on Delayed Payment Act, 1998 to Small Scale and Ancillary Industrial Undertakings, have
been strengthened as under:
(i) The buyer has to make payment to the supplier on or before the date agreed upon between him
and the supplier in writing or, in case of no agreement, before the appointed day. The period
agreed upon between the supplier and the buyer
shall not exceed forty five days from the date of acceptance or the day of deemed acceptance.
(ii) (ii) In case the buyer fails to make payment of the amount to the supplier, he shall be liable
to pay compound interest with monthly rests to the supplier on the amount from the appointed
day or, on the date agreed on, at three times of the Bank Rate notified by Reserve Bank.
(iii) For any goods supplied or services rendered by the supplier, the buyer shall be liable to pay
the interest as advised at (ii) above.
(iv)In case of dispute with regard to any amount due, a reference shall be made to the Micro and
Small Enterprises Facilitation Council, constituted by the respective State Government.
Further, banks are advised to fix sub-limits within the overall working capital limits to the large
borrowers specifically for meeting the payment obligation in respect of purchases from MSMEs.
CHAPTER - VI
6 Committees on flow of Credit to MSE sector

6.1 Report of the High Level Committee on Credit to SSI (now MSE) (Kapur Committee)
RBI had appointed a one-man High Level Committee (June 30, 1998) headed by Shri S L Kapur,
(IAS, Retd.), Former Secretary, GOI, Ministry of Industry to suggest measures for improving the
delivery system and simplification of procedures for credit to SSI sector. The Committee made 126
recommendations covering wide range of areas pertaining to financing of SSI sector. These
recommendations were examined by the RBI and it was decided to accept 88 recommendations
which include the following important recommendations:
(i) Delegation of more powers to branch managers to grant ad-hoc limits;
(ii) Simplification of application forms;
(iii) Freedom to banks to decide their own norms for assessment of credit
requirements;
(iv) Opening of more specialised SSI branches;
(v) Enhancement in the limit for composite loans to Rs. 5 lakh. (since enhanced
to Rs.1 crore);
(vi) Banks to pay more attention to the backward states;
(vii) Special programmes for training branch managers for appraising small projects;
(viii) Banks to make customers grievance machinery more transparent and simplify the
procedures for handling complaints and monitoring thereof.
All scheduled commercial banks were advised vide our circular was RPCD.No.PLNFS.BC.22
/06.02.31/98-99 dated August 28, 1998 to implement the Kapur Committee Recommendations.
6.2 Report of the Committee to Examine the Adequacy of Institutional Credit to SSI
Sector (now MSE) and Related Aspects (Nayak Committee)
The Committee was constituted by RBI in December 1991 under the Chairmanship of Shri P. R.
Nayak, the then Deputy Governor to examine the issues confronting SSIs (now MSE) in the matter
of obtaining finance. The Committee submitted its report in 1992. All the major recommendations
of the Committee have been accepted and the banks have been, inter-alia, advised to:
(i) give preference to village industries, tiny industries and other small scale units in that order,
while meeting the credit requirements of the small scale sector;
(ii) grant working capital credit limits to SSI (now MSE) units computed on the basis of
minimum 20% of their estimated annual turnover whose credit limit in individual cases is
upto Rs.2 crore [ since raised to Rs.5 crore ];
(iii) ensure that there should not be any delay in sanctioning and disbursal of credit. In case of
rejection/curtailment of credit limit of the loan proposal, a reference to higher authorities
should be made;
(iv) not to insist on compulsory deposit as a `quid pro-quo’ for sanctioning the credit;
(v) open specialised SSI (now MSE) bank branches or convert those branches which have a
fairly large number of SSI (now MSE) borrowal accounts, into specialised SSI (now MSE)
branches;
(vi) standardise loan application forms for SSI (now MSE) borrowers; and
(vii) impart training to staff working at specialised branches to bring about attitudinal change in
them.
All scheduled commercial banks were advised vide our circular was
RPCD.PLNFS/BC.No.61/06.0262/2000-01 dated March 2, 2001 to implement the Nayak Committee
Recommendations.
6.3 Report of the Working Group on Flow of Credit to SSI (now MSE) Sector (Ganguly
Committee)
As per the announcement made by the Governor, Reserve Bank of India, in the Mid-Term Review of
the Monetary and Credit Policy 2003-2004, a “Working Group on Flow of Credit to SSI sector” was
constituted under the Chairmanship of Dr. A S Ganguly.
The Committee made 31 recommendations covering wide range of areas pertaining to financing of
SSI sector. The recommendations pertaining to RBI and banks have been examined and RBI has
accepted 8 recommendations so far and communicated to banks for implementation vide circular
RPCD.PLNFS.BC.28/06.02.31(WG)/2004 05 dated September 4, 2004 which are as under:
(i) adoption of cluster based approach for financing MSME sector;
(ii) sponsoring specific projects as well as widely publicising successful working models of NGOs
by Lead Banks which service small and tiny industries and individual entrepreneurs;
(iii) sanctioning of higher working capital limits by banks operating in the North East region to
SSIs (now MSE) , based on their commercial judgment due to the peculiar situation of hilly
terrain and frequent floods causing hindrance in the transportation system;
(iv) exploring new instruments by banks for promoting rural industry and to improve the flow of
credit to rural artisans, rural industries and rural entrepreneurs
6.4 Working Group on Rehabilitation of Sick SMEs (Chairman: Dr. K.C. Chakrabarty)
In the light of the recommendations of the Working Group on Rehabilitation of Sick MSEs
(Chairman: Dr. K.C. Chakrabarty, the then CMD of Punjab National Bank), all commercial
banks were advised vide our circular RPCD. SME &
a) put in place loan policies governing extension of credit facilities, Restructuring/Rehabilitation
policy for revival of potentially viable sick units/enterprises and non- discretionary One Time
Settlement scheme for recovery of non-performing loans for the MSE sector, with the approval of
the Board of Directors and
b) implement the recommendations with regard to timely and adequate flow of credit to the MSE
sector as detailed in the aforesaid circular.
Banks were also advised vide above circular dated May 4, 2009 to consider implementation of the
recommendations, inter alia, that lending in case of all advances upto Rs 2 crores may be done on
the basis of scoring model. Banks have further been advised vide circular DBOD. Dir.
BC.No.106/13.03.00/2013-14 dated April 15, 2014 to undertake a review of their loan policy
governing extension of credit facilities to the MSE sector, with a view to using Board approved credit
scoring models in their evaluation of the loan proposals of MSE borrowers.
6.5 Prime Minister’s Task Force on Micro, Small and Medium Enterprises A High Level Task
Force was constituted by the GOI (Chairman: Shri T K A Nair), in January 2010, to consider various
issues raised by Micro, Small and Medium Enterprises (MSMEs). The Task Force recommended
several measures having a bearing on the functioning of MSMEs, viz., credit, marketing, labour, exit
policy, infrastructure/technology/skill development and taxation. The comprehensive
recommendations cover measures that need immediate action as well as medium term institutional
measures along with legal and regulatory structures and recommendations for North-Eastern States
and Jammu & Kashmir.
Banks are urged to keep in view the recommendations made by the Task Force and take effective
steps to increase the flow of credit to the MSE sector, particularly to the micro enterprises.
A circular was issued to all scheduled commercial banks vide RPCD.SME&NFS BC.No.
90/06.02.31/2009-10 dated June 29, 2010 advising implementation of the recommendations of the
Prime Minister’s task Force on MSMEs.
6.6 Working Group to Review the Credit Guarantee Scheme for MSME
A Working Group was constituted by the RBI under the Chairmanship of Shri V.K. Sharma,
Executive Director, to review the working of the Credit Guarantee Scheme (CGS) of CGTMSE and
suggest measures to enhance its usage and facilitate increased flow of collateral free loans to MSEs.
The recommendations of the Working Group included, inter alia, mandatory doubling of the limit for
collateral free loans to micro and small enterprises (MSEs) sector from Rs.5 lakh to Rs.10 lakh and
enjoining upon the Chief Executive Officers of banks to strongly encourage the branch level
functionaries to avail of the CGS cover and making performance in this regard a criterion in the
evaluation of their field staff, etc. have been advised to all banks.
A circular was issued to all scheduled commercial banks vide
RPCD.SME&NFS.BC.No.79/06.02.31/2009-10 dated May 6, 2010 mandating them not to accept
collateral security in the case of loans upto Rs 10 lakh extended to units in the MSE sector and
advising them to strongly encourage their branch level functionaries to avail of the CGS cover,
including making performance in this regard a criterion in the evaluation of their field staff.
Annex I
MINISTRY OF SMALL SCALE INDUSTRIES NOTIFICATION : New Delhi, the 5th October, 2006
S.O. 1722(E) – In exercise of the powers conferred by sub-section (1) of Section 7 of the MSMED
Act, 2006 (27 of 2006) herein referred to as the said Act, the Central Government hereby specifies
the following items, the cost of which shall be excluded while calculating the investment in plant and
machinery in the case of the enterprises mentioned in Section 7(1)(a) of the said Act, namely:
(i) equipment such as tools, jigs, dyes, moulds and spare parts for maintenance and the
cost of consumables stores;
(ii) installation of plant and machinery;
(iii) research and development equipment and pollution controlled equipment
(iv)power generation set and extra transformer installed by the enterprise as per regulations of
the State Electricity Board;
(v) bank charges and service charges paid to the National Small Industries Corporation or the
State Small Industries Corporation;
(vi)procurement or installation of cables, wiring, bus bars, electrical control panels (not mounted
on individual machines), oil circuit breakers or miniature circuit breakers which are
necessarily to be used for providing electrical power to the plant and machinery or for safety
measures;
(vii) gas producer plants;
(viii) transportation charges (excluding sales-tax or value added tax and excise duty) for
indigenous machinery from the place of their manufacture to the site of the enterprise;
(ix)charges paid for technical know-how for erection of plant and machinery;
(x) such storage tanks which store raw material and finished products and are not linked with
the manufacturing process; and
(xi)firefighting equipment.
2. While calculating the investment in plant and machinery referred to in paragraph 1, the original
price thereof, irrespective of whether the plant and machinery are new or second hand, shall be
taken into account provided that in the case of imported machinery, the following shall be included
in calculating the value, namely;
(i) Import duty (excluding miscellaneous expenses such as transportation from the port
to the site of the factory, demurrage paid at the port);
Shipping charges;
(ii) Customs clearance charges; and
(iv)Sales tax or value added tax.
BUDGET 2016-17 ( Banking & Finance related )
RELIEF TO SMALL TAX PAYERS :Raise the ceiling of tax rebate u/s 87A from Rs.2000 to Rs.5000 to
lessen tax burden on individuals with income upto Rs.5 laks.
Increase limit of deduction of rent paid u/s 80GG from Rs.24000 p.a. to Rs.60000, as relief to those who live in
rented houses
CHANGES IN threshold limits: Payment to contractors : Aggregate annual limit Rs.100000 (existing
Rs.75000), Brokerage payments: Rs.15000 (existing Rs.5000)
Changes in FDI limits:
• Insurance and pension under automatic route : 49%
• Asset Reconstruction Companies under automatic route: 100%
• Indian stock exchanges : 15%
• FPI in Central Public Sector enterprises : 49%
• 100% FDI to be allowed through FIPB route in marketing of food products produced and manufactured
in India.
BOOST EMPLOYMENT AND GROWTH
• Increase the turnover limit under Presumptive taxation scheme u/s 44AD of the Income Tax Act to Rs. 2
crores to bring big relief to a large number of assesseesin the MSME category.
• Extend the presumptive taxation scheme with profit deemed to be 50%, to professionals with gross
receipts up to Rs.50 lakh. Phasing outdeductionunderIncomeTax:
• Accelerated depreciation wherever provided in IT Act will be limited to maximum 40% from 1.4.2017
• Benefit of deductions for Research would be limited to 150% from 1.4.2017 and 100% from 1.4.2020
• Benefit of section 10AA to new SEZ units will be available to those units which commence activity
before 31.3.2020.
Corporate Taxrate proposals:
• New manufacturing companies incorporated on or after 1.3.2016 to be given an option to be taxed at 25%
+ surcharge and cess provided they do not claim profit linked or investment linked deductions and do not
avail of investment allowance and accelerated depreciation.
• Lower the corporate tax rate for the next financial year for relatively small enterprises i.e. companies
with turnover not exceeding Rs. 5 crore (in the financial year ending March 2015), to 29% plus
surcharge and cess.
• 100% deduction of profits for 3 out of 5 years for startups setup during April,2016 to March,2019. MAT will
apply in such cases.
• Period for getting benefit of long term capital gain regime for unlisted companies is proposed to be reduced
from 3 to 2 years.
• NBFCs shall be eligible for deduction to the extent of 5% of its income in respect of provision for bad and
doubtful debts.
• Commitment to implement General Anti Avoidance Rules (GAAR) from 1.4.2017.
• MOVING TOWARDS A PENSIONED SOCIETY
• Withdrawal up to 40% of the corpus at the time of retirement to be tax exempt in the case of National
Pension Scheme (NPS). Annuity fund which goes to legal heir will not be taxable.
• For superannuation funds & recognized provident funds, including EPF, same norm of 40% of corpus to be tax
free will apply for corpus created out of contributions made on or from 1.4.2016.
• Limit for contribution of employer in recognized Provident and Superannuation Fund of Rs. 1.5 lakh per annum
for taking tax benefit. Exemption from service tax for Annuity services provided by NPS and Services provided
by EPFO to employees. PROMOTING AFFORDABLE HOUSING
• 100% deduction for profits to an undertaking in housing project for flats upto30 sq. metres in four
metro cities and 60 sq. metres in other cities, approved during June 2016 to March 2019 and
completed in three years. MAT to apply.
Deduction for additional interest of Rs.50,000 p.a. for loans up to Rs.35 lakh sanctioned in 2016-17 for
first time home buyers, where house cost does not exceed Rs 50 LAKH
FINANCIAL SECTOR REFORMS
• A comprehensive Code on Resolution of Financial Firms to be introduced.
• Statutory basis for a Monetary Policy framework and a Monetary Policy Committee through the Finance
Bill 2016.
• A Financial DataManagement Centre to be set up.
• RBI to facilitate retail participation in Government securities.
• New derivative products by SEBI in Commodity market.
• Amendments in the SARFAESI Act 2002 to enable the sponsor of an ARC to hold up to 100% stake in
the ARC and permit non institutional investors to invest in Securitization Receipts.
• Comprehensive Central Legislation to be bought to deal with the menace of illicit deposit taking
schemes.
• Allocation of Rs. 25,000 crore towards recapitalisation of Public Sector Banks.
• Target of amount sanctioned under Pradhan Mantri Mudra Yojana increased to Rs. 1,80,000 crore.
• General Insurance Companies owned by the Government to be listed in the stock exchanges.
GOVERNANCE AND EASE OF DOING BUSINESS
• Bill for Targeted Delivery of Financial and Other Subsidies, Benefits and Services by using the Aadhar
framework to be introduced.
• Price Stabilisation Fund with a corpus of Rs. 900 crore to help maintain stable prices of Pulses.
• 'Ek Bharat Shreshtha Bharat' program to be launched to link States/Districts in annual program that
connects people through exchanges in language, trade, culture, travel & tourism.
LATEST BANKING NEWS upto 30.06.2016 ( JUNE -2016)
RBI grants “in-principle” approval to three applicants for setting up Trade Receivables
Discounting System (TReDS): NSE Strategic Investment Corporation Limited (NSICL) and Small
Industries Development Bank of India (SIDBI), Mumbai; Axis Bank Limited, Mumbai; Mynd Solutions
Pvt. Ltd., Gurgaon, Haryana
Interest Rates on Advances (December 17, 2015): i) Internal Benchmark: All rupee loans sanctioned
and credit limits renewed w.e.f. April 1, 2016 will be priced with reference to the Marginal Cost of Funds
based Lending Rate (MCLR). (ii) The MCLR will comprise of: (a) Marginal cost of funds; (b) Negative carry
on account of CRR; (c) Operating costs; (d) Tenor premium; (iii) Marginal Cost of funds will comprise of
Marginal cost of borrowings and return on net worth; (vii) Spread: All banks shall adopt the following
broad components of spread: a). Business strategy; b) Credit risk premium; (viii) Interest Rates on
Loans: Actual lending rates will be determined by adding the components of spread to the MCLR; ix)
Exemptions from MCLR: a). Loans covered by schemes specially formulated by Government of India
wherein banks have to charge interest rates as per the scheme; b). Working Capital Term Loan (WCTL),
Funded Interest Term Loan (FITL), etc. granted as part of the rectification/restructuring package; c).
Loans granted under various refinance schemes formulated by Government of India; (d) Advances to
banks’ depositors against their own deposits; (e) Advances to banks’ own employees including retired
employees; (f) Advances granted to the Chief Executive Officer / Whole Time Directors; (g) Loans linked
to a market determined external benchmark; (h) Fixed rate loans granted by banks. x) Review of
MCLR: Banks shall review and publish their Marginal Cost of Funds based Lending Rate (MCLR) of
different maturities every month on a pre-announced date with the approval of the Board or any other
committee to which powers have been delegated. xi) (b) Weightage of Marginal cost of borrowings:
Marginal cost of borrowing shall have a weightage of 92% of Marginal Cost of Funds while return on net
worth will have the balance weightage of 8%; (c) Return on net worth: The weightage
given for this component in the marginal cost of funds will be 8%. (d)Marginal cost of funds =
92% x Marginal
cost of borrowings + 8% x Return on net worth
Regulatory relaxations for start-ups- Clarifications relating to acceptance of payments
(February 11, 2016): A start-up in India with an overseas subsidiary is permitted to open foreign
currency account abroad to pool the foreign exchange earnings out of the exports/sales made by the
concerned start-up. The balances in the said foreign currency account as due to the Indian start-up
should be repatriated to India within a period as applicable to realisation of export proceeds (currently
nine months). A start-up is also permitted to avail of the facility for realizing the receivables of its
overseas subsidiary or making the above repatriation through Online Payment Gateway Service
Providers (OPGSPs) for value not exceeding USD 10,000 (US Dollar ten thousand) or up to such limit
as may be permitted by RBI from time to time under this facility.
Revision of fee structue by CERSAI Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest (CERSAI) has revised the fee as under, w.e.f 1.2.2016:
Creation or modification of Security Interest in favour of secured creditors: (FORM I) - Rs.100 for a loan
above Rs.5 lakh and Rs.50 for a loan upto Rs.5 lakh.
2. Satisfaction of any existing Security Interest (FORM II): no charges
3.Securitisation or reconstruction of financial assets (FORM III) - Rs.500
4. Satisfaction of securitisation or reconstruction transactions (FORM IV) - Rs.50
5. Any application for information recorded / maintained in the Register by any person - Rs.10
6. Condonation of delay up to 30 days - Not exceeding 10 times of the basic fee, as applicable.
Modifications in the Interest Rate Cap under
Credit Guarantee Scheme (CGS) of CGTMSE On 30.09.15, CGTMSE had placed the interest cap up to
2% and 3% over the Base Rate for loans up to 50 lakh and loans above 50 lakh respectively on loans
eligible for guarantee cover. CGTMSE decided (Nov 16, 2015) to restore the earlier Interest Rate Cap of 4%
over the Base Rate i.e. any credit facility which has been sanctioned by MLI, under Credit Guarantee
Scheme (CGS), to an eligible borrower, with interest rate more than 4% over its Base Rate (BR) will not be
eligible for coverage under the CGS.
4. Ways & Means Advances: The limit for Ways and Means Advances (WMA) for the first half of
the financial year 2016-17 (April 2016 - September 2016) will be Rs 50,000 crore.
Revitalising Stressed Assets in the Economy (February 25, 2016): Strategic Debt Restructuring
(SDR) Scheme: The Strategic Debt Restructuring (SDR) has been introduced with a view to ensuring
more stake of promoters in reviving stressed accounts and providing banks with enhanced capabilities
to initiate change of ownership, where necessary, in accounts which fail to achieve the agreed critical
conditions and viability milestones. In case of divestment of banks’ holding in favour of a ‘new
promoter’, the asset classification benefit will be available provided banks divest a minimum of 26% of
the shares of the company (and not necessarily 51% ab initio as required hitherto) to the new
promoters within the stipulated time line of 18 months. Joint Lenders’ Forum Empowered Group (JLF –
EG): The decisions on the Corrective Action Plan (CAP) must be approved by a minimum of 75% of
creditors by value and 50% of creditors by number in the JLF.
VARIOUS RATES AT GLANCE

Bank Rate 7.00% 05.04.2016
CRR 4.00% 09.02.2013
SLR 21.25% 02.04.2016
Repo Rate 6.50% 05.04.2016
Reverse Repo Rate 6.00% 05.04.2016
MSF Rate 7.00% 05.04.2016
• INDIAN ECONOMY-IMPORTANT PARAMETERS
• RBI's growth estimate for 2016-17 : 7.6%
• GDP growth-2014-15 (revised estimate) : 7.6%
• GDP@constant mkt prices (cr) : 10656925
• GVA@2011-12 basic prices (cr) : 9857672
• GDP projected by Govt. for 2016-17 : 15065010
• Fiscal Deficit Target (2016-17) 3.5% of GDP : 533904 cr Revenue Deficit Target (2016-17) 2.3.% of
GDP : 354015 cr Share of service sector in GVA (2015-16) : 53.4%
• Share of manufacturing sector in GVA : 31.2%
• Share of agriculture sector in GVA : 15.3%
• Wholesale Price Index : 1.5%
• Money Supply (M3) expansion : 12.9%
• Exports during 2015-16 : 261.2 bn
• Imports during (2015-16) : 379.6 Bn
• Export target - 2015-16 (in $) : 310 bn
• India's share in world merchandise export : 1.70%
• India's currency rating (S&P) : BB Postv
• India's external debt (Mar 2016) US $ : 485.6 Bn
• Tax-GDP ratio (2014-15) : 9.93%
• Apr- May16:Export $ 42.7 bn$ Imports : 53.9 bn
• Per capita Income 2014-15 (Rs.) : 88533
Indian economy's ranking in PPP terms : 3rd Indian economy's ranking in world in value: 10th
5. Setting up of SME
India's economic policies are in process of restructuring to adjust to the emerging
challenges. The future of small and medium enterprises is a major policy concern because
of (a) their ability to contribute to Gross Domestic Product, exports, employment and to
reducing regional imbalances and (b) their vulnerability to external pressures and
competition. The Industries (Development and Regulation) Act, 1951 provided the basic
framework for the post-independence industrialization strategy. The regulatory framework
encompasses 56 Laws, 72 control orders, 165 Returns, and 60 Inspectors. This is
undergoing change with the enactment of MSME Development Act, 2006 and the rules
framed under it.
SME in its definition, is not uniform across the globe. In India, the words Micro and Medium
entered the enterprise dictionary as adjectives lately. Till then the sector was
known as small-scale industries sector. These SSIs are defined from various angles by various
agencies, institutions, and departments like the Labour Department or Factories Department.
The definition broadly rested on the value of investment in plant and machinery. Small Scale
Business Service Enterprises have also come to be defined under this category. In order to give
special emphasis for lending to this sector, the RBI has categorized them as priority sectors.
The definition that the MSME Development Act, 2006 adopted can be understood from the table
presented.
Each entrepreneur or set of entrepreneurs chooses one type of business organization or the
other to start with. Each form of organization has its own advantages and disadvantages: sole
proprietorship; partnership firms; joint stock companies- private or public limited companies;
joint Hindu family firms; and Limited Liability Partnership Companies.
Women enterprise development is around three decades' old in our country. According to
International Labour Organization, more than 45 percent of women all over the world, in the
age group of 15-64 years are contributing to the economy in a significant way. Women suffer
from two sets of discrimination:
1. pre-market discrimination, and
2. market discrimination, i.e., differential wages for similar work.
This section describes the status of women entrepreneurship. Various initiatives taken for the
development of women through training and concessions by the Ministry of MSME are making
significant positive outcome for the women entrepreneurs.
Micro enterprise development through self-help groups phenomenally stepped up the role of women as
entrepreneurs.
STARTING AN ENTERPRISE
An entrepreneur desirous of setting up an industrial venture has to, therefore, comply with a number of
formalities and take important decisions relating to which form of business organization he would
embrace and with what effects and for how long on the journey to progress or growth of the enterprise.
Although the MSMED Act also makes registration of an enterprise as optional, if the benefits of the Ad were
to be enjoyed, the entrepreneur is well advised to register. It has to be registered with the District
Industries Centre or the Directorate of Industries and Commerce. Apart from the registration of firms as
required under different forms of organization with the concerned Statutory Authority the enterprise has to
obtain PAN (Permanent Account Number) with the Income Tax Department and VAT registration number
with the Commercial Tax Department.
Where to Start? Plot or Shed; own or rented?
Several State Governments sell either developed plots or constructed shell space (sheds) in Industrial
Estates on hire purchase basis or outright sale. If the unit wants to test its waters it may choose not
to invest in fixed assets of such nature but take a lease place.
The entrepreneur should undertake initially a market survey to find out where his product will sell
and with what competitive forces operate. This should be part of the project proposal he submits to
the Bank.
CHOICE OF PLANT AND MACHINERY

The promoter, if he is a technologist or a qualified engineer well acquainted with the product
and manufacturing process, he may himself identify the plant and machinery required for his
venture. If he is desirous of seeking counseling, he may approach the MSME institutes. Some
states have Industrial Technical and Consultancy Organizations (APITCO in AP, ITCOT in Tamil
Nadu etc.) to offer valuable advices on this count, of course, for a price.
PO LL U TI O N C O N T R OL CL E A R A N C E
It is extremely important that an entrepreneur in his anxiety to set up an industrial venture
in the name of employment creation and exports cannot afford to ignore the environmental
concerns. When the process of manufacture releases toxic and harmful effluents affecting the
health of both the workers and the citizens residing close to the Unit, Pollution Control Board
has to give clearance and such clearance would be given only when the unit sets up effluent
treatment plant (ETP). The Board will examine the process contemplated for neutralizing the
effect of emissions, both gases, liquids and solids and gives such directions as warranted
technically for the purpose.
Registration has also to be done under the Factories Act that specifies the facilities that
the Industry has to put in place for safe running of the plant.
ESI Registration: Registration with the Employees State Insurance Corporation has to be 1
completed prior to commencement of production and procedures for deducting the
contributions from employees, and remittances of such deductions together with employers'
contribution have be clearly understood.
Many of such clearances are provided under the single window scheme in several States.
CUSTOMERS & THEIR ACCOUNTS
BANKER
The Banking Regulation Act 1949 (Section 5c) defines a banker as a person undertaking business of
banking. Banking means (Section 6) accepting deposits from public, for the purpose of lending or
investment, repayable on demand or otherwise withdrawable by , cheque, draft, order or otherwise.
CUSTOMER
There is no legal definition of a bank customer but from various judgements, a customer means a person
who opens account with the bank. When customer tenders an account opening form to open the a/c
(proposal) and banker accepts it (opens the account), a contractual relationship is established.
Initial deposit : The initial deposit for opening an account may be (a) cash, (b) cheque or (c) no deposit
even at the time of opening the account, as ZERO balance account (BSBDA) can be opened.
CUSTOMER AS PER KYC POLICY

As per RBI, for KYC policy, a 'Customer' may be defined as a person who is engaged in a financial
transaction or activity with a reporting entity and includes a person on whose behalf the person who is
engaged in the transaction or activity, is acting (Master cir 01.07.15).
Banker Customer Relationship and Accounts of Customers
1. Banker Customer Relationship
Bank is one which conducts business of banking. Banking has_been defined in Section 5 of Banking
Regulation Act.'Customer is not defined in any Act. However, it is defined in KYC norms. As per various
court decisions, any person for whom bank agrees to open an account is called as customer of the bank.
Various types of relationships
Type of Transaction Bank Customer
Deposit in the bank (CR balance in account) Debtor Creditor
Loan from. Bank (Debit balance in account) Creditor Debtor
Safe Deposit-Locker Lessor (Licensor) Lessee (Licensee)
Safe custody Bailee Bailor
Issue of draft (after issue of draft) Debtor Creditor
Payee of draft Trustee Beneficiary
Collection of cheque & Standing Instruction Agent P rin c ip a l
Goods left negligently by customer Trustee Be ne f i c i a ry
Purchase of cheque from customer Holder for value Endorser
Purchase/sale of securities on behalf of customer . Agent Principal
Currency Chest on behalf of RBI Agent Trustee RBI is principal
Money deposited. No instructions for its disposal. Beneficiary
Pledge Ea veda t el Mo rt gag ee Pawner (Pledger)
Mortgage Mortgagor Hypothecator
Hypothecation Hypothecatee
Assignment Assignee Assignor
ACCOUNTS OF CUSTOMERS
Partnership Firms
1. As per section 4 of the Indian Partnership Act, 1932 partnership is the relation between
persons who have agreed to share the profits of a business carried on by all or any of them acting
for all.
2. Minimum partners: A partnership firm should have minimum 2 partners.
3. Maximum partners: As per Companies Act 2013, an association of more than 100 persons which is not
registered as Company or Society will be an illegal association. Therefore, maximum number of partners can
be 100. (As per Companies. Act 1956, maximum number of partners could be 20 for any business other than
banking and 10 for banking business).
4. In case of Limited Liability Partnerships, there is no limit on maximum number of partners.
5. Who can become a partner?:. Only a person competent to contract can become partner.
Minor, insolvent, insane cannot become partners A company and a firm can become partner in another
firm.
6. Who can not become a partner?: HUF can not become partner as per judgement of the Supreme
Court because HUF is neither a legal person nor a natural person and can not be liable for action of others.
7. Partnership Deed: Partnership can be oral or in writing. Therefore, banks do not insist on
partnership deed while opening accounts of a partnership eencern.
8. Registration of Partnership: A partnership firm is registered with registrar of firms. Though, it
is not necessary that the firm be registered yet registration is ,preferred because an unregistered firm
can not sue others in its own name for recovery of its dues while others can sue it in its name.
Therefore, while granting loans banks prefer that the firm should be registered one.
9. Implied authority of partner: As per section 19 of the Partnership Act, 1932, a partner of a firm has
implied authority to act on behalf of the firm for the normal business of the firm and bind the firm. Alt actions
of the partner in the ordinary course of business are actions of all partners. However, in the absence of any
usage or custom of the trade to the contrary, a partner's implied authority does not cover '(a) admission of any
liability in a suit against the firm (b) withdrawal of any suit filed on behalf of the firm (c) acquire/transfer any
immovable property on behalf of the firm (d) submitting a dispute relating to the business of the firm to
arbitration (e) opening a bank account on behalf of the firm in his own name (f) compromising on behalf of a
firm (g) entering into partnership on behalf of the firm. But if all partners agree for these issues—and
authorize any one in this regard, these jobs can be undertaken by the said partner.
10.Liability of partner: As per section 25 of the Indian Partnership Act, 1932 every partner is liable, jointly with
all other partners and also severally, for all acts of the firm while he is a partner. Thus, liability of a partner is
unlimited. In case of Limited Liability Partnership, the liability of partner is limited up to the amount agreed to
be contributed by him.
11.Account of Partnership firm: For opening account of a partnership firm, all partners are required to
sign Account opening form except minor who is admitted for benefits of firm.
12.00erational Authority: In Partnership accounts operation authority is given by all partners. Any change in
the operational authority is also with the consent of all partners including those who were earlier not
authorized to operate. Every partner including a sleeping partner has authority to stop payment of a cheque
issued by another partner of the firm. The revocation of stop payment of cheque will be as per operational
authority._
13.As per section 18, a partner is the agent of the firm for the purpose of business-of the firm. Being an
agent, he can't delegate his authority to an outsider without the written consent of all other partners.
14.Death, insolvency, insanity of partner: On the death, insolvency or insanity of a partner, the partnership
is dissolved and operations are stopped. The cheques signed by the deceased, insane or insolvent partner
will
not be paid. If the account is in credit, operations are allowed for winding up of the firm. In such case
operations are allowed on the basis of a fresh mandate. It the account is in debit, operations in the
account should be stopped to retain liability of the deceased /insolvent partner or his/her estate and to
avoid operations of the Clayton's rule.
12. Limited Liability Partnership (LLP)
LLP, governed by Limited Liability Partnership Act 2008, was Introduced in India wef Apr 1, 2009. It
combines advantages of ease of running a partnership and separate legal entity status and limited liability
aspect of a company.
Main Features
• RoC has jurisdiction over the incorporation of LLP.
• LLP is a legal entity separate from its partners. It can own assets in its name, sue and be sued.
• It has perpetual succession (death of partner does not affect the existence of LLP).
• Partners have the right to manage the business directly (in a company shareholders do not ).
• A partner is not liable for another partner's misconduct or negligence, except in certain cases.
• Liability of a partner is limited to the extent of his contribution in the LIP. No exposure of personal assets of
the partner, except in cases of fraud.
• Minimum 2 individual Designated Partners should be there. At least one of them should be resident in
India. No limit on maximum no. of partners.
• Resident individuals, a company or an LLP can be partners (but not an NBFC).
• The rights and duties, are governed by an agreement between partners. If no agreement is made, the
rights & duties as prescribed under Schedule I to the LLP Act shall be applicable.
• LLP shall maintain annual accounts.
• Firms and companies can get themselves converted into LLP.
• 30 days notice is required to be given by a partner to other partners, to resign from LLP.
Limitations:
1. LLP cannot raise funds from Public.
2. Any act of the partner without the consent of other, may bind the LLP.
3. No separation of Management from owners
Accounts of Limited Companies

1. A limited company is an artificial person with perpetual succession incorporated under the
Companies Act.
2. Number of members: As per Companies Act 2013, in the case of a private limited company,
minimum number of members should be 2 and maximum number of members excluding employees
can be 200. For public limited company minimum number of shareholders should be 7 and there is no
ceiling on maximum number
3. Number of Directors: Minimum Directors in a public limited company should be three, in a private
limited company 2 and in One Person Company one. Maximum directors in all types of companies can be 15.
However, company may appoint more than 15 directors by passing a special resolution. An individual can not
be director of more than 20 companies at one time out of which public co should not be more than 10.
4. Shareholders are owners of the company, directors are agents of the company and debenture
holders are creditors of the company.
5. Documents for opening_ account: For opening account of a limited company bank should
obtain the following:
(a) Memorandum of Association: It contains name of the Company, its authorised capital,
registered office and liability of shareholders, objects of the company etc. Anything done by the directors
beyond the objects stated in the memorandum of association is called ultra-vices the company and can't
be ratified even in a general body meeting. Directors can borrow only for the objects mentioned in the
MOA. if any loan is given for objects other than those mentioned in Memorandum of Association, company
will not be liable for such loans.
(b) Articles of Association: lays down the internal working of the company like rights and
powers of the directors, rules of conducting meetings, borrowing power of directors etc.
(c) Certificate of incorporation : It is equivalent to birth registration certificate of the
company. This is the most important document. A company does not exist without it.
(d) Certificate of commencement of business: used to be issued by Registrar of companies.
Earlier it was required by public limited companies only. Now it is not required by either public
limited company or private limited company.
(e) Resolution of Board of Directors which is passed by the Board of Directors authorising opening
and operation of the account by named officials of the company. A copy of the resolution should be
attested by its Company Secretary and / or Chairman of the meeting at which resolution was passed.
(f) While opening account of a limited company, no introduction is required as Certificate of
incorporation is sufficient for that purpose. However, KYC norms are required to be applied on all persons
authorized to operate the account of company.
6. As per doctrine of 'Constructive Notice' anybody dealing with company is assumed to have
knowledge of Memorandum and Articles of Association.
7. Operational Authority: The operational authority is decided by Board Resolution. Any change in
operational authority is also as per Board Resolution. Stop payment of a cheque and revocation of stop
payment will be as per operational authority. The directors can not delegate their authority to any other
person.
8. In case a director dies, the cheques signed by him presented for payment can be paid if these
are otherwise in order and are dated prior to his death.
9. Common Seal of the Company is to be affixed on documents as per Articles of Association or
Board Resolution.
10.Borrowing powers of Directors: The borrowing powers of company arise from Memorandum of
Association. The Borrowing powers of directors are given in the Articles of Association. If it is not
mentioned in Articles of Association, it is equal to paid up capital and reserves of the company. The Board
of Directors of a public limited company or a private limited company which is a subsidiary of public limited
company can't borrow in excess of its paid-up capital and free reserves. If the directors want to borrow
more than the paid up capital and reserves of the company, consent of the shareholders is required in the
General Body meeting.
11.Winding up of company: Winding up can be (a) voluntary (b) Compulsory by court (c) through
court supervision.
Registration of Charge
1. When to be registered: Under section 77 of the Companies Act, 1956, a charge other than
created by way of pledge or lien, by a company is required to be registered with Registrar of
Companies (ROC).
2. Modification: Whenever, there is a change in terms and conditions of the loan, then the
particulars of Modification of charge should be filed with the ROC.
3. Satisfaction: When loan is repaid, particulars of satisfaction of charge should be filed with
ROC , within 30 days of the satisfaction of charge.
4. ROC with whom particulars to be filed: The particulars of the charge should be filed with the
Registrar of companies in whose jurisdiction the Registered Office of the Company is located.
5. Forms: For filing particulars of fresh charge, Form No. CHG 1 is required. Form used for
modification of the charge is same as that for fresh registration. For satisfaction of charge, Form No. CHG
4 is to be submitted.
6. Period for filing particulars: Particulars of charge are required to be filed within 30 days of creation of
charge.
7. Extension of Period of Registration: ROC can grant extension of 270 days in filing particulars
of charge. The company will be required to pay additional fees not exceeding 10 times the specified
fees. Beyond this period permission is required from Company Law Board.
8. Duty to file particulars of charge: It is the primary duty of the company to get the charge /
modification of charge / satisfaction of the charge registered with ROC. However, if the company does not
get the charge registered, bank in its own interest can file particulars of charge.
9. Consequence of non filing the particulars: In case the particulars of charge are not filed, the
bank becomes the unsecured creditor against the official liquidator.
10.Priority of charge: The priority of the charge is reckoned from the date of creation of charge (i.e. date of
documents) and not from the date of registration if the charge is registered within the stipulated period.
Other Provisions in summary, of Companies Act 2013

Registered office: A company shall, within 15 days of its incorporation, to have a registered office and
furnish its verification to ROC, within 30 days. Commencement of business: A company with share
capital can commence business or exercise borrowing powers after a declaration is filed with ROC that
the Paid-up capital is not less than Rs. 5 lac (public company) and Rs.1 lac (private company).
Board and Governance
Number of directors: Minimum : Public company -3 Private -2 , OPC-1. Maximum no. of directors :
15 (earlier 12). More can be added by special resolution without approval of Central Govt.
Woman director: At least one woman director shall be on Board.
Resident Director: A company to have min one director who has stayed in India for min 182 days in
previous calendar year.
Independent Directors: All listed companies shall have min one-third as independent directors.
Board meeting : At least 7 days' notice is required to be given for a Board meeting. For a Meeting at
shorter notice, at least one independent director shall be present at the meeting.
Managerial Remuneration : Maximum limit of 11% (of net profits) has been retained.
Financial Year: Year ending March 31.
Corporate Social Responsibility : A company with net worth of Rs. 500 crore or more, or turnover of
Rs. 1000 crore or more or a net profit of Rs. 5 crore or more during any financial year (FY), shall
constitute a Corporate Social Responsibility Committee (with 3 or more directors - at least one shall be
an independent director). The company should spend in every FY at least 2% of average net profits
during 3 immediately preceding FY in pursuance of its CSR policy.
Auditors : A company shall appoint an auditor at AGM to hold office till conclusion of 6th AGM.
The maximum number in which a person may be appointed as auditor is 20 companies.
Penalty for fraud related offences: Imprisonment up to 6 months which may extend to 10 years
and fine up to the amount involved which may extend to 3 times the amount involved. In fraud
involving public interest, imprisonment shall be min 3 years
National Financial Reporting Authority (NFRA) : Central Govt. can constitute NFRA for matters
related to accounting and auditing standards. NFRA have powers similar to a civil court under Code of
Civil Procedure, 1908, for trying a suit. NFRA can impose min penalty of Rs.1 lac, which may extend to
5 times in case of individuals; and min Rs.10 lac, which may extend to 10 times of the fees received, in
case of firms.
Serious Fraud Investigation Office (SFIO) : Investigation report of SFIO filed with the Court for
framing of charges shall be treated as a report filed by a Police Officer. SFIO can make arrest for
certain offences, which attract the punishment for fraud. National Company Law Tribunal and
Appellate Tribunal : The Central Government shall, constitute these Tribunals.
REGISTRATION OF CHARGE (COMPANIES ACT 2013)
Sec 77 - Duty to register charges : Every company creating a charge within or outside India, on its
assets or undertakings, whether tangible or otherwise, and situated in or outside India, is to register
the particulars of the charge with Registrar of Companies (ROC) within 30 days of its creation.
ROC may allow the registration within a period of 300 days of such creation. For period beyond 300
days, the company shall seek extension of time. On registration, ROC shall issue a certificate of
registration.
Effect of non-registration : Charge created by a company shall not be taken into account by the
liquidator or any other creditor, if it is not registered and a certificate of registration is not given by
ROC. Sec 78 - Application for registration of charge: Where a company fails to register within the
specified period, the creditor may apply to the Registrar within prescribed period. ROC, within 14 days,
after giving notice to the company, allow such registration.
Sec 80 - Notice of charge : If a charge is registered, a person acquiring such assets shall be deemed
to have notice of charge from date of registration.
Sec 81 - ROC Register of charges : ROC shall keep a register of charges registered, which shall be
open to inspection by any person on payment of fees.
Sec 82 - Satisfaction of charge : A company shall give intimation to ROC of the payment or
satisfaction in full, of any charge registered, within a period of 30 days from the date of such payment
or satisfaction.
ROC shall send a notice to creditor to show cause within such time not exceeding 14 days, as to why
payment or satisfaction in full should not be recorded. If no cause is shown, ROC shall enter the
satisfaction in register of charges kept by ROC.
Sec 86 - Punishment for contravention : If a company contravenes these provision, the company
shall be punishable with fine which shall not be less than Rs.1 lakh but which may extend to Rs.10
lakh. Every officer of the company who is in default, shall be punishable with imprisonment for a period
up to 6 months or with fine, not be less than Rs.25000 but which may extend to Rs.1 lakh, or with
both.
Accounts of Hindu Undivided Family (HUF)
1. HUF is neither a legal person nor a natural person, It is not created by agreement. 1t is not incorporated
under any Act. It is from—a-eornmon ancestor and membership is by birth or adoption.
2. The eldest coparcener including daughter is the Karta and continues to be Kerte even when
he/she lives outside India.
3. Operational authority to operate the account is with Kerte. Karta can appoint any other coparcener
or third party to conduct bUsiness of HUF and/or operate the account. Co parcener can not stop
payment of the cheque unless he is authorized to operate the account.
4. In case of death, insanity or insolvency of Karta, next seniormost member of family becomes Kerte.
5. The liability of Karta is unlimited while that of co parceners is limited up to their share in the firm.
Account of Trusts
Types of Trusts: Trusts can be of two types - private trusts where beneficiaries are certain
specified individuals or groups and public trusts where beneficiary is public at large. The document
creating a trust is called 'trust deed'. Public Trusts are registered with the Charity Commissioner.
2. Operational Authority: The operation and other aspects of the bank account are to be conducted as .per
the Trust Deed. Unless otherwise provided for in the trust deed, all trustees have to operate the account
jointly. Trustees can't delegate their powers to an outsider even by mutual consent.
3. Loan to a trust: Unless specifically provided for in the trust deed, no trustee can raise loan against
the security of the assets of the trust. Loan should be for the objects as mentioned in the Trust Deed.
4. On the death of a trustee, the trust property is passed on to the next trustee while in the event of
death of sole trustee or last surviving trustee, the court can appoint a trustee.
5. Death or insolvency of a trustee does not affect the trust property-and the bank can pay cheques
issued by the deceased trustee prior to his death.
6. Stop payment of a cheque and revocation of stop payment as per operational authority.
Account of Executors and Administrators

1. An executor is a person named by the deceased in his will to mange his estate whereas an administrator
is appointed by the court of law for the same purpose where the deceased dies without leaving behind a will.
2. Executors and administrators, are treated as one person. On opening a bank account, therefore,
executors/administrators can authorise any one or more of them to operate the account.
3. On the death of an executor or administrator, the surviving executor(s) or administrator(s) can
continue to operate the account unless otherwise provided for in the will or letter of administration.
4. While opening the account of an executor, bank should obtain letter of probate, which is an official
confirmation of the will of the deceased by a court of law. For opening account in the name of
administrator(s), letter of administration is required which is issued by the court of law.
Societies and Clubs

1. Societies and Clubs are non-profit making organizations.
2. These can be registered under Societies Registration Act 1860 with Registrar of Societies.
3. Societies can also be registered with Registrar of Companies under section 25 of Companies Act
which pertains to non profit making companies.
4. Documents to be obtained while opening the account: (i) Copy of Registration Certificate (ii) Copy of
Bye laws which contain rules and regulations (iii) Copy of resolution passed by the Managing Committee
which should include authority to open the account and operational authority.
5. Cheques presented after death of Secretary or Office Bearer: An=y cheque signed by the
Secretary of Club or Society or any other office bearer who is authorized to operate the account and
presented after his death can be paid provided if is otherwise in order and dated prior to his death.
MIN OR :
1. According to Indian Majority Act, a minor is one who has not completed 18 years of age. In case of a
minor, whose guardian is appointed by the court, the minority continues up to the age of 18 years. (earlier it
was 21 years) HO CIR 62/06
2. According to section 11 of the Indian Contract Act 1872, any contract with a minor is void ab initio and the
minor cannot ratify the same even after becoming a major.
3. In case of loan granted against deposits standing in the name of minor, we have to ensure that the
purpose for which loan is required is for the benefit of the minor.
ILLITERATES:
1. Normally left thumb impression should be obtained. If left thumb impression is not possible or practice
of the area is to take right thumb impression the same may be obtained.
2. There is no need to attest an agreement executed by an illiterate. Below the thumb impression,a
narration reading LT1/RT1 of has to be written.
3. In case of illiterate and also in case of those who sign in other language, it is necessary to explain the
contents of the documents to the party and obtain a letter of attestation/declarations in NF 821 to the effect
by a person knowing the language of the document.
Test Your self : Companies Act 2013
01 As per the Companies Act 2013, the maximum no. of share holders in a private company is
restricted to: a 20 b 50 c 100 d 200
02 The maximum of directors in a public company can be . without any permission
from Central Govt. as per provisions of Companies Act 2013: a 12, b 15, c 20 d 25
03 As per provisions of Companies Act 2013, if the no. of directors is more than the prescribed
number, the number of directors can be increased with : a consent of Board of Directors
b Special resolution from shareholders, c permission of Central Govt. d permission of SEBI
04 As per provisions of Companies Act 2013, the financial year of a company can be only:
a Jan to Dec ,b Apr to Mar, c Jul to Jun ,d any, at discretion of the company
05 A particular per'son can be director of maximum companies concurrently, as per provisions of
Companies Act 2013: a 12 b 15 c. 20 d 25
06 Out of the prescribed no. of maximum no. of directorships that can be held by a person
concurrently, the maximum number of such public companies can be as per provisions of Companies
Act 2013: a 10 b 12 c 15 d 18
07 For companies having networth of Rs. 500 crore or more or turnover of Rs. 1000 crore or more or
net profit of Rs. 5 crore or more during any financial year it is mandatory that it spends on corporate
social responsibility, at least of average net profit of immediately preceding 3 financial years for every
financial year, as per /provisions of Companies Act 2013 : a 2.5% , b 2.0%, c 1.5%, d 1.0%
08 Every listed company or every other company having a paid up share capital of Rs. of
more are mandatorily required to appoint at least one women director, as per provisions of Companies
Act 2013 : a Rs.500 cr b Rs.200 cr c Rs.100 cr d Rs.50 cr
09 As per provisions of Companies Act 2013, what is minimum paid'up capital of a private company
a Rs.1 lac b Rs.5 lac c Rs.10 lac d No condition
10 As per provisions of Companies Act 2013, what is the minimum paid up capital of a public company
: a Rs.1 lac b Rs.5 lac c Rs.10 lac d No condition
11 As per provisions of Companies Act 2013, what is the paid up capital of a small company (other
than a public company): a max Rs.10 lac b max Rs.20 lac ,max Rs.50 lac d max Rs.100 lac
12 As per provisions of Companies Act 2013, the minimum number of members in a company, is
wrongly stated in which of the following cases: a private company — minimum 2
b one person company — minimum 1, c public company — minimum 7, d none of the above
13 As per provisions of Companies Act 2013, the certificate of commencement of business is not
required by: a a subsidiary company , b a public company a private company, d none of the above
14 Where a company creates charge on its assets to secure a loan, it is required to get the charge
registered with Registrar of Companies as per Section of Companies Act 2013:
a Sec 77 b Sec 89 c Sec 105 d Sec 125
registered with Registrar of Companies as per provisions of Companies Act 2013 by filing the
particulars of charge within from date of creation of such charge: a 14 days b 20 days c 30 days d
45 days
registered with Registrar of Companies as per provisions of Companies Act 2013 by filing the
particulars of charge within the stipulated period that can be extended by with permission of
Registrar of Companies: a 30 days b 210 days c 270 days d 300 days
17 If a company fails to file details of charges for registration with Registrar of Companies within the
stipulated period, the charge holder can file the details for registration. In such case, the Registrar will
give days notice to the company as to why the charge should not be registered.
a 14 days b 20 days c 30 days d 45 days
18 If a company adjusted the loan where the charge is registered with Registrar of Companies and
makes request to the Registrar for satisfaction of charge, the Registrar will give days notice to
the
creditor as to why the charge should not be treated as satisfied. a 14 days b 20 days
e 30 days d 45 days
19 If a company contravenes provision relating to registration of charge, the company shall be
punishable with fine which shall not be less than but which may extend to
a Rs.l lac, Rs.5 lac, b Rs.I lac, Rs.10 lac , c Rs.2 lac, Rs.5 lac , d Rs.2 lac, Rs.I 0 lac
20 If a company contravenes provision relating to registration of charge, every officer of the company
who is in default shall be punishable with imprisonment for a term which may extend to 6 months or
with fine not be less than but which may extend to , or with both.
a Rs.10000, Rs.50000 , b Rs.20000, Rs.50000, c Rs.20000, Rs.1 lac, d Rs.25000, Rs.l lac
ANSWER
Q A Q A Q A Q A Q A
1 d 2 b 3 b 4 b 5 c
6 a 7 b 8 c 9 d 10 d
11 c 12 d 13 d 14 a 15 c
16 c 17 a 18 a 19 b 20 d
LISTS OF LAWS & ABBREVIATIONS

LIST OF LAWS
Labour Laws
1. Shops and Establishment Act, 1988
2. Factories Act, 1948
3. Indian Boilers Ad, 1923
4. Employees' Provident Funds and Miscellaneous Provisions Act, 1952/Employees' Provident
Funds Scheme, 1952
5. Employees' State Insurance Act, 1948/Regulations, 1950
6. Employment Exchanges (Compulsory Notification of Vacancies) Act, 1959
7. Industrial Disputes Act, 1947
8. Trade Unions Act, 1926
9. Minimum Wages Act, 1948/AP Rules
10. Payment of Bonus Act, 1965/Rules, 1975
11. Payment of Gratuity Act, 1972/Rules, 1972
12. Weekly Holidays Act, 1942
13. Workers' Compensation Act, 1923
14. Maternity Benefits Ad, 1961
15. Equal Remuneration Act, 1976
16. Apprentices Act, 1961
17. Collection of Statistics Act, 1953
18. Contract Labour (Regulation and Abolition) Act, 1970
19. Payment of Wages Act, 1936/AP Rules
20. Interstate Migrant Workmen (Regulation of Employment and Conditions of Service) Act,
1979
21. Bonded Labour System (Abolition) Act, 1976
22. Child Labour (Prohibition and Regulation) Act, 1986
23. Labour Laws (Exemption from furnishing returns and maintaining registers by certain
establishments) Act, 1988
24. Dangerous Machines (Regulation) Act, 1983
25. Industrial Employment (Standing Orders) Act, 1946
26. Fatal Accidents Act, 1855
27. Beedi & Cigar Workers (Conditions of Employment) Act, 1966
28. Employment of Children Act,1938
Environmental Laws
29. Water (Prevention and Control of Pollution) Ad, 1974
30. Air (Prevention and Control of Pollution) Act, 1981
31. Environment Protection Act, 1986
Financial Laws
32. Central Sales Tax Act
33. Central Excises and Salt Act, 1944
34. Debt Recovery Act, 1999
35. Delayed Payments Act,1994
Infrastructural Laws
36. State Panchayat Raj Ad
37. State Municipalities Act
38. State Town Areas Act
39. Urban Areas (Development) Act
40. Urban Land (Ceiling and Regulation) Ad, 1976
41. Indian Electricity Act, 1910
42. Electricity (Supply) Act, 1948/Rules
Corporate Laws
43. Companies Act, 1956 (Bill 1997)
44. Indian Partnership Act
45. Drugs & Cosmetics Act, 1940
Other Central Laws
46. Essential Commodities Regulation Order, 1975
47. Pharmacy Ad, 1948 --> Applicable for Pharma
48. Insecticides Act, 1968 0 Chemical Industries
49. Prevention of Food Adulteration Ad, 1954
50. Standards of Weights and Measures Act, 1976
ABBREVIATIONS
ACWW Associated Country Women of the World
AIC Agro Industries Corporation
ANC Ancillary Undertakings
APTDC A. P. Technology Development Centre (CII)
ASBA Alliance of Small Business Associations in the USA
ASI Annual Survey of Industries
ASSOCHAM Association of Chambers of Commerce and Industry
AWEK Association of Women Entrepreneurs of Karnataka
BDS Business Development Services
CAR Common Annual Return
CDCC Central Documentation and Clearance Centre
CDR Corporate Debt Restructuring
CGTMSE Credit Guarantee Fund Trust for Micro and Small Enterprises
CGTSI Credit Guarantee Trust for Small Industries
CII Confederation of Indian Industry
CITD Centre for International Trade in Agriculture and Agro-based Industries, New
Delhi
COSIA Chamber of Small Industry Associations
CRM Customer Relationship Management
CWEI Consortium of Women Entrepreneurs in India
CWEI Consortium of Women Entrepreneurs of India
DIC District Industries Centre
DICGC Deposit Insurance & Credit Guarantee Corporation
DRT Debt Recovery Tribunal
DWCRA Development of Women and Children in Rural Areas
EDIT Entrepreneurship Development Institute of India
EOU Export Oriented Units
EU European Union
EXIM BankExport Import Bank of India
FAPCCI Federation of Andhra Pradesh Chambers of Commerce and Industry
FAPSIA Federation of Andhra Pradesh Small Industries Association
FASII Federation of Associations of Small Industries of India
FDI Foreign Direct Investment
FICCI Federation of Indian Chambers of Commerce and Industry
FISME Federation of Indian Micro & Small and Medium Enterprises
FISME Federation of Indian Small & Medium Enterprises
FIWE Federation of Indian Women Entrepreneurs
FOSMI Federation of Small & Medium Industries
GATT General Agreement on Trade and Tariff
Gol Government of India
HUDCO Housing & Urban Development Corporation
HUF Hindu Undivided Family
ICSI Indian Council of Small Industry
ICWE India Council of Women Entrepreneurs, New Delhi
IDLSS Integrated Development of Leather Sector Scheme
IIA Indian Industries Association
IIC Industrial Infrastructure Corporation
IIE Indian Institute of Entrepreneurship, Guwahati
IRAC Income Recognition and Asset Classification
ISEC Interest Subsidy Eligibility Certification
JHF Joint Hindu Family
KVIC Khadi & Village Industries Commission
LLP Limited Liability Partnership
MFA Multi-Fibre Arrangement
MSE-CDP Micro & Small Enterprises Cluster Development Programme
MSMED Micro Small and Medium Enterprises Development
NABARD National Bank for Agriculture and Rural Development
NAYE National Alliance of Young Entrepreneurs
NGO Non-Governmental Organization
NIC National Industrial Classification
NIESBUD National Institute for Entrepreneurship and Small Business Development,Noida
NIMSME National Institute for Micro, Small and Medium Enterprises
NISBET National Institute of Small Business Extension Training
NMCP National Manufacturing Competitiveness Programme
NPA Non-Performing Asset
NPV Net Present Value
NRY Nehru Rojgar Yojna
NSIC National Small Industries Corporation
OECD Organisation for Economic Co-operation and Development
OGL Open General License
OTS One Time Settlement
PACS Primary Agricultural Cooperative Credit Society
PCB Pollution Control Board
PMEGP Prime Minister's Employment Generation Programme
PPP Public Private Participation
PRF Portfolio Risk Fund
PRODIP Product Development, Design Intervention and Packaging
QRs Quantitative Restrictions
RBI Reserve Bank of India
RGUMY Rajiv Gandhi Udyami Mitra Yojana
SEZ Special Economic Zone
SFC State Financial Corporation
SFURTI Scheme of Fund for Regeneration of Traditional Industries
SHG Self Help Group
SIDBI Small Industries Development Bank of India
SIDC State Industrial Development Corporation
SIDO Small Industries Development Organisation
SIIC State Industries Investment Corporation
SMERA Small & Medium Enterprises Rating Agency of India Ltd.
SMEs Small and Medium Enterprises
SNDP State Net Domestic Product
SPV Special Purpose Vehicle
SSIDC State Small Industries Development Corporation
SSSBE Small Scale Service and Business (industry-related) Enterprises
TANSTIA Tamil Nadu Small and Tiny Industries Association
TCO Technical Consultancy Organisation
TREAD Trade Related Entrepreneurship Assistance and Development
TRIPs Trade-Related Intellectual Property Rights
TRYSEM Training for Rural Youth for Self Employment
TUFS Technical Upgradation Fund Scheme
WE Town and Village Enterprises
UNIDO United Nations Industrial Development Organization
VAT Value Added Tax
WASME World Association for Small and Medium Enterprises
WASME World Association of Small and Medium Enterprises
WAWE World Association of Women Entrepreneurs
WE Women Enterprises
WTO World Trade Organisation
6. SME POLICY, REGULATORY & LEGAL FRAME WORK

Good Governance Initiatives for Support and Development of MSMEs in India
The Government and Reserve Bank of India have taken many initiatives for the promotion and
sustainable development of MSMEs. The latest in that effort is the "Make in India" programme launched
by the Prime Minister recently in 2014. This module provides a general scenario of the MSME sector in
India and also gives a view of all the recent initiatives taken by the Government and RBI. The trainer/
programme director should require the trainees to read the referenced documents, policy papers and
regulatory guidelines/ circulars before the training starts. The trainer, therefore, should focus on critical
issues and building blocks of the policies and regulations/ regulatory guidelines in order to have
interactive communications with the trainees on the enabling dimensions of the current and changed
policies / regulations that could help the trainees do the risk assessments in more involved ways and
derive assurances in relation to the financing proposals in the context of the national sensitivity
involved.
POLICY FRAMEWORK FOR SMEs IN INDIA

The approach to economic development since Independence has been historically driven by the
premise that the launching of large investment projects would inevitably result in the growth of
small industrial establishments to service the requirements of the "mother" industry. It was only
during the 1950-70 period that the growth of small industry sector occurred and several policy
measures were initiated.
India's industrial policies have been shaped in a wide range of contexts. However, the broad
policy thrust remains the same: to expand the capability of small and micro enterprises to
generate employment, promote exports, further the process of rural industrialization, facilitate
the development of appropriate technologies and new entrepreneurial skills.
The Industries (Development and Regulation) Act of 1951, provided the basic framework for
the post-independence industrialization strategy. Regulatory policies were laid down for the
regulation of licensing, location, production, pricing, imports, exports, foreign exchange
controls, inter-state movement of commodities and several other areas of industrial operation.
For small scale industries, there were regulations with regard to definition which was in terms
of ownership - i.e. a small scale unit had to be an entrepreneur-directed concern and not a
subsidiary to another industrial undertaking.
The Karve Committee Report (1955) was one of the earliest of the exercises which
recommended a protective environment for the growth of small industries in India. Supportive
policies through the 1960s, 70s and 80s took the form of reservation of products exclusively for
the SSI sector (at one point, 836 products were reserved exclusively for SSIs), grant of fiscal
concession and government procurement of supplies from the sector. For increased credit flow
to the SSI sector, a policy of priority sector lending through nationalized banks has been
followed, though this has not been adequate for the growth requirements of the sector. This is
perhaps the most compelling reason for the Expert Committee on Small Enterprises to state
that: "Small enterprises will continue to need exceptional support in terms of financial
resources, technological development and infrastructure." (Expert Committee on Small
Enterprises; 1997: 21). As the process of economic development led to changing priorities, the
policy focus shifted to regional imbalances (1977), ancillarisation (1980), exports and dispersal
in rural areas (1990) and then to small, tiny and village industries (1991) (Mahajan and Raju, 2002).
The industrial policy statements made periodically were not always translated into facilitative laws and
regulations, which beg for immediate attention of a Government that craves for accelerating the
reform process towards liberalization and globalization.
The evolution of the policy framework and support measures of the Government can be broadly
grouped into the following three periods:
1948-1991: In all the Policy Resolutions from 1948 to 1991, recognition was given to the micro
and small enterprises, termed as an effective tool to expand employment opportunities, help
ensure equitable distribution of the national income and facilitate effective mobilization of private
sector resources of capital and skills. The Micro, Small and Medium Enterprises Development
Organisation [earlier known as Small Industries Development Organization (SIDO)] was set up in
1954 as an apex body for sustained and organised growth of micro, small and medium enter-
prises. Within next two years, the National Small Industries Corporation, the Khadi and Village
Industries Commission and the Coir Board were also set up. The era provided the supportive
measures that were required to nurture MSEs, in the form of reservation of items for their
exclusive manufacture, access to bank credit on priority through the Priority Sector Lending
Programme of commercial banks, excise exemption, reservation under the Government Purchase
Programme and 15% price preference in purchases, infrastructure development and
establishment of institutes for entrepreneurial and skill development.
MSME — Development Institutes [earlier known as Small Industries Service Institute (SISI)] were set
up all over India to train youth in skills/entrepreneurship. Tool Rooms were established with German
and Danish assistance for providing technical services essential to MSEs as also for skill-training. At the
State level, District Industries Centres were set up all over the country.
1991-1999: The new Policy for Small, Tiny and Village Enterprises of August, 1991 laid the
framework for government support in the context of liberalisation, which sought to replace
protection with competitiveness to infuse more vitality and growth to MSEs in the face of foreign
competition and open market. Supportive measures concentrated on improving infrastructure,
technology and quality. Testing Centres were set up for quality certification and new Tool Rooms as
well as Subcontracting Exchanges were established. The Small Industries Development Bank of
India (SIDBI) and a Technology Development and Modernisation Fund were created to accelerate
finance and technical services to the sector. A Delayed Payment Act was enacted to facilitate
prompt payment of dues to MSEs and an Industrial Infrastructure Development (IID) scheme was
launched to set mini industrial estates for small industries.
1999 onwards : The Ministry of MSME [earlier known as Ministry of Small Scale Industries
and Agro & Rural Industries (SSI & ARI)] came into being from 1999 to provide focused
attention to the development and promotion of the sector. The new Policy Package
announced in August, 2000 sought to address the persisting problems relating to credit,
infrastructure, technology and marketing more effectively. A Credit Linked Capital Subsidy
Scheme was launched to encourage technology upgradation in the MSE sector and a Credit
Guarantee Scheme was started to provide collateral-free loans to micro and small
entrepreneurs, particularly the first generation entrepreneurs. The exemption limit for relief
from payment of Central Excise duty was raised to Rs.1 crore ($0.25 million) and a Market
Development Assistance Scheme for MSEs was introduced. At the same time, consultations
were held with stakeholders and the list of products reserved for production in the MSE
sector was gradually reduced each year. In 2006, the long-awaited enactment for this sector
finally became a reality with the passage of the Micro, Small and Medium Enterprises Act. In
March, 2007, a third Package for the Promotion of Micro and Small Enterprises was
announced which comprises the proposals/schemes having direct impact on the promotion
and development of the micro and small enterprises, particularly in view of the fast changing
economic environment, wherein to be competitive is the key of success.
POLICY INITIATIVES FOR THE FUTURE: PUBLIC-PRIVATE PARTICIPATION (PPP)
Greater participation between the public and private sectors is the framework for future
policy and regulatory interventions in more and more countries across the globe. PPP refers
to all joint initiatives of the public with the private sector and involves long-term
commitment of resources as well as sharing of risks. Several countries have made PPP
operational through policies aimed at strengthening market institutions. The forms of PPP
activities include dialogue platforms (such as deliberation committees), self-regulation
procedures, arbitration courts, formal training schools, infrastructural facilities and business
development services. (R.Strohmeyer, 2000). One of the most prominent examples of such
policies is the dual vocational training system adopted in Germany, which is financed by
government and organised by the Chambers of Commerce and Industry. PPP reduces
transaction costs, promotes self-regulation, enhances efficiency and leads to sustainable
policies through a more democratic participation of business with government. Public-
private participation points the way to better implemented policies and a more responsive -
demand-led - approach to institutional change.
WHY REGULATION?
There are a number of procedures to be followed by a small-scale industry at the stage
of setting up of the industrial unit and then going into production.
At the entry stage, a small scale unit is expected to get clearance in principle for
allocation of land, water, electricity, etc., and in some cases only, an approval that the
proposed to be manufactured in that quantity (e.g., defense equipment) [For a list of
clearances required see annexure]
The project implementation stage involves the conversion of the application after
clearance into actual supply of the commodity or the service. The risk at this stage is very
high because there is no proper monitoring to ensure that all applications will be dealt with in
the chronological order or with the same degree of objectivity.
The operational stage in the life cycle of a SSI unit relates to the maintenance of a large
number of registers whose i,umber, nature and use are not clear to the entrepreneur. There is
also a plethora of returns to be filed with different agencies. Each SSI unit has to cope with
inspections by various departments throughout the year.
Several State Governments in the post-liberalization period (after 1991), at various points of
time have formulated either laws or rules to provide single window clearance for setting up
any small scale enterprise within a set time frame. Some States like Andhra Pradesh,
Karnataka, Kerala, Tamil Nadu, UP, Punjab, Haryana, Gujarat, Maharashtra took the lead in
rationalizing returns and even inspections that were within their limited purview.
However, there are different definitions for certain terms like the 'wages', manufacturing,
factory, etc. applied under various Acts like the Factories Act, Industrial Disputes Act,
Employees State Insurance Act, Minimum Wages Act, Payment of Wages Act, High Court and
Supreme Court rulings etc. Even if industry stops production for reasons of viability it has
certain statutory obligations to electricity, revenue, and labour departments, it cannot wind
up its operations, notwithstanding the clearance of creditors' obligations. Small-scale
industries in the post-WTO regime had to prepare for the removal of quantitative restrictions
(QR) apart from gradual de-reservation. (Certain products were reserved for exclusive
production by the small scale industries that gave them protection from competition both
from within and outside the country, perpetrating inefficiencies in production and markets).
This scenario called for a structured statutory intervention to promote, develop and transform
the sector into a competitive sector. This gave birth to the new Law for the SSI sector. Since
the rest of the world has combined the small and medium enterprises under one umbrella
legislation — though the words small and medium
have their vcirying definitions — our country also thought of moving in tandem with the rest
of tha world for redefining the sector as SME sector. This also envisages that over a peric. , 2I
of time there could be easy facilitation for mergers, amalgamations, franchisee arrangements
across the globe particularly in the SME sector.
POLICY SHIFTS SINCE 1991

The New Industrial Policy 1991 has brought about several changes in the regulatory
framework for industry. All industries — except those in the public sector, and some specified
industries subject to compulsory licensing, and industries in the small-scale :;ectar — are
exempt from industrial licensing. Ever since, most states have been formulating their own
industrial policies with thrust areas relevant to their specific priorities. Since the size of the
industry in terms of investment, employment and turnover had a bearing on the starting,
running and growth of enterprises, Government of India, right from the year 1974 had been
mulling over bringing out a separate legal and regulatory framework governing the small scale
industries sector. Expert Committees set up under the Chairmanship of Abid Husain and S.P.
Gupta recommended that the Small Enterprises would require to be regulated and governed
more to make them competitive than protective through a separate umbrella type of
legislation. The exercise though originally started in 1974 by the Union Ministry Commerce
and Industries, became effective only in 1998 when the task of formulating a Draft Bill was
entrusted to the Administrative Staff College of India, Hyderabad, and later in 2005 got
widened to cover the medium enterprises as well. (Medium enterprises were not defined until
that date)
The policy shifts since 1991 — the widely recognized threshold of liberalization in India — are
presented in the Box.
Policy Package for SSI in 2000 shifts its gear to SMEs in 2006.
A Comprehensive Policy Package for SSI and Tiny Sector was announced by the Prime
Minister in August 2000 that later underwent a progressive change to convert the SME sector
as "India's engine of growth in the New Millennium." The supportive interventions outlined in
the Policy Package are summarized in the Table below.
Policy Package for SMEs Sector (2000)
SI. Type of Details
No. Suppor
1. Policy Support The investment limit for the SSI sector will be Rs. 50 million The Limited
Partnership Ad to be enacted soon.
2. Fiscal Support Exemption for excise duty limit raised from Rs.5 million to Rs.10 million
3. Credit ♦ The composite loans limit raised from Rs.

Support 1 million to Rs. 2.5million
♦ The SSBEs with a maximum investment of
Rs.1 million will qualify for priority lending
♦ In the National Equity Fund Scheme, the
project cost limit raised fromRs.2.5million
to Rs. 5million
♦ Eligibility limit for coverage under the Credit Guarantee Scheme has been
revised to Rs. 5million from Rs.2.5million
♦ Nayak Committee's recommendations regarding provision of 20 per
cent of the projected turnover as working capital is recommended to
the financial institutions and banks
4. Infrastructura ♦ The Integrated Infrastructure Development (IID) Scheme will
l Support progressively cover all areas of the country with 50 per cent
reservation for rural areas
♦ Detailed scheme for upgrading the Industrial Estates
♦ Plan Scheme for Cluster Development
5. Technological ♦ Capital Subsidy of 12 per cent for invest-
Support and ment in technology in select sectors.
Quality ♦ To encourage Total Quality Management,
Improvement the Scheme of granting Rs.75,000 to each unit for opting ISO-9000
Certification will continue till the end of the Tenth Plan
♦ Setting up of incubation centres in Sunrise
Industries will be supported
♦ Dissemination of the latest technology-re-
lated information to the R&D institutions in India and abroad
♦ One-time Capital Grant of 50% will be given
to Small Scale Associations which wish to develop and operate Testing
Laboratories, provided they are of international standard
3. Marketing ♦ SIDO will have a Market Development As-

Support sistance (MDA) Programme
4. Streamlining ♦ Repeal of laws and regulations applicable
Inspections/R to the sector that have since become redundant
ules and ♦ Self-certification will be progressively encour-
Regulations aged in lieu of inspections
5. Entrepreneurs ♦ Capacity building, both for entrepreneurs as

hip well as workers, will be given top priority
development RBI to draw up revised guidelines for the
6. Rehabilitation ♦
of Sick Units rehabilitation of currently sick but potentially viable units. Such guidelines
to be detailed, transparent and non-discretionary.
7. Improving ♦ A fresh Census of Small ScaleIndustries

the Data Base conducted covering, inter alio, the incidence of sickness and its causes
(2002-03).
After a prolonged discussion of the Small and Enterprise Development Bill of 2003 containing 11
chapters in various Forums, the Bill was referred to a Select Committee by the Parliament. Since
various representative associations of the small scale industries felt that the objectives of
legislation would jeopardize the interests of Micro enterprises, a more comprehensive legislation
came into being in the shape of Micro, Small and Medium Enterprises Development Act,
2006 (effective from 2nd October 2006).
While the various Provisions of the Act and the framework are furnished in the Annexure a few
essential provisions are mentioned below:
The objectives of the Act as spelt out in the preamble are to provide for facilitating the promotion and
development and enhancing the competitiveness of Micro, Small and Medium enterprises and for
matters connected or incidental thereto.
The MSMED Act, 2006 containing six chapters broadly deals with the following aspects.
Chapter I : This chapter deals with the preliminary aspects like Definition of Act, Date of
Commencement, terms like Days of acceptance, Day of deemed acceptance, buyer, enterprise, goods.
Chapter II : Deals with the setting up of National Board for Micro, Small & Medium Enterprises. The
Head Office of the Board shall be at Delhi. A Minister and Dy.Minister at the Centre, Six Ministers of
State Governments, five Members of Parliament, one Administrator of Union territory, Secretaries of
the Indian Govt., representatives of Industry, Finance, Food Processing, Labour and Planning,
Chairman of the Board of Directors of the National Bank; Chairman & MD of SIDBI, Chairman
IBA, 20 persons to represent micro, small and medium enterprises, 3 persons of eminence
from the fields of economics, industry and science & technology; 2 representatives of Central
Trade Unions; one Member-Secretary Ex-officio of the Board will be from Central Government
having administrative control of the small & medium enterprises; Powers of the Board;
Functions of the Board, Powers and Functions of the Member Secretary of the Board are spelt
out in the detailed Act.
Chapter III : Deals with Classification of enterprises, Advisory Committee and
Memorandum of Micro, Small & Medium Enterprises.
The Act has made clear distinction between the enterprises engaged in the manufacture or
production of goods pertaining to any industry specified in the first schedule to the Industries
(Development & Regulation) Act, 1951: size of enterprise is defined in terms of
manufacturing and services separately as detailed in the previous Chapter 1 (Para 1.5)
Advisory committees are also contemplated to be constituted to render advice on level of
employment, level of investment, nature of investment, Promoting and Diffusing of entrepreneurship
etc.
Chapter IIIA : Section 8 contains information about methodology and procedure to be
followed in respect of a person who intends to establish a Micro, Small or Medium
Enterprise. This section also deals with the procedure to be followed by any person who has
already established Micro, Small and Medium enterprise before commencement of the Act.
Chapter IV : Deals with measure for promotion, development enhancement of
competitiveness of Micro, Small and Medium Enterprises. The envisaged 5 steps include:
provision of market facilities, procurement preference policy, funds-grants by Central
Government, administration and utilization of fund or funds.
Chapter V : Deals with supportive measures to prevent delayed payments to Micro, and
small enterprises in respect of supplies made by them. This chapter deals with provisions
like, liability of buyer to make payment, date from which and rate at which interest is
payable, reference to Micro and Small entrepreneurs Facilitation Council. Application for
setting aside decree, award or order and establishment of Micro and Small Enterprises
Facilitation Council, interest on delayed payment not to be allowed as deduction from
income, overriding effect and lastly scheme for closure of business of Micro and Small
enterprises and the procedure thereon.
Chapter VI : Deals with Miscellaneous Provisions like the appointment of Officers and
other employees, levy of penalties, jurisdiction of courts, power to make rules by the Central
Government, and State Government, powers to remove difficulties in implementing act and lastly
Repeal of Act 32 of 1993.
Calculation of Investment in Plant & Machinery
The Central Government has specified that the cost of following items or following types of
costs/expenditures shall be excluded while calculating the investment in plant & machinery in case of
enterprises
1. Equipments such as tools, jigs, dies, moulds and spare parts for maintenance and the
cost of consumables stores
2. Cost of installation of plant & machinery
3. Research and development equipments, pollution control equipments, power generation
sets and extra transformers installed by the enterprises as per the regulations of State
Electricity Board
4. Bank charges and service charges paid to National Small Industries Corporation or State Small
Electricity Board
5. Costs of procurement or installation of cables, wiring, bus bars, electrical control panels,
oil circuit breakers or miniature circuit breakers which are necessarily to be used for
providing electrical power to the plant & machinery or for safety measures.
6. Gas producer plants
7. Transportation charges (excluding sales tax or value added tax or excise duty) for indigenous
machinery from the place of their manufacture to the site of enterprise
8. Charges paid for technical know-how for erection of plant & machinery
9. Such storage tanks which store raw material and finished products only and are not linked with
such manufacturing process
10.Fire fighting equipments.
It is to be noted that, while calculating the cost of plant & machinery the original price thereof
irrespective of whether the plant and machinery was new or second hand shall be considered
Procedural formalities
Schedule I of the MSMED Act, 2006 provides for the EM Form (Entrepreneurs Memoranda) for
setting up Micro, Small and Medium Enterprise. The Memorandum has two parts. Part-I shall be filed
for registration of the Enterprise and Part-II shall be filed after commencement of actual
manufacturing or production or actual starting of rendering of services by the enterprise.
Alternatively, it can be said that Part -II shall be filed by the Existing Unit. Four copies of
Memoranda are required to be filed with the District Industries Center as per Section 8 (1) of
MSMED Act, 2006. There are no fees for submission of the Memoranda. Application forms are
required to be obtained from the office of the District Industries Centre on payment of necessary
charges for the application. The forms are machine numbered and are required to be submitted
in physical form after filling up all necessary information.
Information required for registration
• Name and complete address of the Applicant. Address of location of the enterprise category
under which the registration is required
• Nature of activity
• Schedule of proposed investment in Plant & Machinery
• Type of organization
• NIC code of the activity - 5 digit code of INC 1998
• Proposed investment in fixed assets installed capacity
• Anticipated power load
• Other source of energy/ power supply
• Expected employment
• Entrepreneurs' profile
• Expected schedule of production/ activity
Advantages of Registration under the Act To the Undertaking

1. Remedy against delayed payments to Micro and Small Enterprises
a. Payment for goods and/ or services in case of supply of goods or services:The buyer of the
goods or person procuring services is required to make payment of the amount due to the
supplier within such period as may be agreed on by both of them subject to a maximum period of
45 days from the day of acceptance or the day of deemed acceptance of goods/ services
b.Payment of interest in case of delayed payments: In case of failure to make payment in time,
the buyer of goods/ services shall be liable to pay compound interest with monthly rests to the
supplier on the amount due from the appointed day (as per definition in the Act, appointed day
means, a day immediately after 15 days from the date of acceptance or the date of deemed
acceptance of the goods and/ or services) or, as the case may be, from the date immediately
following the date agreed upon, at three times of the bank rate notified by the Reserve Bank. It
is noteworthy that the Act requires the buyer of the goods/ services to specify the unpaid
amount with interest in the annual statement of accounts, where he is required to get his annual
accounts audited under any law for the time being in force and amount of such interest is not
allowed as a deduction from income while calculating income as per the Income Tax Act,.
c. Reference to Micro and Small Enterprises Facilitation Council - An aggrieved party may make a
reference to the Micro and Small Enterprises Facilitation Council with regard to any amount due.
2.Establishment of Micro and Small Enterprises Facilitation Council - The State Government shall,
by notification, establish one or more Micro and Small Enterprises Facilitation Councils for
considering the disputes, at such places, exercising such jurisdiction and for such areas, as may be
specified in the notification. Wherever the council receives any reference for recovery of delayed
payments, it shall either itself conduct conciliation in the matter or may make a reference to any
institution or centre providing alternate dispute resolution services for conducting conciliation and
the provisions of sections 65 to 81 of the Arbitration and Conciliation Act, 1996 shall apply to such
a dispute as if the conciliation was initiated under Part III of that Act. Where the conciliation is not
successful and stands terminated without any settlement between the parties, the matter will be
refereed to arbitration and the provisions of the Arbitration and Conciliation Act, 1996 shall then
apply to the dispute as if the arbitration was in pursuance of an arbitration agreement referred to
in sub-section (1) of Section 7 of that Act. Every such reference is required to be decided within 90
days of making of such reference.
3.Credit facilities - The policies and practices in respect of credit to the Micro, Small and Medium
Enterprises shall be progressive and such as may be specified in the guidelines or instructions issued
by the Reserve Bank of India, from time to time,
4.Scheme for closure of business of Micro, Small and Medium enterprises The power to notify a suitable
scheme with a view to facilitating closure of business by a Micro, Small or Medium Enterprise (other
than a Company registered under the Companies Act, 1956), has been granted to the Central
Government.
5.Procurement preference policy - The Central Government or the State Government may, by order
notify, from time to time, preference policies in respect of procurement of goods and services,
produced and provided by Micro and Small Enterprises, by its Ministries or Departments, as the case
may be, or its aided institutions and public sector enterprises.
Present Policy Framework and Focus Areas

The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 seeks to facilitate
the development of these enterprises as also enhance their competitiveness. It provides the
first-ever legal framework for recognition of the concept of "enterprise" which comprises both
manufacturing and service entities. It defines medium enterprises for the first time and seeks
to integrate the three tiers of these enterprises, namely, micro, small and medium. The Act
also provides for a statutory consultative mechanism at the national level with balanced
representation of all sections of stakeholders, particularly the three classes of enterprises;
and with a wide range of advisory functions. Establishment of specific Funds for the
promotion, development and enhancing competitiveness of these enterprises, notification of
schemes/programmes for this purpose, progressive credit policies and practices, preference in
Government procurement to products and services of the micro and small enterprises, more
effective mechanisms for mitigating the problems of delayed payments to micro and small
enterprises and assurance of a scheme for easing the closure of business by these enterprises
are some of the other features of the Act.
Foreign Direct Investment (FDI) Policy

With the promulgation of the MSMED Act, 2006, the restrictive 24% ceiling prescribed for
equity holding by industrial undertakings, whether domestic or foreign, in the MSEs has been
done away with and MSEs are defined solely on the basis of investment in plant and
machinery (manufacturing enterprises) and equipment (service enterprises). Thus, the
present policy on FDI in MSE permit FDI subject only to the sectoral equity caps, entry
routes and other relevant sectoral regulations.
7. INSTITUTIONAL FRAMEWORK & SME Financing

The importance of MSMEs is recognised in the 12 th five year plan for 'faster, sustainable and more
inclusive Growth (Planning Commission, 2011). It is understood that MSMEs provide a vehicle to
build more inclusive growth, with higher disbursement compared to larger scale enterprises. With
MSMEs, comes the opportunity for unrestricted creativity and innovation driven by individual of
entrepreneurship. Backed by Hon'ble Prime Minister Shri Modi's ambitious 'Make in India'
campaign, there are number of growth advantages that MSMEs can benefit from. They have
significantly higher labour to capital ratios and as such offer significant opportunities for job
production, as well as growth through rural urbanisation which comes as a result of a strong
degree of operational flexibility. The MSME sector remains one of the most cost-effective
employment creation resources. A number of capital resources can be mobilised by the increased
spread of entrepreneurship that would otherwise have been left immobile. Similarly, with
increased MSME job production comes the opportunity to utilise the nation's skills that may have
been left unutilised were over skilled workers to remain in unskilled jobs.
A vibrant MSME sector could create heterogeneous market that cuts across Technology,
Manufacturing and Pharmaceuticals sectors. This vibrancy manifests itselfin a variety of
enterprise sizes, varying levels of capital investments, varying outputs and ultimately highly
differentiated products that satisfy domestic demand and help the enterprises register an
increasingly strong global presence. As the strength of the MSME sector grows, India grows,
setting trends towards import substitution and development of indigenous technology. Presently,
the MSME entrepreneurs are fuelling a wave of socio-economic development across the country
through an increased sense of self-determination while shedding employee status. With MSMEs
increasingly being able to emerge close to both resources and markets, they are tending to come
together and exist inclusters. This presents the opportunity for them to benefit from certain
characteristics that give them a competitive advantage over other disparate MSME units and
sometimes even large enterprises. Whether it is a technology cluster that locates close to a
college to take advantage of skilled graduates or a manufacturing cluster that relies on local
resources, MSMEs can profit from grouping together into high concentration. The existence of
clusters often attracts the benefit of abundance of customers or company buyers where the
industry has a preference for cluster production.
Interestingly, the rapid growth in the MSME sector complements the growth in the larger
industries. The variety in scale of production gives alternative supply chain possibilities such as
an opportunity for outsourcing to smaller enterprises. Such a possibility emerges due to rapid
technological advances that enable small enterprises to compete. As such, growth has not
necessarily come at the expense of other enterprises. And here exists for the lenders an exciting
possibility of dovetailing large enterprise financing to the MSME financing and the vice versa.
Problems faced by MSMEs Financing Issues
Globally and historically, MSMEs often find themselves unable to access the finance required to
grow their businesses. This is exacerbated by very limited access to the capital market, so
financing usually relies on non-bank borrowing and/ or borrowing from outside the financial
system. The issue can be looked at from two sides of the table. For the banker, the issues pertain
to the inherent riskiness of providing the loans, as they look at the proposals through conventional
risk assessment lenses. For the MSMEs, the issue is the inability to meet the requirements of the
banks due to the limited information they could generate and provide to the banks. Loan
applications for such enterprises involve meeting a series of stringent requirements that banks
implement to assess and mitigate risks.Large number of MSME enterprises lack of experience to
effectively and meaningfully communicate with the bankers and even when they are able to
communicate they fail to offerusual types of mitigants like tangible collaterals. As such, some of
the requirements may not be satisfied, and loans may be refused, even if they represent a strong
investment choice. Even if these are met, there are extensive delays in sanctioning and
disbursement, which leads to cash flow issues, limiting technological investment and stifling innovation.
Information Asymmetries
For many MSMEs, the existence of information asymmetry between the lender and the borrower
is the cause for lack of finance. This is due to the lack of reliable financial and legal information
such as patents or financial statements. Accounting standard may not be followed and records of
payment behaviour will often be extremely limited. Thus, the banks do not find themselves in a
strong position to take an informed decision regarding the suitability of the company. This
manifests itself in increased transaction costs as risk is overestimated.
Lack of collateral
In the banking sector, use of collateral for guarantee of loans often provides a safety net against
the possibility of the loan becoming an NPA. The issue for MSMEs is that they may not possess
the necessary collateral that potentially guarantees their loans. This limits the ability of the
banks to provide them with the required finance to grow their business. If for example, the
enterprise sought finance to invest in new machinery to speed up the packaging of a particular
drug, the risk of using the machine as collateral is that it is extremely specialised, and would
struggle to regain anywhere near the original value should it need to be seized to repay the
loan. As such, these loans will often be either refused, or provided at exorbitant rates, imposing
a further cost on the enterprise.
Inadequate supply of raw materials
The requirement of raw materials for the production of goods is often reflected in the location of
MSMEs. Due to their small size, they cannot purchase in bulk and therefore do not benefit from
economies of scale. Furthermore, they may need to buy on credit, leading to further costs and
thus often they choose to purchase locally. In addition, a survey of 200 manufacturing SMEs
found that 91% cited raw material sourcing as the second biggest challenge after access to
finance, showing that procurement of inputs can be as problematic as the purchasing process.
The inconsistencies in the supply of high quality domestic raw materials can lead to enterprises
looking to imports, which come at a cost. The process of establishing and maintaining an efficient
procurement route is key to continued growth and development of MSMEs. In particular, with
MSMEs losing certain elements of protection such as the reservation of drugs for the production
in the MSME sector, they will need to ensure that they are able to compete on other factors such
as price or quality. This rests heavily on the ability of the enterprise to efficiently source the
materials required.
Infrastructure
Sufficient capacity in every area of infrastructure proves a major stumbling block for MSME
growth. Obsolescent technology in the manufacturing of goods and lack of provision of transport
infrastructure can lead to low quality, high cost products. In both respects, there are modern
technology requirements.
The reality for many MSMEs is the lack of capital to meet these demands. In each example, the
initial investment required puts much of this technology out of the reach of small enterprises who
ultimately struggle to raise finance. This can result in MSMEs employing more labour intensive
practices which, due to low relative cost of labour, keep initial costs low, but stifles innovation,
development and progression. Thus due to a high labour to capital ratio, the marginal
productivity of labour is low on account of diminishing marginal returns. Inversely, the marginal
productivity of capital is high. There is therefore, a higher opportunity cost of using funds to
employ labour, as the returns from technological investment would be higher, representing
foregone revenue and growth possibilities.
Furthermore, infrastructure difficulties exist outside the manufacturing and development process
for MSMEs. Insufficient capacity in transportation network causes logistical difficulties and
imparts unnecessary costs. These problems include road conditions, lack of capacity in airports
and docks, poor intercity connectivity and a lack of the development in alternative inland
methods of transportation. Moreover, the infrastructure that is in place is not sufficient to
manage the capacity in the system, thus leading to bottlenecks which impart time delays and
higher costs. Considering that the logistics sector is equally fragmented, many of the firms are
not in position to take advantage of economies of scale, pushing costs higher and restricting the
possibility for established logistics networks that ensure consistency in service.
Inadequate Knowledge and Access to Markets
Success in a particular industry relies on a working knowledge of what the consumer wants, how
best to deliver, and where the market is going. This requires a level of managerial and
technological competence and the ability to conduct market research. These possibilities are
limited by the enterprises' resources, in terms of both skilled labour availability and the capacity
to allocate resources towards R&D. Many MSMEs also remain unaware of the benefits and
consistency of using online advertising to promote products, services and the brand as a whole.
In addition, due to the make-up of the small scale industries, many generate most revenue from
the local market and as such look towards narrow field advertising such as print and electronic
media to reach customer.
Make in India Programme of Government of India (GOI)
Four Components of Make in India Programme (MIP)
• New Processes
• New Sectors
• New Infrastructure
• New Mindset
MIP is an initiative of the GOI, to encourage companies to manufacture their products in India. It
was launched by the Prime Minister on September 25, 2014.
Objective
The major objective is to focus on the 25 sectors of the economy for job creation and skill
enhancement.
Benefits
• To increase GDP growth and tax revenue.
• Aims at high quality standards and
• Minimizing the impact on the environment.
100% FDI under automatic route is permitted in construction, operation, maintenance and in specified
Rail Infrastructure projects such as:
1. Suburban corridor projects through PPP
2. High speed train projects
3. Dedicated freight lines
4. Rolling stock including train sets and locomotives/coaches manufacturing and
maintenance facilities
5. Railway electrification
6. Signaling systems
7. Freight terminals
8. Passenger terminals
9. Mass Rapid Transport Systems
Infrastructure in industrial park pertaining to railway line/sidings including electrified railway lines and
connectivity to main railway line
25 Sectors identified for Make in India

Automobiles Automobile Aviation Biotechnology Chemicals
Components
Construction Defense Electrical Electronic Food
Manufacturing Machinery Systems Processing
IT and BPM Leather Media & Mining Oil & Gas
Entertainment
Pharmaceuticals Ports Railways Renewable Roads &
Energy Highways
Space Textiles & Thermal Tourism &
Wellness
Garments Power Hospitality
New Processes
• Doing business in India just got easier - new de-licensing and deregulation measures are
reducing complexity, and significantly increasing speed and transparency. (Ease of doing
business)
• Process of applying for Industrial License & Industrial Entrepreneur Memorandum made online
on 24x7 basis through eBiz portal. Validity of Industrial license extended to three years.
• States asked to introduce self-certification and third party certification under Boilers Act.
• Major components of defense products' list excluded from industrial licensing.
• Dual use items having military as well as civilian applications deregulated.
• Services of all Central Govt. Departments & Ministries will be integrated with the eBiz - a
single window IT platform for services by 31 Dec. 2014.
• Process of obtaining environmental clearances made online.
Following advisories sent to all Departments/ State Governments to simplify and rationalize regulatory
environment.
• All returns should be filed on-line through a unified form.
• A check-list of required compliances should be placed on Ministry's/Department's web portal.
• All registers required to be maintained by the business should be replaced with a single
electronic register.
• No inspection should be undertaken without the approval of the Head of the Department.
• For all non-risk, non-hazardous businesses a system of self-certification to be introduced.
New Sectors
• India's manufacturing infrastructure and capacity for innovation is poised for phenomenal
growth: new smart cities and industrial clusters, being developed in identified industrial
corridors having connectivity, new youth-focused programs and institutions dedicated to
developing specialized skills.
• Impetus on developing Industrial Corridors and Smart Cities.
• A new 'National Industrial Corridor Development Authority' (NICDA) is being created to
coordinate, integrate, monitor and supervise development of all Industrial Corridors.
• Work on five smart cities in progress as a part of the Delhi-Mumbai Industrial Corridor (DMIC):
Dholera, Shendra-Bidkin, Greater Noida , Ujjain and Gurgaon.
• Chennai-Bengaluru Industrial Corridor (CBIC): master planning for 3 new Industrial Nodes
[Ponneri (TN), Krishnapatnam (AP), Tumkur (Karnataka)] in progress.
• The East Coast Economic Corridor (ECEC) with Chennai-Vizag Industrial Corridor (CVIC) as the
first phase of this project: Feasibility Study commissioned by ADB.
New Infrastructure
• Amritsar-Kolkata Industrial Corridor (AKIC): DMICDC selected as Nodal Agency for doing
Feasibility Study, which is being conducted at a fast pace.
• North-eastern part of India planned to be linked with other Industrial corridors in cooperation
with Government of Japan.
• New Industrial Clusters for promoting advance practices in manufacturing.
• Approval accorded to 21 Industrial projects under Modified Industrial Infrastructure Upgradation
Scheme with an emphasis on
a. Use of recycled water through zero liquid discharging systems.
b. Central Effluent Treatment plants.
• Approval accorded to 17 National Investment and Manufacturing Zones.
• Nurturing Innovation-approval obtained for strengthening Intellectual Property Regime in the
country.
New Mindset
Most importantly, the Make in India Program represents an attitudinal shift in how India relates to
investors
a. Not as a permit-issuing authority, but as a true business partner.
b. Dedicated teams that will guide and assist first-time investors, from time of arrival.
c. Focused targeting of companies across sectors.
Committee on Financial Architecture for MSME Sector
• It was set up by Ministry of Finance (MOF), GOI in September 2014.
• Chairman - Shri K V Kamath
• Report submitted in February 2015.
• The MSME sector, with its significant contributions to the Indian economy, is expected to
be one of the pillars of the Make in India push.
• However, to ensure that the MSMEs are well established as a bellwether of the Indian
economy, it is essential that enabling infrastructure, particularly in terms of financing of
MSMEs, is made available to them.
• The Committee has aimed to create an environment where they can thrive through not only
easier access to finance but also an entire enabling ecosystem where MSMEs are able to access
benefits created for them under a formal mechanism.
Key Recommendations
• Create an apex authority which would be called the National MSME Authority under the Ministry
of MSME which will create a centralized and integrated National MSME Portal for online
registration of MSMEs
• Achieve, in a time bound manner, universal financial inclusion of MSMEs by using the above
registration to ensure that every registered MSME has a bank account
• To facilitate ease of doing business by making changes in Acts.
• Increase the flow of equity to the MSME sector by operationalising the Rs. 10,000 crore fund
proposed in the Union Budget FY2014-15.
• Encourage establishment of an effective, online, technology-driven receivables financing
platform - (TReDS) of RBI.
• Expand coverage under and enhance effectiveness and utilization of credit
guarantee/insurance schemes and make the programmes accessible to a wider set of
credit providers.
• The financial architecture to serve the MSME sector should encompass a wider and deeper
set of entities which will include scheduled commercial banks, non-bank finance
companies, micro finance institutions, cooperative banks, the proposed new small finance
banks and the proposed Post Bank of India. (Hub-and-Spoke Approach).
• Encourage expansion of coverage of credit bureaus to include a wider range of credit
institutions and a wider range of transaction records to facilitate a better credit and
payment history of the buyer and the seller.
• Reducing operating costs
• Augmenting existing credit analysis processes with use of payment information for assessing
credit worthiness
• Reducing credit costs for financiers
• Reducing borrowing costs for MSMEs.
Key Elements
• Encouraging registration
• Opening of bank accounts
• Access to equity financing
• Creating a platform for receivables financing
• Expanding and enhancing guarantee cover
• Increasing distribution and reach to cover large number of Micro, Small and Medium Enterprises
(MSME) in the country through a wider base of financial intermediaries.
Organisational Setup
The M/o MSME has two Divisions called Small & Medium Enterprises (SME) Division and Agro &
Rural Industry (ARI) Division. The SME Division is allocated the work, inter- alia, of administration,
vigilance and administrative supervision of the National Small Industries Corporation (NSIC) Ltd., a
public sector enterprise and the three autonomous national level entrepreneurship
development/training originations. The Division is also responsible for implementation of the
schemes relating to performance and credit rating and assistance to training institution, among
others. SME Division is also responsible for preparation and monitoring of Results Framework
Document (RFD) as introduced in 2009 by the Cabinet Secretariat under Performance Monitoring
and Evaluation System (PMES). The ARI Division looks after the administration of two statutory
bodies viz. the Khadi and Village Industries Commission (KVIC), Coir Board and a newly created
organization called the Mahatma Gandhi Institute for Rural Industrialization (MGIRI). It also
supervises the implementation of the Prime Minister's Employment Generation Programme
(PMEGP).
The implementation of policies and various programme schemes for providing infrastructure and
support services to MSME's is undertaken through its attached office, namely the Office of the
Development Commissioner (Office of DC), National Small Industries Corporation (NSIC), Khadi
and Village Industries Commission (KVIC); the Coir Board, and three training institutes viz.,
National Institute for Entrepreneurship and Small Business Development (NIESBUD), NOIDA;
National Institute for Micro, Small and Medium Enterprises (NI-MSME), Hyderabad; Indian
Institute of Entrepreneurship (IIE), Guwahati and Mahatma Gandhi Institute for Rural
Industrialization (MGIRI), Wardha, a society registered under Societies Registration Act, 1860.
The National Board for Micro, Small and Medium Enterprises (NBMSME) was established by the
Government under the Micro, Small and Medium Enterprises Development Act, 2006 and Rules
made thereunder. It examines the factors affecting promotion and development of MSME, reviews
existing policies and programmes and makes recommendations to the Government for formulating
the policies and programmes for the growth of MSME sector.
Office of the Development Commissioner [MSME]

The Micro, Small and Medium Enterprises- Development Organisation (MSME-DO) is headed by
the Additional Secretary & Development Commissioner (MSME). The Office of the Development
Commissioner (Micro, Small & Medium Enterprises) assists the Ministry in formulating, co-
ordinating, implementing and monitoring different policies and programmes for the promotion
and development of MSMEs in the country. In addition, it provides a comprehensive range of
common facilities, technology support services, marketing assistance, etc. through its network
of 30 Micro, Small and Medium Enterprises-Development Institutes (MSMEDls); 28 Branch
MSME-Dls; 4 MSME Testing Centres (MSME-TCs); 7 MSMETesting Stations (MSME-TSs); 2
MSME-Training Institutes (MSME-Tls); and 1 MSME-Technology Development Center-Hand
Tools (MSME-TDC-Hand Tools). The DC (MSME) also operates a network of Tool Rooms and
Technology Development Centres (including 2 Footwear Training Institutes) which are
autonomous bodies registered as Societies under the Societies Act. The Office implements a
number of schemes for the MSME sector, the details of which have been duly incorporated in
this booklet.
National Small Industries Corporation Limited (NSIC)

NSIC, established in 1955, is headed by the Chairman-cum-Managing Director and managed by
a Board of Directors.
The main function of the Corporation is to promote aid and foster the growth of micro and
small enterprises in the country, generally on commercial basis. NSIC provides a variety of
support services to micro and small enterprises catering to their different requirements in the
areas of raw material procurement; product marketing; credit rating; acquisition of
technologies; adoption of modern management practices, etc.
NSIC implements its various programmes and projects throughout the country through its 9
Zonal Offices, 39 Branch Offices, 12 Sub Offices, 5 Technical Services Centres, 3 Technical
Services Extension Centres, 2 Software Technology Parks, 23 NSIC-Business Development
Extension Offices and 1 Foreign Office.
Khadi & Village Industries Commission (KVIC)

The Khadi & Village Industries Commission (KVIC), established under the Khadi and Village Industries
Commission Act, 1956, is a statutory organisation engaged in promoting and developing khadi and
village industries for providing employment opportunities in rural areas, thereby strengthening the
rural economy. The KVIC has been identified as one of the major organisations in the decentralized
sector for generating sustainable rural non-farm employment opportunities at low per capita
investment. This also helps in checking migration of rural population to urban areas in search of the
employment opportunities.
Mahatma Gandhi Institute for Rural Industrialisation (MGIRI)
The national level institute namely ‘Mahatma Gandhi Institute for Rural Industrialization (MGIRI)”
(erstwhile Jamnalal Bajaj Central Research Institute) has been established as a society under Societies
(Registration) Act, 1860 at Wardha, Maharashtra, to strengthen the R&D activities in KVI sector. The
main functions of the Institute are to improve the R&D activities under rural industrial sector through
encouraging research, extension of R&D, quality control, training and dissemination of technology
related information.
Coir Board
The Coir Board is a statutory body established under the Coir Industry Act, 1953 for promoting overall
sustainable development of the coir industry and improving the living conditions of the workers
engaged in this traditional industry. The activities of the Board for development of coir industries, inter-
alia, include undertaking scientific, technological and economic research and development activities;
developing new products & designs; and marketing of coir and coir products in India and abroad. It
also promotes co-operative
organisations among producers of husks, coir fibre, coir yarn and manufacturers of coir products;
ensuring remunerative returns to producers and manufacturers, etc. The Board has promoted two
research institutes namely; Central Coir Research Institute (CCRI), Kalavoor, Alleppey, and Central
Institute of Coir Technology (CICT), Bengaluru for undertaking research and development activities on
different aspects of coir industry, which is one of the major agro based rural industries in the country.
National Small Industries Corporation (NSIC) Ltd
The National Small Industries Corporation (NSIC) Ltd. was established in 1955 by the Government of
India with a view to promote, aid and foster the growth of small scale industries in the country. NSIC
continues to remain at the forefront of industrial development throughout the country with its various
programmes and projects to assist the MSMEs in the country. The main functions of the Corporation
are to promote aid and foster the growth of micro and small enterprises in the country, generally on a
commercial basis. It provides a variety of support services to micro and small enterprises by catering
to their different requirements in the areas of raw material procurement; product marketing; credit
rating; acquisition of technologies; adoption of modern management practices, etc. The NSIC is directly
operating different programmes by a dedicated team of professionals at all levels and operates through
142 offices located all over India and one office located at Johannesburg (South Africa).
National Institute for Micro, Small and Medium Enterprises

Entrepreneurship development and training is one of the key elements for the promotion of micro,
small and medium enterprises (MSMEs), especially for creation of new enterprises by the first
generation entrepreneurs. In order to inculcate the entrepreneurial culture amongst the first generation
of entrepreneurs on a regular basis, the Ministry has set up three national level Entrepreneurship
Development
Institutes viz; National Institute for Micro, Small and Medium Enterprises (ni-msme) (1960) at
Hyderabad ,The National Institute for Entrepreneurship and Small Business Development (NIESBUD)
(1983) at Noida (Uttar Pradesh), , and Indian Institute of Entrepreneurship (IIE) (1993) at Guwahati,
as autonomous societies.(NIESBUD and IIE have been transfered to MoSDE May 2015)
National Institute for Micro, Small and Medium Enterprises (ni-msme) is engaged in developing training
modules; undertaking research & training; and providing consultancy services for entrepreneurship
development & promotion of MSMEs, including enhancement of their competitiveness.
ni-msme proudly mentions to mention that during the last three years it has offered 4,931 training
programmes benefiting 1,63,823 participants consisting of prospective/existing entrepreneurs and
executives besides undertaking 31 research and consultancy projects, attaining a cumulative growth of
12,040 training programmes, 4,00,505 participants and 885 projects.
Over the years, ni-msme has expanded its reach to embrace the entire developing world. In the last
three years, it has offered 64 programmes benefiting 1,221 executives of the developing countries. So
far, 8,776 executives from 140 developing countries have profited from its expertise, knowledge and
resources. The Institute’s collaborative efforts with various international organizations and institutions
make its endeavours more meaningful and its reach more extensive.
National Board for Micro, Small and Medium Enterprises (NB MSME)
The range of development work in MSMEs involves several Departments/ Ministries and different
organisations of Central/ State Governments. To facilitate coordination and inter-institutional linkages
and in pursuance of the MSME Development Act, 2006, a National Board for Micro, Small & Medium
Enterprises consisting of a total of 47 members has been constituted with 20 non-official members. It
is an apex advisory body constituted to render advice to the Government on all issues pertaining to the
MSME sector. The Minister Incharge of MSME of the Government of India is the Chairman and the
Board comprises among others, State Industry Ministers, some Members of Parliament, Secretaries of
various Departments of Government of India, financial institutions, public sector undertakings, industry
associations and eminent experts in the field. The board meets periodically to take stock of the issues
pertaing to policy matters.Newly constituted Board has its 13th meeting recently.
International Cooperation (IC) Scheme

Technology infusion and/or upgradation of Indian micro, small and medium enterprises (MSMEs), their
modernisation and promotion of their exports are the principal objectives of assistance under the
Scheme. The Scheme would cover the following activities:(a) Deputation of MSME business delegations
to other countries for exploring new areas of technology infusion/upgradation, facilitating joint
ventures, improving market of MSMEs products, foreign collaborations, etc; (b) Participation by Indian
MSMEs in international exhibitions, trade fairs and buyer-seller meets in foreign countries as well as in
India, in which there is international participation; (c) Holding international conferences and seminars
on topics and themes of interest to the MSME. IC Scheme provides financial assistance towards the
airfare and space rent of entrepreneurs. State/Central Government Organisations, Industry/Enterprise
Associations and Registered Societies/Trusts and Organisations associated with the promotion and
development of MSMEs are eligible to apply.
Physical Performance:
During the year2015-16, financial assistance provided for 42 events and 650 entrepreneurs have been
taken part.
The financial performance of the scheme is given below: (In Rs. Crore)
Budget 2014-15 Expenditure 2014-15 Budget 2015-16
5.00 3.94 4.00
Assistance to Training Institutions Scheme

The Scheme envisages financial assistance for establishment of new institutions (EDIs), strengthening
the infrastructure of the existing EDIs and for supporting entrepreneurship and skill development
activities. The assistance shall be provided to these training institutions in the form of capital grant for
creation/strengthening of infrastructure and programme support for conducting entrepreneurship
development and skill development programmes. Maximum assistance for creation or strengthening of
infrastructure will be Rs. 150 lakhs on matching basis, not exceeding 50% of project cost. However, for
the North Eastern region (including Sikkim), Andaman & Nicobar and Lakshadweep, the maximum
assistance on matching basis would be Rs. 270 lakhs or 90% of project cost, whichever is less. Any
State/Union Territory Government, Training Institutions, NGOs and other development agencies can
apply for assistance for creation or strengthening of infrastructure. Training Institutions who wish to
conduct training programmes under the Scheme will have to enroll themselves with any of the three
National Level EDIs of the Ministry viz, NIESBUD, Noida; IIE Guwahati and NIMSME, Hyderabad.
Maximum assistance per trainee per hour for entrepreneurship development and skill development
programmes is Rs 50 (Rs. 60 for NER, A&N and Lakshadweep)
Physical Performance:
During the year2015-16, 1146 programmes held and 31275 persons were trained
87.00* 86.25 80.00
*Revised Estimate
MSME Talent/Job Melas
A new initiative was taken up under the ATI scheme in making available skilled persons for the MSMEs
in the country. As part of this, ni-msme conducted MSME Talent/ Job Melas at different places across
the country bringing employers and the skilled persons to a common platform. These melas are directly
providing employment to the trained youth and indirectly encouraging the youth to participate in
ESDPs, while also enhancing the success rate of the programmes. The details are as follows.
• States covered 8
• MSME Talent/Job Melas 87
• MSME’s participated 907
• Candidates selected 21,338
Survey, Studies and Policy Research
The main objectives of the Scheme are (i) to regularly/periodically collect relevant and reliable data on
various aspects and features of MSMEs, (ii) to study and analyze, on the basis of empirical data or
otherwise, the constraints and challenges faced by MSMEs as well as the opportunities available to
them in the context of liberalization and globalization of the economy,and (iii) to use the results of
these surveys and analytical studies for policy research and designing appropriate strategies and
measures of intervention by the Government. Several studies on the MSME sector and evaluation
studies of various schemes implemented by the Ministry have been completed under this scheme. The
financial performance of the scheme is given below: (In Rs. Crore)
1.00* 0.54 2.28
*Revised Estimate
Scheme of fund for Regeneration of Traditional Industries (SFURTI)
With a view to making the traditional industries more productive and competitive and facilitating their
sustainable development, the Govt. of India announced setting up of a fund for regeneration of
traditional industries. The objective is to organize the traditional industries and artisans into clusters to
make them competitive and provide support for their long term sustainability and economy of scale,
and providesustained employment for traditional industry artisans and rural entrepreneurs to enhance
marketability of products of such clusters by providing support for new products, design intervention
and improved packaging and also the improvement of marketing infrastructure. The objective is also to
equip traditional artisans of the associated clusters with the improved skills and capabilities through
training and exposure visits and to make provision for common facilities and improved tools and
equipments for artisans in order to strengthen the cluster governance systems with the active
participation of the stakeholders, so that they are able to gauge the emerging challenges and
opportunities and respond to them in a coherent manner.Funding for the cluster varies from Rs.1.5
Crore to Rs.8 Crore in view of the size and scale of the project. Funding pattern under the scheme has
provision for soft interventions including skill training, capacity building, design development, etc. hard
interventions including Common Facility Centres, Raw Material Banks(RMB), training centres, etc. and
cross cutting thematic interventions which include brand building & promotion, news media marketing,
e-commerce, innovation, R&D initiatives and developing linkages between clusters. The financial
performance of the scheme is given below: (In Rs. Crore)
10.00 0 50.00
Physical Achievements of SFURTI during 2015-16 (upto 31.12.15)
Year No. of Clusters No. of Clusters Total Approval Total Releases Estimated
Approved Approved (Rs. In cr) (Rs.in cr) artisans
(DSR) (DPR) covered
2015-16 67 26 54.47 20.75 25756
Market Promotion and Development Assistance (MPDA)
The MDA scheme of KVIC has been modified as Market Promotion Development Assistance scheme
(MPDA). MPDA scheme is formulated as a unified scheme by merging different schemes /sub-
schemes/components of different Heads implemented in the 11th Plan, namely: Market Development
Assistance, Publicity, Marketing and Market promotion and adds a new component of Infrastructure
(inclusive of new component of Marketing Complexes/Khadi Plaza).
The components of the scheme are as follows:
A. Modified MDA
The existing MDA scheme, had subsidy @ 20% on production value of Khadi to be distributed among
producing institutions (30%), selling institutions (45%) and artisans (25%). The Modified MDA shall be
at 30% of the Prime Cost and shall be distributed amongst producing institutions (20%), selling
institutions (40%) and artisans (40%). Under the Modified MDA, Pricing would be fully de-linked from
the cost chart and products can be sold at market-linked prices at all stages of production. Incentives
would be extended to other Artisans and Karyakartas
B. Publicity
Under the Publicity (currently under the Village Industry Grant), KVIC undertakes publicity of schemes
and products of the sector.
C. Market Promotion & Infrastructure
The new component of ‘Market Promotion & Infrastructure’ would encompass establishment of
Marketing Complexes/ Plazas (EMCP) with an outlay of Rs 60 Crore. This is a new inclusion under
Market Promotion & infrastructure. The maximum assistance per project will be limited to Rs.10 Crore.
D. Exhibitions (Foreign and Domestic)
Assistance would be provided under the scheme to the eligible KVIs for participation in International
Exhibitions/ Trade Fairs held in foreign countries in order to showcase Khadi & Village Industry
products to foreign countries, access international buyers and sellers and forge business alliances etc.
Budget Expenditure Budget Expenditure
2014-15 2014-15 2015-16 2015-16
201.83 196.94 178.00 *156.24

*Figure upto 31.12.2015
Interest Subsidy Eligibility Certificate for Khadi and Polyvastra:
The ISEC scheme is applicable for all registered institutions under KVIC / State KVIBs. The quantum of
subsidy shall be limited to the difference between the actual rate of interest charged by the financing
institutions and 4 (four) per cent to be borne by the borrower. If at any stage interest rate charged by
the KVIC is modified, the quantum of subsidy shall be limited to the difference between the rate of
interest charged by the financial institutions and such modified rate of interest. The financial
performance of the scheme is given below: (In Rs. Crore)
Budget 2014 - 15 Expenditure 2014 - 15 Budget 2015 - 16
40.63 38.32 40.07
Schemes for Coir Sector

Coir Vikas Yojana :Coir Board is implementing the Export Market Promotion Scheme for adoption of
strategic and aggressive product specific and market specific promotional programmes for popularizing
coir and coir products in markets abroad, supporting the export oriented industry on modernization
programme and to attain overall and sustainable development of Indian Coir Industry by participating
in international fairs / product promotion programmes/ seminars etc. and to assist the entrepreneurs to
participate in such programmes through export market development assistance scheme. TA financial
assistance of upto Rs.2.00 lakhs is provided to the eligible coir exporters to participate in the
international fairs/product promotion programmes etc. Assistance for publicity material up to 25% of
the production cost with over all ceiling of Rs.15000/- is also admissible.All micro, small and medium
exporters, with FOB turnover of less than Rs.2.00 crore worth coir and coir products in the previous
year and micro, small & medium entrepreneurs of coir and coir products, registered with the Coir
Board, would be eligible for assistance under the scheme, provided they have not availed the facility
from any other source for the same purpose or participated three times in the same exhibition to the
same destination thrice with government assistance.
29.30 29.28 26.37
Coir Udyami Yojana
The objective of the scheme is to Rejuvenate, Modernize and Technologically Upgrade the most crucial
link in the Coir production chain, namely Spinners and Tiny Household sector. The scheme envisages
replacement of outdated ratts/looms and providing of worksheds to spinners and tiny household units
resulting in increase in production and earnings of workers. Any individual above 18 years of age with
Indian Citizenship can apply under the scheme. There will be no income ceiling for assistance for
setting up of project under CUY Scheme.Assistance under the Scheme is only available for projects for
the production of coir fibre/yarn/products etc. coming under coir sector.Assistance will be made
available to individuals, Companies, Self Help Groups, NGO, Institutions registered under Societies
Registration Act 1860, Production Co¬operative Societies, Joint Liability Groups and Charitable Trust.
The SC/ST, Women, NER and Andaman and Nicobar Island and Lakswadweep beneficiaries will be
given priority. The financial performance of the scheme is given below:
(In Rs. Crore)
7.30 4.00 20.00
RECENT INITIATIVES OF THE MINISTRY
ASPIRE: A Scheme for Promoting Innovation and Rural Entrepreneurship

A Scheme for Promotion of Innovation, Rural Industry and Entrepreneurship was launched by the
Ministry on 18.3.2015. The scheme was formulated to set up a network of technology centres and to
set up incubation centers to accelerate entrepreneurship and also to promote start-ups for innovation
and entrepreneurship in agro-industry. The scheme emanates from the Finance Minister’s budget
speech for 2014-15, whereby, he has suggested establishing Technology Centre Network to promote
Innovation, Entrepreneurship and Agro Industry with a fund of Rs.200 crore. ASPIRE is designed to
provide necessary skill set for setting up business enterprises and also to facilitate the market linkages
available to entrepreneurs and to provide hand holding for a critical period to ensure self-
sustainability.The most important component is to set up Livelihood Business Incubators (LBI) under
National Small Industries Corporation (NSIC), KVIC or Coir Board or any other Institution/agency of
GOI/State Govt. or under PPP mode with these institutions. The next important component is to set up
Technology Business Incubators (TBI) at twin levels, i.e. supporting existing incubation centres
operated currently under different Ministries and Departments of the Government of India or
Institutions including National / Regional level institutions of GOI / State Governments to set up such
centre dedicated to incubation and enterprise creation in the area of Agro based Industries and also
new incubation centres to be set up by eligible private institutions including Industry Associations,
along with the Academic Institutions, R&D laboratories, Universities, Government entities and
Technology Parks. The last important component is to create a framework for Start-up Promotion
through Small Industries Development Bank of India (SIDBI) by using innovative means of finance like
Equity, Quasi-Equity, Angel fund, Venture capital fund, Impact funds, Challenge funds etc. to enable
ideas/innovation with creativity and scalability to come to the fore and convert these into commercial
enterprises with specific outcomes and within a specific time period. The financial support under LBI is
upto Rs.1 crore for NSIC & others and Rs.50 Lakh for PPP incubators. For setting up of TBI, the
assistance is for Rs.30 Lakh for existing and Rs.1 Crore for new incubators. Other financial support
includes funds for incubation of ideas @Rs.3 lakh per idea and a seed capital of Rs.1 Crore for setting
up of start-ups by the incubators. Under the scheme, 500 new incubation centers will be set up all over
India by next year.
Current Status:
• 1st Livelihood Business Incubator (LBI) has been set up in Deoria, Uttar Pradesh on 15.04.2015
by NSIC.
• Subsequently 21 LBIs have been approved with sanction of funds of Rs.20.67 Crore and Rs.7.21
Crore has been released. The 2nd Centre was inaugurated on 18rd December 2015 at Rajkot Gujarat.
• 2 TBIs have been approved in the States of Tamil Nadu (Thiruchirapally) and Maharashtra
(Pune).
• For creation and setting up of ASPIRE Fund of Funds, Rs.60 Crore has been released to the
SIDBI.
• In the first year of the scheme, as of now, LBIs and TBIs are set up/proposed across 12 States
of the country including NER.
• As on 15.01.2016 a batch of 217 incubates involved in 8 different training modules have passed
out from Deoria Centre and another batch of 160 incubates are undergoing training. In the Rajkot
centre, a batch of 88 incubates are undergoing training involving 7 training modules.
New Initiatives Under PMEGP
In order to expand the scope of PMEGP negative list of the PMEGP Guidelines has been modified. Under
the Modified Guidelines, the following activities have now been allowed:
• Industries such as processing of pashmina wool and other products like hand spinning and hand
weaving.
• All rural and urban transport activities.
• Value added Products for Tea, Coffee, Rubber etc. sericulture, Horticulture, Floriculture.
Instructions have been issued to the concerned agencies for implementation of the concept of one
nodal branch of each Public Sector Bank in each State. All the nodal branches of the banks under
PMEGP have been connected through Central Plan Scheme Monitoring System (CPSMS) under PFMS
(Plan Financial Management System) to monitor the flow of funds. Regular updating of the database is
being done directly by the nodal branches.
To bring in transparency in implementation of PMEGP scheme as well as to create data base of PMEGP
beneficiaries, e-tracking of PMEGP applications has been introduced. In order to bring about
transparency in the processes, better governance and check corruption in implementation, KVIC has
introduced an electronic tracking system for online tracking of all cases under this scheme, beginning
with filing of application to selection, sanction, disbursal, setting up of unit and its physical verification.
Applicants will be able to view the status of their cases online.
The PMEGP and REGP units have been enabled to register online for filing Entrepreneurship
Memorandum (EM-1)-Application for industrial land application for credit, pollution clearance etc. so
that the entrepreneurs can obtain the benefits under the EM-1 of Ministry of MSME.
MoU with RSETI to impart EDP training: KVIC has executed an MoU on 20th February 2015 with
National Association of RSETI (Rural Self Employment Training Institutes) to impart EDP training
through the 578 training centers of RSETI/RUDSETI under PMEGP.
Revamped Coir Udyami Yojana (CUY) & Coir Vikas Yojana (CVY)
Central Sector Schemes being implemented by the Coir Board namely “Rejuvenation, Modernization
and Technology Up -gradation”(REMOT) and “Coir Plan (General)” Scheme, have been re-named as
Coir Udyami Yojana (CUY) and Coir Vikas Yojana (CVY) respectively to make it better understood by
the Stakeholders. CUY is a credited linked subsidy scheme in coir sector, aims to integrate and develop
coir units. The scheme provides 40% as Govt. subsidy, 55% as Bank loan and 5% beneficiary
contribution for setting up of coir units with project cost up to Rs.10.00 lakh (revised from Rs.5.00
lakh).Coir Vikas Yojana (CVY) envisages training for men & women coir workers and providing
subsidized Ratts to women workers apart from providing assistance for setting up and expansion of coir
units. Assistance under CVY is also provided for participation in international and domestic
exhibitions/Fairs. Coir Board won Gold Medal in ITPO exhibition in Nov 2015.
Technology Centre Systems Programes
Under Technology Centre System Programme (TCSP), 15 New Technology Centres (Tool Rooms) would
be set up and existing Tool Rooms would be upgraded with support of World Bank. The expanded and
upgraded network would be supplied by (a) Technology partners to strengthen technical capabilities of
MSMEs (b) Clusters Network Managers to establish linkages amongst all key stakeholders of entire
ecosystem and (c) National portal for creating a vibrant and interactive platform to meet various needs
of MSMEs. Loan Agreement between GOI and World Bank has been signed on 10.11.2014 and the loan
has become effective w.e.f. 19.12.2014. Locations have been identified at 10 states and a total of 160
acres of land has been taken possession at 10 places.
Udyog Aadhaar :Ease of Registration Process through Udyog Aadhaar Memorandum (UAM) :
Based ontheHon’ble Prime Minister’s suggestionin his ‘Mann Ki Baat’, on 3.10.2014, to simplify forms to
enable ease of registration of MSME’s, Ministry has notified a simple one-page registration Form ‘Udyog
Aadhaar Memorandum’ on 18th September, 2015 in the Gazette of India Vide Notification Number S.O
2576 (E). The simplified one page registration form “Udyog Aadhaar” was madeafter consultations with
the states and stakeholders, onrecommendation made by the Kamath Committee and
observations/approvals by Department Related Parliamentary Standing Committee, National Board and
Advisory Committee etc. This is inline with Prime Minister’s announcement with regard to dispensing
with requirement of attestation of documents to be replaced with self-attestation of document. The
salient features of the Udyog Aadhaar Memorandum are
• The one page simplified registration Form would constitute a self declaration format under which
the MSME will self certify its existence, bank account details, promoter/owner Aadhaar details, other
minimum basic information required, etc
• Creating a business friendly environment with easy entry and exit procedures to encourage
entrepreneurial activity.
• Encouraging States to strengthen existing ‘Single Window System’ with a High Power
Committee empowered go give all necessary clearances for setting up a business.
• There shall be no fee for filing the UAM
Quality Management System (ISO) in Ministry of MSME, KVIC, Coir Board and ni-msme
The Ministry of Micro, Small and Medium Enterprises has been awarded ISO 9001:2008 certification,
demonstrating the Ministry’s mission of promoting the growth and development of Micro, Small and
Medium Enterprises with dedication and commitment. It is a matter of pride that the Ministry is one of
the first in Government of India to be awarded ISO certification for Ministry-wide application.
Implementation of ISO standards will enable the Ministry to identify areas for improvement and also
bring in transparency and accountability in the functioning. Similarly Organizations of the Ministry viz.
KVIC, Coir Board and ni-msme have also adopted ISO standards and have obtained certification.
Development Commissioner (DC-MSME) Schemes

Related scheme: 1. Credit Guarantee
Description Ministry of Micro, Small and Medium Enterprises, GoI and Small Industries
Development Bank of India (SIDBI), established a Trust named Credit Guarantee Fund Trust
for Micro and Small Enterprises (CGTMSE) to implement Credit Guarantee Fund Scheme for
Micro and Small Enterprises. The corpus of CGTMSE is being contributed by GoI and SIDBI.
Nature of assistance Collateral free loans up to a limit ofRs.50 lakh - for individual MSEs
Who can apply Both existing and new enterprises are eligible to be covered under the scheme.
How to apply Candidates meeting the eligibility criteria may approach banks/financial
institutions, which are eligible under the scheme, or scheduled commercial banks and select
Regional Rural Banks.
Related scheme: 2. Credit Linked Capital Subsidy (CLCS) forTechnology Upgradation
Description Technology upgradation would ordinarily mean induction of state-of-the-art or near

state-of-the-art technology. In the varying mosaic of technology obtaining in more than 7,500
products in Indian small scale sector, technology upgradation would mean a significant step up
from the present technology level to a substantially higher one involving improved productivity,
and/or improvement in quality of products and/or improved environmental conditions including
work environment for the unit. It includes installation of improved packaging techniques as well
as anti-pollution measures and energy conservation machinery. Further, units in need of
introducing facilities for in-house testing and on-line quality control would qualify for assistance,
as the same are a case oftechnology up-gradation.
Replacement of existing equipment/technology with same equipment/ technology will not
qualify for subsidy under this scheme, nor would the scheme be applicable to units
upgrading with second-hand machinery.
Nature of assistance The revised scheme aims at facilitating technology upgradation by
providing 15% up-front capital subsidy to SSI units, including tiny, khadi, village and coir
industrial units, on institutional finance availed by them for induction of well established and
improved technologies in specified sub-sectors/products approved under the scheme.
Revised CLCS has been amended as follows:

(a) Ceiling on loans under the scheme has been raised from Rs.40 lakh to Rs.1 crore
(b) Rate of subsidy has been enhanced from 12% to 15%.
(c) Admissible capital subsidy is calculated with reference to purchase price of plant and
machinery, instead of term loan disbursed to the beneficiary unit.
(d) Practice of categorisation of SSI units in different slabs on the basis of their present
investment for determining eligible subsidy has been done away with; and
(e) Operation of the scheme has been extended up to 31st March, 2007. The above
revisions/amendments are effective from September 29, 2005.
Who can apply Eligible beneficiaries include sole proprietorships, partnerships, co-operative
societies, and private and public limited companies in the SSI sector. Priority shall be given
to woman entrepreneurs.
How to apply Candidates meeting the eligibility criteria may approach all scheduled commercial
bank, scheduled cooperative bank [including urban cooperative bank co-opted by SIDBI
under Technological Upgradation Fund (TUF)], Regional Rural Bank (RRB), State Financial
Corporation (SFC) and North-Eastern Development Financial Institution (NEDFi).
Related scheme: 3. ISO 9000/ISO 14001 Certification Reimbursement
Description SME has emerged as dynamic and vibrant and is making significant contribution to
industrial production, export and employment generation. The process of economic
liberalisation and market reforms has opened up Indian SMEs to global competition. In order
to enhance the competitive strength of SME, the Government has introduced an incentive
scheme for their technological upgradation/quality improvement and environment
management. The scheme provides incentives to those SMEs/ancillary undertakings who
have acquired ISO 9000/ISO 14001/HACCP certification. The scheme is enlarged so as to
include reimbursement of expenses for acquiring ISO 14001 certification.
Nature of assistance The scheme envisages reimbursement of charges for acquiring ISO-
9000/ISO14001/HACCP certification to the extent of 75% of expenditure subject to a
maximum ofRs.75,000 in each case.
Who can apply Permanent registered micro and small enterprises (MSEs) are eligible to avail the
incentive scheme. The scheme is applicable to those MSEs/ancillary/SSSB units who have
already acquired ISO-9000/ISO-14001/ HACCPcertification.
How to apply MSEs with their EM No. are required to submit their application, duly completed, to
their local Director, MSME-DI addresses given in the following website: www.dcmsme.gov.in
Related scheme: 4. Micro & Small Enterprises Cluster Development Programme (MSE-CDP)
Description The Ministry has adopted cluster development approach as a key strategy for
enhancing productivity and competitiveness as well as capacity building of MSEs and their
collectives in the country. Clustering of units also enables the providers of various services
to them, including banks and credit agencies, to provide their services more economically,
thus reducing the costs and improving the availability of services for these enterprises.
Objectives ofthe scheme:
i. To support sustainability and growth of MSEs by addressing common issues such as

improvement of technology, skills and quality, market access and access to capital.
ii. To build the capacity of MSEs for common supportive action through the formation of self-
help groups, consortia, upgradation of associations, etc.
iii. To create/upgrade infrastructural facilities in the new/existing industrial areas/clusters
ofMSEs.
iv. To set up common facility centres (for testing, training, raw material depot, effluent
treatment, complementing production processes, etc.)
Nature of assistance • Diagnostic Study

• Soft Intervention
• Setting up of Common Facility Centres (CFCs)
• Infrastructure Development (Upgradation/New)
Cost ofproject and Govt. of India assistance:
• Diagnostic study - maximum cost Rs.2.50 lakh.

• Soft interventions - maximum cost of project Rs.25.00 lakh, with GoI contribution of 75%
(90% for special category States and for clusters with more than 50%
women/micro/village/SC/STunits).
• Hard interventions, i.e., setting up of CFCs – maximum eligible project cost of Rs.15.00
crore with GoI contribution of 70% (90% for special category States and for clusters with
more than 50% women/micro/village/SC/ST units).
Infrastructure development in the new/existing industrial estates/areas; maximum eligible project cost
Rs.10.00 crore, with GoI contribution of 60% (80% for special category States and for clusters with
more than 50% women/micro/SC/ST units).
Who can apply Industrial associations/Consortia, Clusters
How to apply Only online applications are considered with effect from 01-04-2012. Hard copy of
applications need to be sent through State Governments or their autonomous bodies or field institutes
ofthe Ministry of MSME i.e., MSME-DIs. The proposals are to be approved by the Steering Committee of
MSE-CDP.
Related scheme: 5. Micro Finance Programme

Description The Union Government has launched a scheme of micro finance and tied up with
the existing programme of SIDBI by way of contributing towards security deposits required from the
MFIs/NGOs to get loan from SIDBI. The scheme is being operated in the under-served States and
under-served pockets/districts of other States.
Nature of assistance Government of India provide funds for micro finance programme to SIDBI, which
is called ‘Portfolio Risk Fund’(PRF).At present SIDBI takes fixed deposit equal to 10% of loan amount.
The share ofMFIs/NGOs is 2.5% of loan amount (i.e., 25% of security deposit) and balance 7.5% (i.e.,
75% of security deposit) is adjusted from funds provided by the Government of India.
Who can apply MFIs/NGOs
How to apply Submit the proposal in the prescribed form to SIDBI.
Related scheme: 6. MSME Market DevelopmentAssitance (MDA)
Description As part of comprehensive policy package for MSMEs, MSME-MDA scheme has
been announced with a view to increasing the participation of representatives of
participating units. The provision of MSME-MDA scheme has been modified
recently. MDAis offered in three forms as mentioned below:
1. Participation in the international exhibitions/fairs - For registered small & micro

manufacturing enterprises with DI/DIC.
2. Financial assistance for using Global Standards (GS1) in barcoding.

3. Recognised importance of barcoding and avail financial assistance through Office of the
DC (MSME).
Purchase and Price Preference Policy - This is administered through Single Point Registration
Scheme of NSIC. Under this, 358 items are reserved for exclusive purchase from MSME by the
Central Government. Other facilities include tender documents free of cost, exemption from
earnest money and security deposit and 15% price preference in Central Government
purchases - for individual MSMEs.
Nature of assistance The scheme offers funding up to 75% in respect of to and fro air fare
for participation by MSME entrepreneurs in overseas fairs/trade delegations. The scheme
also has provision of funding for producing publicity material (up to 25% of costs), sector
specific studies (up to Rs.2 lakh) and for contesting anti-dumping cases (50% up to Rs.1
lakh) - for individual MSMEs & associations.
Who can apply Individual MSMEs & industry associations.
How to apply Candidates meeting the eligibility criteria may send their applications to Office of
the DC (MSME) through the concerned MSME DIs.
Related scheme 7. NationalAwards (Individual MSEs)

Description MSMEs have registered tremendous growth and progress in terms of quality of
production, exports, innovation, product development and import substitution,
very much beyond the expected objectives of the setting up of MSMEs. Entrepreneurial efforts have
made it possible to produce a number of items, which were hitherto imported. In quite a few cases new
variants so produced are having additional attributes over their original versions and are capable of
solving a multitude of user problems. All this has become possible owing to the ambitions and visionary
spirit of entrepreneurs of MSMEs.
The MoMSME with a view to recognising the efforts and contribution of MSMEs, gives NationalAwards
annually to selected entrepreneurs and enterprises under the scheme ofNationalAwards.
Deserving entrepreneurs managing MSMEs having permanent registration/have
filed Entrepreneurs’ Memorandum Part-II with notified authorities. The MSMEs should have been in
continuous production/servicing at least during the last three years.
How to apply Eligible enterprises may send nominations in the prescribed proforma (may
download from the Ministry of MSME website) to Director, MSME-DI of the state where their MSME is
registered/they have filed Entrepreneurs’ Memorandum (EM).
Related scheme 8. National Manufacturing Competitiveness Programme (NMCP)
Description The National Manufacturing Competitiveness Council (NMCC) has finalised a

five-year national manufacturing programme. Ten schemes have been drawn up including
schemes for promotion of ICT, mini tool room, design clinics and marketing support for SMEs.
Implementation will be in PPP mode, and financing will be tied up. Under this plan following
schemes are being implemented.
1 Marketing support/Assistance to MSMEs (Bar Code).

2 Support for entrepreneurial and managerial development of SMEs through incubators.
3 Enabling manufacturing sector to be competitive through Quality Management Standard &
Quality Tech. Tools (QMS/QTT).
4 Building awareness on Intellectual Property Rights (IPR) for MSME.

5 (a) Lean manufacturing competitiveness scheme for MSMEs. (b)
Compendium of success stories.
6 (a) Design clinic scheme for design expertise to MSMEs manufacturing sector (DESIGN).
(b) Case studies of design projects under design clinic scheme for MSMEs.
7 Marketing assistance & technology upgradation scheme in MSMEs.
8 Technology and quality upgradation support to MSMEs.

9 Promotion of ICT in Indian manufacturing sector (ICT)
Nature of assistance Varies for each scheme; visit the following website: http://www.dcmsme.gov.in/
schemes/nmcp_scm.htm
Who can apply MSMEs
How to apply Submit the proposal in the prescribed form to be obtained from the DC (MSME).
i). Marketing Support/Assistance to MSMEs (Bar Code)
Description Under this scheme MSEs are encouraged and motivated to use bar-codes through
seminars and reimbursement of registration fees.
Nature of assistance Reimbursement of registration fee (one time and recurring for 3 years) for bar
coding. Financial assistance for reimbursement of 75% of one-time registration fee (Under MSE-MDA)
w.e.f. 1st January, 2002 and 75% of annual recurring fee for first three years (Under NMCP) w.e.f. 1st
June, 2007 paid by MSEs to GS1 India for the use ofbar coding.
Who can apply The scheme is applicable to those MSEs with EM-II registration and registration
with GS1 India for use ofbarcode.
How to apply On getting registration for use ofbarcode for products, (http://www.gs1india.org/),
take the following steps for reimbursement of fee:
• Fill the prescribed application form for claiming reimbursement on bar code.
• The application form along with formats for supporting documents may be collected from
the Director, MSME-DI, or can be downloaded from http://www.dcmsme.gov.in/
• The filled-in application form with required documents is to be submitted to the office of
MSME-DI.
• The address of MSME-DI is given on the website: www.dcmsme.gov.in/ MSME-
DO/DCmsmeaddress.html
ii). Entrepreneurial and Managerial Development of SMEs through Incubators

Description The scheme endeavours to provide early stage funding for nurturing innovative
business ideas (new indigenous technology, processes, products, procedures, etc.) which could be
commercialised in a year. Under this scheme financial assistance is provided for setting up ofbusiness
incubators.
Nature of assistance Funding support for setting up of ‘Business Incubators (BI)’: The cost may vary
from Rs.4 to 8 lakh for each incubatee/idea, subject to overall ceiling of Rs.62.5 lakh for each BI. Items
@ per BI:
(a) Upgradation of infrastructure Rs. 2.50 lakh

(b) Orientation/training Rs. 1.28 lakh
(c)Administrative expenses : Rs. 0.22 lakh, Thus the total assistance per BI - Rs. 66.50 lakh
Who can apply Any individual or MSME having innovative ideas ready for commercialisation can
apply to the host institution (e.g., IITs, NITs, technical colleges, research institutes, etc.). See the list
ofhost institutions at
http://www.dcmsme.gov.in/schemes/Institutions_Detail.pdf
Any technical institution (as given in the EoI) which wants to become host institution can apply to the
office of the Development Commissioner – MSME (DC-MSME) or their nearest MSME-DI for funding
support.
How to apply • Application can be made by the technical institution which wants to be host
institution once a Request For Proposal (RFP)/Expression of Interest (EoI) is released.
Any individual or MSME can apply directly to their nearest host institution, a list of host institutions is
given on the website: http://www.dcmsme.gov.in/ schemes/Institutions_Detail.pdf
iii). Enabling Manufacturing Sector to be Competitive through Quality Management
Standards and Quality Technology Tools
Description The scheme endeavours to sensitise and encourage MSEs to understand and adopt
latest Quality Management Standards (QMS) and Quality Technology Tools (QTT).
Nature of assistance • Funding support for introduction of appropriate course modules in technical
institutions
• Funding support for conducting ‘QMS awareness’ workshops (applicant – expert
organisation or industry associations)
• Funding support for conducting competition watch (C-watch), study and analysis
• Funding support for introduction of QMS and QTT in selected MSMEs (applicant– expert
organisation or industry association)
• Participation in international study mission (MSEs as selected by Monitoring andAdvisory
Committee)
• A total contribution of Rs.425 lakh per year to be made by the GoI for introduction of
course material, training the trainer, awareness workshop and other activities
• Funding support of Rs.1.25 lakh per programme to be provided for conducting awareness
programme.
• Under C-watch
~ GoI contribution of Rs.2.5 lakh for professional study on threatened
products.
~ GoI contribution ofRs.7.5 lakh for technical exposure visit
~ GoI contribution ofRs.2.5 lakh for procurement of samples
~ GoI contribution of Rs.5 lakh for product development
~ GoI contribution ofRs.1.5 lakh for popularisation of improved products
• GoI contribution of Rs.2.5 lakh/unit for covering the costs of diagnostic study and for
implementation of Quality Technology Tools/Quality Management Standards (25 to 50% cost
will be paid by the participating units)
• GoI contribution of Rs.2.5 lakh per SME for international visit (25% and 50% cost to be
collected by the micro and small enterprise respectively)
Who can apply : Expert organisations like Quality Council of India (QCI), National Recruitment
Board for Personnel and Training, Consultancy Development Corporation, National Productivity Council,
Standardisation Testing & Quality Certification (STQC, a Society under the Ministry of IT), IIQM (Indian
Institute of Quality Management), Industry Associations that have taken active interest in QMS/QTT,
technical institutions, engineering colleges, tool rooms and similar bodies, and MSEs.
How to apply MSEs or clusters may contact Office of the DC (MSME). The DC office will
finalise the MSME clusters for conducting the Awareness Programme on Quality Management Standards
and Quality Technology Tools (QMS/QTT).
iv). BuildingAwareness on Intellectual Property Rights (IPR)

Description The purpose of the scheme is to enhance awareness among the MSMEs about
Intellectual Property Rights, to take measures for protecting their ideas and business strategies.
Effective utilisation of IPR tools by MSMEs would also assist them in technology upgradation and
enhancing their competitiveness.
Nature of assistance Funding support for
• Conducting awareness/sensitisation programmes on IPR (Applicants – MSME

organisations and expert agencies)
• Conducting pilot studies for selected clusters/groups of industries (Applicants – MSME
organisations, competent agencies and expert agencies)
• Funding support for conducting interactive seminars/workshops (Applicants – MSME
organisations and expert agencies)
• Funding support for conducting specialised training on IPR (Applicants – Expert agencies)
• Funding support in the form of Grant on Patent/GI Registration (Applicants – MSME units
and MSME organisations)
• Funding support for setting up IP Facilitation Centre (IPFC) for MSME (Applicants –MSME
organisations and IPR facilitating agencies)
• Funding support for organising interaction with international agencies (Applicants –MSME
organisations and IPR facilitating agencies)
• GoI assistance ofRs.1 lakh per awareness programme
• GoI assistance ofRs.2.5 lakh per pilot study
• GoI assistance ofRs.2 lakh per programme of interactive seminar
• GoI assistance of Rs.6 lakh per short term training programme and Rs.45 lakh per long
term training programme
• For registered Indian MSMEs, one time financial support limited up to Rs.25,000 on grant
of domestic patent and Rs.2 lakh for foreign patent; for registering under Geographical
Indications of Goods Act, one time financial support limited up to Rs.1 lakh
• A total financial support by GoI up to Rs.65 lakh each for establishing IPFCs which will
include one-time grant of Rs.45 lakh and Rs.18 lakh as recurring expenses for 3 years, and
Rs.2 lakh as miscellaneous charges.
• Financial support by GoI up to Rs.5 lakh and Rs.7.50 per event for domestic interventions
and international exchange programme respectively.
Who can apply • Registered MSME units

• MSME organisations like industry associations, societies, cooperatives, firms, trusts,
NGOs, institutions and universities with a track record of assisting MSMEs
Related scheme 1. Growth Capital and EquityAssistance

Description The scheme provides adequate capital to meet growth aspirations of MSMEs and
helps existing small and medium businesses to make investments in marketing, brand building,
creation of distribution network, technical know-how, R&D, software purchase, etc.
Nature of assistance Assistance in the form of mezzanine/convertible instruments, subordinated debt
and equity
Who can apply Existing small and medium businesses in need of capital for growth
i). An MSME as per definition of Government of India (MSMEDAct)
ii). SIDBI’s existing customers (meeting internal rating criteria) or
i). Units with past 3 years of profitability and 2 years of satisfactory banking credit track
record (meeting internal credit rating criteria)
ii). Acceptable external rating from CRISIL, ICRA, D&B, SMERA, etc., would be desirable.
How to apply Submit the on-line enquiry form in the website
Related scheme 2. Refinance for Small Road Transport Operators (SRTOS)

Description Expenditure on the cost of chassis, body building, initial taxes/insurance and
working capital; second-hand vehicles are not eligible for assistance. The scheme is operated through
SFCs/SIDCs/banks.
Nature of assistance Refinancing
Who can apply Small road transport operators
How to apply Apply to SFCs/SIDCs/banks.
Related scheme 3. General Refinance

Description Setting up new MSEs or expansion, modernisation, diversification, etc., of existing
units and for all activities eligible for assistance under the scheme including professional
practice/consultancy venture and service sector units such as tourism related
activities/hospitals/nursing homes/polyclinics/hotels/restaurants/ marketing and industrial
infrastructural projects.
The scheme is operated through SFCs/SIDCs/banks.
Nature of assistance For setting up new MSEs or expansion, modernisation, diversification, etc.
Who can apply All forms ofMSEs (proprietary, partnership), company, society, etc.
How to apply Apply to SFCs/SIDCs/banks
Related scheme 4. Refinance for Textile Industry under Technology Upgradation Fund
(RTUF)
Description Installation of specified types of machinery in a new unit or in an existing unit by
way of replacement of existing machinery and/or expansion.
Scheme operated through SFCs/SIDCs/banks Nature of assistance Refinancing
Who can apply Textile industries
Related scheme 5. Acquisition of ISO Series Certification by MSE Units

Description Expenses on consultancy, documentation, audit, certification fees, equipment and
calibrating instruments required would be taken into account for determining loan requirement.
Scheme operated through SFCs/SIDCs/banks
Nature of assistance Financial support for ISO certification
Who can apply Existing MSEs having good record of past performance and sound financial
position. The concerns should: have been in operation for a period of at least two years; earned profit
and/or declared dividend during preceding two financial years; and, not be in default to
institutions/banks in payment of their dues.
Related scheme 6. Composite Loan

Description Assistance for equipment and/or working capital as also for worksheds
Nature of assistance Loan limit - Not to exceed Rs.25 lakh
Who can apply Mocro and small industries
Related scheme 7. Single Window

Description Providing both term loans for fixed assets and loan for working capital through a
single agency.
The total working capital requirement of such units inclusive of all fund based facilities is to be taken
into account for determining the working capital facility eligible for refinance.
Nature of assistance Loans for fixed assets and working capital
Who can apply Entrepreneurs setting up new projects in MSE sector, new promoters acquiring
unencumbered fixed assets of existing MSE concerns from PLIs and also existing well-run units
undertaking modernisation/ technology upgradation and potentially viable sick units undertaking a
rehabilitation scheme.
Related scheme 8. Rehabilitation of Sick Industrial Units

Description Provides assistance for rehabilitation ofpotentially viable sick units
Nature of assistance Assistance for rehabilitation ofpotentially viable sick MSEs.
Who can apply Potentially viable MSE units conforming to the definition of sick MSE unit.
The assistance is meant for sick MSE units for which proper rehabilitation packages have been drawn
up. Units eligible for rehabilitation assistance should be capable of being restored to normal health
within a reasonable time.
Related scheme 9. Development of Industrial Infrastructure for MSME Sector

Description Setting up of industrial estates/development of industrial areas including such
projects found eligible under the KVIC model.
Nature of assistance Financial support for development of industrial infrastructure Who can apply
Promoters of industrial infrastructure
Related scheme 10. Integrated Infrastructural Development (IID)

Description IID centres with facilities like water supply, power, telecommunication, common
services centre including technological back up services for MSEs in rural backward areas.
The cost of improving/upgrading deficient infrastructural facilities to increase productivity and optimum
utilisation of existing centres/clusters in backward/rural areas.
Nature of assistance Ceiling on project cost is Rs.500 lakh. Cost in excess of Rs.500 lakh may be met
by
the State/UT Government. Of Rs.500 lakh. Rs.200 lakh by grant from GoI and loan from SIDBI, from
any other bank/FI of Rs.300 lakh. In case of NE region, amount of Grant from GoI and loan from
SIDBI, from any other bank/FI would be Rs.400 lkh and Rs.100 lakh respectively.
Who can apply Implementing agencies (a public sector corporation or a corporate body or a good
NGO with a sound financial position) entrusted with the task of implementing the
scheme by the concerned State/Union Territory Government.
Related scheme 11. Bills Re-discounting Equipment

Description For sale/acquisition of machinery on deferred payment terms for setting up of new
MSME units is also for expansion, diversification, modernisation, replacement, addition ofbalancing
equipment, etc.
Nature of assistance Operated through scheduled commercial banks Usance ofbills - Normally 2-5 years
Who can apply Manufacturer-sellers/purchaser-users of indigenous machinery/capital equipment
one ofwhom should be in the small scale sector
How to apply In the prescribed proforma given in the SIDBI
Related scheme 12. Bills Re-discounting - Equipment (Inland Supply Bills)

Description To encourage bills culture as a method of working capital financing to ensure timely
payment, trade bills arising out of the supply of goods by MSME units and discounted with commercial
banks either by seller or buyer are re-discounted by the banks with SIDBI.
Scheme operated through scheduled commercial banks
Nature of assistance Unexpired usance - Not more than 90 days.
Who can apply MSME suppliers
How to apply Apply to scheduled commercial banks
NABARD Schemes
Related scheme 1. Producer Organisations Development Fund (PODF)
Description Extending credit facilities to take up production, aggregation, processing and/or
marketing activities
Nature of assistance Fund support to producers organisations across three levels: credit
support,
capacity building & market linkage
Who can apply Marketing federations/corporations/cooperatives
How to apply Apply to banks
Related scheme 2. Dairy Venture Capital Fund

Description Milch animal
Nature of assistance Interest-free loan - 50% ofthe outlay
Who can apply Individuals
How to apply Apply through banks
Related scheme 3. Establishing Poultry Estates and Mother Units for Rural Backyard
Poultry
Description Scheme for poultry development. The scheme has the following three components
(i) Assistance to state poultry farms
(ii) Rural backyard poultry and
(iii) Poultry estates
Nature of assistance Unit cost (unit size 1,500 chicks per batch): Rs.1.36 lakh
Related scheme 4. Establishment/Modernisation of Rural Slaughter Houses
Description The scheme is subsidy based credit linked scheme for establishment/modernisation
ofrural slaughterhouses
Nature of assistance Capital subsidy - 50% ofthe total financial outlay
Who can apply Any company, partnership firm, NGO and individual entrepreneurs
Related scheme 5. Commercial Production Units of Organic Inputs
Description The scheme has two components: Fruit and vegetable market waste compost and
bio-fertitisers - bio-pesticides production units
Nature of assistance Subsidy @ 25% of the capital cost ofthe project
Related scheme 6. Poultry Venture Capital Fund
Description The scheme:
• encourages poultry farming activity especially in non-traditional states and provides

employment opportunities in backward areas;
• improves production of poultry products which have ready market all over country;
• improves productivity of unscientifically run units through technology up-gradation;
• provides quality meat to consumers in hygienic conditions, and improves hygienic sale
of poultry meat and products in urban areas and neighbourhood societies through poultry
dressing and marketing outlets;
• improves productivity and facilitates rearing of other poultry species like quails, ducks,
turkeys, which have good potential.
Nature of assistance • Entrepreneurs contribution (margin) - for loans upto Rs.1 lakh, banks may not
insist on margin as per RBI guidelines. For loans above Rs.1 lakh: 10% (minimum)
• Back ended capital subsidy - 25% of outlay (33.33 % for SC/ST farmers and NE states
including Sikkim)
• Effective bank loan (excluding eligible subsidy as above) - balance portion, minimum
40% of outlay
Who can apply • Farmers, individual entrepreneurs, NGOs, companies, cooperatives, groups of
unorganised and organised sector which include SHGs, Joint Liability Groups (JLGs), etc.
SMALL AND MEDIUM ENTERPRISES RATING AGENCY (SMERA)

SME Rating Agency of India Ltd (SMERA) is a third party rating agency exclusively set up
for micro, small, and medium enterprises in India for ratings on credit worthiness.
SMERA is promoted by SIDBI and Dun & Bradstreet along with various government,
public and private sector banks. It provides ratings which enable MSME units to raise
bank loans at competitive rates of interest. SMERA's ratings are an independent third-
party assessment of the overall status of the MSMEs as performing entities. The ratings
comprise a composite appraisal indicator and a size indicator. Its ratings enhance the
market standing of the MSMEs among their trading partners and customers. In addition,
the agency factors in industry dynamics in its ratings through a system of comparison of
strengths and weaknesses of the MSME with other companies in the same line of
business. It is also risk profiling the clusters through special studies and these would fill
the information gap between the lender and the sector. Banks offer concessions in pricing
(0.25%-0.50%) for credit to MSMEs rated by SMERA.
Other MSME Rating Agencies approved by RBI are ICRA, CARE, India Ratings & Research Pvt.
Ltd. (India Rating) & CRISIL, who are rating the units on various parameters which are
acceptable to the financial institutions/Banks and in the marketability of the products. RBI has
granted accreditation to SMERA as an External Credit Assessment Institution (ECAI) in Sept.
2012 and accordingly banks have been permitted by RBI to use the ratings of SMERA for the
purpose of risk weighting their claims for capital adequacy purposes in addition to the existing
five domestic credit rating agencies, It has paved way for SMERA to rate/grade various
instruments such as: IPO, Bonds, Security Receipts, Bank Loan Instruments etc.
SMEs because of their diversity, spread both in form and content, have an inherent need for
support both from the Government and non-government organizations as well as financing
institutions. This chapter narrates the role and functions of these organizations. Many of the
functions they perform have evolved over a period of time and they are mostly demand-driven
although some government organizations continue to remain supply-driven, MSME DO is the
fountainhead of the service organizations in the government fold. Some of them underwent
structural changes in tune with the emerging needs of the sector like NIMSME, NIESBUD,
NSIC etc. Some like the SFCs that suffered due to inefficient functioning building up huge
NPAs, shifting their span of control from IDBI to SIDBI are also changing
8. FINANCING OPTIONS & MODES

MSMEs make a major contribution to the growth and employment and their ability to grow
depends on their potential to invest in technology, restructuring, innovation and human
resource development. All these investments need capital and therefore, access to finance.
Recent and ongoing developments in the financial sector and in particular, banking will
further impact on the access to finance. The main changes in the banking sector that will
influence MSME Finance are:
♦ Globalization intensified the competition and the profit orientation in the sector;
♦ The ups and downs of some sectors, bubbles as some economists refer to like in the aqua,
IT, real estate, lately, even retail business sector, tend to make the banks more focused on
profitability of their operations;
♦ Implementation of capital adequacy norms and Basel III norms
♦ Mergers and acquisitions in banking industry; bigger the size of the bank smaller would
tend to be the attention on the MSME sector.
In lending to MSME sector there is a need to look beyond the standard rule based approach. It
requires the bankers to understand the financing need of the borrowers as each business has a
unique life cycle and if needed be innovative in their approach. Particularly through technology
innovations such as cloud technology, advanced data analytics and mobile technology it has been
possible to increase efficiency and increase access to bank finance.
In this context, the need for banks to focus their attention on the MSME sector without affecting
their profitability and without compromising on the quality of lending. Reference to the
recommendations of various committees appointed by the Government of India and Reserve
Bank of India, directs the reader to the concerns of the MSME sector and the Finance sector and
the meeting ground between the two. Financing this sector calls for an innovative approach far
different from financing the large corporate sector as this sector heavily depends on debt
instead of equity. The options though limited have not been fully made known to the MSMEs
and these have been highlighted. The traditional loan products like the Term Loans, Demand
Loans, Cash Credit, are giving way to new products like the Factors, (which needs to be made
clear and popularized amongst the MSMEs by the Banks & factoring agencies) and the MSMEs
look for widely expanding equity products as well. But availing these products call for the
required financial discipline on the part of the MSMEs and counselling from the service
providers. In order to reduce the burden of transaction costs banks are shifting to non-
supervised credit. The contents of the supervised credit have also been dealt with in the
chapter. The credit process involves: 1) Appraisal; 2) Assessment; 3) Sanction; 4)
Documentation and 5) Disbursement.
The price of accessing credit will be influenced by risk grading and the nature and size of debt
transaction. Due to higher risk awareness of the finance sector and the needs of Basel II & Ill
norms, many MSMEs will be confronted for the first time with internal rating procedures or
credit scoring systems by their banks. The banks will require more and better quality of
information from their clients and will assess them in a new way. Banks have developed their
own credit rating system for their internal assessments as well as getting the rating of the
units done through recognized external rating agencies. The Banks will have to communicate
the relevant criteria affecting the rating of MSMEs and should inform them about its
assessment in order to allow MSMEs to understand the system, effecting factors and then
improve.
Need for to focus on the middle segment
The SME segment is an essential part of the consumer spectrum for banks. With
thinning spreads in corporate finance coupled with large capital requirements for
lending to the sector make it necessary for banks to look at expanding their loan
portfolio beyond the big tickets. The natural synergies with retail businesses have
made the SME segment both attractive and critical to balance sheet growth. Key
challenges to service the segment are to optimise credit risk, minimize operational
and distribution costs.
Five pronged focus to innovation in credit delivery in the MSME sector
Approach
The traditional approach to lending to the MSME sector was to use the "one size fits all" attitude
and method. There was a price led approach with no economies of scale. There was little interest
in understanding the business processes of the borrower and little effort at relationship banking.
The new approaches use expanded SME assets coverage model through focused market
segmentation. There is a focus on (i) Cluster Banking with specific industry clusters (ii) Corporate
Linked Business- Corporate Linked Channel partners and (iii) Small Businesses- Other Small &
Medium Sized Companies.
Products
Traditional banking focussed on fund based approaches linked to the financial statements of
borrowers with low customisation. Newer models focus on Fund / Non-Fund transactions,
sector specific products, forex and trade related lending, cash flow based lending, transaction
banking and cash management services etc.
Relationships
Banking to the MSME sector was largely reaction driven; the borrower would request a service and the
banker would react to the requirement based on certain
rules. Increasingly banking has become relationship based with banks focussing on actual needs of
the customer. The single interface that the customer used to have at the bank through the branch
has now changed to multiple interfaces through branch, ATM, internet, mobile and IVRS.
Online submission and tracking of application forms has become mandatory for all banks.
Assessment
Traditional approaches to lending used to depend on credit appraisal using financial statements.
Newer models look at a 360 degrees evaluation, with credit scoring models and centralized
sanctions.
Mobile Based Solutions for MSMEs
A simple mobile web payment system can also include a credit card payment flow allowing a
consumer to enter their card details to make purchases. This process is familiar but any entry of
details on a mobile phone is known to reduce the success rate (conversion) of payments.
In addition, if the payment vendor can automatically and securely identify customers then card
details can be recalled for future purchases turning credit card payments into simple single
click-to-buy giving higher conversion rates for additional purchases.
Online wallets
Online companies like PayTM, Airtel Money etc. have mobile options.
The appraisal process, the various risks, risk-mitigants, Risk-Reward computation process
etc.
Banks classify clients according to their profile. While classifying, financial background of
customers and subjective factors of customers are evaluated. Financial ratios play an important
role for risk level calculation. These ratios are objective and indicate the financial statement of
business. Balance sheet, income statement and cash flows are some financial statements for
collecting information to calculate objective financial ratios.
From a credit analysis point of view, historic trends must be examined relative to the current financial position
(balance sheet and capital structure) and operating performance. These trends serve as the basis for judging
the degree to which forecasts for future operating results and financial position are reasonable.
Determining what is 'reasonable' leads to the art of credit analysis. Judgments must be made
about the forecasts of performance relative to history, management capability, competitors'
performance and competitive pressure, and the macroeconomic environment judgements must
also be made about the strength or weakness of the obliger's current and future
Credit Risk Assessment Framework for SMEs
Asymmetries of information are substantial for SMEs. Credible screening and effective
monitoring of borrowers is a real challenge. First, the lender needs to choose borrowers of high
credit quality before the loan is granted, to minimise losses due to default, when it may not be
possible to distinguish good and bad risks. This raises the problem of adverse selection. Second,
the lender must monitor the borrower after the loan is granted, to ensure that the borrower is
not acting contrary to the lender's interests. For example, the borrower might divert the funds to
high-risk activities that reduce the probability that the loan will be repaid: the problem of moral
hazard. As screening and monitoring are costly to the lender, the price of credit (including both
the interest rate and non-price terms) will tend to be higher, i.e. there will be increased price
rationing of credit, for SMEs where information and incentive problems are greater.
Assessment of the need on Funded Facilities like Working Capital, Term Loan
Based on the above principles and proposed framework, credit officers should assess the quantitative
financial metrics that capture:
Profit and Profitability
Firm Efficiency Working Capital
Debt Service - Liquidity and Leverage
Borrowing Needs
Market Position
Cash Flow and Funds Flow Statements
In addition to quantitative analysis, credit officers should also conduct qualitative analysis of
the SME borrower to rate its credit, performance and market risks. Qualitative analysis is
fundamentally important because it identifies the key risks in the industry where the borrower
operates and provides a tangible method to rate and rank borrower performance within the
industry.
Similar to quantitative analysis, effective qualitative analysis requires the development of key
metrics that represent the credit, performance and market risks of the specific industry and
region of the borrower. Qualitative risk metrics should focus on the key indicators that logically
align with the SMEs' industry sector and business model and be based on practical and
accessible information.
In order to provide an accurate picture of the borrowers' credit and performance risks, the
qualitative metrics should be used as a comprehensive framework and be explicitly linked to the
borrowers' financial conditions and the quantitative analysis. The key qualitative metrics must be
customized for the SME's industry and should include the following key metrics
Cash Flows
Payment Risks
Operational Costs
Market Position and Risks
Non-Financial Analysis
To prudently assess the credit risk of SMEs in a cost-efficient manner, the analysis should focus
on performance or risk indicators that have proven to be useful, in other markets and over time,
within specific industries as reliable discriminators for predicting satisfactory credit behaviour and
risk ranking. They must aid in facility structuring and risk-based pricing. They should include:
Use of proxy financial measures and industries norms
The paucity of reliable financial statements and lack of transparency characteristic of SMEs
necessitates the use of proxy / surrogate financial measures and industry norms. While not a
substitute for analysis of the borrower's financial performance, the use of such proxy measures
have proven to be a practical and reasonably reliable way of predicting SMEs' financial
performance, in many emerging markets in the absence of complete or transparent information -
such as professionally audited financial reports.
Proxy financial measures typically can be developed from the following sources
a. Listed companies: The publicly available financial data (Key Balance Sheet and Income Ratios,
Profitability dynamics and Returns) of listed firms can be used as industry benchmarks to be
compared with SMEs and to help affirm the quality and viability of a particular firm.
The business operations of the listed companies used as proxies should be in the same sector
and geography as those of the SME borrower.
Accounting firms: Credit officers can work with reputable accounting firms which have a
history of auditing companies within a particular industry or sector to build, validate and
annually review key surrogate financial indicators and assumptions.
Industry associations: Industry associations have in-depth knowledge of the financial
conditions of their industry. In many cases, such information is publicly available.
The following efforts are also necessary for thorough assessment and prudent lending practices
Analyze the credit history of the SME firm and its principals: Since SMEs often lack credit
history and the firm's financials are often intertwined with the principals' personal financial
resources, the credit analysis may include both the firm and its principals. The analysis of the
principals should be dependent on how much of the firm's income and expenses are reported in
the principal's personal accounts. Often a "word picture" of a principal's possible net worth or
income needs to be developed through frank Turnover Method/Nayak Committee Method
Fund requirement is computed at a minimum of 25% of the output value, of which, at least four-fifths
is provided by the Bank and the balance one-fifth represents the borrower's contribution towards
margin for working capital.
In other words, working capital credit limit should be computed at a minimum of 20% of the projected
annual turnover.
This method is applicable for sanction of fund based working capital limit of upto Rs. 5 crore.
Cash Budget/Cash Flow Method
This method is used for assessing working capital finance for seasonal industries (like sugar, tea),
construction and service related activities as also for the sanction of ad-hoc working capital limits.
Required finance is quantified from the projected cash flows and not from the projected values of
current assets and current liabilities.
The borrower's revenue or expense stream that converts into cash over a given period are
analyzed which may be used to service debt and loan obligations. Major factor is the time period
it takes for the borrower to convert its resource inputs into cash for the company.
Assessment is done on the basis of monthly/quarterly cash budgets. Correspondingly, drawings should
be regulated on the basis of the monthly/quarterly cash budgets subject to the condition that the
outstandings should not exceed the advance value of the security charged or the sanctioned limit,
whichever is lower.
Assessment in Sole/Multiple/Consortium Banking Arrangements
Projected Balance Sheet (PBS) or cash budget method is applicable for the working capital finance
given by the bank in sole/ multiple/ consortium banking arrangements.
In respect of advances under consortium arrangements, branches may sanction the bank's share
of the limits on the basis of assessment under the PBS or cash budget method provided the
overall limits assessed by them are not different from the limits assessed by the leader of the
consortium.
Under consortium arrangements, the Lead Bank is required to circulate to the members the
appraisal note prepared by it for discussion. The participant banks subject the lead
bank/Financial Institution estimates to critical examination which would help in rectifying errors,
if any, in the judgment of the Lead Bank and taking remedial action.
Credit Scoring and Credit Rating for MSMEs
The significance of credit scoring and rating is that it very useful in the selection of good MSME
borrowers. It helps the bank in building up a qualitative MSME portfolio. This module describes the
elements of an effective internal process for rating credit risk. Trainers need to provide an overview
of the importance of management of credit risk, its identification and rating.
Section I is a generic, discussion of the objectives and general characteristics of effective credit
risk rating and credit scoring systems, Section II deals with measurement of default and loss
probability which facilitates more accurate pricing, allows capital allocation, and enhances early
warning and portfolio management while Section III deals with the approach for SME/MSME
ratings.
Introduction to credit scoring
Well-managed credit risk rating systems promote bank safety and soundness by facilitating
informed decision making. Rating systems measure credit risk and differentiate individual
credits and groups of credits by the risk they pose. This allows bank management and
examiners to monitor changes and trends in risk levels. The process also allows bank
management to manage risk to optimize returns.
Many banks are developing more robust internal risk rating processes in order to increase the
precision and effectiveness of credit risk measurement and management. This trend will
continue as banks implement advanced portfolio risk management practices and improve their
processes for measuring and allocating economic capital to credit risk. Further, expanded risk
rating system requirements are anticipated for banks that assign regulatory capital for credit
risk in accordance with the Basel Committee on Bank Supervision's proposed internal-ratings-
based approach to capital.
Credit scoring vs credit rating
Internal credit ratings are becoming increasingly important in credit risk management. Banks'
internal ratings are somewhat like ratings produced by Moody's, Standard & Poor's, and other
public rating agencies in that they summarize the risk of loss due to failure by a given borrower
to pay as promised. However, banks' rating systems differ significantly from those of the
agencies (and from each other) in architecture and operating design as well as in the uses to
which ratings are put. One reason for these differences
is that banks' ratings are assigned by bank personnel and are usually not revealed to outsiders.
Most large banks use ratings in one or more key areas of risk management that involve credit,
such as guiding the loan origination process, portfolio monitoring and management reporting,
analysis of the adequacy of loan loss reserves or capital, portability and loan pricing analysis,
and as inputs to formal portfolio risk management models. Banks typically produce ratings only
for business and institutional loans and counter parties, not for consumer loans or other assets.
Credit ratings take into account both quantitative and qualitative factors. Financial measures
are a core component of any rating, but ratings will also consider a range of economic,
industry and business fundamentals, including the quality of an institution's risk management
and governance structures.
Credit scoring offers an alternative method of evaluating loans for small businesses. The credit
scoring approach, which is based on use of computer technology and mass production methods,
was originally designed to handle consumer loans, but are now being used effectively for
lending to small businesses by predicting their potential loan delinquency.
Credit scoring, is a model applied by banks in their assessment and approval or decline of the
loan requests by SMEs. As there is a strong link between the payment behavior of the business
owner and that of the business, SME credit scores usually include financial characteristics from
both the business and the business owner. Credit scoring is based upon information like how the
repayment of the previous loans has gone, what is the current income level of the enterprise,
what are the outstanding debts, if any? It focuses on the credit history of the enterprise. As part
of the process, the lenders see whether the enterprise/business owner has the reliability and
honesty to repay the loan. It also examines how the enterprise has used credit before, its record
for repayment of bills, including utility bills, how long the enterprise has been in existence, assets
possessed by the enterprise and sustain ability and viability of the activities that the unit is
engaged in. Credit scoring model draws inputs from historical information on the performance of
loans with similar characteristics.
What can and cannot be achieved with credit scoring
When used appropriately, credit scoring can benefit multiple stakeholders, including lenders,
borrowers, and the overall economy. For the lender, scoring leads to process automation which
facilitates process improvements leading to many by-products such as improved management
information, control and consistency. It also increases the profitability of SME lending by
reducing the time and cost required to approve loans and
increasing revenues by expanding lending opportunities as lenders can safely approve marginal
applicants that an individual underwriter might reject. International evidence has shown that
credit scoring can assist in overcoming the inherent benefit/cost trade-off that banks face when
deciding whether or not to invest in obtaining information regarding a potential borrower
Funding Cost: this represents interest expense related to the monthly average volume of
deposits and other funds reported to the regulator on a monthly basis. The interest rates charged
on risk assets are influenced by the interest rates paid on the various sources of deposits and
funds. The higher the interest rates paid to depositors the higher the loan price and vice versa.
The Treasury Management unit is responsible for identifying the cost of funds that is applicable
for each loan product prior to the effective date of the loan, thereby allowing sufficient time for
loan-pricing decisions and for appropriate notification to be made to the borrower.
Operating Cost: this includes indirect cost/overheads and statutory costs such as deposit
insurance premium, cash reserve requirements, opportunity cost of holding liquid assets.
Risk Based Pricing Methodology
The figure below depicts the components of risk based pricing methodology
Funding Cost: this represents interest expense related to the monthly average volume of
deposits and other funds reported to the regulator on a monthly basis. The interest rates charged
on risk assets are influenced by the interest rates paid on the various sources of deposits and
funds. The higher the interest rates paid to depositors the higher the loan price and vice versa.
The Treasury Management unit is responsible for identifying the cost of funds that is applicable
for each loan product prior to the effective date of the loan, thereby allowing sufficient time for
loan-pricing decisions and for appropriate notification to be made to the borrower.
Operating Cost: this includes indirect cost/overheads and statutory costs such as deposit
insurance premium, cash reserve requirements, opportunity cost of holding liquid assets in
excess of the minimum requirements and the cost of holding nonearning assets.
Risk Cost: This is the expected loss that institution will suffer and it is the product of Probability
of Default (PD), Loss given Default (LGD) and Exposure at Default (EaD). The PD estimates is
based on rating from the institution's internal rating system. The LGD relates to the loss the
institution will suffer given that a default has occurred. EAD is the exposure of the institution at
the time the borrower defaults. Under the Basel II framework, an institution is required to
conduct credit rating of its borrowers, categorise borrowers into rating classes and calibrate the
rating classes to their respective PDs. Hence, this component of risk based pricing is fully
dependent on Basel II.
Capital Cost: This is a product of hurdle rate and economic capital. Economic capital is a function of
PD, LGD, EAD and default correlation of the asset portfolio. The hurdle rate figure is a board decision
and can be determined from the capital asset pricing model (CAPM) or through appropriate bench
marking. Economic capital represents the capital required to cover unexpected losses in the
institution, given the risk-specific time horizon and the desired target rating of the institution. This
component is mostly Basel II dependent.
Additional Margin: This represents the target return on equity, i.e. the rate of return expected
by shareholders. This expectation is guided by economic fundamentals and the long term sustain
ability of the institution.
What are credit scorecards?
Credit scorecards traditionally estimate a probability that the borrower will not repay his loan.
Since the Basel 2 accord was first published, the most common definition of credit risk has
become the probability of default (PD) over the 12-month period following the application, or
evaluation, date. Basel 2 has also spurred financial institutions to develop models of expected
loss given default (LGD) and exposure at default (EAD).
National Small Industries Corporation (NSIC) - CARE Performance and Credit Rating Scheme
The NSIC credit rating scheme for performance and credit rating seeks to establish independent,
trusted third party opinion on capabilities and credit-worthiness of SMEs, and makes credit
available at attractive interest rates. It endeavors to enable SMEs fain recognition in global
trade, ensure prompt sanctions of credit from banks and financial institutions, subsidized rating
fee structure for SMEs, facilitate vendors/buyers in capability and capacity assessment of SMEs,
enable the SMEs to ascertain the strengths and weaknesses of their existing operations and take
corrective measures.
What is Performance and Credit Rating?
A Performance and Credit Rating is an analysis of performance capability and credit risks
associated with a business. Performance and credit rating assignments are completed by
approved rating agencies which act with independence and without any bias. Some of the
factors considered in a performance and credit rating are industry dynamics, financial
performance, operational performance, competitive position of the entity, operating efficiency,
management capability, organization systems, customer profile, track record with lenders and
other stake holders.
Any SSI or MSME unit having MSME or SSI Registration can avail the NSIC Credit Rating Scheme. The
nature of assistance provided from NSIC for Credit Rating is dependent on the sales turnover of the
business as follows
Up to Rs.50 lakh of Sales Turnover: 75% of the fee or Rs.25,000 (whichever is less);
Rs.50 lakhs to 200 lakh of Sales Turnover: 75% of the fee or Rs.30,000 (whichever is less)
More than Rs.200 lakh of Sales Turnover: 75% of the fee or Rs.40,000 (whichever is less)
How these credit score zappers can lower credit score?
Two of the most common factors to impact credit scores negatively are a history of bankruptcy and numerous
applications for credit accounts in a short time period.
Besides the obvious (bankruptcies, judgments, etc.) the top killers are
Payments over 30-days late
Maxing out credit cards (i.e. using over 70% of a high credit limit)
Seeking too much credit in a short period of time
The business of lending carry certain inherent risks and banks cannot take more than calculated risk
whenever they want to lend. Banks have to follow a cautious approach based on certain principles which
include: a Principle of safety of funds, b Principle of profitability, c Principle of liquidity.
d Principle of purpose, e Principle of risk spread,f Principle of security.
FINANCIAL STATEMENT / BALANCE SHEET ANALYSIS

1. A Financial Statement is organized collection of information or data prepared as per certain acceptable
accounting norms & procedures. Financial statement mainly consists of Balance sheet (the position of
assets and liabilities as on particular date), Profit and loss account (the income and expenditure
statement for a Particular period), Funds flow statement & cash Flow statement.
2. Financial Statements : 3 stage process - Classification of assets and liabilities ( as per RBI guidelines
),Calculation of financial ratios Interpretation of ratios.
3. Audited Balance sheet : For credit limit ( FB + NFB ) upto Rs. 20 lacs no ABS, only unaudited BS but
over Rs.20 lacs ABS is must but for Agril. Related loans no ABS upto Rs. 100 lacs & only above Rs.
100 lacs ABS in Agril. Credit ( FB + NFB ) is required. For company & other statutory body ABS
always required irrespective of Quantum of limit and similar in the case in business enterprises where
turn over is Rs. 100 lacs or more- ABS. Gross receipt of Profession exceeds Rs.25 lacs- ABS required.
As per IT rules Form 3CB & Form 3CD also required where ever it is applicable. In case of sticky
accounts S-3, a special audit report is required. Penal Interest of 2% on the outstanding liability shall
be collected if ABS is not submitted before 31st oct. every year ( within 07 month from closing year )
or within a fortnight from the date of Audit of financial accounts of business unit which ever is earlier.
Terms used inFinancial statement analysis
1 Net Sales Gross Sales minus returns, discounts, excise duty.
2 Raw Materials consumed Opening Stock of raw materials plus purchases of raw materials less
Dosing stock of raw material .
3 Cost of Production Raw materials consumed, stores and spares consumed, power and
fuel, direct labour, repairs and maintenance, other manufacturing
expenses and depredation plus opening stock of stock in process
minus dosing stock of stock in process.
4 Cost of Sales Cost of production (3) plus opening stock of finished goods minus
dosing stock of finished goods.
5 Gross Profit Net Sales - Cost of Sales (Item 1 minus Item 1)
Gross Profit (5) minus interest, selling general and administrative
6 Operating Profit
expenses.
7 Net Prokbefore tax Operating profit plus other incomes minus other expenses
8 Net Profit after tax Profit before taxation minus provision for taxes.
9 Retained Profit Net profit minus dividend paid / dedared
10 Cash Profit Profit before charging Depreciation (Net Profit + Depredation)
11 Cash-Loss Loss before charging Depredation (Net Loss — Depredation)
_12 Assets Things owned by a business Not converted into cash in normal course
13 Fixed Assets of business, These are acquired to use them in the production of
. other goods and services.
14 Current Assets Assets which are meant to be converted into cash or consumed in
normal course of business say within 1 year. These are also called as
gross working capital.
15 Intangible Assets Expenditure on invisible assets, likely to yield benefit to the company
in future e.g. goodwill, patent, trade marks, designs.
16 Fictitious Assets Which have notional value only e.g. losses, preliminary expenses.
17 Miscellaneous Assets or Non Which can't be classified as current, fixed or intangible e.g. inter
current assets Corporate investment
18 Tangible Assets Total asset side of balance sheet minus intangible assets.
19 Quick Assets Assets which can be converted to cash quickly. Cash, bank balances,
marketable investments, bills receivables and sundry debtors
considered goal. (Current Assets minus-Inventories & Prepaid
Expenses)
20 Liabilities Thin s owed by the business.
21 Owners Equity Paid up share capital, reserves and surplus, preference shares with
(Net Worth) more than 12 years maturity.
22 Long term liabilities or Debt Outsiders funds, payable in more than 12 months. Term loan
(exduding instalment payable within 12 months) plus debentures
maturing within more than one year, preference shares redeemable
within 12years, deposits payable beyond one year.
23 Current Liabilities Liabilities which are payable in less than one year e.g. sundry
creditors, unsecured loans, advances from customers, interest
accrued but not due, dividends payable, statutory liabilities,
provisions, Bank borrowings for working capital etc
24 Total Outside Liabilities Total of the liability side of balance sheet minus net worth
25 Tangible Net Worth Total tangible assets minus total outside liabilities. Owner's funds
minus Intangible & Fictitious assets ; Paid up capital plus reserves
minus intangible assets
26 Gross Working Capital Total of Current Assets
27 Net Working Capital Current assets minus total current liabilities. Long Term Sources
minus long term uses
28 Working Capital gap Current Assets minus current liabilities other than Bank Borrowings.
29 Long term sources Paid up capital, reserves and surplus (excluding specific reserves) i.e.
Net Worth and long term liabilities.
30 Short Term Sources Current Liabilities
31 Long Term Uses Fixed Assets, Miscellaneous or Non. current assets, Intangible and
Fictitious Assets (assets other than current assets)
32 Short Term Uses Current Assets
33 Contingent Liabilities Likely liability which may or may not arise on the happening or non
happening of an event
(i) As per RBI guidelines, installments of term loans due within 12 months are not to be treated as
current liability for calculation of Net Working Capital and Working Capital Gap. (ii) Overdue
instalments and Interest on term loan is treated as current liability. (iii) Sundry Debtors/ Book debts
older than 6 months are treated as Non current assets. (iv) Loans from friends and relations are
normally treated as Long term liability but if these are secured by Demand Promissory Note i.e.
payable on demand then the same should be treated as Current Liability. (v)Reserves except which
are in the nature of provisions like Depreciation Reserve are part of net worth.
(ii) Contingent Liabilities: which may or may not arise. For example: aairns against the company
not acknowledged as debts; Arrears of fixed cumulative dividends; Bills discounted but not matured
and shown in the Balance Sheet; Letter of Credit; Guarantees given by the company on behalf of its
subsidiary company, employees etc.
Liabilities Assets
Net worth/Equity Funds brought in by the Fixed Assets :Assets which are purchased for long
promoters as their investment in business or term and not meant to be sold but used for
generated by and retained in business production.
Share capital/partner's capital/ Paid up Land & Building,Plant & Machinery
equity share capital,/owners funds Vehicles,Furniture & Fixture
Reserves & Surplus e.g. General Reserve, Office equipment,Capital Work in Progress These
Capital Reserve, Revaluation Reserve and are represented as under:
Other Reserves),Retained Earnings Original value (Gross Bock) Less depreciation
Undistributed Profits,Preference share capital Net Block or book value or written down
(not redeemable within 12 years) Value Method
Long term liabilities: Non Current Assets:

Liabilities which are not due for payment Assets which cannot be classified as current or
within 12 months from the date of the fixed or intangible assets Book Debts or Sundry
Balance Sheet) Debtors more than 6 months old/ Disputed Debts,
Term loans from financial institutions; Investment of long term nature in shares,
Term loan from banks; Debentures/Bonds; govt. securities, associates or sister firms or
Deferred payment liability;Preference Shares companies. Long term security deposits. Unquoted
redeemable within 12 years; investments; Investments in subsidiaries or sister
Fixed Deposits maturing after one year; concerns; Loans & Advances to directors, officers;
Provision for gratuity; Unsecured Loans Accounts receivables in respect of sale of plant &
machinery; Advances to concerns in which
directors are interested; Deposits with customs
port trust etc
Intangible & fictitious Assets Which do not have
physical existence. For example: Goodwill, Patents,
Trade Mark, Copy Right, Preliminary or pre
operative expenses, other formation expenses,
debit balance of P & L account, accumulated
losses, bad debts, Capital issue expenses e.g.
discount on issue of share & debentures,
commission on underwriting of shares &
debentures; Deferred revenue expenditure
e.g. Advertisement
Short term for CurrentyLiabilities Liabilities Current Assets : Cash in hand, Bank balance
which are due for payment within 12 months including fixed ,deposits with banks.
from the date of the balance sheet and are to Stocks/inventory (such as raw material, stock in
be repaid out of proceeds of current process, finished goods, consumable stores and
assets,Short term borrowings from banks spares),Book debts/Sundry debtors/Bills
(C/C, 0/D or B/P, B/D limits) for working Receivable/ Accounts receivable/ debtors,
capital.,Sundry/trade creditors/creditors/ Government and other trustee securities
Account payable,Bills Payable / trade (other than for long term purposes e.g. sinking
acceptances funds, gratuity funds etc.),Readily
Fixed Deposits from public payable within Marketable/quoted govt. or other securities meant
one year,Short duration loans or deposits for sale,Interest accrued and
Provision for taxation, Proposed Dividends, receivables,Advance payment of taxes,
Provision for bonus, unclaimed dividend. pre-paid expenses,Advance payments for
Deposits from dealers, selling agents etc. merchandise; unexpired insurance
Advance payments from customers,
outstanding expenses and Accruals e.g.
wages & salaries, rent; expenses payable
TOTAL TOTAL
How ratios are expressed
Ratios can be expressed in the following different ways: In %age terms such as net profit to sale ratio
(being 23%),In proportion such as current ratio (being 2:1),In no. of times such as stock turn over
ratio (being no of times )
IMPORTANT RATIOS & FORMULAE LIQUIDITY RATIOS
• Current Ratio : Current assets / Current liabilities
• Acid Test or Quick Ratio Quick assets / Current liabilities
• Net working capital : Long term sources - long term uses OR current assets - current liabilities.
SOLVENCY or LEVERAGE RATIOS
• Debt-Equity Ratio
• Long term outside liabilities/Tangible net worth
• Debtor service coverage ratio (DSCR)
(Net profit + depreciation + amount of interest on th long term liabilities) / (amount of interest on
the lob term liabilities + amount of instalment of long tern liabilities).
ACTIVITY RATIOS
• Stock OR Inventory turnover: Sales / Stocks
• Debtor turnover : Sales / sundry debtors (i.e. book debts, receivables)
• Debtors' velocity or debt collection period Book-debts / sales x 12 PROFITABILITY
• Return on equity : Profit / tangible net worth x 100
• Return on investment or capital employed Profit / Investment (or capital employed) x 100
• Net Profit Ratio -=Net profit / Sales x 100
BREAK-EVEN RATIOs
Costs of a business cart be classified into fixed and variable. Fixed costs are those costs which do not
change with production like rent, salaries and variable costs are those which change with production
like raw material, wages, power, repair etc.
1. Profit = Sale minus fixed cost minus variable cost
2. Contribution = Sale price per unit minus variable cost per unit or Sale-variable cost
3. Break Even Point in units = Fixed Cost/(Sale Price per unit — Variable Cost per unit)or
Fixed cost/contribution per unit
4. Break Even Point in Rupees = Fixed cost x sale/(Sale- Variable Cost)
5. PV Ratio = contribution/sales x 100
6. Break Even Point = Fixed cost/PV Ratio
7. Break Even Point in terms of capacity utilization=Break even units/Installed capacityx 100
8. Margin of Safety =(Actual Sale — Break Even Sale)/ Actual Sale*100
Earning Per Share (EPS) :

The ratio denotes per share profit of a company. It can be used to compare 2 different companies" profitability. To
calculate the ration only the no. of equity share is taken (and not of preference shares). It can be calculated as
under: Net profit after tax and preference dividend/ no. of equity shares. It help in understanding market pricing of
the equity share.
Price Earning Ratio (PER) : The ratio indicates the current market price vis-a-vis the earning per share. It can be
calculated as under: Market price of the equity share / earning per share
Different users of ratios
Long term creditors Short term lenders (Banks) Shareholders
Fixed charges cover = Quick ratio ---
Earning per share =
Income before interest and Quick assets / current liabilities
Profit available for equity holders
tax / Interest charges
/ no. of equity shares
Debt service coverage ratio = Current ratio = Dividend Yield ratio =
Cash profit for debt service / annual Current assets / current liabilities Dividend per share / market
interest and principal price per share
Cash Flow Statement :Cash flow statements are useful in planning short term
operation of the business. Usually cash flow statement is prepared by cash receipt &
payment.
Fund Flow Statement : Fund flow statement is a statement of sources and uses of funds for a period.
Fund means net working capital. Fund flow statement indicates the changes in net working capital
position and the reasons for the same.
For preparing this statement, balance sheet of two consecutive years and profit and loss
account for the intervening period is required.
Long term sources of funds include issue of capital, raising term loans, debentures, funds from
operations and long term uses include purchase of fixed assets, payment of dividend, payment of
taxes, repayment of term loans.
If long term sources are more than long term uses, it will result in increase in net working
capital and vice versa
Various types of long term source, short term sources and uses are given below:
Net Profit after Tax LTS Tax Payments LTU
Dividend Payments LTU Increase in Term Loans LTS
Increase in Other CL STS Increase in Stock STU
Decrease in TL LTU Depreciation Neither S nor U
Increase in short term bank borrowing STS Increase in Fixed Assets LTU
Net Loss LTU Increase in Receivables STU
Reduction in fixed assets LTS Drawings by partners LTU
Decrease in Receivables
LTS Increase in Capital LTS
CONCEPT OF WORKING CAPITAL

Working Capital is defined as the excess of current assets over current liabilities. It is the same as net current
assets. It represents the investment of a company's funds in assets which are expected to be realised within a
relatively short period of time. It is not an investment in an asset with a long life but, as the name implies,
represents funds which are continually in use and are turned over many times in a year. It is capital used to
finance production, to support levels of stock and to provide credit for customers. The three main current
assets are stock, debtors and cash. They can be funded by short-term finance, i.e. current liabilities, or by
medium and long-term finance in case of permanent current assets or core current assets.
Components of Working Capital
The firm's Working Capital may be viewed as being comprised of two components:
1. Permanent working capital: These funds represent the current assets required on a continuing basis over
the entire year. it represents the amount of cash, receivables and inventory maintained as a minimum, to carry
on operations at any time, as a safety measure.
2. Variable working capital: These funds represent additional assets required at different times during the
operating year. Added inventory must be maintained to support the peak selling periods. Receivables increase
and must be financed following periods of high sales. Extra cash may be needed to pay for increased supplies
preceding high activity.
Working Capital Cycle
Working Capital cycle is the length of time that elapses between the company's outlay on raw materials, Wages
and other expenditures and the inflow.of cash from the sale of the goods. The length of the cycle depends upon
(I) stock of raw material required to be held.
(ii) The work in process which depends on the process involved in manufacturing or processing the
raw material.
(iii) Credit required to be provided to the purchasers.
Longer the working capital cycle, the more is the working capital requirement i.e. need for maintaining
the current assets.
Working capital & Net working Capital Working capital (or gross working capital) refers to the
amount of total current assets.
Liquid surplus or net working capital refers to the surplus of long term sources over long term uses
as per RBI prescription (also calculated by banks as difference between current assets and current
liabilities). It is desirable, that the net working capital should be positive which would signify liquidity
and availability of. Adequate working funds. If in a particular case, the net working capital is negative,
the difference will be called the working capital deficit.
The working capital can also be classified as:
a Permanent working capital which is minimum amount of current assets necessary for carrying
out operations for a period.
b Fluctuating working capital : Additional assets required at different times during an operating
period due to cyclic factors.
c Seasonal working capital means requirement for additional current assets due to seasonal
nature of the industry.
d Adhoc working capital : Additional funds for meeting the needs arising out of special circumstances
e.g. execution of special order, delay in receipt of payment of receivables.
e Working capital term loan : A long term loan given to meet the working capital margin needs of a
borrower. The concept was introduced by. Tandon Committee.
f Working capital gap = total current assets less other current liabilities. It is financed by net working
capital and bank finance for working capital (called MPBF).
SUMMARY - WORKING CAPITAL TERMS
Particulars Classification
Working capital Current assets such as cash, stocks, book-debts, other
current assets
Net capital working Current assets — current liabilities OR Long term sources — long term
uses
Working gap capital Current assets — current liabilities
(other than bank borrowing — i.e. OCL)
Working limits capital Bank facilities needed to purchase current assets. These facilities are
cash credit, overdraft, bills
purchase/discounting, pre-shipment or post-shipment loans etc.
Factors which determine the working capital The following factors determine the overall working
capital levels of the industrial units: Policies for production, Manufacturing process, Credit Policy of
the unit, Pace of turnover , Seasonality
Process for assessment of working capital requirements Generally there are three methods
followed by banks for assessing working capital of a firm i.e. (i) traditional method suggested under
Tandon Committee, (ii) turnover method suggested by Nayak Committee and (iii) cash budget method
followed in case of seasonal industries.
Methods of Assessing Bank Finance
Holding Norms based Method of Assessment of Bank Finance
Various steps used in the process include following
(a) Deciding on the level of turnover: : in case of existing units, past performance can help in
ascertaining projected turnover. In case of new enterprise, it is based on production capacity, proposed
market share, availability of raw materials, industry norms etc.
(b) Assessment of Gross working capital: This is sum total of various components of working capital
(i) inventory: For assessment of stock levels of raw material, work in process and finished
goods, information like lead time, minimum order quantity, location and number of suppliers,
percentage of imported material, manufacturing process etc are considered. Industry norms may be
helpful in this regard.
(ii) Receivables/bills: it can be assessed easily. It is governed by market practice relating to a
particular business.
(iii) Other Current assets: A reasonable estimate of other current assets like cash level, advance
to suppliers, advance tax payment etc is calculated. Sources of Meeting Working Capital Requirement
(i) Own sources: This represents available net working capital. Further, as the estimate of limits is based on
the projected balance sheet at the end of the current accounting year, some internal accruals are also taken into
account. Bank may stipulate additional NWC if available NWC and anticipated internal accruals are not enough to
maintain desired current ratio.
(ii) Suppliers's credit based on market practice
(iii) Other current liabilities like salary payable, advance from customers etc.
(iv) Bank Finance
Calculation of Bank Finance
This method was suggested by Tandon Committee. Though banks have been given complete discretion in this
regard, yet banks still follow this method.
There are three methods of lending.
1. As per first method of Tandon Committee, permissible bank finance is equal to 75% of the working capital
gap. Working capital gap is equal to total current assets minus current liabilities other than bank borrowing.
Borrower's margin will be 25% of the working capital gap. This method will give a current ratio of minimum
1.17:1.
As per second method of Tandon Committee, permissible bank finance is equal to 75% of the current assets
minus 100% of current liabilities other than bank borrowing. Borrower's margin will be 25% of the current
assets. This method will give current ratio of minimum 1.33:1.
As per third method, borrower is required to bring 100% of core current assets and at least 25% of the
remaining current assets as margin.
If the borrower is not able to bring required margin, he may be given working capital term loan. Thus, working
capital term loan was suggested by Tandon Committee.
Cash Budget Method
In any economic activity there will be outflows to meet the expenses of production and inflows from the sale of
output. Any firm requires working capital from the bank to meet the gap between these inflows and outflows.
Therefore, under this method, cash flows are projected on monthly or quarterly basis to ascertain the deficit.
Bank finance will be equal to cash deficit. This method is used while financing seasonal industries like tea,
sugar, service oriented industries like software, Non banking finance companies, construction contracts.
Turnover Method:
6. This method was suggested by Nayak Committee.
This method is to be applied in the case of working capital limits up to Rs 5 crore in the case of Small
Manufacturing enterprises and up to Rs 2 crore in other cases.
This method is simple in nature. According to this method, working capital requirement is equal to 25% of the
accepted projected annual sales; bank finance is 20% of the projected annual sales or 80% of the
working capital requirements and margin is 5% of the projected annual sales or 20% of the working
capital requirements. For example, if the current sales are Rs 400 lac, projected growth is 25%, then
projected annual sale will be Rs 500 lac. Accordingly, working capital requirement will be Rs 125 lac, bank
finance Rs 100 lac and borrower's margin Rs 25 lac. However, actual drawing power will be allowed as per security
available.
if net working capital available with the borrower (i.e. borrower's margin) is more than 5% of the projected
annual sale, the limits can be adjusted accordingly.
7. The requirement as per this method is minimum assuming working capital cycle of the unit at 3 months. If
working capital cycle is more, Bank may consider higher requirement depending on the business of the borrower.
Turnover Method (Nayak Committee) It is used where the aggregate fund-based working
capital credit limits are upto Rs. 500 lac from the banking system.
Working capital : Minimum 25% of the projected turnover (or 3 months's sale).
Working capital limits : Minimum of 20% of projected annual turnover after satisfying about
reasonableness of the projected annual turnover. Borrowers' margin : 5% of projected turnover.
If it is higher than 5%, the bank limits can be fixed at a lower level than 20%.
The margin proportionately increases with increase in period of operating cycle (ratio of margin to
bank finance should be 1:4.
Calculation of working capital
Estimated sale turnover (projected sale) Rs.80 lac
Minimum Working Capital @ 25% estimated sales (which Rs.20 lac
represents 03 months' sales)
Contribution of borrower @ 5% Rs.4 lac
Minimum Bank credit for working capital @ 20% of projected sales Rs.16 lac
Traditional method
As per traditional method (Tandon Committee), the level of working capital is determined both
by the length of the operating cycle and the size of the sales.
The method is applicable to working capital limits above Rs.5 lac. In a circular dated 04.11.97, RBI
withdrew the mandatory application of this method and allowed banks to use their own method.
The total of anticipated level of current assets calculated on the basis of estimated sales and by applying
the norms for inventory and receivables, is the level of working capital. The amount of bank limit, can be
determined as under :
a: Assess the level of net work ing capita l
(surplus of long term sources over long term uses) available, which normally should not be less than
25% of total current assets.
Work out bank finance to be sanctioned being gap of total current assets less NWC and other current
liabilities.
Calculation of limit
Method of lending
1st Method 2"d method
1.Total current assets 2000 2000

2.Less other current liabilities 200 200
capital gap (1-3) 1800 1800
_3.Working
Minimum stipulated NWC 450+ 500++
Maximum Permissible Bank Finance 1350 1300
+ Under 1st method it is 25% of working capital gap. ++ Under 2nd method it is 25% of total current assets
Loan Delivery System
1. This method was suggested by Jilani Committee.
2. Applicable to units with working capital requirements of Rs 10 crore and above from the banking
system.
1. Accordingly to this method, 80% of the working capital requirements were to be sanctioned by
way of a demand loan and balance 20% as fluctuating cash credit limit. Now, RBI allowed banks to fix
the percentage of demand loan as per their discretion.
2. The method is not applicable in respect of (a) Bill Finance (b) Export credit (c) Seasonal industries
.(d) sick units
WHAT THE CHANGE IN RATIOS MEAN
If a firm realises book debts in cash — No change in current assets, quick ratio, current ratio or net working
capital.
If a firm realises old assets or non current assets in cash or sell fixed assets in cash: current assets, quick ratio, current
ratio or net working capital will all improve
If a firm issues bonus shares — There is no change in any ratios
If a firm issues rights shares — Current ratio, quick ratio, net working capital, debt equity ratio, net worth will
improve
If a firm revalues its fixed assets and creates revaluation reserve: Net worth and tangible networth increase.
Debt equity ratio declines / improves. There is no effect on current assets or quick assets or current ratio and
quick ratio.
If increase in long term sources is more (say 125%) than increase in long term uses during a year liquid
asset would increase, liquidity would improve.
If increase in long term is uses more (say 125%) than increase in long term sources during a year — liquid
asset would decrease, liquidity would decline.
Lower and higher break even point : A firm with lower break even point has better chances for earning profits. A
firm with higher break even earns lower profits.
If break-even point of a firm goes up — It is an indication of dedine in profits
If break-even point of a firm goes down — It is an indication of increase in profits
If debtor-turnover ratio increase — It shows efficiency in recovery
If debtor-velocity ratio decrease — It shows firm is allowing credit to buyer of its products for a lesser period
If stock-turnover ratio increase — It is better use of stocks
If current ratio increases and quick ratio remain constant — It shows higher %age of stocks in or lower %age of
receivables in total current assets.
If current ratio is constant and quick ratio increases — It shows lower %age of stocks or higher %age in receivables
in total current assets.
TEST YOURSELF MCQs – RECALLED QUESTIONS

FI NA NCI AL ST ATE M EN T AN ALYSI S
1. Balance Sheet is a statement of Assets and Liabilities or statement of Sources and Uses
*(a) as on a date (b) as on 31st March (c) for 12 months (d) for a particular period (e) none
2. Assets can be represented as :
(a) uses of funds (b) sources of funds (c)what the business owns *(d) both (a) and (c) above
3. Liabilities can be represented as :
(a) sources of funds (b) uses of funds (c) what the business owes *(d) both (a) and (c) above
4. Current assets are defined as :
(a) assets which are expected to be consumed within one year
(b) assets which are expected to be converted into cash within one year
*(c) either (a) or (b) (d) assets which are to paid out of current liabilities(e) none of the above
5. Fixed assets are defined as :
(a) assets which are fixed to the land *(b)assets which are acquired for production and not meant for
sale
(c) assets which have a fixed value (d) assets which can not be sold easily (e) none of the above
6. Term liabilities are one :
(a) which are to be met within one year from the date of balance sheet
*(b) which are not payable within one year from the date of balance sheet
(c) which were raised for more than one year (d) which are not payable immediately (e) none
7. Current Liabilities are those liabilities
(a) which are payable within one year (b) which are expected to be met from proceeds of current
assets
(c) which are payable after one year *(d) both (a) & (b) (e) both (b) & (c)
8. Which of the following is not classified as current asset?
(a) stocks (b) prepaid expenses *(c) pre operative expenses (d) book debts (e) none
Which of the following is classified as intangible or fictitious asset?
(a) Goodwill (b) Preliminary expenses (c) Accumulated losses (d) Deferred Revenue Expenses
*(e) All of these
10. Which of the following is a current liability for calculation of current ratio?
(a) Sundry creditors (b) Borrowings from banks (c) Provision for tax
(d) Instalment of term loan payable within one year *(e) All of these
11. Debtors which are old for more than 6 months are to be classified as
(a) Current Assets (b) Intangible Assets (c) Non Current Assets (d) Fixed Assets
12. Instalments of term loan falling due within a year are treated as for calculation of current ratio :
*(a) current liability (b) current asset (c) term liability (d) net worth
13. Quick assets mean:
(a) all assets minus inventory (b) all current assets minus inventory
(c) assets other than cash (d) all current assets minus inventory and prepaid expenses
14. Sales minus cost of sales is referred to as :
(a) operating profit (b) net profit (c) profit before tax (d) profit after tax *(e) gross profit
15. Operating profit is arrived at by :
*(a) reducing administrative, general and selling expenses from gross profit
(b) adding back depreciation to gross profit (c) adding back depreciation and interest to net
profit
(d) adding back interest expenses to gross profit (e) none of the above
16. Cash profit is:
(a) gross profit before depreciation (b) net profit after depreciation
(c) net profit before depreciation (d) gross profit after depreciation (e) none of these
17. Cash loss is:
(a) gross loss before depreciation (b) net loss after depreciation (c) net loss before depreciation
(d) gross loss after depreciation (e) none of these
18. Tangible net worth means :
*(a) Paid up capital and reserves minus intangible assets(b) Net worth minus investment in fixed assets
(c) Paid up capital and reserves minus instalment of term loan payable within one year
(d) Net worth minus current liabilities (e) Total Assets minus intangible assets
19. The term Liquid Surplus or Net working capital refers to :
(a) total investment in current assets (b) excess of current liabilities over current assets
*(c) excess of current assets over current liabilities
(d) excess of capital plus free reserves over term liabilities (e) none of the above
20. Net working capital will be positive when :
(a) current assets are more than current liabilities (b) current liabilities are more than current assets
(c) current ratio is more than one (d) when current ratio is less than one *(e) both (a) & (c)
21. Liquidity ratios include :
(a) Current Ratio (b) Quick Ratio (c) Debt equity ratio *(d) Both (a) & (b) (e) all above
22. Current Ratio is obtained by :
(a) reducing current liabilities from current assets and dividing the resultant figures by current
liabilities
(b) dividing current liabilities by current assets *(c) dividing current assets by current
liabilities
(d) dividing outside liabilities by net worth (e) none of the above
23. Current Ratio is an indicator of ____________ of the borrower:
*(a) liquidity position (b) solvency (c) profitability (d) all above (e) none of the above
24. Current Ratio of less than 1 indicates that the borrower:
(a) has sufficient current assets to meet current liabilities (b) may be unable to pay current dues
(c) has borrowed excessively from outsiders (d) any of the above (e) none of the above
25. Current ratio as per second method of lending given by Tandon Committee works out to :
(a) 1:1- (b) 2:1 (c) 1.17:1 (d) 1.33 : 1 (e)none of these
26. Acid Test Ratio is supportive ratio for ____
(a) Debt-Equity Ratio (b) Current Ratio (c) Gross Profit Ratio
(d) Net Profit Ratio (e) Debt-Service Coverage Ratio
27. The following are the Current and Quick Ratio of a firm for two consecutive years
Current Ratio 1.6:1 & 2.3:1; Quick Ratio 1.1:1 & 1:1. The trend indicates that :
(a) the borrower is relying heavily on term loans
(b) there is reasonable investment from current liabilities in current assets
(c) there is excessive investment in inventory and prepaid expenses
(d) more sales are being effected on credit than before (e) none of the above
28. Debt Equity Ratio is relationship between :
(a) total liability and net worth (b) current assets and current liabilities
(c) term liabilities to total net worth *(d) term liabilities to tangible net worth (e) either (a) or (d)
29. A decreasing Debt Equity Ratio means :
*(a) higher stake of owners (b) lower stake of owners (c) decrease in profitability of the business
(d) sharp increase in profitability of the concern . (e) none of the above
30. Profit & Loss account helps in computing
(a) Profitability Ratio (b) Solvency Ratio (c) Turnover Ratio (d) Liquidity Ratio
31. Return on Investment (ROI) falls in the category of :
*(a) Profitability Ratios (b) Solvency Ratios (c) Liquidity Ratios (d) all above
32. Gross Profit Ratio is obtained by :
(a) dividing gross profits by net sales and multiplying it with 100
(b) dividing net profit by gross sales and multiplying it with 100
(c) dividing gross profit by gross sales and multiplying it with 100
(d) net sales by net profit (e) none of the above
33. Which of the following ratios is one of the most important ratios to ascertain the profitability ?
(a) Debt Equity Ratio (b) Return on Investment (c) Working Capital Turnover Ratio
(d)Gross Profit Ratio (e) Quick Ratio
34. 'Activity Ratios' or 'Turnover Ratios' indicate :
(a) extent of profitability *(b) efficiency of the concern in the utilisation of assets
(c) stake of owners' funds (d) stake of term lending institutions (e) none of the above
35. Debtors Velocity Ratio indicates :
(a) proportion of credit sales to annual sales (b) proportion of credit sales to fixed assets
(c) average time-lag between sales and the collection of debts
(d) average time taken in effecting sales to customers (e) none of the above
36. A decreasing trend of Debtors Velocity Ratio implies :
(a) more credit being extended(b) less likelihood of bad and doubtful debts (c) poor debt collection
(d) more demand for product of the seller (e) none of the above
37. Debt Service Coverage Ratio (DSCR) indicates :
*(a) capability of unit to generate adequate cash accruals to pay instalments of term loans and interest
thereon (b) knowing short term liquidity of borrower (c) overall profitability of the unit
(d) ascertaining borrower's stake in business (e) none of the above
38. Debt Service Coverage Ratio is used for sanction of :
(a) Working Capital Facilities *(b) Term Loans (c) Bank Guarantee (d) Letter of Credit
39. Ideal DSCR is
a) 1:1 (b) 1.33:1 (c) 1.5:1 *(d) 2:1 (e) None of these
40. Short term solvency of a unit is indicted by
a) Debt equity Ratio b) Total indebtedness ratio c) proprietary ratio *d) Current ratio
41. A very high Current Ratio of say 4:1 is :
(a) highly desirable as it shows capacity of the borrower to repay current dues without difficulty
*(b) not desirable as it means less efficient use of funds
(c) desirable as it means that the borrower is relying more on capital and reserves than on outside
borrowings (d) desirable as it ensures safety of bank funds in the long run (e)none of the above
42. Proprietory Ratio is the relationship between :
(a) total assets to tangible net worth *(b) capital or shareholders' funds to total tangible assets
(c) net fixed assets to long-term debts (d).either (a) or (b) (e) none of the above
43. For calculating Debt Service Coverage Ratio (DSCR), the numerator will be :
*(a) Profit after tax plus depreciation plus interest on term borrowings
(b) Profit before tax plus depreciation plus interest on term borrowings
(c) Profit after tax plus interest on term borrowings (d) Profit before tax plus interest on
term'borrowings
44. Which of the following is incorrect?
(a) For a dealer of cars, a car is a current asset
(b) Security deposits for electricity or telephone is a non current asset.
(c) Prepaid rent is a current asset
*(d) For a transport operator, a car is a current asset(e)Pre expenses is a fictitious asset
45. The short term solvency of a unit can be judged by
a) Debt Equity Ratio *b) Current Ratio c) Debt collection period
d) Gross profit margin e) None of these
46. Debt Equity Ratio is calculated by dividing
*(a) Long term liability by tangible net worth b) Long term liability by paid up capital and reserves
(c) Tangible net worth by long term liability d) Paid up capital and reserves by long term liability
(e) Total outside liability by paid up capital
47. Working capital gap means
(a) Current Assets minus Current Liability
*(b) Current Asset minus Current Liability other than bank borrowing
(c) Current Assets minus inventory & prepaid expenses
(d) Current Assets minus paid up Stocks
(e) Quick Assets minus Current Liability other than bank borrowing
48. Which of the_following is not a fixed cost of a manufacturing unit? a)
raw material consumed b) rent paid for factory shed c) consumption of
power
d) salary of the office staff e) commission paid to salesmanf) salary of manager
g) wages paid to production staff based on production *(h) a,c,g & e (1) none
49. Break even point in a production process is the point where:
a) fixed costs equal variable costs (b) fixed costs start rising on further production
*(c) total of fixed and variable costs just equals the total revenue (d) both (a) and (c)
50. Break Even Point represent a level of sales at which :
(a) there is no profit or loss (b) sales revenue is equal to total cost
(c) a firm is able to recover both fixed and variable costs *(d) all of these (e) none of these
51. Operating cycle in an industrial concern means
a) Conversion of raw materials into semi-finished goods
b) *Conversion of raw materials into finished goods sundry debtors and back into cash
c) Conversion of raw materials into finished goods
d) Conversion of sundry debtors into cash e) none
52. As per first method of lending of Tendon Committee bank should finance 75% of:
*a) working-capital gap (b) total current assets (c) net working capital
d) lower of (a) or (b) above (e) none
53. In the second method of lending under Tendon Committee:
(a) Bank should finance 75% of working capital gap
(b) Bank should finance 50% of the current assets
*(c) Borrower should contribute 25% of total current assets and total current liabilities including
bank
borrowing should not exceed 75% of current assets
(d) Lower of (a) & (b) e) none
54. As per Nayak Committee recommendations as modified from time to time, 20% of projected sales
are to be sanctioned as working capital to SSI units with WC limits up to
a) Rs. 50 lakh b) Rs. 100 lakh c) Rs. 200 lakh *d) Rs. 500 lakh e) none
55. Funds flow statement means:
(a) operating statement for a period (b) statement of sources and use of funds as on a date
*(c) statement of sources and use of funds for a period (d) statement of assets and liabilities as on a
date
56. Which of the following is a long term source?
a) Paid up capital and reserves b) Term loan from financial institution
c) Plant and machinery *d) Both (a) & (b) e) Both (b) & (c)
57. Which of the following is not a long term use?
a) Goodwill b) Land & Building c) Investment in subsidiaries
*d) Debentures e) Pre operative expense
58. The profit retained in the business are classified as
b) Current asset as these are easily realizable (b)Current liability as these are payable to shareholders
c) Assets as these are owned by business *(d) Liabilities as this represent as a source of funds
e) Long term liability as these are payable to shareholders after one year
59. Which of the following is incorrect? : a) Increase in liabilities is a source of funds b) Decline in
assets is a source of funds c) Increase in assets is a use of funds d) Decline in liabilities is a use of funds
*e) None of these ( ANSWER IS - * MARKS )
TEST YOUR SELF
Classify the following assets and liabilities for Balance Sheet of M/s ABC Enterprises Company for the
year as on 31.3.2013 & 31.03.2014
31.03.13 31.03.14 31.03.1 31.03.14
Cash 15000 26400 Good will 3
3000 3000
Provision for Expenses 1200 1500 Capital 20000 25000
Vehicles 13000 10000 Sundry Debtors 16000 20000
Unsecured loans (Long 8000 2000 Term Loan 20000 25000
term)
Investment in other 2000 2500 Plant and 20000 22500
firms
Pre Operative Expenses 700 200 Machinery
Sundry Creditors 12000 14000
Stocks 20000 25000 Reserves 15000 18000
Prepaid expenses 1500 2200 Expenses payable 4000 3800
Security Deposit 2000 3000 Bank Borrowings / 13000 25000
Land and building 12000 11500 cash credit
Debentures 12000 12000
Sales 100000 110000 Net profit 5000 3000
Interest on Term Loan 3000 3700 Depreciation 2000 2200
Calculate Current Ratio / Quick Ratio / Net working Capital / Debt Equity Ratio / Debt
Service Coverage (consider that installment during the year is 4000) Ratio / Stock turnover
ratio / Debtor Turnover ratio / Debtor velocity ratio / Net profit %.
Answer:
LIABILITIES 31.3.13 31.3.14 ASSETS 31.3.13 31.3.14

OWNERS FUNDS FIXED ASSETS
Capital 20000 25000 Land and Building 12000 11500
Reserves 15000 18000 Plant and Machinery 20000 22500
B TOTAL(Net Worth) 35000 43000 Vehicles 13000 10000
LONG TERM LIABILITIES SUB TOTAL(Fixed 45000 44000
Unsecured Loans 8000 2000 Assets)
NON CURRENT
Term Loan 20000 25000 ASSETS (NCA)
Investment in Firms 2000 2500
Debentures 12000 12000 Security Deposit 2000 3000
SUB TOTAL(Term 40000 39000 SUB TOTAL (Total 4000 5500
Liabilities) Non Current Assets)
CURRENT LIABILITIES INTANGIBLE ASSETS
Provision for Expenses 1200 1500 Goodwill 3000 3000
Sundry Creditors 12000 14000 Pre Operative 700 200
Expenses Payable 4000 3800 Expenses
SUB TOTAL(Total Intangible
3700 3200
Assets)
Bank Cash Credit 13000 25000 CURRENT ASSETS
SUB TOTAL(Current 30200 44300 Cash 15000 26400
Liabilities) Sundry Debtors 16000 20000
Stocks 20000 25000
Prepaid Expenses 1500 2200
Total Current 52500 73600
GRANDTOTAL 10520 Assets - Subtotal
12630 GRANDTOTAL 105200 126300
(Total of Liabilities) 0 0 (Total of Assets)
Calculations:
31.3.13 31.3.14
Networth Capital + Reserves 35000 43000
Intagible assets 3700 3200
Tangible NW NW - Intangibles 31300 39800
Long Term Liabilities 40000 39000
Long Term Sources LTL + Networth 75000 82000
Current Liabilities
44300
Short Term Sources (= Current Liabilities) 30200
Outside Liabilities (= LTL + CL) 70200 83300
Long Term (= Fixed Assets+ NCA+ 43700 47200
Uses Intangible Assets
Current Assets
Gross Working (= Total CA) 52500 73600
Capital
Short Term Sources (CL) 30200 44300
Net Working Capital CA – CL 22300 29300
Quick Assets CA –Stocks& Prepaid Exp 31000 46400
Current Ratio CA ÷ CL 1.73 1.66
Quick Ratio QA ÷ CL 1.02 1.04
Debt Equity Ratio LTL ÷ TNW 1.27 0.98
DSCR (Profit + Depreciation + TL Interest) ÷ 1.71 1.16

(TL Installment + TL Interest)
Stock Turnover Sales ÷ Stocks 50 44

Ratio
Drs T/o Ratio Sales ÷ Sy Debtors 62.5 44
Debtors Velocity (Sy Drs÷Sales) x 12 0.24 0.27
Ratio
Net Profit % (NP ÷ Sales) x 100 0.50 0.27
Return on NW (NP ÷ TNW) x 100 15.97 7.54
PROJECT APPRAISAL AND TERM LOAN SANCTIONS

Project appraisal :The project appraisal is a comprehensive and systematic review of all the related
aspects of a given project by a bank or financial institution with a view to ascertain as to what extent
the project can be run viably in the long run.
Viability :Viability is ability to generate adequate cash to pay principal and interest of all long
liabilities including term loans as per pre-determined time schedule, in addition to providing
appropriate return on owned funds (dividend or drawings) so as to keep entrepreneur's interest intact
in continuation of the enterprise.
Components of appraisal : For a appropriate appraisal of a project, the study is undertaken in 4
areas, namely,
1 Technical appraisal: it - determines the feasibility of setting up a project to achieve particular level
of operations (in terms quantity, quality and timely delivery) and takes into account all technical
details.
2 Financial appraisal takes into account the aspects such as the profitability and the cash generation
based on which the project will be able to reward the entrepreneur and also service its financial
commitments.
3 Market appraisal looks into the availability or creation of the market to achieve the sales targets. It
takes into consideration the demand forecasting based on overall demand and supply position,
product promotion measures, selling strategies, pricing, competition, export potential, product life
cycle etc.
4 Management appraisal studies the adequacy and suitability of management structure for the
successful implementation and running of the project and achieve the objectives for which the project
has been promoted. Cost of project
The cost included the cost of land, its development, construction of required buildings etc.,
acquisition of plant, machinery, equipment, other misc. and fixed assets, preliminary, preoperative
expenses, technical fee, contingencies, margin for working capital etc. The cost differs from project
to project.
Means to finance a project
Contribution from promoters in the form of equity or subordinated loans, secured loans raised from
financial institutions or banks, lease finance, debentures, grants and subsidies, cash accruals (in
respect of existing projects), suppliers' credit etc. are various forms of means to finance projects.
Debt Service Coverage Ratio (DSCR) :The relationship between the repaying capacity and the
repayment commitment is expressed in the form of Debt Service Coverage Ratio (DSCR) which
indicates the coverage of liability of the concern. The following formula for working out DSCR, is
followed: " (Net profit + interest on TL + depreciation) / (Interest on term loan + instalment of term
loan)"
Term loan and Deferred Payment Guarantee (DPG)
Term Loan DPG
It Is fund based. It Is non-fund based
Funds outlay instant Funds outlay contingent
It is shown as part of balance sheet It is shown as footnotes of the balance sheet
This loan is allowed by bank or financial Institution Long term credit is allowed by seller against
guarantee
Common features : Purpose is purchase of capital assets. Detailed appraisal required. Repayment
is from future profits
Financial Appraisal Techniques for Project
DISCOUNTED CASH FLOW (DCF) METHODS
DCF takes into account the actual timing of cash outgo and cash inflow. It is based on total cash flow
over the life of the project. There are two principal measures of DCF, i.e. NPV & IRR.
Net present value (NPV)
NPV is the difference between cash outflows at base period and present value of future cash inflows. It
helps the bank to ascertain, whether a oroject should be taken up for financing or not
Project A Project B
Year Discount rate Cash inflow NPV Cash inflow NPV
(DCF) 10%
0 (-)5000 -5000 (-) 5000
5000
1 0.91 1100 1000 1125 1024
2 0.83 1210 1000 1235 2025
3 0.75 1330 999 1355 1016
4 0.68 1460 997 1485 1010
5 0.62 1500 931 1525 945
Total 6600 4927 6725 5020
Net present value 4927 - 5000 = (-) 73 5020-5000 = 20
This is initial investment in the project is an outflow.
In project A while the cash outflow is 5000 (original investment), the future cash inflow is 6600 and its
net present value at 10% discount rate is 4927. Hence the NPV is less than Zero (i.e. — 73). On the
other hand, for project B, against cash outflow of 5000, the net present value of the inflow of 6725 is
5020 which is more than Zero.
Hence, the project B can be taken up for financing.
Internal rate of return (IRR)
IRR is the rate of discount at which the net present value is ZERO. In the following example it is 34.62%.
At this discount rate the discounted value of the net cash flow from a project is equal to the amount
which has been invested to obtain that net cash flow (in the following case, the investment is 1500. At
30% discount, the NPV of cash inflow is 1633 and at 35% it is — 11, but at 34.62%, it will be 1500,
making the net value as Zero).
Illustration:
The exact IRR would be 34.62% which can be worked out as under, at which the net present value of
the cash Inflow would be Zero which is (-) 11 at 35% and 133 at 30% discount rate.
(Lower discount rate + difference between two discount rates) X Net present value of the cash flow at
lower discount rate / absolute difference between the NPV of cash flow stream at two discount rates.
= 30 + 5 (133/144) i.e. = 30 + 5 (.924) = 34.62%
Year Cash flow DCF-30% Discounted DCF-35% Discounted
0 Cash flow cash flow
(-)1500 (-)1500
1 500 0.769 384 0.741 370

2 750 0.592 444 0.549 412
3 1000 0.455 455 0.406 406
4 1000 0.350 350 0.301 301
5 3250 1633 1489
Net position 1633-1500 = 133 1489-1500=(-)11
This is initial investment. Hence an outflow.
GUARANTEE
1. Guarantee is defined in section 126 of Indian Contract Act.
2. There are three parties to a contract of guarantee namely principal debtor, creditor and surety.
3. The contract of guarantee is not a contract of utmost good faith. Therefore, bank is not
supposed to disclose-, all information regarding loan account being guaranteed. However, ii the
surety makes specific enquiry bank must disclose facts to surety otherwise he can avoid liability.
4. A Guarantee which is for a single transaction like term loan is called specific guarantee. A
Guarantee for series of transactions like in cash credit or overdraft is called continuing guarantee.
5. The liability under guarantee is a contingent liability and surety is liable on default by the
principal debtor_ Once there is a default, the liability of the surety is co extensive with the principal
debtor.
6. When on default by principal debtor, a guarantor makes payment on being called by the
creditor, he becomes entitled to all rights and remedies which creditor had against the principal
debtor. This right of the surety is called Right of Subrogation.
7. If a surety revokes guarantee then he will be liable for the amount outstanding in the account at
the time of revocation and interest thereon. However, if guarantee is continuing like in case of cash
credit, surety is required to issue notice and he will be liable for the amount outstanding in the account
on the expiry of notice period and interest thereon.
BANK GUARANTEE
Bank Guarantees are of three types namely (a) Financial Guarantee (b) Performance Guarantee (c)
Deferred Payment Guarantee.
1. Financial Guarantee: When a customer of the bank is required to deposit some amount with
court or revenue authority or earnest money and guarantee is issued in lieu of such money, it is
called Financial guarantee.
2. Performance Guarantee: This type of guarantees are meant for performance of contracts
entered into by the customers.
3. Deferred Payment Guarantee: This type of guarantee is issued when the bank's customer
purchases some machine etc on deferred payment basis and that payment is guaranteed by the
bank. Deferred payment guarantee is a type of financial guarantee.Both bank and the purchaser of
machinery prefer this type of guarantee as neither is required to part with funds immediately. Basic
difference between Term Loan and Deferred Payment Guarantee is on account of outlay of funds. In
term loans funds are disbursed immediately whereas in case of DPG, bank is required to make
payment when the purchaser of machinery defaults. Appraisal of the DPG proposal is done just like
that of a term loan
4. Maximum period for guarantee: Generally maximum period can be up to 10 years. However,
banks have been allowed to issue guarantee for more than 10 year also.
5. Liability of Bank: In the case of guarantee, the liability of bank is contingent liability and it is
shown as a footnote to the Balance Sheet.
6. Limitation period in a guarantee: As per amendment to Section 28 of Indian Contract Act,
limitation period for enforcing claims under Bank guarantee is 3 years (30 years in case of Govt)
from the date of invocation or stipulated expiry date whichever is earlier.
LETTER OF CREDIT
A letter of credit is a commercial instrument of assured payment and widely used by the business
community for its various advantages. It is an instrument by which a bank undertakes to make
payment to a seller on production of documents stipulated in the credit (refer to Article 2 of UCPDC).
The credit specifies as to when payment is to be made which may be either when the documents are
presented to the paying bank or at some future date, depending upon the terms stipulated in the
credit.
Parties to LCs
a: Applicant- The buyer / importer of the goods (generally borrower of the issuing bank). The applicant
has to make payment if documents as per LC are delivered, whether the goods are as per contract
between the buyer and beneficiary or not.
b: Issuing bank - Importer's or buyer's bank who lends its name or credit. It is liable for payment
once the documents under LC are received by it from nominated (negotiating) bank, irrespective of the
fact whether it is able to recover the payment from applicant or not. It gets 5 banking days to check
the documents.
c: Advising bank - Issuing bank's branch (or correspondent in exporter's country) to whom the letter
of credit is sent for onward transmission to the seller or beneficiary,-after authentication of genuineness
of the credit. Where it is unable to verify the authenticity, it can seek instructions from the opening bank
or can advise the LC to beneficiary, without any liability on its part. This bank has no obligation to
negotiate the documents.
d. Beneficiary - The party to whom the credit is addressed i.e. seller or supplier or exporter. It gets
payment against documents as per LC from the nominated bank within validity period for
negotiation, maximum 21 days from date of shipment.
e: Negotiating bank - The bank to whom the beneficiary presents the documents for negotiation. It
claims payment from the reimbursing bank or opening bank and gets 5 banking days to check the
documents.
f: Reimbursing bank- 3rd bank which repays, settles or funds the negotiating bank at the request of
its principal, the issuing bank.
g: Confirming bank - The bank adding confirmation to the credit, which undertakes the
responsibility of payment by the issuing bank and on his failure to pay. The confirmation is added on
request of the opening bank.
TYPES OF LETTERS OF CREDITS
DA (Usance) or DP LCs: DA LCs are those, where the payment is to be made on the maturity
date in terms of the credit. The documents of title to goods are delivered to applicant merely on
acceptance of documents for payment. He makes the payment on due date. To that extent
these are unsecured.
DP LCs are those where the payment is made against documents on presentation.
Irrevocable & Revocable LCs: An irrevocable LC is one, which can be cancelled or amended with
consent of beneficiary, applicant bank and confirming bank, if any.
A revocable credit is one that can be cancelled or amended at any time without the prior
knowledgeof the beneficiary. If the negotiating bank makes a payment to the seller prior to
receiving notice of cancellation or amendment, the issuing bank must honour the liability. If
nothing is stated, the LC is irrevocable.
With or without recourse LCs: Where the beneficiary holds himself liable to the holder
Of the bill if dishonoured, it is considered
with-recourse LC. Where he does not hold himself liable,the credit is said to be without-recourse. As
per RBI directive (Jan 23, 2003), banks should not open such LCs. Under LC, the Banks can negotiate
bills bearing the 'without recourse' clause.
A restricted LC is one wherein a specified bank is designated to pay, accept or negotiate.
payment will be made. The confirming bank's liability is similar to the issuing bank. The confirming
bank has to negotiate documents if tendered by the beneficiary.
Transferable LCs: It is an LC, where the beneficiary is entitled to transfer the LC, in whole or in part,
to the 2nd beneficiary/s (supplier of beneficiary). The 2'd beneficiary, however, cannot transfer it
further, but can transfer the unused portion, back to the original beneficiary. It is transferable
only once.
A back to back credit is the 2'1 LC opened by the original beneficiary in favour of the rd beneficiary
who is his local supplier. He tenders the original LC to the bank in his country as a cover for opening
the 2'1 LC. The terms of such credit would be identical except that the price may be lower and validity
earlier.
A red clause credit also referred to a packing or anticipatory credit, has a clause permitting
the correspondent bank in the exporter's country to grant advance to beneficiary at issuing bank's
responsibility. These advances are adjusted from proceeds of the bills negotiated.
A green clause LC permits the advances for storage of goods in a warehouse in addition to pre-
shipment advance. It is an extension of the red clause LC.
Standby credits is similar to performance bond or guarantee, but issued in the form of LC. The
beneficiary can submit his claim by means of a draft accompanied by the requisite documentary
evidence of performance, as stipulated in the credit.
Documentary Credits:
When LC specifies that the bills drawn under LC must - accompany documents of title to goods such as
RRs or MIRs or Bills of lading etc. it is termed as Documentary Credit. If any such documents are not
called, the credit is said to be Clean Credit.
Revolving Credits:
These LCs provide that the amount of drawings made there under would be reinstated and made
available to the beneficiary again and again for further drawings during the currency of credit provided
the applicant makes the payment of documents earlier negotiated. At times, an overall turnover cap is
also stipulated.
Instalment Credit:
It is a letter of credit for the full value of goods but requires shipments of specific quantities of goods
within nominated period and allows for part-shipment. In case any one instalment of shipment is
missed, credit will not be available for that and subsequent instalment unless LC permits it.
DOCUMENTS UNDER LETTER OF CREDIT
Liability of an opening bank in a letter of credit arises, when the beneficiary delivers the documents
strictly drawn as per terms of the letter of credit. These documents include the following:
Bill of exchange: This is the basic document which requires to oe discharged by making the
payment. It is defined u/s 5 of NI Act. The right to draw this document is available to
beneficiary and the amount, tenor etc. has to be in terms of the credit.
Invoice : This document provides relevant details of the sale transaction, which is made in the name
of the applicant, by the beneficiary. The details regarding, quantity, price, specification etc. should be
same as mentioned in the letter of credit.
Transport documents: It evidences the despatch of the goods by the beneficiary, by handing over
the goods to the agent of the applicant, which may be a ship, railways or a transport operator,
who issues documents such as such as bill of lading, railway receipt, transport
receipt. Other documents could be Airway Bill or Postal or courier receipt.
Insurance : The despatched goods are required to be insured for transit. Insurance policy or
insurance certificate should be signed by the company or underwriter or their agent. Amount, kinds of
risk etc. should be same as mentioned in the letter of credit.
Other documents: The letter of credit may also specify other documents to be presented along with the
above documents which may include certificate of origin, certificate from health authorities etc.
UNIFORM CUSTOMS AND PRACTICES FOR DOCUMENTARY CREDITS (UCPDC-600)
Uniform Customs and Practices for Documentary Credits - 600 (referred to as UCP-600), prepared by
ICC, Paris (by revising the UCPDC-500), has been implemented wef July 01, 2007. It is 6th revision of
the Rules since first promulgation in 1933. The new document has 39 Articles (against 49 of UCPDC-
500) with supplement for Electronic • Presentation covering 12 eArticles. UCPDC-600, shall be
applicable to LCs that expressly indicate that these are subject to UCPDC-600.
Discounting of Bills by Banks under LC As per extant guidelines of RBI (Master Cir dated July 02,
2010) the banks are required to purchase / discount / negotiate bills under Letter of Credit (LC) only
in respect of genuine commercial and trade transactions of their borrower constituents who have
been sanctioned regular credit facilities by the banks. RBI has reviewed the above instructions (Aug
03, 2007) and decided as under:
In cases where negotiation of bills drawn under LC is restricted to a particular bank, and the beneficiary
of the LC is not a constituent of that bank, the bank concerned may negotiate such an LC, subject to
the condition that the proceeds will be remitted to the regular banker of the beneficiary. However, the
prohibition regarding negotiation of unrestricted LCs of non-constituents will continue to be in force.
The banks may negotiate bills drawn under LCs, on 'with recourse' or 'without recourse' basis, as per
their discretion and based on their perception about the credit worthiness of the LC issuing bank.
However, the restriction on purchase/discount of other bills (the bills drawn otherwise than under LC)
on 'without recourse' basis will continue to be in force.
Parties to a LC transaction
1. There are 05 parties to LC i.e. a.Exporter who is beneficiary of credit, b. Issuing bank who is
importer's bank.
3.Advising bank is the one through whom LC is advised to the exporter. 4. Confirming bank is the one who
gives additional undertaking to make issuing bank.
45 Negotiating Bank : who will purchase or discount bills drawn under LC
Export Credit
Export credit is allowed in two stages namely pre shipment or packing credit and post shipment. Salient
features of packing credit are as under:
2. For packing credit eligibility conditions are (a) Exporter should have Import Export Code Number
(b)Exporter should not be on the caution list of RBI (c) Exporter should not be on the specific approval
list of ECGC (d) He should have confirmed order of LC. However, if running packing credit facility has
been allowed confirmed order can be submitted later on.
2. Amount of PCL: on the basis of FOB value
3. Period of PCL: As per need of exporter. If pre-shipment advances are not adjusted by submission of
export documents within 360 days from the date of advance, the advances will cease to qualify for prescribed
rate of interest for export credit to the exporter ab initio.
Adjustment of PCL: Normally through proceeds of export bills or export incentives or debit to EEFC
account.
Post shipment credit
1. As per Exchange Control Regulations, bills should be submitted for negotiation within 21 days of
shipment.
2. Export proceeds should in general be realized within 12 months from date of shipment. (Earlier it was
6 months and for status holder exporters, 100% EOU, units in EHTP/STP, the period was 12 months from the
date of shipment). In case of export for warehousing the period of realization is 15 months. In case of exports
by units in Special Economic Zone there is no maximum period prescribed by RBI.
3. Authorised Dealer can grant extension up to 6 months if invoice amount is up to USD 1 million.
4. If any export is not realized within 180 days of date of shipment, in all cases, a report should be
sent to RBI on XOS statement which is a half yearly statement submitted as at the end of June & Dec of each
year. This is to be submitted by 15th of July / January.
5. Normal Transit Period is the period between negotiation of bills and credit to Nostra account.
It is fixed by FEDAI and presently it is 25 days irrespective of the country.
Interest Rate on Export Credit
1. Export credit in rupees: Interest rates applicable for all tenors of rupee export credit advances sanctioned
on or after July 01, 2010 will be at or above Base Rate. Interest Rates under the BPLR system
effective upto June 30, 2010 will be 'not exceeding BPLR minus 2.5 percentage points per annum' for
the following categories of Export Credit:
• Pre-shipment Credit (from the date of advance) : (a) Up to 270 days (b)Against incentives receivable from
Government covered by ECGC Guarantee up to 90 days. If pre-shipment advances are not liquidated
from proceeds of bills on purchase, discount, etc. on submission of export documents within 360 days
from the date of advance, the advances will cease to qualify for prescribed rate of interest for export
credit ab initio.
• Post-shipment Credit (from the date of advance): (a) On demand bills for transit period (as specified by
FEDAI); (b) Usance bills (for total period comprising usance period of export bills, transit period as specified by
FEDAI, and grace period, wherever applicable): i) Up to 180 days; ii) Up to 365 days for exporters under the
Gold Card Scheme. (a) Against incentives receivable from Govt. (covered by ECGC Guarantee) up to 90 days
(d) Against undrawn balances (up to 90 days); (e) Against retention money (for supplies portion only) payable
within one year from the date of shipment (up to 90 days) (f) In respect of overdue export bills also interest
rate should be charged at not more than BPLR minus 2.5% up to 180 days from date of advance.
2. Export Credit in Foreign Currency:
• Pre-shipment Credit in foreign currency (from the date of advance): (i) up to 180 days not more than
LIBOR/ EURO LIBOR/ EURIBOR plus 200 basis points. (ii) Beyond 180 days and up to 360 days: Rate
for initial period of 180 days prevailing at the time of extension plus 200 basis points. (iii) Beyond 360 days
as per bank discretion
• Post shipment in foreign currency: (a) On. demand bills for transit period: Not exceeding 200 basis points
over LIBOR/EURO LIBOR/EURIBOR. (b) Against usance bills for total period comprising usance period
of export bills, transit period and grace period up to 6 months from the date of shipment: Not exceeding
200 basis points over LIBOR/EURO LIBOR/EURIBOR (c) Export Bills (Demand or Usance) realized after
due date but up to date of crystallization: 200 basis points over the rate charged up to due date.
Interest Subvention on export credit in rupees:
The Government of India has decided to extend Interest Subvention of 2% from April 1, 2010 upto March 31, 2011 on
pre and post shipment rupee export credit, for certain employment oriented export sectors as under: (i) Handloom (ii)
Handicrafts (iii) Carpets (iv) Small & Medium Enterprises, (v) Leather and Leather Manufactures (vi) Jute Manufacturing
including Floor covering (vii) Engineering Goods (viii) Textiles. The items marked bold added vide circular dated 9th Aug 10.
However, the total subvention will be subject to the condition that the interest rate, after subvention will not fall below 7%
which is the rate applicable to the agriculture sector under priority sector lending. The interest subvention will be available
even in cases where Base Rate system has been introduced and banks can grant export credit below Base Rate after
considering subvention provided it is not less than 7% p.a.
Foreign Trade Policy 2015-20
The Foreign Trade Policy (FTP), 2015-20, is notified by Central Govt., in exercise of powers conferred
under Section 5 of the Foreign Trade (Development & Regulation) Act, 1992 (No. 22 of 1992).
Duration of FTP : 2015-20 FTP, incorporating provisions relating to export and import of goods and
services, came Into force w.e.f. 01.04.2015 and shall remain in force up to 31st March, 2020, unless
otherwise specified. All exports and imports made upto the date of notification shall, accordingly, be
governed by the relevant FTP.
Director General of Foreign Trade (DGFT) can, by means of a Public Notice, notify Hand Book of
Procedures, including Appendices and Aayat Niryat Forms or amendment thereto, if any, laying down
the procedure to be followed by an exporter or importer or by any Licensing/Regional Authority or by
any other authority for purposes
of implementing provisions of FT (D&R) Act, the Rules and the Orders made there under and provisions
of FTP.
IMPORTER EXPORTER CODE (IEC): No export or import can be made by any person without
obtaining an IEC number unless specifically exempted. Further, only one IEC is permitted against one
Permanent Account Number (PAN). If any PAN card holder has more than one IEC, the extra IECs is
disabled.
IEC : An IEC is a 10-digit number allotted to a person that is mandatory for undertaking any
export/import activities. The facility for IEC in electronic form or e-IEC has also been operationalised.
Exports from India Schemes: There are two schemes for exports of Merchandise and Services
respectively: (I) Merchandise Exports from India Scheme (MEIS).
(ii) Service Exports from India Scheme (SEIS).
Niryat Bandhu - Handholding Scheme for new Exporters / Importers: As per provisions of Foreign
Trade Policy 2015-20, DGFT is implementing the Niryat Bandhu Scheme for mentoring new and
potential exporter on the inbicades of foreign trade through counselling, training and outreach
programs.
Towns of Export Excellence (TEE): Selected towns producing goods of Rs. 750 cr or more may be
notified as TEE, based on potential for growth in exports. For TEE in Handloom, Handicraft, Agriculture
and Fisheries sector, threshold limit would be Rs.150
EOU, EHTP, STP, BTP: Units undertaking to export their entire production of goods and services (except
permissible sales in Domestic Tariff Area-DTA), may be set up under Export Oriented Unit (EOU)
Scheme, Eledronics Hardware Technology Park (EHTP) Scheme, Software Technology Park (STP)
Scheme or 1310-Technology Park (BTP) Scheme for manufacture of goods, rendering of services,
development of software, agriculture induding bio-tedinology. Trading units are not covered under
these schemes.
Export Promojion Capital Goods Scheme: (a) Scheme allows import of capital goods for pre-production,
production and post-production, at Zero customs duty. The Authorisation holder may also procure
Capital Goods from indigenous sources: Capital goods shall indude capital goods as defined in foreign
trade policy; (ii) Computer software systems; (iii) Spares, moulds, dies, jigs, fixtures, tools &
refractories and spare refractories; and (iv) catalysts for initial charge-i- one subsequent charge.
(b) Import of capital goods for Project Imports notified by CBEC.
Second hand capital goods are not permitted.
Interest Equalisation Scheme on Pre and Post Shipment Rupee Export Credit (December 4,
2015): The scheme is effective from April 1, 2015. (a) The rate of interest equalisation would be 3 percent
and will be available on Pre Shipment Rupee Export Credit and Post Shipment Rupee Export Credit; (b)
The scheme would be applicable w.e.f 01.04.2015 for 5 years. (c) The scheme will be available to all
exports under 416 tariff lines [at ITC (HS) code of 4 digit] and exports made by Micro, Small & Medium
Enterprises (MSMEs) across all ITC(HS) codes; (d) Scheme would not be available to merchant exporters;
(e) A study may be initiated on the impact of the scheme on export promotion on completion of 3 years of
the operation of the scheme. The study may be done through one of the IIMs
Export Refinance
1. Who will provide? Export Refinance is provided by RBI.
2. Maximum period of refinance is 180 days.
3. Extent of Refinance: 15% (w.e.f. 27.10.2009) of eligible export finance outstanding on the reporting Friday
of the preceding fortnight. Outstanding Export Credit for the purpose of working out refinance limits will be
aggregate outstanding export credit minus export bills rediscounted with other banks/Exim Bank/Financial
Institutions, export credit against which refinance has been obtained from NABARD/Exim Bank, pre-shipment
credit in foreign currency (PCFC), export bills discounted/rediscounted under the scheme of 'Rediscounting of
Export Bills Abroad', overdue rupee export credit and other export credit not eligible for refinance.
Interest rate is Repo Rate. 5. Packing Credit in Foreign Currency is not eligible for export refinance
EXPORTS FROM INDIA
Export trade is regulated by DGFT under Govt. of India, which announces policies and procedures for
exports from India. AD-I banks conduct export transactions in conformity with the Foreign Trade Policy,
the Rules framed by the Govt. of India and the directions issued by RBI. Manner of receipt of export
proceeds: (i) The amount can be received through AD Banks in the form of (a) Bank draft, pay order,
banker's or personal cheques (b) Foreign currency notes/travellers' cheques from the buyer during his
visit to India. (c) Payment out of funds held in the FCNR/NRE account maintained by the buyer
(d) International Credit Cards of the buyer (e) Wef Jan 01, 2009, Asian Clearing Union participants can
settle their transactions in ACU Dollar or in ACU Euro (equivalent in value to one US Dollar and one
Euro, respectively). Payment can be received from 3rd parties named by exporters in EGF, subject to
compliance of certain conditions (RBI-Nov 08, 2013).
Time limits for realisation and repatriation of export proceeds:
(a) Units in SEZs, Status Holders, 100% Export Oriented Units and Units in EHTPs/STPsIBTPs: max 9
months
(b) Exported to a warehouse established outside India : Max 15 months from the date of shipment of
goods; and
(c) Other cases: Max 9 months.
Offices and Immovable Property for Overseas Offices: For setting up of the office, AD-I banks may
allow remittances towards initial expenses up to 15% of the average annual sales/income or turnover
during the last 2 financial years or up to 25% of the net worth, whichever is higher. For recurring
expenses, remittances up to 10% of the average annual sales/income or turnover during the last 2
financial years may be sent.
Advance Payments against Exports: The exporter shall ensure that -
i. the shipment of goods is made within one year (ADs can allow period above one year also w.e.f. 21.2.12 subject
to the condition that refund during the last 3 years is not more than 10% of advance payments received);
ii. the rate of interest payable on the advance payment does not exceed London Inter-Bank Offered
Rate (LIBOR) + 100 basis points.
(ADs to sent quarterly report to RBI, within 21 days, for delay in utilization of advance payments — 09.02.15)
LONG TERM EXPORT ADVANCE : RBI allowed (May 21, 2014) AD banks to permit exporters, having a
minimum of 3 years' satisfactory track record, to receive long term export advance up to a maximum
tenor of 10 years for execution of long term supply contracts for export of goods. The rate of interest
should not exceed LIBOR plus 200 basis points. Receipt of advance of USD 100 million or more should
be immediately reported RBI. Where AD banks issue bank guarantee (BG) / Stand by Letter of Credit
(SBLC) for export performance, BG / SBLC may be issued for a term not exceeding 2 years at a time
and further rollover of not more than 2 years at a time may be allowed subject to satisfaction with
relative export performance as per the contract.
Part Drawings /Undrawn Balances: Where it is the practice to leave a small part of the invoice
value (maximum of 10% of the full export value) undrawn for payment after adjustment due to
differences in weight, quality, etc. to be ascertained after arrival AD-I banks may negotiate the bills.
Opening / Hiring of Ware houses abroad: Banks may grant permission for opening / hiring
warehouses abroad if export outstanding does not exceed 5% of exports made during the previous
financial year and applicant has a minimum export turnover of USD 100,000/- during the last financial
year.
Supplier's Credit
Under supplier credit contracts the exporter supplier extends a credit to the buyer importer of capital goods. The
terms can be down payment with the balance payable in instalments. The interest on such deferred payments
will have to be paid on the rates determined at the time of entering Into such arrangement. The deferred
payments are supported by the promissory notes or bills of exchange often carrying the guarantee of importer's
bank. To finance the credit given to the Importer under such arrangement, the exporter raises a loan from his
banker under the export credit schemes in force. In general, the export credit insurance will be an inherent part
of the mechanism.
Buyer's credit
In a buyer credit transaction, the buyer importer raises a loan from a bank in the exporter's country under the
export credit scheme in force on the terms conforming to the OECD consensus. The loan Is drawn to pay the
exporter in full and thus for the exporter, the transaction is a cash sale. Another form of the buyer credit
arrangement is, for a bank in the exporter's country, to establish a line of credit in favour of a bank or financial
institutions, in the importing country. The later makes available, loans under the line of credit to its importer
clients for the purchase of capital goods from the credit giving country. In India BUM Bank makes available
supplier/buyer credits and also extends line of credit to foreign financial institutions to promote exports of capital
goods from India.
Export Credit Guarantee Corporation of India Ltd. (ECGC)
Export Credit Guarantee Corporation of India Ltd. (ECGC) is a Government of India Enterprise
which provides export credit insurance facilities to exporters and banks in India. It functions under
the administrative control of Ministry of Commerce & Industry, and is managed by a Board of
Directors comprising representatives of the Government, Reserve Bank of India, banking, insurance
and exporting community. Over the years, it has evolved various export credit risk insurance
products to suit the requirements of Indian exporters and commercial banks. ECGC is the seventh
largest credit insurer of the world in terms of coverage of national exports. Its present paid up
capital is Rs. 1200 Crores and the authorized capital is Rs. 5000 Crores.
ECGC is essentially an export promotion organization, seeking to improve the competitive
capacity of Indian exporters by giving them credit insurance covers comparable to those available
to their competitors from most other countries. It keeps it's premium rates at the lowest level
possible Provides a range of credit risk insurance covers to exporters against loss in export of goods
and services Offers export credit insurance cover to banks and financial institutions to enable
exporters to obtain better facilities from them Provides Overseas Investment Insurance to Indian
companies investing in joint ventures abroad in the form of equity or loan
How ECGC helps exporters
• Offers insurance protection to exporters against payment risks
• Provides guidance in export-related activities
• Makes available information on different countries with its own credit ratings
• Makes it easy to obtain export finance from banks/financial institutions
• Assists exporters in recovering bad debts
• Provides information on credit-worthiness of overseas buyers.
TAKE-OUT FINANCING
Take-out financing is a method of providing finance for longer duration projects (say of 15 years) by
banks by sanctioning medium term loans (say 5-7 years).
It is understanding that the loan will be taken out of books of the financing bank within pre-fixed period, by
another institution thus preventing any possible asset-liability mismatch. After taking out
theloansfromthebanks,theinstitutioncouldoff-loadthemtoanotherbankorkeepit.
Under this process, the institutions engaged in long term financing such as IDFC, agree to take out the loan
from books of the banks financing such projects after the fixed time period, say of 5 years, when the project
reaches certain previously defined milestones. On the basis of such understanding, the bank concerned
agrees to provide a medium term loan with phased redemption beginning after, say 5 years. At the end of
5 years, the bank could sell the loans to the institution and get it off its books.
Prudent guidelines on NPA are applicable. Benefits - This ensures that the project gets longterm
funding though various participants.
Process of Take Out Financing
The original lender participates in a long term project (say 15-20 years) by granting a medium term
loan (of say 5-7).
On completion of the pre-decided period, this loan is taken over by another institution subject to
fulfillment of the conditions stipulated in .the orignal arrangement
Original lender receives the payment from the 2" lender who has taken over the loan
FACTORING
The arrangement in which short term domestic receivables on sale of goods or services are sold to a
company (known as a FACTOR), is called, factoring which was introduced during 1991 on the Report of
Kalyanasundrama Committee. Funcions : The FACTOR performs the functions such as (1) purchase of
receivables, (2) maintaining the sales or receivables ledgers, (3) submitting sales account to the creditors,
(4) collection of debt on due dates, (5) after collection, to return the reserve money to seller and provide
consultancy services to customer. Advantages of factoring are:
a: Sales practically become cash sales
b: Money blocked with debtors becomes available for business.
c: The seller also gets rid of collection of the receivables
d: His working capital management becomes efficient which also reduce his cost and in turn improve
the possibility of better profits. Process of Factoring
1. Seller sells goods on short term credit basis.
2. Buyer accepts the bills raised by seller.
3. Seller discounts these receivables with a FACTOR by assigning the receivables.
4. FACTOR purchases the receivable on with or without recourse basis.
5. FACTOR recovers the amount from buyer on due date.
With or without recource : If non payment loss is borne by the factor it is called without recourse
factoring. If risk can be transferred back to seller, it is called with recourse factoring.
FORFAITING
Forfeiting represents the purchase of obligations, which fall due at some future date and arise from delivery of goods
(or services) in export transactions, without recourse to the previous holder of the obligation.
Under forfeiting, the forfeiter deducts interest in advance for the whole period of credit and disburses the net proceeds to
the exporter. The sole responsibilities of the exporter is to manufacture and deliver the goods to the importer, which
creates a valid payment obligation of the importer.
Forfeiting and Factoring : Factoring is suitable for financing smaller and short term receivables with credit period
between 90 to 180 days, whereas forfeiting is used to finance capital goods' exports with credit terms between a few
months to 10 years. Factoring covers the commercial risk, whereas forfeiting additionally covers the political and
transfer risk.
Process of forfeiting:
•The exporter approaches the forfaitor, willing to undertake forfeiting.
• The transaction covers the export, the price of which is receivable over a medium term and it is covered by a bank
guarantee or aval.
•The forfaitor stipulates an expiry date during which the exporter will make the shipment, prepare the documents and
present the documents.
•The exporter gets payment immediately on presentation of documents.
•The forfaitor recovers the interest for the money, the charges for political, commercial and country risk and other
incidental costs.
•The importer becomes liable for the cost of contract and receives the credit from forfaitor for a given no. of years, at a
given interest rate.
•The importer's obligation is guaranteed by a bank guarantee or aval (guarantor).
Security for forfaiting: The drafts (In the form of promissory notes or accepted bills of exchange) covering the
transaction, are guaranteed by a bank aval (co-acceptance of bills of exchange or of promissory notes by the bank) or a
bank guarantee (as a separate guarantee bond), promising to pay the amount on the given date, in the event of non-
payment by the original debtor (i.e. importer). The guarantor is usually an internationally active bank,
resident in the importer's country which can ascertain the importer's creditworthiness first-hand. Repayments : The
repayments are by periodic instalments, usually on 6 months intervals. The total period may range up to 7-10 years.
Advantages of Forfaiting: 1.100 % risk cover as the forfaiter covers the (a) country risk (b) currency risk
(c) commercial risk (d) interest rate risk. 2. Instant Cash : The forfaitor generates instant cash for the
exporter that relieves his balance sheet and improves liquidity
TReDS - Receivable Finance System
RBI issued the guidelines on Dec 03, 2014, for setting up and operating the trade receivables system u/s 10(2) and Sec
18 of Payment & Settlement Systems Act, 2007.
Objective : To facilitate discounting of invoices and bills of exchange. TReDS can deal with (i) receivables factoring and
(ii) reverse factoring. The transactions will be "without recourse" to the sellers.
Participants: Sellers (MSMEs), corporate, other buyers, Government Departments, PSUs, financiers (banks and NBFC
factors). The TReDS provides a platform for uploading, accepting, discounting, trading and settlement of the invoices /
bills of sellers.
Generation of reports : In order to ensure a smooth process of payments, the TReDS would provide various types
of MIS report such as intimation of total receivables position, financed and unfinanced (to sellers); intimation of
outstanding position, financed and unfinanced with details of beneficiaries and beneficiary accounts to be credited (for
buyers); total' financed position for financiers; etc. The system will also generate due date reminders to relevant
parties, notifications to be issued to bankers when a factoring unit is financed, notifications to be issued to buyers once
a factoring unit related to their transaction is traded in the secondary segment, etc.
Access to TReDS : TReDS would put in place a standardized mechanism / process for on-boarding of buyers and
sellers on the TReDS. Access would be through IDs / Passwords for TReDS participants. Participation would be accepted
after submission of all KYC related documents to the TReDS, along with resolutions / documents.
Regulatory framework for TReDS
The TReDS, undertaking clearing and settlement activities, would be governed by RBI's regulatory framework under
Payment and Settlement Systems Act 2007 (PS5 Act) and function as an authorised payment system under the PSS Act
2007.
Eligibility criteria to set up/operate the TReDS There is a 3-dimension criteria as under:
(a) Financial Criteria
(i) Minimum paid up equity capital shall be Rs. 25 crore.
(ii) Entities, other than promoters, cannot have
shareholding In excess of 10% of the equity capital.
(b) Due diligence of promoters :RBI would assess the 'fit and proper' status on the basis of past record
of sound credentials and integrity; financial soundness and track record of at least 5 years in running their
businesses.
(c) Technological capability : The TReDS should have sound technological basis to support its
operations.
LEASING
A lease is a contract where the owner of the assets transfers the right to another person to use the assets
against, payment of fixed lease rentals. There are two parties in a lease contract i.e. lessor or the owner
and the lessee or user. The lesser remains owner and the leased property remains in the possession of
the lessee.
Leasing activity by banks : During March 1994, RBI permitted banks to undertake business of leasing
and hire-purchase but not beyond 10% of their total advances.
Period of lease: Lease is generally of fixed period. After expiry of the period, the lessee may purchase
the leased assets as per agreement. The lease contract is generally not cancelled.
Rental :The lease rentals are decided in advance for the entire lease period. The accelerated lease
rentals in leasing mean low in the beginning but gradually increase later on.
Lease and Hire-purchase : A lease (governed by Indian Contract Act 1872) is different from hire-
purchase which is a contract of owner-hirer and after the contract the ownership is passed to the hirer
on payment of the amount. The assets in hire-purchase appear in the balance sheet of the hirer and he
also claims depreciation. The instalment is partly treated as capital repayment and balance as interest
expenditure. Only the amount of interest is considered for tax benefits
Terms in leasing
Lessor A person who under an agreement, conveys to another person (the lessee) right to use, in return
for rent, an asset for an agreed period.
Lessee A person, who obtains from another person (the lessor) the right to use, in return for rent, an
asset for an agreed period of time.
Lease An agreement whereby the lessor conveys to the lessee, in return for rent, the right to use an
asset for an agreed period of time.
Finance lease A lease Is dassified as finance lease if it secures for the lessor, the recovery of his capital
outlay plus a return on the funds invested during the lease term. Such a lease is normally non-cancellable
and the present value of the minimum lease payments at the Inception of the lease exceeds or is equal to
substantially the whole of the fair value of the leased assets.
Operating lease A lease is classified as operating lease If It does not secure for the lessor the recovery of his
capital outlay plus a return on the funds invested during the lease term.
Sale and lease back A sale and lease back
transaction involves the sale of an asset by the vendor and the leasing of the same asset back to the
vendor. The rentals and sale price are usually Inter-dependent as they are negotiated as a package
and may not represent fair values.
VENTURE CAPITAL
Venture capital is a source of funds used to finance new proposals/ideas involving new technology or
products which are risky but with a potential of high returns. It is a capital committed in the form of
share-holding for the formation and setting up of a firm, specialising in new ideas or technologies. In
other words, it is a long term fund in equity or semi-equity form, to finance high-tech projects
involving high risks and yet having strong potential of high profitability.
In India, the venture capital has largely been sponsored by financial institutions.
Kinds of venture capital:
a Risk capital - representing financial investment in a highly risk proposition in the hope of earning
high rate of return
b Start-up capital, seed capital, initial capital
c Equity capital Advantages
• It makes contribution to technological innovations and promotion of entrepreneurship.
• It helps the industrialisation, technological development, generate employment and help develop
entrepreneurial skills.
• It benefits the investors when they are invited to invest only after organisation starts earning profit,
when risk is low and growth is healthy. Exit from project The investors can exit on success of the project,
by off loading their shareholding/ investment.
9. SME DEVELOPMENT BUSINESS DEVELOPMENT SERVICE PROVIDERS
Technology is a key asset for firm's competitive efficiency in market place. Custome r
preferences are the key drivers for new technology introduction. The value chain of a firm is
largely influenced by the choice of technology, innovation in adaptation, firm infrastructure,
and human resource management, in-bound and outbound logistics, procurement practices
etc. Government of India introduced several schemes for technology promotion and
development both spatially and sectorally. TIFAC, TUFs, CGTS are a few institutional
interventions of consequence to the SME development.
Technology Platforms for Financing MSMEs

The G-20 SME Finance Sub-Group did a stocktaking exercise of best practices on all SME models.
It was found that the best practices included the following characteristics: they reduce cost
through intensive use of technology and/or use of cost-effective client relationships; they use
advanced risk management technology to optimize risk/reward balance and leverage on data to
identify potential MSMEs for suitable financing opportunities. Technology platforms are therefore
critical in future financing methods to the MSME sector. This module therefore covers some of
the technology platforms which are currently being used as well as some which are in the
pipeline. The trainer should preferably utilize resources of experts and experienced resource
persons to delivery this module.
Banking products needed by MSMEs Liability Products
• Simple Current Accounts
• Roaming Accounts
• Term Deposits
• Hybrid Accounts
Transaction Products
• Remittances, collections
• Money Transfers
• Remote banking
• 24 x 7 channels
Loan Products
• Working Capital Loans
• Term Loans
• Bill facilities
• LCs, BGs, Securitisation loans
SME Lending under Basel Regime

The capital and liquidity provisions of Basel III are intended to shield the global financial system
from a new financial crisis. This module is about the impact of Basel norms on SME lending. Section
I deals with the basics of Basel norms- Basel II and III Section III deliberates on the effects of
Basel II for SMEs in terms of the credit risk premium charged and the capital requirement.
The basics of Basel II and III Basel II

The risk weights are the gross measures of the riskiness of assets in bank portfolios, which under Basel
II, are determined by one of the two methods
a. The standardized approach based on external credit ratings - Banks classify their exposures to
risk according to various asset classes and where possible, establish weights based on the credit
rating given to the entity by an external credit assessment institution.
b. The internal rating-based approach (IRB) - Sophisticated banks use their own internal risk
models to determine appropriate minimum capital depending upon the estimates of a loan's
probability of default, exposure to loss etc. This gives a modest reduction in capital as
compared to the standardized approach.
The standardized approach uses certain pre-determined weights depending upon the entities' external credit rating. For example,
the following weights are used against assets that represent claims against corporates and commercial real estate.
Credit risk vs. Capital Requirement under Basel II: Are SME loans and retail credit really different?
For retail exposures, that is, loans to individuals and small businesses, the risk weight is 75% if the
bank's retail portfolio is diverse and no loan exceeds INR 5 crore.
A special feature of the new regulation is that retail credit and loans to SMEs will receive a
different treatment than corporate loans and will require less regulatory capital for given default
probabilities. The main reason for this differential treatment is the supposedly low correlation
between small business loans. Their risk is generally thought to be largely of an idiosyncratic
nature.
Basel III : Capital
The most important change affecting capital requirement arising from Basel III is that of the
minimum capital adequacy ratio, or the ratio of Tier 1 capital to risk weighted assets which will
increase to 7%. This will comprise a minimum common equity requirement, to be phased in by
2015 and a 'capital conservation buffer' to be phased in by 2019.
In addition, where national circumstances are believed to warrant it in order to protect the
financial system against large swings in asset prices, a counter-cyclical buffer of 0% - 2.5% may
be added to the ratio. In the case of global systemically important financial institutions (GSIFIs)
an additional surcharge of 1%-2.5% has been proposed. Applicability and the amount to be
added would depend upon the bank's size, interconnectedness, global activity and complexity.
Liquidity management rules
While many banks had adequate capital during the recent financial crisis, they did not have
adequate liquidity or cash, or the ability to raise cash quickly. In response, two new measures of
liquidity are introduced to reinforce the Basel Committee's 2008 principles for sound liquidity risk
management and supervision: the liquidity coverage ratio (LCR) and net stable funding ratio
(NSFR)
The LCR requires banks to maintain an adequate level of unencumbered,
high-quality liquid assets that can be converted into cash to meet their liquidity needs for a 30
calendar day time horizon under severe liquidity stress scenario specified by bank supervisors.
LCR defined as a stock of high quality liquid assets over total net cash outflows of 30 days should
not be less than 100% which has come into effect from 2015.
The NSF majors the amount of long term stable sources of funding employed by banks, relative
to the liquidity profiles of the assets funded and the potential for contingencies arising from off-
balance sheet commitments and obligations.
The leverage ratio
The ratio of 3% is a non-risk-weighted supplementary measure to the risk based capital
adequacy ratios. It is an additional test of capital adequacy to serve as a "safety net" to protect
against problems of risk weighting. It requires of 100% risk weight treatment of all balance sheet
items and includes off-balance sheet exposures as well.
Effects of Basel II for SMEs - credit risk premium and capital requirement
As Basel III carries over the risk weighting system assets from Basel II, it retains the capital
requirements that are sensitive to risk, which increase the risk premium that bank's charge for
SMEs. The weighting system favours large corporates over smaller once because large companies
with good external credit ratings are assigned a 20% risk weight whereas, SMEs that are unrated
have risk weighting of 100% or 75%.The Basel Committee on Banking Supervision has taken this
issue into the consideration and revisions in the formulas for calculating the regulatory capital
associated with SME lending have been made. The main modification is that the retail risk rating (75%)
can be used to weigh SME loans, provided the bank's portfolio is diverse and the bank's loan to the
SME borrower is less than INR 5 crore.
Basel III regulations also allow banks to make to use of collateral and collateral substitutes
such as government guarantees, which can reduce or mitigate the 'risk weights'. Under the
standardized approach, the credit rating of the collateral or the guarantor will be substituted
for the rating of the borrower for the collateralized portions of the exposure, if certain
conditions are made. In fact, guarantees issued by entities with a lower risk weight than the
SME can lead to reduced regulatory capital since the collateralized portions of SME exposure is
assigned the risk weight of the guarantor and the uncovered portion retains the risk weight of
SME.
The application of Basel II and Basel III have important consequences for banks, and SME
borrowers. For banks, the new banking regulation means working in a more stable financial
environment. Once the banks have learnt how to measure, cover, and appropriately manage
the risks to which their operations are exposed, they would face fewer situations of default;
but if these situations do occur, they should be better placed to deal with them. For SMEs, the
Capital Accords mean the payment of premiums according to the risk of their business
initiatives. In the past, the alternative involved restrictions in their access to credit, arising
specifically from the difficulty that calibrating that risk presented for the banks. At the same
time, the SMEs need to be instructed in the management of risk, knowing that the lender will
assess them in that respect.
10. CLUSTERS & CLUSTER DEVELOPMENT
Cluster based approach to lending is intended to provide a full-service approach to cater to the
diverse needs of the MSE sector which may be achieved through extending banking services to
recognized MSE clusters. A cluster based approach may be more beneficial (a)in dealing with
well-defined and recognized groups (b) availability of appropriate information for risk assessment
(c) monitoring by the lending institutions and (d) reduction in costs.
The banks have, therefore, been advised to treat it as a thrust area and increasingly adopt the
same for SME financing. United Nations Industrial Development Organisation (UNIDO) has
identified 388 clusters spread over 21 states in various parts of the country. The Ministry of
Micro, Small and Medium Enterprises has also approved a list of clusters under the Scheme of
Fund for Regeneration of Traditional Industries (SFURTI) and Micro and Small Enterprises Cluster
Development Programme (MSE-CDP) located in 121 Minority Concentration Districts. Accordingly,
banks have been advised to take appropriate measures to improve the credit flow to the
identified clusters.
Banks have also been advised that they should open more MSE focused branch offices at
different MSE clusters which can also act as counseling. Centres for MSEs. Each lead bank of the
district may adopt at least one cluster
CLUSTERS & CLUSTER DEVELOPMENT

"United we stand. Divided we fall" — the age old adage applies in every sphere of life: in
family, warfare, business, education, entertainment and collective approach. Small and
medium enterprises considering the complex situation in which they are placed have an option
in forming clusters as risk mitigation strategy.
The concept of cluster development offers new insights into the potential role of SMEs, in
enhancing their access to new technology. Characteristics of a successful cluster are inter-firm
cooperation, cooperation blended with competition, the importance of local value systems,
flexibility and innovative capacity, geographic proximity, sectoral specialization, a local pool of
skilled labour and the presence of a large number of firms. It also includes willingness to work
together to resolve potential dashes of interest, widespread entrepreneurial spirit and ability,
promotion of a social compromise.
WHAT IS A CLUSTER?
Different countries in the world have defined clusters in their own way keeping in mind the
policy framework, nature of products, technology used, ethnic and demographical factors.
However, we may understand the concept as under -
1. A cluster is a geographically bound concentration of similar related or complementary
business with active channels for business transaction, communication and dialogue that share
specialized infrastructure, labour markets and services that are faced with common
opportunities and threats.
2. A cluster is a sector and geographical concentration of MSMEs faced with common opportunities and
threats.
3. The product category, product range, market opportunities and identical factors like location,
process, and trade practices also can be building factors for the enterprises to come together as a
cluster.
4. Industrial districts functioning on somewhat similar lines have shown mark e d improvement
in economic competitiveness. The pattern of inter-firm collabor a . tion both at horizontal and
vertical levels raise technical know-how, accelerat e innovation and improve the ability of small
producers to respond to external market developments.
5. Where large number of industrial units are located producing somewhat similar products with
varying degrees of quality levels cannot be defined as cluster groups because of the following
deficiencies:
♦ These are promoted by the initiative of some institutions like SIDBI and are mainly industries
enterprises;
♦ The efforts are mainly on technology and integration of various other factors are not in their
agenda;
♦ The limited initiatives in technology are in isolation, and
♦ The involvement of all the beneficiary firms in all the initiatives is quite limited.
CLUS T E R A P PR OA CH — W H AT I T CAN DO?

The two main challenges of an SME are: 1. to upgrade themselves from local, national to global
markets; 2. meet competition through superior quality and technology upgradation. The SMEs in this
approach can -
(1) Access information, knowledge skills and finance
(2) Have linkage with markets and suppliers
(3) Correct inadequate strategies and improve organization
(4) Overcome inefficient regulations and take advantage of the existing incentives
The cluster approach can lead to
(1) Inter-firm cooperation culture
(2) Cooperation + competition
(3) Combines flexibility and efficiency
(4) Continuous upgradation of production, markets, skills and technology
(5) Increases innovation joint learning and collective efficiency.
Enhancing SME Competitiveness through Cluster Development

Remedies sought through Cluster initiative
Nature of deficiencies in SMEs
Individualistic & Non sharing Awareness and Trust building interactions among the cluster
participants
Lack of collective thinking Industry Associations are associated to bring about

effective
idealization and participation; networking both within and
outside the cluster
High Costs Consortium approach in procurement of raw materials,
contracts and financing; sharing of costs of common
services
Common testing and R & D facilities; Awareness programmes on
Low Quality quality management; bench marking
Low Market penetration Product innovation; product diversification; market
information and market diversification strategies & market
research
Lack of or poor Brand image Brand building; Brand imaging; co-branding; and brand
management
Low capital, low debt and poor Improved access to debt markets; skill building in financial
financial management and accounting management; Build bridges of understanding
between the financing institution and entrepreneurs for
better facilitation; Innovation of new financial products to
suit the specific products and markets.
Lack of institutional supports Institution building and building strong public-private
partnership in building product specific and general
infrastructure
Lack of enthusiasm and Entrepreneurship Development programmes specifically de-
disinterested second generation signed for the cluster
entrepreneurs
Selection of a Cluster — Cluster Development Approach

Selection of a cluster for launching a Cluster Development Project involves the following
steps:
(1) Identification of a cluster in a country
(2) Creation of a country cluster table and map
(3) Preliminary selection and short list of cluster
(4) Formulation of final selection criteria
(5) Final selection of cluster(s)
Identification of Clusters
Since Cluster Development is relatively a new approach in the field of MSME Development,
an inventory of clusters in the country with the information required for proper cluster
selection is not available. Hence, cluster selection can be done only with secondary
sources combined with expert opinion.
However, a broad guideline for selection of a potential cluster would contain elements
such as location and product growth factor, whether vertical or horizontal.
Sources of Information
Statistical parameters have been used in countries like Italy and UK to build prope r
data base. Details such as indices of concentration, stage of cluster development,
depth, variety of cluster shareholders, dynamics (growing or declining), econoTnics
of significance, regional/national or international information are gathered in addi-
tion to statistics. As different from this approach, we have case study or expe r t
opinion approach. Those who are familiar with MSMEs in the region or an agency
working in the field of MSME development are entrusted with the task of cluster
identification. MSME support institutions can play a useful role in assisting these
teams.
Creation of a Country Cluster Table

The data of clusters can be plotted on the map of a country. The cluster Table provides
details on each cluster illustratively, based on some chosen criteria.
TABLE :COUNTRY CLUSTER TABLE

SI. 1 2 3 4 5 6 7 8 9 10 11
1 No. Drugs Pharma
2 Textiles Hand
Block
3 Housing
4 Machine Tools
Explanation to Column 1 to 11 -
1. Name of the cluster
2. Location in India
3. Natural (NA) induced (IN) cluster
4. Whether the product belongs to traditional art/craft 5.•
Modern SME
6. Large Unit centered (L); Vertical (V); Horizontal (H); Both (B)
7. Degree of product specialization
8. Need for Technology upgradation

9. Export potential
10. Market based (MK) — Resource based (R) Infrastructure based (I) cluster
Major problem — Yes (Y) — No (N) — High Medium
Short list of clusters
Using the above tools a preliminary short list of clusters can be made. The short list will differ
according to development priorities. A regional agency will concentrate on a cluster or clusters in its
territory. A sectoral/functional specialized agency will select similar clusters in different regions. An
agency with no regional or sectoral bias can select a mix of clusters distributed over regions and
products, if it has the capacity to handle more than one cluster and if there is added value (in terms
of cumulative development effects) in assisting a mix of clusters.
Final Selection
Final Selection of the cluster depends on the following criteria:
(1) Importance of clusters
Clusters with large number of enterprises that absorb sufficient share of local workforce,
enterprises having export potential, linkages with other sector; presence of any development
agencies, etc. are factors determining the importance of a cluster.
(2) Viability: Cluster selection should focus on factors with solid growth prospects. The focus of
growth should be not mere price (profit) but also product quality.
(3) Promotability: The promotability of a cluster refers to the presence of institution or association
in the clusters that enjoy the trust of the enterprises, capable leadership, adequate business
infrastructure and a conducive policy framework. Such clusters provide the best framework
conditions for development and creating leadership by local stakeholders.
Complementarity is also essential ingredient in formulation of the selective clusters. Optional use of
resources is also promoted by exploiting synergies. The effectiveness of technical upgradation
programme can be greatly enhanced if complemented with a marketing related programme. Isolated
activities by different institutes at different periods of time tend to lead to sub-optimal results.
CLUSTER DEVELOPMENT STRATEGY

The following aspects occupy a significant position in the Cluster Development framework.
Skills Upgradation:
1. Technical Training of trainees
2. Training in basic drawing and designing skills of artisans
3. Training of second level Managers in information technology
4. Training in Product diversification
UNIDO cluster development project in India

UNIDO implemented a development initiative in the knitwear cluster of Ludhiana, whose products
represent 95% of the Indian woollen market. An initial diagnostic study that identified lack of skilled
workers, limited product range, poor market information, and weak infrastructure as the key challenges
faring the cluster formed the basis for intervention.
A group of six exporters were helped creating a focused network the Apparel Exporters' Association of
Ludhiana (APPEAL) to demonstrate the effect of a private initiative. Over the years, APPEAL grew to
associate 54 exporters, representing 80% of exports from the cluster. Subsequently, Knitwear Club (the
local association of knitwear manufacturers) was supported in the implementation of developmental
activities. Federation of Knitwear and Allied Industries Associations (FEKTAA) formed at the end of the
initiative ushered in a new era of governance.
Towards the close of 2001, the project activities through APPEAL and Knitwear Club benefited directly
150 firms and many more indirectly. Cost-cutting and productivity improvement interventions generated
savings in excess of Ind Rs 45 million with energy-saving and store-management techniques introduced
in the cluster. New market ventures, both domestic and abroad, led to increased sale of INR180mn by
around 25 firms. Joint participation in trade fairs and Buyers-Sellers Meet were initiated, which have now
become feature in the cluster. Additional investment worth INR 360mn was triggered with forty-five new
yarns introduced in the cluster. Five innovative training programs were designed in collaboration with
the industry leading to the training of 400 people (300 women), 70% of which gained new employment.
After the completion of the project, several institutions have actively taken up the challenge of cluster
development. The State Bank of India launched its own cluster project in March 2001 and Textiles
Committee of India (again in partnership with UNIDO) in June 2002. In the meantime, Knitwear Club,
APPEAL and FEKTAA were helped to forge strong linkages with central and local policy makers and with
various support institutions. As a result, the International Yarn Fair (organised by APPEAL with the China
Chamber for Promotion of Import and Export of Textiles) displayed the capacity of the industry to
manage large-scale events. A very large Buyer-Seller Meet was then organised by APPEAL to promote
exports. Knitwear Club conducted a workshop on "technical textiles" and organized a major exhibition
on yarns, accessories and machinery. All the exhibitions have been fully sustainable and have earned
profits for both the associations. On the marketing front, a brand "Made in Ludhiana" is being promoted
by FEKTAA to build consumers' confidence in Ludhiana products. A key challenge still under way is the
Apparel Park, though Central Government has endorsed the capability of the cluster stakeholders to
undertake a project worth over INR 45mn.
These clusters are estimated to contribute upto 60% of India's manufactured exports. Their size in
terms of number of units and quantum of output may vary, with some being so big that they produce
upto 70-80% of the total volume of a particular product (Gems and Jewellery in Surat and Mumbai —
80%; Tirupur in Coimbatore District (Tamil Nadu)- 80% in cotton hosiery exports are cases for
instance). Panipat, for example produces 75% of total blankets produced in the country. Similarly,
Agra with 800 registered and 6000 unregistered small and cottage footwear production units makes
1.5 lakh pairs of shoes a day with a production value of Rs. 1.3 Mn. Ludhiana producers 95% of
woollen knitwear, 85% of the country's sewing machines and 60% of the nation's bicycle parts. An
evaluation by UNIDO to the MOCI, of seven clusters reveals that 850 firms were benefited by US$3.25
Mn. in terms of sales (175 firms), US$ 22 Mn. in terms of export earnings (68 firms) and US$ 2.3 Mn.
(235 firms) in terms of increase in savings during the years 1997-2003
UNIDO CLUSTER DEVELOPMENT PROGRAMME
The aim of the UNIDO Cluster Development Programme (CDP) in India is to contribute to the overall
performance and collective efficiency of the small and medium enterprise clusters for sustainable
development by assisting selected communities of firms and associated institutions in the clusters.
This entails the implementation of cluster support initiative in selected pilot clusters as well as
assistance to central and local institutions in their programmes of cluster modernization and
restructuring.
In the pilot clusters, UNIDO strives to act as a catalyst bringing about the necessary qualitative changes
at the cluster level. At the policy level, the primary purpose of UNIDO's intervention is to customize its
methodology to the Indian settings so that it can be shared with the partner institutions for replication.
Policy level support is provided by a Focal Point Office that is based in New Dell7i.lt seeks to
disseminate the principles of cluster development through sensitizatib n , awareness building, and
technical support in policy formulation, provision of trainin g at the implementation level and
assistance to programme monitoring and evalua. tion
The Focal Point is linked to the Project Steering Committee headed by Development Commissioner
(SSI), Ministry of SSI that supports and monitors the UNIDO Cluster Development Programme.
The Focal Point is linked to the Project Steering Committee headed by Development Commissioner
(SSI), Ministry of SSI that supports and monitors the UNIDO Cluster Development Programme.
Major Outcomes — Cluster Development Programme
Jaipur _
Ludhiana Hand Block
Knitwear Textile
Printed
Tirupur Knitwear
Pune Food Processing
Conclusion of the support to 3 directly assisted clusters, Swiss assisted
Ahmedabad Drugs & Pharmaceuticals
Ambur Leather & Leather Shoes
Bangalore Machine Tools
Govt. of India and technical support of UNIDO, in the year 2005. The Foundation planned in the
year 2009 to update the available list of clusters compiled under the UNIDO string of cluster
projects. The Foundation has for over the period 2008-11, updated the resources with financial
support drawn from the project 'Promoting Innovation Clusters in India' funded by Department
of Science & Technology, Ministry of Science & Technology, Govt. of India.
CONCEPTUAL FRAMEWORK FOR DEVELOPMENT OF A CLUSTER
Clusters can be categorized in different ways. But before developing the typology, it is important to
realize that such classifications may help to provide useful first static insight into the structure of a
cluster, but need not present a dynamic picture of that. Therefore typology should not be used to
generalize any policy prescriptions. Secondly, the categorization of a cluster into a specific type
during the course of its evolution or later due to changes in the international scenario may change.
This typology presented as under is therefore a first cut at taking stock and organizing the information
on clusters in India and any further understanding of how the specific clusters function would require
detailed analysis of each cluster.
Typology based on stage of development
An important way of categorization has been developed based upon the stage of development of a
cluster at a static period of time. Development of a cluster could conceptually be divided into four
distinct phases : namely the 'Initial phase', 'Growth phase', 'Maturity phase' and 'Extinction phase'.
Some of the characteristics of a cluster in these phases of cluster development are given as under:-
1. Initial Phase
In this stage of cluster formation, only a handful of units establish themselves and based on their
success, several other units come up in the subsequent stages. The formation of cluster may be
natural, based upon high demand potential and private initiative or may be induced due to policy
incentives, infrastructure availability or a large buying public sector unit. The reason may also be
the availability of critical raw material or specific skills, as in case of most traditional clusters. The
example of natural cluster based on raw material resources would be 'marble cutting' cluster at
Kishangarh in Rajasthan while a demand based cluster would be 'ready-made garments' at Indore
and Mumbai. The examples of induced clusters would be automobile component industry at
Gurgaon due to setting up of the public sector car manufacturing unit of 'Maruti Udyog Limited' and
another example may be cited as of petro-chemical based industry at Vadodara due to setting up of
'Indian Petrochemical Industries Ltd', another public sector undertaking.
The firms, in the initial stage, develop the man power and help setting up of ancillary or subcontracting
firms. They also contribute to the development of support institutions and other enterprises with the rise
of demand for them. The initial phase is likely to be characterized by slow growth and high costs. There
are a few competitors in the cluster at this stage, so it is possible to pass on the cost to the consumer by
charging higher than that in the later stages of development. An example of a cluster in the initial stage is
floriculture industry at Bangalore, Pune and Gurgaon.
2. Growth Phase
The second phase characterizes rapid development of the industry, intervention b y support
institutions including government institutions and consolidation of other raw material and service
providers. New firms enter the market and thus the competition increases. This increased
competition encourages technology development and expansion into new markets. The growth is
usually fueled by the widening of national or international markets that the cluster caters to. Both
in the spheres of marketing and management, innovative means are likely to be developed thus
reducing the overall decline in the prices. Since the industries go through their cycles of recession
and growth, a cluster that is not currently in the growth stage may reach that stage later. An
example of the industry currently in the growth stage is "automotive components industry" that
was pushed back from maturity stage because of the industry for new cars and other automotive
vehicles had been allowed to be set up first during the early 1980s in India and subsequently with
the onset of liberalization several MNCs set up their base in India.
3. Maturity Phase
The third phase is characterized by the growth of the cluster slowing down due to over capacity
generally created in the cluster and resultant very high competition amongst the units. The data
seems to suggest that in the Indian context so far, the stage of maturity lasts longer than the
previous two stages. During the maturity phase strong input of research & development may be
needed to reduce costs, increase productivity and add new product features to stay ahead of the
competition. As a natural outcome, weak units begin to wither away creating space for the healthier
units to continue to survive. Several studies have shown how 'mature' clusters that were
overwhelmed by technological change at one point of time, regenerated themselves back into the
growth stage as a result of choices made by local actors and groups. This represents the
transformation and reinvention. The examples of the matured clusters would be "the electric fans
cluster" in Calcutta, "sewing machines cluster" in Ludhiana and 'stationery diesel engines cluster' in
Rajkot.
4. Extinction Phase
If due to wide ranging technological changes that the cluster is unable to cope with or due to
change in the life styles, a product is no longer in demand, the cluster may go to face extinction.
Another reason may be the erosion of competitiveness because of increase in the labour costs in
the cluster.
However the same industry may find itself viable in a different location where favourable
conditions exist for the survival and growth of the cluster. One example of such a cluster is
related to shoddy yarn made from recycled wool which shifted itself from Prato in Italy to
Panipat in India where not only the skills existed due to the presence of textile industry and
the cheap labour but also the favourable market for the shoddy yarn existed. During the last
decade, Panipat has grown to be a cluster of 700 carding machines each on an investment of
Rs. 7 million (USD 200,000). Now there is hardly any such unit in Prato in Italy. In the Indian
case, tile industry cluster based in Mangalore with a history of 175 years has now gone into
oblivion due to the stated reasons of scarcity of raw material and fire wood and a ccentuated
with increased competition from China in the export market.
Exceptions may occur:
There may be exceptions to the above stages of development in some of the clusters. The
growth and maturity phases may in certain cases be inseparable thus making it difficult to
assign one of the two stages to such specific clusters. Secondly, the transition from one
stage to another may not be but could be quite jerky due to certain internal or external
changes that may crop up.
POLICIES & LAWS RELATING TO SME CLUSTERS
No policy specifically for the clusters
There is no special policy either of the central government or state governments for the
promotion of the SME clusters in general. The industrial policy related to small scale sector is
a small component of the industrial policy in general which relates to the entire small scale
sector rather than based on national or regional priorities by focusing on certain industrial
group or cluster of industries. The state governments have however provided special policy
incentives for the electronics and agro-processing industry but these are also directed
towards the sectors as a whole instead of clusters.
There has been however attempts to strengthen the clusters by providing support through
the general schemes related to technology upgradation, infrastructure provision and training
through various institutions at the national and state levels. Some of the industrial estates
developed especially for a particular industry have been developed, but their intensity and
significance is at best limited.
Supportive of clusters through its general framework

The central government, without a specific policy framework, has generally been supportive to
development of clusters through its general MSME policy. This support has especially been
available in their growth stage, while in the initial stages of cluster formation, it was the private
initiative and the profits that led to agglomeration of units. The initiatives of the government
were taken in establishing institutions at the cluster level for technology upgradation, training,
providing infrastructure and for facilitating business operations. Some of the examples of the
institutional suppo r t provided under the general framework of policy are given as under:
a. A bourse was established at Surat for trading in diamonds. The trading wa s earlier done in
Mumbai while the production was mainly based in Surat. With the opening of the bourse at
Surat, the industry got benefited considerably. 'Indian Diamond Institute' was set up in Surat
for technology upgradation and for imparting training to labour in skill development. 'Diamond
Industrial Park' with facilities to house approximately 300 units has also been established at S
u rat.
b. For shoddy yarn and other textile units engaged in international trade, a customs office has
been established at Panipat in Haryana so that the small entrepreneurs can get their custom
related documentation completed within the town, itself.
c. The 'National Institutes of Fashion Technology' (NIFT) have been established in New Delhi
and Gandhinagar for providing information and forecast on latest fashions and for developing
the industry technologically. Besides, the institutes train manpower to meet the needs of the
industry.
d. 'Footwear Design & Development Centres' have been established at Noida, Agra, Madras
and Kanpur where the footwear clusters exist. These centres provide consultancy services for
factory set up, lay outs, technology, trouble shooting, cost reduction and productivity
improvement.
e. The 'Central Glass and Ceramics Research Institute' (CGCRI) has centres in Calcutta, Khurja
and Naroda. The Institute provides services to the entrepreneurs on technology upgradation
and training of skilled manpower. The 'Central Leather Research Institute' at Chennai performs
the function of designing and development, information dissemination, technology upgradation
and training of skilled persons.
Micro and Small Enterprises Cluster Development Programme (MSE-CDP)
The Ministry is implementing the Micro and Small Enterprises – Cluster Development Programme (MSE-CDP) wherein
support is provided for Diagnostic Study; Soft Interventions like general awareness, counseling, motivation and trust
building, exposure visits, market development including exports, participation in seminars, workshops and training
programmes on technology upgradaion etc; Hard Interventions ilike setting up of Common Facility Centers (Common
Production/Processing Centre, Design Centre, Testing Centre etc.) and creation/upgradation of infrastructural facilities in
the new/existing industrial areas/ clusters of MSEs. For further details please visit www.dcmsme.gov.in.
1 Budget Estimates 2015-16 Financial 100
Progress
2 During 2015-16 (upto 31.12.2015) 52.21
3 Till now (Since inception) Physical 318.00 since 2007-08
achievements
4 During 2015-16 (upto 31.12.2015) i. Diagnostic Study Report- 15 (3312
beneficiary units)
ii. Soft Intervention - 9 (869 beneficiary units)
iii. Common Facility Centers - 7 (14800
beneficiary units)
iv. iv.Infrastructure Development Centers - 6
5 Till now (Since inception) i. Clusters Taken – 996
ii. ID Centers - 171 Infrastructure Development
Centers
Introduction
The Ministry of Micro, Small and Medium Enterprises (MSME), Government of India (GoI) has adopted
the cluster development approach as a key strategy for enhancing the productivity and competitiveness
as well as capacity building of Micro and Small Enterprises (MSEs) and their collectives in the country.
A cluster is a group of enterprises located within an identifiable and as far as practicable, contiguous
area and producing same/similar products/services. The essential characteristics of enterprises in a
cluster are (a) Similarity or complementarity in the methods of production, quality control and testing,
energy consumption, pollution control, etc (b) Similar level of technology and marketing
strategies/practices (c) Channels for communication among the members of the cluster (d) Common
challenges and opportunities.
Objectives of the Scheme
To support the sustainability and growth of MSEs by addressing common issues such as improvement
of technology, skills and quality, market access, access to capital, etc.
To build capacity of MSEs for common supportive action through formation of self help groups,
consortia, upgradation of associations, etc.
To create/upgrade infrastructural facilities in the new/existing industrial areas/ clusters of MSEs.
To set up common facility centres (for testing, training centre, raw material depot, effluent treatment,
complementing production processes, etc).
Strategy and Approach
Given the diverse nature of the MSEs in terms of both geographical location and sectoral composition,
the MSE-CDP scheme aims at addressing the needs of the industries, through well defined clusters.
This will enable achieving the economies of scale in terms of deployment of resources as well as
focusing on the specific needs of similar industries. The capacity building of associations, setting up of
special purpose vehicles (SPVs), consortia, etc. which are integral part of the scheme would enable the
MSEs to leverage their resources and also to have better access to public resources, linkages to credit
and enhance their marketing competitiveness.
Online Application
To ensure the transparency and speedy implementation of MSE-CDP, this office has started online
application system from 1st April 2012 & successfully implementing the same.
Major Activities
Soft Interventions: This will lead to creation of general awareness, counseling, motivation and trust
building, exposure visits, market development including exports, participation in seminars, workshops
and training programmes on technology upgradation, etc.
Common Facility Centre (CFC): This will lead to creation of tangible “assets” as Common Facility
Centers (CFCs) like Common Production/Processing Centre (for balancing/correcting/improving
production line that cannot be undertaken by individual units), Design Centres, Testing Facilities,
Training Centre, R&D Centres, Effluent Treatment Plant, Marketing Display/Selling Centre, Common
Logistics Centre, Common Raw Material Bank/Sales Depot, etc.
Infrastructure Development Centre (ID); This will lead to creation of infrastructural facilities like power
distribution network, water, telecommunication, drainage and pollution control facilities, roads, banks,
raw materials, storage and marketing outlets, common service facilities and technological backup
services for MSEs in the new/existing industrial estates/areas.
Financial Achievements Expenditure of Rs.124.74 crore and Rs.180.87 crore has been incurred during
11th Five Year Plan and 12th Five year plan (up to 31st December, 2015) respectively.
Financial Progress: Funds to the tune of Rs.52.85 Crore have been released up to 31st December, 2015
during the current financial year under MSE-CDP.
Way forward
• Enabling creation of cluster brands.
• Integration of other schemes of this Office / Ministry such as Lean Manufacturing, QMS/QTT, IPR
etc. to make it more effective and competitive. Exploring and involving schemes of other
Ministries in adopting the cluster approach.
• E-management of cluster in terms of inventory, resource management, marketing etc.
International & our own 60 years industrial/SME experience shows that small enterprises are
unable to face the competitive pressures because of their isolation and ineffective linkages
with support organizations and commercial service providers. In countries like Italy, USA,
Germany and several other European nations, clusters of SMEs bound together in strong and
dynamic net works and rely on strong linkages with national and international support
institutions providing competitive edge in the global context. A cluster, according to UNIDO, is
a geographical concentration of enterprises engaged in manufacturing similar and
complementary products facing common opportunities and threats. There are working
clusters, latent clusters, potential clusters and wishful-thinking clusters. Some of them are
growth oriented clusters and some are incipient. After the UNIDO initiative, Gol took first step
following Abid Hussain Committee's (1997) direction: "Focus on clusters is the centre-piece of
new approach in increasing public private partnership in setting up support systems for small
scale enterprises. Such PPPs thrive particularly in clusters of small scale enterprises." The
Committee recommended that State Governments identify existing SSE clusters and then
promote new type of organizations, which are joint ventures between the State Governments
or local authorities and business associations in these clusters. Recent cluster developments
in India, its growth, deficiencies, and requirements for further improvement, Govt. approach
as well as non-Govt. approach & efforts have also been discussed threadbare. In the last few
years some Banks like the State Bank of India, SIDBI, NABARD etc. and organizations like the
UNIDO, Textiles Committee of India, DCSSI initiated programmes for Development of
Clusters. In this contextual frame, the chapter defines clusters in all their dimensions,
specifies the advantages, and places in proper perspective how the strategy would enhance
competitiveness of the SMEs. Areas of Intervention for Inclusive Growth of Clusters & Policy
Perspective have also been discussed in details. Case studies of successful clusters both in
domestic spheres have been cited. Evaluation of the functioning of clusters and taking
appropriate corrective steps when needed would help strengthening the strategy on a
sustainable basis.
11. SME: RECOVERY & REHABILITATION

Rehabilitation of Sick MSE
On recommendations of an RBI Working Group (Chairman Dr. K. C. Chakrabarty), RBI revised the
guidelines (Nov 01, 2012) relating to identification of a unit as sick, early detection of incipient sickness,
and to lay down a procedure to be adopted by banks before declaring a unit as unviable.
A. Handholding stage: Assistance and rehabilitation effort should begin on a proactive basis when
early signs of sickness are detected. This stage is called handholding stage.
Criteria for handholding stage:
a. More than 6m delay to commence commercial
production for reasons beyond promoter's control;
b. Losses for 2 years or cash loss for one year
c. Capacity utilization is less than 50% of the projected level in terms of quantity or the sales are less
than 50% of the projected level in terms of value during a year. pank action : An enquiry into the
operations of the unit, proper scrutiny of accounts, timely financial assistance as per established need. The
handholding support should be undertaken within a maximum period of 2 months of Identification of such
units.
B. Definition of Sickness: The Unit may be said to have become Sick, if:
a) Loan remains NPA for 3 months or more OR
b) Erosion in net worth due to accumulated losses up to 50% of net worth during the previous
accounting year. The units which could not be revived after intervention at the 'handholding stage', it is to
be dassified as sick subject to complying with any one of the above 2 conditions and based on a viability
study.
The rehabilitation package should be fully Implemented within 6 months from the date, the unit is dedared
as 'potentially viable' / 'viable'.
While identifying and implementing the rehabilitation package, banks are to do 'holding operation' for a period
of 6 months. This will allow MSEs to draw funds from cash credit account, to the extent of their deposit of sale
proceeds during period of 'holding operation'. Ineligible units : Units becoming sick due to willful
mismanagement, willful default, unauthorized diversion of funds, disputes among partners / promoters, etc.
not to be dassified as sick units.
C. Viability: The decision on viability should be taken within 3 months of becoming sick. Procedure
for viability :
a) A unit should be dedared unviable only if the viability status is evidenced by a viability study. For
micro-manufacturing enterprises, having investment In plant and machinery up to Fts.5 lakh and micro-
service enterprises having investment in equipment up to Rs. 2 lakh, the Branch may take a decision on
viability and record the same, along with the justification.
b) The declaration of the unit as unviable, as evidenced by the viability study, should have the approval of
the next higher authority/ present sanctioning authority for MSEs, after giving an opportunity to the
promoters of the unit to present their case. The above process should be completed in not later than 3
months.
c) For sick units dedared unviable, with loan of Rs.1 crore & above, a Committee approach may be
adopted.
D. Reliefs and Concessions for Rehabilitation of Potentially Viable Units
Banks may decide on the reliefs and concessions based on their own Board approved policies.
E. One-Time Settlement : The banks are to put in place a non-discretionary One Time Settlement (OTS)
scheme for recovery of non-performing loans for the MSE sector, duly approved by the Board of Directors.
Framework for Revival & Rehabilitation of Micro, Small & Medium Enterprises
Ministry of Micro, Small and Medium Enterprises, Government of India, on May 29, 2015 notified the
‘Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises’. After making it
compatible with the existing regulatory guidelines on ‘Income Recognition, Asset Classification and
provisioning pertaining to Advances’ RBI circulated the revised Framework on March 17, 2016, to be made
operative by banks not later than June 30, 2016. It supersedes earlier framework dated 01.11.2012.
Amount ceiling : The revival and rehabilitation of MSMEs having loan up to Rs.25 crore will be in terms of
these instructions and restructuring of loan accounts with exposure of above Rs.25 crore will be governed by
the extant guidelines on Corporate Debt Restructuring (CDR) / Joint Lenders’ Forum (JLF) mechanism.
Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises
1. Eligibility: The provisions are applicable to MSMEs having loan limits up to Rs.25 crore, including
accounts under consortium or multiple banking arrangement (MBA).
2. Identification of incipient stress :
1. Identification by banks – Banks should identify incipient stress by creating 3 sub-categories under
the Special Mention Account (SMA) category based on early warning signals, i.e.: SMA-0 : Principal
or interest payment overdue for >30 days SMA-1: Principal/interest overdue between 31-60 days
SMA-2 : Principal or interest overdue between 61-90 days Reference : The branch maintaining the
account should forward the stressed a/c with aggregate loan above Rs.10 lakh to Committee
within 5 working days for a suitable Corrective Action Plan (CAP). Forwarding the a/c to the
Committee will be mandatory for accounts reported as SMA-2.
2. As regards accounts with aggregate loan up to Rs.10 lakh identified as SMA-2, the a/c should be
examined for CAP by branch itself under authority of branch manager / such other official as
decided by bank. The cases, where the branch decided the option of recovery under CAP instead
of rectification or restructuring, should be referred to the Committee for their concurrence.
3. Identification by Borrower - A borrower may voluntarily initiate proceedings, if it apprehends failure of
business or inability or likely inability to pay debts or there is erosion in the net worth due to
accumulated losses to the extent of 50% of its net worth during the previous accounting year, by
making an application to the branch or directly to the Committee. When such request is received, the
account with aggregate loan above Rs.10 lakh should be referred to the Committee. The Committee
should convene its meeting at the earliest but not later than 5 working days to examine the account
for a suitable CAP. The accounts with aggregate loan up to Rs.10 lakh may be dealt with by the branch
manager / designated official for a suitable CAP.
3. Committees for Stressed MSM Enterprises:
1. Banks shall constitute a Committee at each District where they are present or at Division level or
Regional Office level, depending upon the number of MSME units financed. These Committees will be
Standing Committees and will resolve the reported stress of MSME accounts of the branches falling
under their jurisdiction.
2. For MSME borrowers having credit facilities under a consortium of banks or multiple banking arrangement
(MBA), the consortium leader, or the bank having the largest exposure to the borrower under MBA, as
the case may be, shall refer the case to its Committee, if the account is reported as stressed either by
the borrower or any of the lenders. This Committee will also coordinate between the different
lenders.
3. The Composition of the Committee shall be as under:
(a) The Regional or Zonal Head of the Convener Bank, shall be the Chairperson of the Committee;
(b) Officer-in-charge of MSME Credit Department of the convener bank at the regional or zonal office
level, shall be the member and convener of the Committee;
(c) One independent external expert with expertise in MSME related matters to be nominated by
bank.
(d) One representative from concerned State Govt. or a retired executive of another bank of rank of
AGM and above.
(e) In case of a/c under consortium or MBA, senior representatives of all banks / lenders having
exposure to the borrower.
4.The decisions of the Committee will be by simple majority (Chairperson shall have the casting
vote, in case of a tie). For under consortium / MBA, lenders should sign an Inter-Creditor Agreement
(ICA) on the lines of (JLF) Agreement.
5. All eligible stressed MSMEs shall have access to the Committee for resolving the stress in these
accounts.
4. Application to Committee for a Corrective Action Plan
1.Any lender on identifying an MSME account as SMA-2 or suitable for consideration under the Framework or
on receipt of an application from the stressed enterprise, shall forward the cases having aggregate loan
above Rs.10 lakh to the Committee for immediate convening of meeting and deciding on a CAP. Stressed
enterprises having aggregate loan limits above Rs.10 lakh can also directly file an application for CAP to the
Committee or to the largest lender for onward submission under advice to all its lenders. IBA may prescribe
suitable application formats for this purpose.
2.Where an application is filed by a bank / lender and admitted by the Committee, it shall notify the
concerned enterprise about such application within 5 working days and require the enterprise to respond
to the application or make a representation. If the enterprise does not respond, Committee may proceed
ex-parte.
3.On receipt of information of liabilities, Committee may send notice to statutory creditors disclosed by
borrower, informing them about the application and permit them to make a representation before the
Committee within 15 working days of receipt of such notice. The information is required for determining
the total liability and not for payments of the same by the lenders.
4.Within 30 days of convening its first meeting for a specific enterprise, the Committee shall take a
decision on the option and notify the enterprise about decision, within 5 working days.
5.If the CAP envisages restructuring, the Committee shall conduct the detailed Techno-Economic Viability
(TEV) study and finalise the terms of restructuring within 20 working days (for accounts having
aggregate exposure up to Rs.10 crore) and within 30 working days (for accounts having aggregate
exposure above Rs.10 crore and up to Rs.25 crore) and notify the enterprise about such terms, within 5
working days.
6.On finalisation of the terms of CAP, the implementation shall be completed by the bank within 30 days (if
CAP is Rectification) and within 90 days (if CAP is restructuring). If recovery is considered as CAP, recovery
measures should be initiated at the earliest.
5. Corrective Action Plan by the Committee
1. While Techno-Economic viability of each account is to be decided by the concerned lender/s before
considering restructuring as CAPs, for accounts with aggregate exposure of Rs.10 crore and above, the
Committee should conduct a detailed Techno-Economic Viability study before finalising the CAP.
2. The options under CAP by the Committee may include:
(a) Rectification:– Obtaining a commitment from the borrower to regularise the account or providing
need based additional finance which should be repaid or regularised within a maximum period of 6
months.
(b) Restructuring:– Consider the possibility of restructuring the account, if it is prima facie viable
and the borrower is not a wilful defaulter.
(c) Recovery:– If option (a) and (b) are not feasible, due recovery process may be resorted to,
including legal and other recovery options.
Majority criteria : The decisions agreed upon by a majority of creditors (75% by value and 50% by
number) in the Committee would be considered as the basis for proceeding with the restructuring of the
account and will be binding on all lenders. Time-lines : In case of non-availability of information on
statutory dues of the borrower, the Committee may take additional time up to 30 days for deciding CAP
and preparing the restructuring package.
Additional Finance
1. Additional finance should be matched by contribution by promoters which should not be less than
the proportion at the time of original sanction of loans. Additional funding will have priority in
repayment over repayment of existing debts. Failure to perform : If the account fails to perform as
per the agreed terms under these options, the Committee shall initiate recovery.
10. Restructuring by the Committee
1. Eligibility : (a) Cases shall be taken up by the Committee for Standard, Special Mention Account or
Sub-Standard by one or more lenders of the Committee.
(b) Committee may consider restructuring, if account is doubtful with one or two but it is Standard or
Sub-Standard with majority of other lenders (by value).
(c) Wilful defaulters, Frauds and Malfeasance cases are ineligible for restructuring.
2. Viability : The viability shall be determined based on viability benchmarks on Debt Equity Ratio,
Debt Service Coverage Ratio, Liquidity or Current Ratio, etc.
3. Conditions : The restructuring package shall stipulate the timeline during which certain viability
milestones such as improvement in certain financial ratios after a period of 6 months may be
achieved.
Prudential Norms on Asset Classification and Provisioning
The extant asset classification and provisioning norms will be applicable.
Review : If the Committee decides that recovery action is to be initiated, such enterprise may request for
a review of the decision within 10 working days from the date of receipt of the decision. A review
application shall be decided by the Committee within 30 days from the date of filing and if as a
consequence of such review, the Committee decides to pursue a fresh corrective action plan, it may do so.
SMA-0 Signs of Stress
Illustrative list of signs of stress for categorising an account as SMA-0:
1. Delay of 90 days or more in (a) submission of stock statement / other stipulated operating control
statements or (b) credit monitoring or financial statements or (c) non-renewal of facilities based on
audited financials.
2. Actual sales / operating profits falling short of projections accepted for sanction by 40% or more; or a
single event of non-cooperation / prevention from conduct of stock audits by banks; or reduction of
Drawing Power by 20% or more after a stock audit; or evidence of diversion of funds for unapproved
purpose; or drop in internal risk rating by 2 or more notches in a single review.
3. Return of 3 or more cheques (or electronic debit instructions) issued by borrowers in 30 days on grounds
of non-availability of balance/DP in the account or return of 3 or more bills / cheques discounted or sent
under collection by the borrower.
4. Devolvement of DPG instalments or LCs or invocation of BGs and its non-payment within 30 days.
5. 3rd request for extension of time for creation of securities or for compliance with any other terms
and conditions of sanction.
6. Increase in frequency of overdrafts in current accounts.
7. The borrower reporting stress in the business and financials.
8. Promoter pledging/selling their shares in borrower company due to financial stress.
Revised Framework for Revival and Rehabilitation of Micro, Small and Medium
Enterprises (MSMEs) (March 17, 2016): Framework to be operationalized by June 30, 2016. The
revival and rehabilitation of MSMEs having loan limits up to Rs.25 crore will be as per revised framework
and with exposure of above Rs.25 crore will continue to be governed by the CDR/ Joint Lenders’ Forum
(JLF) mechanism. Banks should report credit information and SMA status of all accounts above the cut-
off exposure of Rs.5 crore and above to the Central Repository for Information on Large Credit (CRILC).
The branch maintaining the account should forward the account to the Committee for CAP reported as
SMA-2 and consider forwarding other stressed accounts with aggregate loan limits above Rs.10 lakh to
the Committee for stressed Micro, Small and Medium enterprises within five working days for a suitable
corrective action plan (CAP). Accounts with aggregate loan limits up to Rs.10 lakh identified as SMA-2
should be mandatorily examined for CAP by the branch itself. Any MSME borrower may voluntarily
initiate proceedings if there is erosion in the net worth due to accumulated losses to the extent of 50%
of its net worth during the previous accounting year.
4. Basel III Capital Regulations – Revision (March 1, 2016): Revaluation reserves arising from
change in the carrying amount of a bank’s property consequent upon its revaluation would be
considered as common equity tier 1 capital (CET1) instead of Tier 2 capital as hitherto. These
would continue to be reckoned at a discount of 55 per cent.
5. RBI clarifications on MCLR System: 1. Fixed Rate Loans: Fixed rate loans upto three years
shall be priced with reference to MCLR. Fixed rate loans of tenor above three years will continue to
be exempted from MCLR system;
6. Designated Trade Repository: The Clearing Corporation of India Limited (CCIL) shall be the
designated trade repository for the OTC interest rate and foreign exchange contracts as mandated
by the RBI from time to time.
NPA & RECOVERY MGMT
The prudent guidelines were first issued by RBI in the year 1991 implemented wef 01.04.1992 on
recommendations of Narasimham committee covering, income recognition, asset classification and
provisioning. Prudential norms prescribed by RBI include norms relating to Accounting, Exposure, and
Capital Adequacy. Prudential accounting norms are income recognition, asset classification and
provisioning.
CLASSIFICATION AS NPA
If Interest and/ or instalment of principal remain overdue for aperiod of more
Term Loan
than 90 days
CC/ if the account remains 'out of order or the limit is not renewed/reviewed
Credit/overdraft within180 days from the due date of renewal. Out of order means an account
where (i) the balance is continuously more than the sanctioned limit or
drawing power OR (ii) where as on the date of Balance Sheet, there is no
credit in the account continuously for 90 days or credit is less than interest
debited OR (iii) where stock statement not received for 3 months or more. if
the bill remains overdue for a period of more than 90 days from due date .
Bills
Agricultural (I) if loan has been granted for short duration crop: interest and/or instalment
accounts of principal remains overdue for two crop seasons beyond the due date.
(ii) if loan has been granted for long duration crop: interest and/or instalment
of principal remains overdue for one crop season beyond due date.
3. Decision about crop duration to be taken by SLBC.
Loan against FD, Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and
NSC, KVP, LIP life policies not treated as NPAs provided sufficient margin is available.
Advances against gold
ornaments, govt securities and all other securities are not covered by this
exemption
Loan guaranteed Loan guaranteed by Central Govt not treated as NPA for asset classification
by Government and provisioning till the Government repudiates its guarantee when invoked.
Treated as NPA for income recognition.
Advances guaranteed by the State Government classified as NPA as in other
cases
Consortium Asset classification of accounts under consortium should be based on the
advances record of recovery of the individual member banks.
· DISTRESSED ASSETS:
Identify incipient stress by creating a sub-category viz., Special mention accounts (SMA)
before a loan Account turns into an NPA.
Early formation of lender’s committee with timeline to agree a plan of resolution.
Incentives for lenders to agree collectively and quickly to plan.
Improvement in current restructuring process.
More expensive future borrowing for borrowers who do not co-operate with lenders.
More liberal regulatory treatment of asset sales.
SPECIAL MENTION ACCOUNTS:
SMA SUB CATEGORY BASIS FOR CLASSIFICATION
SMA 0 Principal or interest payment not overdue for more than 30 days but
account showing signs of incipient stress.
SMA 1 Principal or interest payment overdue between 31 – 60 days.
SMA 2 Principal or interest payment overdue between 61 – 90 days.
SMA-0: IDENTIFIED AREAS
• Delay of 90 days or more in
• Submission of stock statement/ other statements such as QOS, HOS and ABS.
• Credit monitoring or financial statements or
• Non renewal of facilities based on audited financials.
• Actual sales/operating profits falling short of projections accepted by 40% or more.
• A single event of non co-operation /prevention from conduct of stock audits.
• Reduction of Drawing Power (DP) by 20% or more after a stock audit.
• Evidence of diversion of funds for unapproved purpose.
• Drop in internal risk rating by 2 or more notches in a single review.
• Return of 3 or more cheques (or electronic debit instructions ) issued by borrowers in 30
days, on grounds of non availability of balance / DP.
• Return of 3 or more bills/cheques discounted or sent under collection.
• Devolvement of Deferred Payment Guarantee (DPG) installments or LCs or invocation of
BGs and its non payment within 30 days.
• Third request for extension of time either for creation or perfection of securities or for
compliance with any other terms and conditions of sanction.
• Increase in frequency of overdrafts in current accounts.
• The borrower reporting stress in the business and financials.
Promoter(s) pledging/ selling their shares in the borrower Company due to financial stress.
Asset Classification :Assets can be categorized into four categories namely (i) Standard (ii) Sub
Standard (iii) Doubtful (iv)Loss
The last three categories are classified as NPAs based on the period for which the asset has remained
nonperforming and the realisability of the dues.
(i) Standard Assets: The loan accounts which are regular and do not carry more than normal risk.
Within Standard assets, there could be accounts which though have not become NPA but are
irregular. Such accounts are called as Special Mention accounts.
(ii) Sub-standard Assets: With effect from 31.3.2005, a sub-standard asset is one, which is classified
as NPA for a period not exceeding 12 Months.
(iii) Doubtful Assets: With effect from 31 March 2005, an asset is to be classified as doubtful, if it has
remained NPA or sub standard for a period exceeding 12 months.
Doubtful accounts are further classified in three categories namely Doubtful 1 (D1), .Doubtful 2 (D2)
and Doubtful 3 (D3).
Doubtful 1 or D1: It is that account which is doubtful up to one year.
Doubtful 2 or D2: It is that account which is doubtful for more than one year but up to 3 year.
Doubtful 3 or D3: It is that account which is doubtful for more than 3 year.
Thus an account remains D1 for 12 months and D2 for 24 months.
(iv) Loss Assets: A loss asset is one where loss has been identified by the bank or internal or
external auditors or the RBI inspection but the amount has not been written off wholly. In other
words, such an asset is considered uncollectible and of such little value that its continuance as a
bankable asset is not warranted although there may be some salvage or recovery value.
When an account is classified as Doubtful or Loss without waiting for 12 months: If the realizable
value of tangible security in an account which was secured in the beginning falls below 10% of the
outstanding, it should be classified loss asset without waiting for 12 months and if the realizable
value of security is 10% or above but below 50% of the outstanding, it should be classified as
doubtful irrespective of the period for which it has remained NPA.
What is to be done when account becomes NPA?
1. If one account of the borrower in the bank becomes NPA in one branch, then all accounts of that
borrower in other branches of the same bank also are classified as NPA. Thus classification as
NPA is done borrowerwise and not accountwise. Only exception to this rule is loan granted to
Primary Agricultural Credit Societies.
2. In NPA account, interest or any other charge can be debited to the account only when it is
recovered.
3. In all NPA accounts, provision is to be made on the basis of asset classification.
Income recognition — Policy: Income from non-performing assets (NPA) to be booked as income only
when it is actually received. The bank should reverse the interest already charged during previous
periods and not collected by debiting Profit and Loss account
PROVISIONING NORMS: Provisioning is made on all types of assets i.e. Standard, Sub
standard, Doubtful and loss assets.
1. Standard 'Assets: Banks should make general provision for standard assets at the following rates
for the funded outstanding on global loan portfolio basis:
(a) Direct advances to agricultural and SME sectors: 0.25 per cent of outstanding
(b) Advances to Commercial Real Estate (CRE) Sector: 1.00 per cent of outstanding; ( CRE for
Residential Housing — 0.75% of outstanding)
(c) Housing Loans at teaser rates till these continue at teaser rates; 2.00 per cent of outstanding.
(d) All other loans and advances not included above: 0.40 per cent of outstanding.
Some points to be noted are:
(1) The provisioning is as percentage of outstanding. It has nothing to do with the availability of
security.
(2) The concessional rate of provisioning of 0.25% is available only in respect of direct advance to
agriculture and micro and small enterprises. It is not available for indirect advances.
(3) The provisions on standard assets should not be reckoned for arriving at net NPAs. The
provisions towards Standard Assets need not be netted from gross advances but shown separately
as 'Contingent Provisions against Standard Assets' under 'Other Liabilities and Provisions Others' in
Schedule 5 of the balance sheet.
2. Sub Standard Assets:
(1) Sub standard secured accounts (secured from beginning): 15% of the outstanding balance.
(2) Sub standard unsecured accounts: 25% of outstanding balance (infrastructure loan accounts:
20%)
(3) Unsecured exposure is defined as an exposure where the realisable value of the security, as
assessed by the bank/approved valuers/Reserve Bank's inspecting officers, is -not more than 10
percent, ab-initio, of the outstanding exposure.
(4) For sub standard assets, the provision is as percentage of outstanding balance. It is not
calculated separately for secured or unsecured portion.
3. Doubtful Assets:
In case of doubtful assets, while making provisions, realizable value of security is to be considered.
100% provision is made for unsecured portion. In case of secured portion, rate of provision varies
from 25% to 100% depending on the period for which the account has been doubtful. The rate of
provision on secured portion of doubtful asset based on age of the doubtful asset is given below:
Age of Doubtful Asset Provision as % of secured portion
Doubtful up to 1 year; D1 25% of RVS
Doubtful for more than 1 year to 3 years; 02 40% of RVS
Doubtful for more than 3 years; D3 100% of RVS
Therefore, provisioning on Doubtful assets will be as given below:

D1 account: 100% for the unsecured portion plus 25% of the realizable value of security.
D2 account: 100% for the unsecured portion plus 40% of the realizable value of security
D3 account: 100% for the unsecured portion plus 100% of the realizable value of security
Thus, if an account is doubtful for more than 3 years, then 100% of the provision is to be made both
for secured and unsecured portion.
If an advance has been guaranteed by DICGC/CGFTIECGC and is doubtful, then provision on secured
portion will be as in other cases but provision on unsecured portion will be made after deducting the
claim available. For example, if the outstanding amount in a 02 account is Rs 10 lac, security is Rs 6
lac, and DICGC cover is 50%, then on Rs 6 lac, the provision will be at the rate of 40% and of the
unsecured portion of Rs 4 lac, provision will be made at the rate of 100% on Rs 2 lac.
4. Loss Assets: 100% of the outstanding amount.
5. Restructured Advances when upgraded to standard category: 5% for first two years.
6. Suspense Interest: While making provisions on NPAs, amount lying in Suspense interest account
and derecognized interest should be deducted from gross advance and provisions be made on the
balance amount.
7. Overall provisions: Total provisioning coverage ratio, should be minimum 70%. Banks should
achieve this norm not later than end-September 2010. Provisioning coverage ratio is the ratio of
provisioning to gross NPAs.
8. Floating Provisions: Banks can deduct floating provisions from gross NPAs or *reckon it as part of
Tier II capital subject to the overall ceiling of 1.25% of total Risk Weighted Assets.
Gross and Net Advances.and Gross and Net NPA:
(i) Gross Advance = Standard Assets + Gross NPA. (For the purpose of computing Gross Advances,
interest recorded in the Memorandum account should not be taken into account.
(ii) Net NPA = Gross NPA minus provisioning for NPAs
(iii) Net advances = Gross advances minus provisioning for NPAs
(iv) Net NPA ratio = Net NPA/Net advances*100
Other features:
1. Asset classification of accounts under consortium should be based on the record of recovery of
the individual member banks.
2. Advances a ainst term de osits NSCs eli•ible for surrender IVPs KVPs and life policies need not be
treated as NPAs provided sufficient margin is available. Advances against gold ornaments,
government securities and all other securities are not covered by this exemption.
3. Government guaranteed advances: The credit facilities backed by guarantee of the Central
Government will be treated as NPA for income recognition. However, asset classification and
provisioning would be made only when the Government repudiates its guarantee when invoked.
4. Availability of security or net worth of borrower/guarantor should not be taken into account for
the purpose of treating an advance as NPA. It should be on the basis of record of recovery.
Provisioning Coverage Ratio & CCPB in terms of Circular dated Dec 01, 2009, a Provisioning
Coverage Ratio (PCR) of 70% of gross NPAs was prescribed by RBI, as a macro-prudential measure,
to augmenting provisioning buffer in a counter-cyclical manner when the banks were making good
profits. Banks have been advised (Apr 21, 2011) by RBI that :
•the PCR of 70% may be with reference to the gross NPA position in banks as on September 30,
2010;
ii. the surplus of the provision under PCR vis-a-vis as required, should be segregated into an
account styled as countercyclical provisioning buffer (CCPB)
iii. This buffer will be allowed to be used by banks for making specific provisions for NPAs during
periods of system wide downturn, with the prior approval of RBI. (On March 31, 2015, RBI allowed
banks to use 50% of CCPB as on Dec 31, 2014).
Further, PCR is to be disdosed in Notes to Accounts to the Balance Sheet
Appropriation of recovery
Banks should adopt an accounting principle and exercise the right of appropriation of recoveries
(towards principal and interest) in a uniform and consistent manner.
Rehabilitation cases
As regards the advances granted under rehabilitation packages finalised by BIFR and/or term lending
institutions, banks should not make any provision on the additional facility for a period of one year from
date of disbursement. However, for original advance, provision be made according to the classification
viz. substandard or doubtful, as the ease may be.
Security/means of the borrower/guarantors
a) Availability of security or net worth of borrower/guarantor should not be taken into account for the
purpose of treating an advance as NPA or otherwise, as income recognition is based on record of
recovery.
b) The net means of the borrowers and guarantors are not to be included as security for the purpose
of calculating shortfall in doubtful category.
c) Pari-passu / second charge on all block assets should be treated as security.
d) Surplus security available in one loan be considered in another loan of the same borrower where
there is a shortfall.
Treatment of NPA Provisions : RBI as per circular of Mar 24, 2009 has decided as under, in
regard to the prudential treatment of different types of provisions in respect of loans portfolios. RBI
has clarified that the relative provisions can only be reckoned for the purpose listed there against.
(i) Additional Provisions for NPAs at higher than prescribed rates:
The regulatory norms for provisioning represent the minimum requirement. Therefore, banks may
voluntarily make specific provisions for NPAs at rates which are higher than the rates prescribed
under existing regulations if such higher rates are based on a policy approved by the Board of
Directors to provide for estimated actual loss in collectible amount and the policy is consistently
adopted from year to year. The additional provisions for NPAs, like the minimum regulatory
provision on NPAs, may be netted off from gross NPAs to arrive at the net NPAs
(ii) Excess Provisions on sale of Standard Asset/NPAs :
(a) If sale consideration is higher than the book value in respect of Standard Asset, the excess
provisions may be credited to Profit & Loss Account.
(b) Excess provisions which arise on sale of NPAs can be admitted as Tier II capital subject to the
overall ceiling of 1.25% of total Risk Weighted Assets.
(iii) Provisions for diminution of fair value: Provisions for diminution of fair value of
restructured advances, both in respect of Standard Assets as well as NPAs, made on account of
reduction in rate of interest and /or reschedulement of principal amount are permitted to be netted
from the relative
Provision asset.
for Diminution in the Fair Value of Restructured Advances
Computation of erosion of fair value : It is computed as the difference between the fair value
before and after restructuring.
Fair value before restructuring is computed as the present value of cash flows of interest (at the
existing rate on the loan before restructuring) and the principal, discounted at a rate equal to the
bank's base rate (applicable to borrower) as on the date of restructuring plus appropriate term
premium and credit risk premium for the borrower category on the date of restructuring. Fair value of
the loan after restructuring :
RBI, decided (02.07.15) that a rate equal to the actual interest rate charged to the borrower before
restructuring may be used to discount the future cash flows for the purpose of determining the
diminution in fair value of loans on restructuring. If existing credit facilities carry different rates of
interest, the weighted average interest rate (with share of each credit facility in the total outstanding
of the borrower as on the date of restructuring being used as weights) may be used as the discounting
rate. This rate may be used to discount pre-restructuring cash flows & post-restructuring cash flows.
This methodology is to be consistently used wherever banks are required to compute fair/present value
of loans under RBI guidelines, including for the purpose of computing net present value of project
loans.
WILFUL LOAN DEFAULTERS - REVISED RBI GUIDELINES
RBI implemented the recommendations of (Kohli Working Group) wef May 31, 2002.
What is Wilful Default ?
A wilful default would be deemed to have occurred if any of the following events is noted :The unit
has defaulted in meeting its payment / repayment obligations to the lender :
(i) even when it has the capacity to honour the obligations OR
(ii) and has not utilised the finance from the lender for the purposes for which finance was availed of
but has diverted funds for other purposes OR
(iii) and has siphoned off the funds so that the funds have not been utilised for specific purpose for
which finance was availed of, nor are funds available with unit in the form of other assets OR and has
disposed of or removed the movable fixed assets or immovable property given by it for the purpose of securing a term loan
without RBI clarifications
The term 'unit' means individuals, juristic persons and all other forms of business enterprises.
A guarantor who fails to repay bank loan on being called to pay when borrower defaults, will also be
categorized willful defaulter, if he has capacity to pay. Within a group, if a group company has given
corporate guarantee for other company declared willful defaulter, the guarantor company will also be
considered willful defaulter, if it does not repay the loan, as guarantor.
(iv) Cut-off limits for Penal provisions Any wilful defaulter with an outstanding balance of Rs. 25
lakh or more, would attract the penal measures. This limit of Rs. 25 lakh may also be applied for
the purpose of taking cognizance of the instances of 'siphoning' / 'diversion' of funds.
(v) Penal measures
(vi) a: In order to prevent the access to the capital markets by the wilful defaulters, a copy of the
list of wilful defaulters would henceforth be forwarded by RBI to SEBI as well.
b. No additional facilities should be granted by any bank / FI to the listed wilful defaulters. In
addition, the entrepreneurs / promoters of companies not to be allowed any financial support for
floating new ventures for a period of 5 years from the date the name of the wilful defaulter is
published in the list of wilful defaulters by the RBI.
c. The legal process, wherever warranted, against the borrowers / guarantors and foreclosure of
recovery of dues should be initiated expeditiously. The lenders may initiate criminal proceedings
against wilful defaulters.
(vii) Reporting of Willful Defaulters
(viii) I. Banks are to furnish data on willful defaulters (non-suit filed accounts) for Dec 31, 2014 onwards to
Credit Information companies and not to RBI. Thereafter, banks/FIs may continue to furnish data on a monthly or
a more frequent basis, so that information is available on a near real time basis.
(ix) if) Data on willful defaulters (suit filed accounts) of Rs.25 lac and above will continued to be submitted to
CICs.
Grievance Redressal Mechanism: Decisions to classify the borrower as wilful defaulter is entrusted
to a Committee headed by the Executive Director and consisting of • two GMs/DGMs. Another
committee headed by Chairman/CMD/CEO is to review the decision taken by the above committee.
NON-COOPERATIVE BORROWERS (RBI Dec 22, 2014)
A non-cooperative borrower is one who does not engage constructively with his lender by .(i) defaulting in
timely repayment of dues while having ability to pay, (ii) thwarting lenders' efforts for recovery of their dues
by not providing necessary information sought, (iii) denying access to assets financed / collateral securities,
(iv) obstructing sale of securities, etc.
(x) The cut off limit for classifying as non-cooperative would be aggregate fund-based and non-fund bas4d
facilities of Rs.50 million from the concerned bank/FI.
(xi) The decision to classify as non-cooperative borrower is entrusted to a Committee headed by an Executive
Director and consisting of two other officers (General Managers/ Deputy General Managers) as decided by the
Board of the concerned bank/r1.
(xii)The Committee shall issue a Show Cause Notice to the borrower (promoter/whole-time directors in case
of companies) and call for his submission and after considering his submission issue an order recording the
borrower to be non-cooperative and reasons for same.
d) The order of this Committee should be reviewed by another Committee headed by the Chairman / CEO and
MD and consisting two independent directors. The order to be come final when confirmed by Review
Committee.
e) Banks/Fls will report information on their non-cooperative borrowers to CRILC under CRILC-Main
(Quarterly Submission) return within 21 days from the close of the relevant quarter.
f) Boards of banks/Fls should review on a half-yearly basis the status of non-cooperative borrowers for
deciding whether their names can be declassified as evidenced by their return to credit discipline and
cooperative dealings. Removal of names from the list of non-cooperative borrowers should be separately
reported under CRILC with adequate reasoning/rationale for such removal.
g} Banks/Fis will make higher provisioning as applicable to substandard assets for new loans sanctioned to
such borrowers as also new loans sanctioned to any other company that has on its board of directors any
of the whole time directors/promoters of a non-cooperative borrowing company or any firm in which such
a non-cooperative borrower is in charge of management of the affairs. However, for the purpose of asset
classification and income recognition, the new loans would be treated as standard assets.
Central Registry of Securitisation Assets Reconstruction & Security Interest of India
Govt. of India established the Central Registry of Securitisation Asset Reconstruction and Security
Interest of India (CERSAI), a Govt. Company, U/S 25 of Companies Act, 1956 on Mar 31, 2011. It
operates/maintains Central Registry functions as per SARFAESI Act 2002 under the
superintendence and
direction of Central Registrar.The majority
shareholding (51%) is with Central Govt., Public Sector Banks and National Housing Bank.
Type of transactions - It registers transactions relating to security interest over property and
transactions of securitization and asset reconstruction. With registration of these transactions, a
public data base is created about encumbrances created on properties to secure loans and advances
given by banks/FIs, as also transactions of securitization or asset reconstruction undertaken under
provisions of the SARFAESI Act. The following transactions are not covered : (1) Securitization or
asset reconstruction done outside the provisions of the SARFAESI Act ; or (2) Security interest
created in favour of any lender not included in the definition,of bank or, FI as per SARFAESI Act. Who
is covered : The secured creditors notified under the SARFAESI Act. are to file the details
Roll over of Short-Term Loans: A roll-over of a short term loan, will be considered as 'restructuring'.
If such accounts (other than properly assessed regular Working Capital Loans like revolving Cash
Credit or Working Capital Demand Loans), are rolled-over more than 2 times, then on 3rd roll-over
onwards, the account would be treated as a restructured account.
Conversion of Debt : The conversion into preference shares should be done only as a last resort maximum up
to 10% of the restructured debt. The conversion should be done only in the case of listed companies subject to
statutory requirement u/s 19 of the BR Act 1949 and relevant SEBI regulations.
Right of Recompense: All restructuring packages must incorporate 'Right to recompense' dause and it should
be based on certain performance criteria of the borrower. In any case minimum 75% of the recompense amount
should be recovered by the lenders and in cases where some facility under restructuring has been extended
below base rate, 100% of the recompense amount should be recovered.
Repeatedly restructured accounts
The concession is not available if the account is restructured for the second or more times.
Benchmarks for Viability Parameters (RBI — May 31, 2013)
As per extant instruction account can be taken up for restructuring by the banks if the financial viability is
established and there is a reasonable certainty of repayment from the borrower. RBI decided that the
viability should be determined based on the acceptable viability parameters and benchmarks for each
parameter as under:
i. Return on capital employed should be at least equivalent to 5 year Govt. security yield plus 2%.
ii. The debt service coverage ratio (DSCR) should be greater than 1.25 within the 5 years period in which the unit
should become viable. On year to year basis the ratio should be above 1. The normal DSCR for 10 years
repayment, should be around 1.33.
iii. The benchmark gap between. internal rate of return & cost of capital, should be minimum 1%.
iv. Operating and cash break even points should be worked out and they should be comparable with the industry
norms.
v. Trends of the company in relation to EBIDTA, based on historical data and future projections should be
comparable with the industry average.
Strategic Debt Restructuring (SDR) Scheme RBI authorised banks {08.06.15) to undertake an
SDR i.e. converting loan dues to equity shares, with the following features:
i) JLF to incorporate, in the terms and conditions, an option to convert the loan (including unpaid
interest) into shares in the company. if the borrower fails to achieve the viability milestones
and/or adhere to the 'critical conditions', the JLF may decide on whether to invoke the SDR to acquire
majority shareholding in the company, which should be min 51% (compliance with Sec19(2) of Banking
Regulation Act, 1949 to be ensured).
ii) The decision should be taken within 30 days and approved by majority of the JLF members (min 75% by
value and 60% by number);
iii) Conversion package should be approved within 90 days from date of deciding to undertake SDR;
iv) The conversion should be completed within 90 days from the date of approval. SDR invocation will
not be treated as restructuring for asset classification and provisioning norms;
v) On completion of conversion, the existing asset classification, as on the reference date, will continue
for a period of 18 months. Thereafter, the classification will be as per IRAC norms.
viii. On divestment in favour of a 'new promoter', account will upgraded to 'Standard'. The provision shall
be reversed when the loans perform satisfactorily during the 'specified period'.
On divestment, banks may refinance the existing debt considering the changed risk profile without
treating the exercise as 'restructuring'.
v). The asset classification benefit is subject to the following conditions:
a. The 'new promoter' should not be an associate from the existing promoter/promoter group; and
b. The new promoters acquired at least 51% of the paid up equity capital of the company. If
foreign investment ceiling is less than 51%, new
non-resident promoter should own min 26% of the paid up equity capital or up to applicable foreign
investment limit, whichever is higher and banks should be satisfied that the non-resident promoter controls
the management.
Calculation of conversion price of the equity Conversion should at fair value decided by JLF on a
reference date, not exceed lowest of the following:
a) Market value i.e. average closing prices during 10 trading days preceding the 'reference date';
b) Break-up value i.e. book value per share calculated from latest audited balance sheet
(without considering 'revaluation reserves') not more than a year old. In case absence of the latest
balance sheet the break-up value shall be Re.1. Banks should adhere to all the prescribed conditions
by SEBI in this regard.
Regulatory Ceiling : Acquisition of shares will be exempted from regulatory restrictions. Acquisition will
require reporting to PBS, RBI, CO every month)
Equity shares under SDR shall be assigned a 150% risk weight for 18 months from the 'reference
date'. After 18 months these shares shall be assigned risk weights as per the extant regulations.
Marking to market : Equity shares shall be exempt from periodic mark-to-market for 18 month period.
Central Repository of Information on Large Credit (CRILC)
U/s 27 (2) B R Act, RBI decided to use the information in Form-A (Return on Large borrowers of
Rs.10 cr and above) for Central repository. W.e.f. 1.4.14, RBI created CRILC (Central Repository of
Information on Large Credit).
Banks are required to send on quarterly basis (within 21 days) the information relating to
(i) Fund and non-fund based loan account of Rs.5 cr and above (with PAN details). Loans extended by
overseas branches are also to be reported. (Exempted loans : Crop loans and inter-bank exposures
including to NI-113, DIM, SIDBI, NABARD).
(ii) current account balance (debit or credit) of Rs.1 cr and above
(iii) SMA accounts with exposure of Rs.5 cr and ab ov e and all SMA-2. (banks can rep ort
on week ly basis as on ev ery Frida y).
Framework for Revitalising NPAs RBI' framework became effective from Apr 1, 2014. Early
Recognition : Banks have 3 sub-categories under special mention accounts (SMA) category: SMA-0 :
Principal or interest payment overdue upto 30 days but account showing signs of incipient stress. SMA-
1 : Principal or interest payment overdue between 31-60 days.
SMA-2 : Principal or interest payment overdue between 61-90 days.
Stress Signs to classify as SMA
1. Delay of 90 days or more in stock statement / other financial statements, renewal of loan limits.
2. Actual sales /operating profits, falling short by 40% compared with projected sales OR reduction of
DP by 20% due to stock audit OR drop in credit rating by 2 or more notches.
3. Return of 3 or more cheques for insufficiency of funds or returns of 3 or more cheques sent for collection.
4. Non-payment of devolved LC or DPG payment for 30 days or more.
d
5. 3' request for time extension for compliance of conditions.
Mandatory formation of Joint Lenders' Forum: When an account is reported to CRILC as SMA-2,
the banks, are to form a Joint Lenders' Forum (JLF) and formulate a joint Corrective Action Plan (CAP).
• In existing consortium accounts leader bank will be convener and consortium will serve as ..11.F.
• For Multiple Banking Arrangements accounts, bank with the highest exposure will convene JLF.
• JLF formation is mandatory for all distressed borrowers with total fund and non-fund based exposure
(AE) of Rs.1000 million and above. For other SMA accounts also, lenders can form JLFs.
• If a borrower requests, for formation of a JLF, the account should be reported to CRILC as SMA-0.
Options for Corrective Action Plan (CAP) by ILF
(a) Rectification : Obtaining a commitment from the borrower with identifiable cash flows within the
required time to regularise the account without additional finance or involving any loss or sacrifice.
(b) Restructuring : if prima facie viable and the borrower is not a willful defaulter.
(c) Recovery : If above is not feasible, due recovery process may be resorted to, by the JLF with
consent of minimum of 75% of creditors by value and 60% by number, which will be binding on the
lenders.
Time limits : 1) JLF is to decide on the option to be adopted within 30 days from (i) the date of
reporting as SMA-2 by any lender, or (ii) receipt of request from the borrower to form a JLF.
2) JLF should sign off final CAP within next 30 days.
Restructuring Process by JLF
Case can be referred to CDR Cell or JLF can restructure independent of CDR structure.
i) Restructuring package by JLF
1) JLF to carry out a Techno-Economic Viability study. If viable, the package to be finalized within 45
days.
2) For accounts up to Rs.5000 million, package to be approved and conveyed by banks to the
borrower, within the next 15 days, for implementation.
For accounts with AE above Rs.5000 million, the TEV study and restructuring package to be evaluated by
an Independent Evaluation Committee (TEC) for recommendation within 45 days. If agreed by JLF, the
package is to be approved by all the lenders and communicated to the borrower within next 15 days.
General conditions : 1) Asset Classification benefit available as under CDR, will be available to such
accounts also. The Classification as on the date of formation of JLF will be taken into account.
2) The viability should be determined based on acceptable viability benchmarks (such as Debt Equity
Ratio, Debt Service Coverage Ratio, Liquidity/Current Ratio, amount of provision in lieu of the
diminution in the fair value of the restructured advance, etc).
3) The operational details, on CDR mechanism, including One Time Settlement, will be applicable. ii)
Restructuring package under CDR
1) As the preliminary viability of account has been decided by JLF, CDR Cell need not duplicate this
process and directly prepare the TEV study and restructuring plan within 30 days.
2) For accounts with exposure of less than Rs.5000 million, the package should be submitted to CDR
Empowered Group (EG) for approval for final decision within the next 30 days. Approved package
should be approved by all lenders and conveyed to the borrower within next 30 days.
3) For accounts with exposure of Rs.5000 million and above, the TEV study and restructuring
package prepared by CDR Cell to be evaluated by an Independent Evaluation Committee (IEC) of
experts which will give recommendation within 30 days. If JLF decides to go ahead with the
restructuring, it should be communicated to CDR Cell. Thereafter, CDR EG should decide within the
next 30 days. CDR approved package should be approved by all lenders and conveyed to borrower
within the next 30 days.
Other Conditions Relating to Restructuring
1) Shareholders bear first loss rather than the banks.
2) In case of listed companies, lenders may be ab-initio compensated for their loss/sacrifice by issue
of equities of the company upfront. If acquisition results in exceeding the regulatory Capital Market
Exposure limit, it will not be treated a breach. It will be reported to RBI and disclosed in the Balance
Sheet.
Prudential Norms on Asset Classification and Provisioning : For proposal under consideration,
the usual classification norm would continue. As an incentive for implementation, the asset
classification status as on the date of formation of JLF, would be the relevant date to decide the asset
classification status after implementation of restructuring package (this incentive will be withdrawn
w.e.f. April 1, 2015).
Penal Measures for non-adherence : If lenders fail to report SMA status to CRILC or resort to
conceal the actual status or evergreen, they will accelerate provisioning at provisioning rates
mentioned above.
Backtracking : If a bank that agreed to the restructuring, backtracks it has to accelerate provisioning
as above. If the account is standard in those lenders' books, the provisioning requirement will be 5%.
Failure to convene 3LF : If lenders fail to convene JLF or fail to agree upon a common CAP within the
stipulated time frame, the account will require accelerated provisioning as above.
If any of the banks reported the account as SMA2 to CRILC and 3LF convening bank fails to convene
JLF, the convening bank will be required to make accelerated provisions.
In case of consortium accounts, if lead bank fails to convene JLF within 15 days of reporting account
as SMA2, the next largest shareholder bank will assume the responsibility of lead bank.
If the escrow maintaining bank under JLF/CDR does not appropriate proceeds of repayment as per
agreed terms, the account with the escrow maintaining bank will attract the asset classification and
provisioning for one year, which is lowest among the lending member banks.
Willful Defaulters, Accountability of Promoters / Directors / Auditors
(a) The provisioning for existing loans to companies having director/s (other than nominee directors
of govt./financial institutions), whose names appear more than once in the fist of wilful defaulters, will
be 5% in cases of standard accounts and accelerated provisioning as above, if NPA.
(b) To discourage borrowers/defaulters from being unreasonable and non-cooperative, banks may
classify such borrowers as non-cooperative borrowers, after giving 30 days notice. Banks will make
higher/accelerated provisioning for new loans to such borrowers or company promoted by such
promoters or to a company on whose board any of promoter / directors of this non-cooperative
borrower is a director.
(c) RBI will create a database of directors on the boards of companies classified as non-cooperative
borrowers for dissemination to lenders.
Sale and Purchase of NPAs by banks
1. The sale and purchase of NPAs can be made by banks, financial institutions and NBFCs
2. A bank can sell NPA provided it is held in its books as NPA for any period.
3. The sale will be on cash basis and without recourse basis. Purchasing bank can not resell the same
to the selling bank.
4. The asset will be classified as Standard Asset in the books of the purchasing bank for 90 days and
thereafter on the basis of its record of recovery.
5. Purchasing bank can resell the same other than to the original bank after keeping the same in its
books for 12 months
6. The purchasing bank should realize the assets within 3 years. Minimum 10% should be recovered
in the first year and 5% in the each following half year.
7. In the books of the purchasing bank, this asset will carry a risk weight of 100% for capital
adequacy purpose. Asset Reconstruction Companies
1. ARCs have been set up for taking over NPAs from banks/Fls and reconstruct or re pack these for
sale
2. First ARC is Asset Reconstruction Company of India Ltd (ARCIL)
3. ARC will be set up as a joint stock company. Registration with RBI is must before commencement
of business as ARC.
4. ARC should start business within 6 months of registration with RBI. RBI can extend it by another
six months.
5. Net owned funds of ARC should be 15% of the acquired assets or Rs 100 crore whichever is less.
6. Capital Adequacy Ratio at all times should be at least 15%
7. ARC should invest at least 15% in security receipts created out of each securitization.
Reporting to Credit Information Company:
(v) Both in respect of suit filed and non suit filed accounts, banks/Fis should furnish the data in
respect of wilful defaulters of Rs. 25 lakhs and above for the quarter ending December 31, 2014 and
the data on defaulters (other than willful) of Rs. 1 crore and above for the half year ending December
31, 2014 to Credit Information Company and not to RI31. Thereafter, banks/Fls may continue to
furnish data in respect of defaulters/wilful defaulters to CICs on a monthly or a more frequent basis.
SUMMARY OF PROVISIONS PERCENTAGE
Standard - General accounts – 0.40 %
Direct Agriculture & SME – 0.25 %
Commercial Real Estate – 1.00%
Teaser Home Loans (provision will be 0.4% after one year of increase in interest rate)
2.00%
New restructured a/c w.e.f 01.06.2013 : 5%
Existing a/c Restructured upto 31.03.2013
wef 31.03.14 ( spread over four quarters ) : 3.5%
Sub-standard Secured 15%
Sub-standard Unsecured 25%
Sub-standard unsecured (infrastructure accounts) 20%
Doubtful - up to 12 months 25%
Doubtful - more than 12 months but up to 3 years 40%
Doubtful - more than 3 years (secured/unsecured): 100%
Loss account 100%
Provisioning coverage ratio is to be calculated w.r.t. gross NPAs as on Sept 2010 (ratio 70%
of provisions / gross NPAs). Excess amount (over and above account-wise provision) to
be kept in Cyclical Provision Buffer Account -70%
Important issues relating to provisions : Provision on Standard account to be kept as part of other
Liabilities in Schedule-5 of bank's balance sheet (it will be part of tier 2 capital fund for CAR purpose)
Provision on Standard accounts to be done on Global Balance and for NPA accounts on Gross Balance
For Doubtful accounts provision to be done Separately for secured portion and unsecured portion of
total balance in the account.For sub-standard accounts, provision to be done by treating the account
secured sub-standard or unsecured sub-standard without bifurcating the balance into secured or
unsecured.
Sub-standard unsecured account means an account where at the time of sanction no security obtained
or security value was 10% or less
Gross NPAs: It is the principal dues of NPAs plus Funded Interest Term Loan where the
corresponding contra credit is parked in sundry account (Interest Capitalization – Restructured
Accounts), in respect of NPAs
NET NPAs: Net NPAs is the amount of Gross NPAs minus
Provisions held in the case of NPA Accounts as per asset classification (including additional
provisions for NPAs at higher than prescribed rates)
• DICGC/ ECGC claims received and held pending adjustment
• Part payment received and kept in Suspense A/c or any other similar accounts
• Balance in Sundry Accounts (Interest Capitalization – Restructured Accounts), in respect of NPAs
• Floating provisions : Provisions in lieu of diminution in the fair value of restructured accounts classified as NPAs
• Provisions in lieu of diminution in the fair value of restructured accounts classified as standard assets
UPGRADATION OF LOAN ACCOUNTS CLASSIFIED AS NPAs

1. if arrears of interest and principal are paid by the borrower in the case of loan accounts classified as NPAs,
the account may be classified as 'standard' accounts immediately.
2. Restructured accounts: After one year after the date when first payment of interest or of principal,
whichever is earlier, falls due, subject to satisfactory performance during 12 months period from the date of
starting payment after moratorium period. For example, an account was restructured on 5th Jan 2014,
moratorium period 6 months, 1st instalment due on 5th July 2014 which was paid on 1s4 July 2014 and
thereafter account was regular for 12 months. This account will be upgraded on 5th July 2015 and not on 1st
July 2015.
ASSET RECONSTRUCTION COMPANIES
An Asset Reconstruction Company (ARC) is a company incorporated under Companies Act 1956 to
engages itself in the activity of financial asset reconstruction (such as securitisation, takeover of
management, sale of assets charged). Financial asset: The term financial asset means, the loans,
advances and investments, made by the banks and financial institutions.
RBI registration : To undertake such activity, it is mandatory that the company gets itself registered
with RBI under the provisions of SARFAESI Act. The company should also commence its business
within 6 months, of such registration (Oct 2006).
Owned Funds : Wef Mar 29, 2004, for commencement of business, the net worth should not less than
15% of assets acquired or Rs.100 lac whichever is less.
They should maintain capital adequacy ratio of minimum 15% of total risk weighted assets.
Functions of ARCs : ARCs acquire nonperforming loans (also called distressed assets) from banks and
Pis at a discount and take steps to recover these loans by way of securitisation, reconstruction or sale
of the assets. In certain cases, they resort to management take over also.
Realisation plan and due diligence: Before bidding, SCs/RCs may conduct a proper due diligence
within minimum 2 weeks.
The realization period can be max 5 years from date of acquisition (period can be extended to 8 years by
Board April 2010). In case of BIFR/CDR/iLF cases, the period can be co-terminus with other lenders. (RBI
07.05.15)
[SC/RC will have planning period of max six months to formulate a plan for realization of NPA of the
selling bank acquired for the purpose of reconstruction].
Sale and purchase of NPAs between ARCs: As per RBI clarification (April 2009), it is not allowed.
Parking of bad loan after purchase: For the purpose of take over of the loan, the ARC creates a Trust
called Special Purpose Vehicle and ARC acts as Trustee' and managing agent for ultimate realization of
the financial asset.
Financing of purchase of loans : SPV holds the financial asset on strength of the security available. It
issues security receipts (SRs) to the investors, mainly the qualified institutional buyers (QIBs). The
investors get the cash on realization of the financial assets when the security receipts are redeemed.
Security receipt : SR represents undivided right / interest in favour of the investors in the financial
assets held by SPV. The SRs are redeemed out of realization from financial assets and do not carry fixed
returns. These are only pass through certificates and not debt instruments. SRs can also be sold in the
secondary market. Presently the SRs are unlisted and there is no trading.
Valuation of SRs -The initial valuation should be done within a period of six months of acquiring the
underlying asset to enable all the stake holders to realistically assess the value of SRs at an earlier
date. It is mandatory for SC/RCs to invest in and continue to hold a minimum 15% stake of the
outstanding amount of the security receipts issued by them under each scheme and each class tilt the
redemption of all the security receipts, under a particular scheme.
FDI /FIT investment
i. Combined limit of 74%. No sponsor may hold more than 50% of the shareholding in an ARC either
by way of FDI or by routing through an FII.
ii. The total shareholding of an individual Fil shall not exceed 10% of the total paid-up capital.
Hi. FII investment in SRs - 74% of the paid up value of each tranche of scheme of Security Receipts
(without individual limit of 10% for investment of a single Fit in each tranche of SRs issued)
Asset Classification
(1) Assets shall be classified as Standard and nonperforming assets. The NPAs to be classified further
as:
(a) 'Sub-standard asset' for a period not exceeding 12 months from date it was classified as NPA;
(b) 'Doubtful asset' if the asset remains a substandard asset for a period exceeding 12 months;
(c) 'Loss asset' if the asset is non-performing for a period exceeding 5 years or 8 years or if the asset
is adversely affected by a potential threat of non-recoverability due to either erosion in the value of
security or non-availability of security or if it has been . identified as loss asset by the Company or its
internal or external auditor.
Provisioning requirements Substandard Assets: 10% of the outstanding; Doubtful Assets (i) 100%
provision for the asset not covered by the estimated realisable value of security; (ii) In addition 50%
of the remaining outstanding. Loss Assets: The entire asset shall be written off. (If, for any reason,
the asset is retained in the books, 100% thereof shall be provided for).
Investment: Surplus can be deployed with NABARD and SIDBI. An upper limit of 10% of the owned funds
has been stipulated for the investment in land and buildings for their own use.
Membership in Joint Lenders' Forum (JLF) SCs/RCs should be members of JLF and should be a
part of the process involving the JLF with reference to such stressed assets.
Relief Measures for Natural Calamities
To enable banks to take uniform action expeditiously, RBI issued guidelines (Mar 25, 2015) covering 4
aspects viz. Institutional Framework, Restructuring of Existing Loans, Providing Fresh Loans and Other
Ancillary Relief Measures.
1. Institutional Framework
• The declaration of natural calamities is to be done by Central/State Govt., when crop loss is 50% or
more (called Annewari, Paisewari, Girdawari).
• The bank branches should have a set of standing instructions for action to be initiated in the calamity
affected areas after the declaration.
• Divisional/ Zonal Managers of commercial banks should be vested with discretionary powers for the line
of action agreed to by the District/ State Level Bankers' Committees covering adoption of scales of
finance, extension of loan periods, sanction of new loans.
• The meeting will be convened by (i) the convener of the SLBC if the calamity covered the entire State/
larger part of a State (ii) the conveners of the District Consultative Committees if the calamity has
affected only a small part of the State/few districts.
• In case of very severe calamity, relief measures may be reviewed on weekly/fortnightly basis.
2. Restructuring/Rescheduling of Existing Loans
a) Short-term Crop Loans_: Other than overdue, all short-term loans can be restructured. The due amount in
the year of occurrence may be converted into term loan with repayment period of 3 to 5 years (for very
severe damage up to 7 years and in extreme cases up to 10 years). The moratorium period should be of
min one year. The banks should not insist for additional collateral security for such restructured loans.
b) Long term (Investment) agriculture Credit
i) Natural Calamities where only crop for that year is damaged and productive assets are not damaged:
The banks may reschedule the payment of installment and extend the loan period by one year in non-willful
default cases and postpone payment of interest.
ii) Natural Calamities where the productive assets are partially or totally damaged and borrowers are in need
of a new loan: The rescheduling by way of extension of loan period may be done and the total repayment
period for the restructured/fresh term loan should not exceed 10 years.
Asset Classification
a) The restructured portion may be treated as current dues and need not be classified as NPA.
b) Banks are required to make higher provisions for such restructured standard advances as prescribed by
RBI.
b) The classification of the remaining amount due (riot restructured), will continue to be as per original
terms. The dues may be classified under different categories viz. standard, sub-standard, doubtful and
toss.d
c) Additional loan may be treated as "standard asset".
• The benefit of asset classification of the restructured accounts is available only if the restructuring is
completed within 3 months.
• The accounts restructured for the second time or more on account of natural calamities, would retain the
same asset classification category on restructuring.
3. Sanctioning of Fresh Loans
• After decision on the rescheduling of loans is taken by SLBC/DCC, banks may grant fresh crop loans
to the affected farmers and other affected borrowers.
• Consumption loans can be allowed up to Rs. 10,000 to existing borrowers without any collateral
(banks can enhance the limit beyond Rs. 10,000).
Providing access to Bank Accounts: Where the bank branches are affected, banks may operate from temporary
premises. For continuing the temporary premises beyond 30 days, specific approval may be obtained from RBI.
Wilful Defaulters
1. Wilful defaulters of Rs 25 lac & above to be reported to RBI
2. Reporting to RBI will be quarterly
3. Where suits have been filed, banks should submit the list of suit-filed accounts of wilful defaulters of Rs.25
lakh and above as at end-March, June, September and December every year to Credit Information agency
like CIBIL and not to RBI.
LOK ADALAT : Created under Legal Services Authority, Act 1983.Decisions are consent decrees. There is no
appeal against such decree. Civil Procedure Code is applicable. These Adalats are similar to civil courts.Banks
can call Lok Adalat with application to High-court.Amount: General Lok Adalat: Up to Rs 20 lacs (wef Aug 03,
2004) and above Rs 20 lacs DRT Lok Adalat.Eligible accounts: NPA (Loss and doubtful accounts).After full
payment discharge should be given.Repayment: Preferably down payment. Max in 1-3 years.
Central Registry of Securitization Assets Reconstruction and Security Interest of India (CERSAI) : Central
Registry of Securitization Assets Reconstruction and Security Interest of India (CERSAI) established as a Sec
25 Company to perform functions of Central Registry wef 31.03.2011.Objective: To prevent loan frauds
relating to multiple mortgage of same property.Transaction of securitization and reconstruction of financial
assets and equitable mortgages to be registered.Time period for registration is 30 days, which can be
increased by 30 days by Central Registrar.Form I to IV for different transactions.
SARFAESI ACT 2002 ( SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS &

ENFORCEMENT OFSECURITY INTEREST ACT 2002 ) : Applicable wef Aug 23, 2002 in entire India,
including J & K .Amendment: Act amended during 2004 on Supreme Court intervention in Mardia Chemicals vs
Union of India and others (provisions of deposit of 75% amount by borrower before approaching DRT were
withdrawn). Banks can take possession of the charged securities, take management of securities, can sell the
charged securities, without court intervention. Designated officer to initiate action under the Act: Scale IV and
above in banks OR officers approved by BoD of the bank. Consortium/BIFR cases: In case of joint/consortium
financing consent of 75% (by value) creditors required for action. BIFR cases can be recalled back with consent
of 75% of creditors.Possession: 60 days notice before possession. Remedy to borrower: If borrower objects,
bank to justify the possession within one week/ 15 days. If borrower not satisfied could approach DRT within 45
days (without depositing any amount). DRT's decision is appealable (within 30 days) to DRAT after deposit of
50% of amount that could be reduced to 25% by DRAT.Sale: Before sale 30 days notice. Sale below reserve
price (to be fixed by bank) only with consent of the borrower. Sale can be by tenders or though public auction.
For sale through auction, public notice in 2 news papers (one. regional). Sale is confirmed on receipt of 25%
amount immediately and balance is payable in 15 days. DRT pending case: Banks can make use of SARFAESI
Act for sale of security for such cases (Supreme Court - Transcore vs Union of India & others).
loans not eligible under SARFAESI Act : Loans with outstanding up to Rs.1 lac. Agriculture land cannot be Sold;
Where the amount due is less than 20% of the principal and interest (i.e. 80% or more already recovered).
Loans secured by pledge, lien & by security of bank deposits.Where limitation has expired Where security is not
charged to the Bank.
Summary of Time Limits in SARFAESI Act
Notice before possession 60 days
Reply to objection by borrower 15 days
Borrower can approach DRT against possession notice without deposit of any amount 45 days
Appeal to DRAT against decision of DRT by deposit of 50% amount which can be reduced 30 days
to 25% by DRAT
Notice before sale 30 days
Period of balance payment 75% by the buyer of assets 15 days
Important Section in SARFAESI Act

60 days notice before possession Sec 13 (2)
Assistance by Chief Metropolitan Magistrate or Dist. Sec 14 Magistrate in taking Sec 14
possession
Application to DRT against possession notice issued by the bank Sec 17
Appeal against DRT to DRAT by depositing 50% amount Sec 18
Debt Recovery Tribunal : Created under Recovery of Debt Due to Banks & FIs Act 1993 (except J&K). These
are like other civil courts for a special purpose of helping in quicker NPA recovery in large account. DRT headed
by President (President assisted by Registrar and Recovery Officer) and DRAT by Chairperson. Eligible account:
Loans of banks and FIs with recoverable dues of Rs.10 lac or more. Jurisdiction: No other court has jurisdiction
over such cases.Time limit: On receipt of application, show cause notice to borrower to submit his defence
within 30 days. Disposal is expected in 180 days. Disposal of appeal by DRAT also maximum 180 days.Appeal:
Order by DRT appealable to DRAT within 45 days from date of receipt after deposit of 75% of due amount.
DRAT may reduce or waive the amount.Order: After claim is upheld, Recovery certificate is issued. Recovery
officer has powers such as attachment etc. under Income Tax Act.Appeal to President of DRT against order of
Recovery Officer within 30 days and appeal against Registrar within 15 days. Fee: Rs.12000. For each
additional Rs.1 lac Rs.1000. Max 1.50 lacs. For appeal Rs.12000 for debt less than Rs.10 lac, 20000 (10 lac to
less than Rs.30 lac) and Rs.30000 (Rs.30 lac & above).
Asset Reconstruction Companies : Objective: For taking over distressed assets from banks/FIs at discount
and reconstruct or re-pack for sale. Recovery period maximum of 5 years (8 years with Board Approval).To be
set up as a joint stock company. RBI registration must before commencement for business as ARC.Business to
be commenced within 6 months of registration with RBI. RBI can extend it by another 1 year in aggregate.Net
worth: not less Rs.100 cr or 15% of acquired assets, whichever lower. Capital adequacy ratio min 15% of Risk
Weighted Assets.ARC to invest at least 5% in security receipts created out of each securitization.
Corporate Debt Restructuring (CDR):
1. The borrower should be a corporate borrower i.e. Companies, Co-operative societies etc.
2. The loan should have been raised from more than one bank or financial institution. The scheme will
not apply to accounts involving only one financial institution or one bank
3. The outstanding fund based and non-fund based exposure should be Rs.10 crore and above by
banks and institutions.
4. The CDR Mechanism is available to the corporates engaged in industrial as well as non-industrial
activities. The account should be standard, sub standard or Doubtful.
5. The account should be Standard, Sub Standarad or Doubtful. Loss accounts are not covered.
6. There would be no requirement of the account / company being sick, NPA or being in default for a
specified period before reference to the CDR system.
7. Corporates indulging in frauds and malfeasance even in a single bank will be ineligible for
restructuring under CDR mechanism.
8. The accounts where recovery suits have been filed by the creditors against the company, may be
eligible for consideration under the CDR system provided, the initiative to resolve the case under
the CDR system is taken by at least 75% of the creditors (by value) and 60% of creditors (by
number).
Types of CDR: CDR is of two types namely CDR I & CDR II. CDR I is applicable to Standard and Sub
Standard accounts if at least 90% of creditors by value have treated the account as standard/sub
standard. It means that if in the books of creditors with exposure up to 10% by value, the account is
classified as Doubtful, it can be still covered under CDR 1. CDR Ii is applicable to Doubtful accounts.
Category I and Category II restructuring: For making reference under CDR I, consent of 20% of
lenders by value is required whereas for making reference of doubtful accounts under CDR II and suit
filed accounts, consent of 75% lenders by value and 60% by number is required.
Stand still clause: Debtors and creditors agree through an agreement called Debtor Creditor
agreement that no party shall take legal action during the standstill period i.e. 90 days (can be
extended to 180 days).
Inter Creditor Agreement: The Inter-Creditor Agreement would be a legally binding agreement
amongst the creditors, wherein they will agree that if 75 per cent of creditors by value and 60 per cent
of the creditors by number, agree to a restructuring package of an existing debt (i.e., debt
outstanding), the same would be binding on the remaining creditors. ICA will be initially valid for a
period of 3 years and subject to renewal for further periods of 3 years thereafter.
Debt Restructuring Mechanism for SMEs

1. The guidelines are applicable to entities which are viable or potentially viable as follows : (i) All
non-corporate SMEs irrespective of the level of dues to banks. (ii) All corporate SMEs which are
enjoying banking facilities from a single bank, irrespective of the level of dues to the bank. (iii) All
corporate SMEs which have funded and non-funded outstanding up to Rs.10 crore under multiple/
consortium banking arrangement.
2. Accounts involving wilful default, fraud and malfeasance would not be eligible for restructuring.
3. Accounts classified by banks as Standard, Sub Standad and Doubtful only are covered. 'Loss assets'
would not be eligible for restructuring.
4. Viability: Banks should decide on the acceptable viability benchmark. it should be ensured that the unit
becomes viable in 7 years and the repayment period for restructured debt does not exceed 10 years.
5. Time period for restructuring: Restructuring package should be implemented within a maximum
period of 60 days from the date of receipt of request.
12. FUTURE OF SMEs
Micro finance sector consisting of a variety of players that include several Nongovernmental
organizations, cooperatives, Self-Help Groups of various hues, Non-Banking Finance
Institutions-some depending on donor funds and external borrowings and some others operating
with savings, donor resources and external debt is a major player in transforming the informal
economy of the country into a vibrant economy during the post liberalization economy. Apex
institutions like the NABARD, SIDBI and several State Governments realized the potential of this
sector in attaining financial inclusion
Relationship banking focuses more on the customer and the banks that were for a long time
inward-looking and delivering what they were having in their cupboards started looking out at
the customers' needs and preparing products that the customer needs. Although need-based
financing was originally introduced in SME lending in the past, post-reform period abandoned
those strategies and started looking at what the rest of the globe has been doing in the retail
segment that includes the SME sector. Inter-sectoral linkages have also come to occupy their
attention and cross-selling of products was found to be a way forward to improving their profits
and profitability as well as productivity at the some time meeting what the customer needs.
Customer Relationship Management embraced many such interventions and the chapter
discusses structural, economic and cultural issues in adopting these strategies.
Global financial integration being on the threshold has been demanding new financial order
acceptable to all stakeholders. While the Basel I could carry conviction over its Minimum
Capital Requirements (MCR) at 8 per cent of the risk weighted assets and saw most
countries veering round to it within certain set boundaries, Basel II standing on the tripod
of 1) Minimum Capital requirements in the 1988-refined framework; 2) Supervisory review
and 3) Market discipline, did not find ready pickers. The first Accord strengthened the
soundness and stability of the international banking system and enhanced competitiveness
among equally placed internationally active banks. The need for second Accord arose as a
result of changes in the risk profiles of the portfolios the banks have come to handle and
the risks that the adoption of new technologies ushered in. India and China are the two
major economies of the globe that have been drawing the attention of every researcher.
Consistency in growth levels and future opportunities in the Indian economy demands a
robust financial sector. Such robustness is receiving the regulator's attention. But the
compelling urge to embrace the Basel-II is going to affect the two most important sectors
of the Indian economy, viz., agriculture and SME that have the capability to generate
employment on a sustained basis. This paper studies the impacts of Basel II on the SME
sector and argues for re-engineering the credit risk management.
The highly regulated banking industry (especially the commercial side of the industry) was
shocked in the 1970s, not only by a turbulent interest rate environment but also by new,
fierce competitors from the non-banking world. With increased sensitivity to interest rate
fluctuations, borrowers and investors alike, began to scour global markets for the smallest
financial advantage. As rates arose further, deposits began to move out of the rate-
restricted banking institutions into higher yielding alternatives:
Disintermediation. Consequently, newer forms of liabilities (jumbo CDs and money market
accounts) as well as assets of increasingly lower quality began to appear in bank's balance
sheets. Banking, thus, began to be transformed from conservative asset management into
aggressive liability management. This in turn dictated the acquisition of financial assets at
higher rates to cover liability costs. This is a traditional fault of the banking industry, forgetting
that the interest rates are not just a function of market conditions but also of risk. Thus, there
is always the inherent danger of reaching out to credits of lesser quality with higher risks to
realize higher returns. Accordingly, from 1988 onwards, is known as the era of Basle Capital
Accord, the primary objective of which was to strengthen the soundness and stability of the
international banking system by creating minimum Risk-Based CAPITAL ADEQUACY
REQUIREMENTS. This was especially for banks with international presence commensurate with
Credit Risk, thereby reducing global systemic risk without unduly comprising the competitive
differences between countries. All this also gave rise to various credit derivative products to
sustain Return on Capital ratios. Securitization became a major tool to make "illiquid assets" of
the banks tradable and marketable. Loans traditionally, are thought to be kept in the books till
maturity. With this new instrument, incremental origination of loans under Retail/consumer
banking could be planned without attendant constraints like, Capital, Cash Flows or Interest
Rate risks.
Most Indian Banks are reformulating their information systems to capture risk events, loan
default rates — sector wise, area wise, like probability of default, loss given default, and
exposure at default. Internal rating capabilities are also in the process of being built; The
country has only a few external rating institutions — most of which are adept at rating issues
and issuers, derivatives etc., (CRISIL-S&P, ICRA, FISCH) with little orientation to SMEs. It is
SMERA and M-ICRA that are exclusively rating the SME sector. The advantages of rating are yet
to be appreciated by the cash-strapped SME sector. A rating estimates the probability as to
whether a company will comply on time and in full their repayment obligations. A rating also
simplifies the comparability of companies and provides statements about future credit
worthiness. Most SMEs fall under retail portfolios of Banks. Almost 50 centres account for nearly
80 per cent of Banks' business. Eleven States account for 80 per cent of the SME sector in the
country. SIDBI's initiative of setting up SME Financial Centres in most clusters in the country
can improve the status of SMEs and could be seen as low-risk entities requiring less capital
provision by Banks. But all depends upon how the regulator allocates weightage for this sector.
Productive SME lending of the future lies in the post-harvest operations in the farm sector.
There are tremendous opportunities in financing agri-clinics manned by qualified management
and Agriculture graduates. These Agri-clinics carry mobile equipment, mobile testing
laboratories to test the genuineness of the agricultural inputs like seeds, fertilizers, pesticides
etc. Repairs to tractors, motors and pump sets, diesel engines, micro irrigation equipments etc.,
are carried out by service centres set up by entrepreneurs in the SME segment. Depending on
the size of the area served the investment in such service centre varies from Rs. 5 lakhs to Rs.
25 lakhs. Such loans qualify for guarantee from the Credit Guarantee Trust Fund. Farm sector
offers cross-selling opportunities in SME segment.
The impact of WTO and its agreements are on every economic activity be it agriculture,
manufacturing, trading or services. Following is the summary of the impacts:
♦ World markets are opening up due to lowering of tariffs and dismantling of other restrictions in
developed and developing countries. Enlightened and awakened entrepreneurs have greater
opportunities to benefit for their comparative advantages.
♦ Domestic markets will face an increasing threat because of lowering tariffs leading to freer
entry of foreign goods and because of larger number of foreign companies establishing their
manufacturing bases with state-of-art facilities.
♦ Export markets will become tougher because of competition among developing nations having
similar comparative advantages.
♦ The WTO regime will benefit those countries more, which show enormous negotiating skills in
the on-going dialogue. India is currently on a strong wicket on this score. The Government
that is in constant touch with the industry would stand to a significant advantage.
Opportunities for SMEs:
♦ Access to global markets
♦ Access to better technology
♦ Access to greater funding through FDI/Joint ventures Challenges
before the SMEs under WTO regime:
♦ Removal of Quantitative Restrictions — this would lead to liberal import of goods and thus
result in additional competition.
♦ Quality of goods — under a regime where better quality of goods imported from other
countries would be available to the consumer, Indian SMEs would have to ensure that their
products meet with international standards in order to remain competitive.
♦ Outdated technologies — Most of the SMEs use outdated technologies either because of lack of
knowledge or lack of capital. These deficiencies would have to be made good.
♦ Infrastructure — several SMEs are facing problems with basic infrastructure facilities like bad
roads, unreliable power supply, high pollution etc.
♦ This chapter gives examples of a few industrial sub-sectors that have put in place strategies to
reduce the adverse impacts of the WTO Agreements.
13. MEMORY BASED RECALLED QUESTIONS
CUSTOMERS & THEIR ACCOUNTS
Partnership
1. A document was executed by three partners in different dates. When shall the limitation period start?:
The limitation period will start from the last date i.e. when the document was executed by the last partner
2. A minor who was admitted to the benefits of partnership has become major. Within how much period,
he has to decide to remain partner in the firm or not?: within 6 months of attaining majority or 6 months
of knowing that he is the partner in the firm whichever is later.
3. A partnership firm conducting business other than the banking business has more than 100 members
as partners. Whether this is allowed?: Such association is called illegal association as per Companies Act
4. Account payee crossing defined in:-Not defined any where
5. HUF cannot be partner in a Partnership firm: HUF does not have any legal entity.
6. Implied authority of a partner does not allow ______ singly? Settle a dispute relating to the business
of the firm thru arbitration.
7. In Limited Liability Partnership account, who are not eligible for becoming partners: a) HUF b) Minor
c) body corporate?: Ans: a & b
8. Outstanding in a CC account is Rs.2.00 lakhs. One of the partner died and the operations were
continued in the account by the bank inspite of notice of the death given to the bank. Later 2.50 lakh
deposited and 1 lakh was withdrawn? What is liability of legal heirs of the deceased partner: NIL as per
Claytons rule.
9. Position of minor on attaining the majority: He has to give public notice within 6 months on attaining
majority as to whether he wants to become partner or not. If he remains silent it is presumed that he has
accepted to become the partner and he will be liable for all transactions since he was admitted for the
benefit of the partnership firms.
10. Reasons for avoiding advance to Un-Registered Partnership Firm: Firm can not sue against anyone for
recovery of its debts but anyone can sue against the firm.
11. The consequence of non registration of Partnership - firm cannot sue others for its dues.
12. The liabilities of partners in Partnership is: Joint and several
13. Who can not be full fledged partner: Minor
14. Who cannot become a partner in a firm as per supreme court judgment HUF
Companies
1. A bank cannot acquire either as owner or as pledgee shares in a company more than:. 10 % of paid
capital of the company or 10% of the•paid up capital and reserves of the bank, whichever is lower.
2. A limited company has registered office at Chennai whereas loan has been raised from bank branch at
Mumbai. The charge will be registered with the ROC at: Chennai
3. A private limited company with Registered office at Bangalore has raised loan from a branch located
at Mumbai. For creating equitable mortgage, title deeds can be deposited at: Mumbai, Kolkatta, Chennal
or any other notified place.
4. Board of Directors want to borrow money in excess of paid up capital and reserves of the company:
can be done through a resolution passed by shareholders in the general meeting
5. CIN in case of a company indicates: Corporate Identity Number.
6. Company is in liquidation, funds are at the disposal of : Liquidator
7. For formation of a company, Registrar of Companies will issue : certificate of incorporation
8. In the case of IPO, the company is required to allot shares or make refund within: 30 days of the
closure of the issue in case of fixed price public issues; 15 days in case of book built issues and 15 days in
case of right issues
9. Objectives for which a company has been formed are given in: Memorandum of Association
10. On repayment of_debt of a company, satisfaction of charge shbuld be filed with ROC within: 30 days
11. The Articles of Association mention that the minimum quorum for passing a resolution is 5 directors.
However a resolution is received which was signed by four directors only with a request to open the
current account: All the 5 Directors should sign the resolution for opening of the account
12. The legal liability to file charges with ROC in case of lending to a Company is that of ______:
Borrowing Company
13. What is the Doctrine of Ultra Vires in the context of a limited company?: Any act by the directors
beyond the object of the company is considered ultra vires the company and company is not bound by
such act.
14. When a company is financed against the security of hypothecation or mortgage of its movable
property, the company is required to file particulars of charge with: Registrar of Companies
RTI
1. As per Right to Information Act (RTI), in how much time the information is to be provided to the
person seeking the information: 30 days.
2. In case of RTI, information related to life and liberty has to be provided within: 48 hrs.
3. While disposing-off the request under RTI Act, PIO is required to mention clearly the time limit of
_____ and address of the Appellate Authority to the complainant: 30 days.
TRUST
1. 1. You are maintaining current account in the name of the Trust. You receive notice of death of one of
the trustees. After this notice, a cheque signed by the deceased trustee is presented for payment. What
should the bank do?: Cheque may be paid, if otherwise in order.
2. A Trust Deed is silent about loans by the trust. The trustee approaches for a loan. Under these
circumstances what should the bank do?: No loan can be raised
KYC/AML
1. Cash receipt or cash payment of more than Rs 10 lakh are reported to FIU on CTR statement which
should be sent to FIU within _____ from the close of the month: 15 days.
2. Suspicious Transaction report is sent to FIU within: 7 days from confirmation of suspicion.
3. In case of transactions carried out by a non-account based customer, that is a walk-in customer, where
the amount of transaction is equal to or exceeds rupees whether conducted as a single transaction or several
transactions that appear to be connected, the customer's identity and address should be verified: fifty
thousand
4. As per KYC norms, banks are required to periodical update data. In respect of High risk customers,
full KYC exercise will be required to be done at least every: two years
5. As per KYC norms, for how much period banks are required to preserve records in respect of
photograph and proof of address or identity?: 5 years from date of close of account
6. As per KYC norms, in the event of change in this address due to relocation or any other reason,
customers may intimate the new address for correspondence to the bank within: two weeks of such a
change
7. As per KYC norms, risk classification of customers should be reviewed in every: 6 Months
8. Banks are required to FIU, cash transactions which are integrally connected to each other and total
amount of receipt or total amount of payment in a month is more than: Rs 10 lac
9. Cash Transaction Report (CTR) in respect of cash receipt or cash payment of more than Rs 10 lac is to
be sent to Director – FIU. What is the periodicity of the report – Fortnightly, Monthly, Quarterly, half
yearly: Monthly, within 15 days of the close of the month.
10. FIR to be filed if number of Counterfeit notes in a single deposit is: 5 or above
11. If a customer does not comply with KYC requirements despite repeated reminders by
banks, banks should impose ‘partial freezing’ by allowing all credits and disallowing all debits
with the freedom to close the accounts after ____ months notice followed by a reminder for
further period of ____months. If the accounts are still KYC non-compliant after _____months
of imposing initial ‘partial freezing’ banks may disallow all debits and credits from/to the
accounts, rendering them inoperative: 3, 3, 6 months.
12. In a cash deposit made by a customer, one piece of counterfeit note is detected. What should the
bank do - (i) It should be impounded and acknowledgement to be issued(ii) Should be destroyed (iii)
Should be returned back: It should be impounded and acknowledgement to be issued to
depositor signed by cashier.
13. In case of counterfeit notes received in a deposit by a person with bank, FIR is not lodged and only
a monthly consolidated report is sent if counterfeit notes in one remittance is up to: 4
14. In case of Non-KYC compliant customer, after how much time notice, account should be freezed?: 3
months notice
15. In respect of Low Risk customers, KYC norms relating to obtaining photograph and proof of address
and ID should be applied once in: 10 Years
16. In respect of Medium Risk customers, KYC norms relating to obtaining photograph and proof of
address and ID should be applied once in: 8 Years
17. Process of making illegally-gained proceeds (i.e. "dirty money") appear legal (i.e. "clean") is called:
Money Laundering
18. RBI has allowed banks to accept at least _____ of the documents prescribed by RBI as activity proof
by a proprietary concern, for opening a bank account in respect of a sole proprietary firm: One
19. What is the Risk category of Trust account High/Low/medium risk?: High Risk
20. When in case of deposit of cash over counter, two counterfeit notes are detected by bank, what
should the bank do – (a) To be returned to customer, (b) impounded immediately, (c) call the police, (d)
destroy it: impound immediately and issue acknowledgement to tender signed by the cashier
21. While opening bank account, as per KYC norms, what another document is taken by bank in addition
to proof of ID?: proof of address ( Both can be same also)
22. Relaxation in KYC norms is permitted if the depositor undertakes that the balance outstanding in his
account will not be more than and credits in a financial year will not exceed . Rs 50,000; Rs
100,000
23. Why KYC guidelines have been issued by RBI under section 35 A of the Banking Regulation Act: To
prevent Money Laundering -
24. The terms used for hiding money to avoid tax is : Money laundering
25. Money laundering: conversion of illegal money into legal through banking channels.
26. For the purpose of KYC rules any addition & modification on which recommendation: Financial Action
Task Force
27. Risk type for customer having political exposed person: High Risk
28. As per KYC Guidelines, Records of transactions to be maintained for at least ten years from the dateof
transaction, instead of _________from the date of cessation of transactions, and records pertaining to
identification of the customer and his address to be preserved for at least ten years after the business
relationship is ended: ten years
29. A customer who does not complete all KYC norms, what type of account is opened for him? No Frill
account in which cannot be more than Rs.50000 and credits in the Financial Year cannot be more than
Rs.100000.
30. There were three cash withdrawals of Rs 5.80 lac ,Rs 4.90 lac & 0.25 lacs from an account in a
month. Which of these transactions is/are will be reported to Financial Intelligence Unit as part of CTR?
Cash withdrawals of Rs 5.8 lac and Rs 4.9 lac.
31. Under Prevention of Money Laundering Act, banks are required to preserve records relating to
opening the account for how much period?: 10 years from date of closure of account.
32. Which of the following is not the key element of KYC policy a) Customer Acceptance Policy; b)
Customer Identification Procedures; c) Monitoring of Transactions; d) Risk Management e) Customer
Awareness Policy: Ans is E i.e. Customer Awareness Policy.
33. On whose recommendations, KYC norms came into force? (a) Goiporia Committee (b) Ghosh
Committee (c) FATF: Ans is FATF
34. Under KYC Norms, Documents relating to opening the account like proof of address and identity and
photograph should be taken again at what interval? (a) once in 10 years for low risk customer (b) once in
8 years for medium risk customers (c) once in 1 year for high risk customers (d) Both (a) and (b): Ans is
(d)
35. Record of cash receipt and payment under KYC to be maintained if cash receipt or payment in a single
day from one account is more than Rs 10 lakh.
36. For Low Risk customers, periodical up-dation of KYC data: Once in 10 years.
LOANS AND ADVANCES INCLUDING BALANCE SHEET ANALYSIS

1. ˜Credit Rating Agencies in India are regulated by: RBI
2. ˜CRISIL stands for: Credit Rating Information Services of India Ltd.
3. ˜Deferred Payment Guarantee is : Guarantee issued
when payment by applicant of guarantee is to be made in installments over a period of time.
4. ˜If Break Even Point is high, it can be construed that the margin of safety is ____: Low.
5. ˜Long Term uses – 12; total Assets – 30; Long Term source 16; What is net working capital : 4
6. Õn which one of the following assets, depreciation is applied on Straight line method: Computers.
7. ˜Projected Turnover is Rs.400 lacs, margin by promoter is Rs. 20 lacs. What is maximum bank
finance as per Annual Projected Turnover method: 80 lakhs.
8. ˜Rohit was a loanee of the branch and news has come that he has expired. On enquiry, it was
observed that he left some assets. Upto what extent the legal heirs are liable to the Bank? Legal heirs are
liable for the liabilities upto the assets inherited by them.
9. ˜The appraisal of Deferred Payment Guarantee is same as that of a) Demand Loan b) OD c) Term
Loan d) CC : Term Loan.
10. A cash credit account will be treated as NPA if the CC limit is not renewed within ___days from the
due date of renewal: 180 days.
11. A director of a bank wants to raise loan of Rs 10 lakh from his bank against Life Insurance Policy with
surrender value of more than Rs 15 lakh. What will be done?: Bank can sanction.
12. A firm is allowed a limit of Rs.1.40 lac at 30% margin. It wants to avail the limit fully. How much will
be the value of security : Rs.2 lac
13. A guarantee issued for a series of transactions is called: Continuing guarantee
14. A lady who has taken a demand loan against FD come to the branch and wants to add name of her
minor son, as joint a/c holder. What you will do?: Name can be added only after adjustment of the loan.
15. A letter of credit which is issued on request of the beneficiary in favour of his supplier: Back to Back
LC
16. A loan is given by the bank on hypothecation of stock to Mr. A. Bank receives seizure order from
State Govt. What should bank do?: Bank will first adjust its dues and surplus if any wilt be shared with
the Govt.
17. A loan was sanctioned against a vacant land. Subsequently a house was constructed at the site.
What security is available now to the bank? : Both
18. A minor was given loan. On attaining majority he acknowledges having taken loan and promises to
pay. Whether the loan can be recovered? : He can not ratify the contract. Hence recovery not possible.
19. A negotiating bank and issuing bank are allowed days each for scrutiny of documents drawn
under Letter of credit to ensure that documents are as per LC: 5 banking days each.
20. Age limit staff housing loan: 70 years;
21. An L/C is expiring on 10.05.2008. A commotion takes place in the area and bank could not open.
Under these circumstances can the LC be negotiated?: The L/C can not be negotiated because expiry date
of LC can not be extended if banks are closed for reasons beyond their control.
22. As per internal policy of certain banks, the net worth of a firm does not include: a. Paid up capital b.
Free Reserve c. Share Premium d. Equity received from Foreign Investor : Revaluation Reserves
23. Authorised capital is Rs.10 lac. Paid up capital Rs.6 lac. The loss of previous year is Rs.1 lac. Loss in
current year is Rs3 _ lac. The tangible net worth is : Rs.2 lac
24. Authorised capital= 10 lac, paid-up capital = 60%, loss during current year = 50000, loss last year =
2 lacs, what is the tangible net worth of the company? : 3.5 lac
25. Bailment of goods by a person to another person, to secure a loan is called : Pledge
26. Balance outstanding in a CC limit is Rs.9 lakh. Value of stock is Rs.5 lakhs. It is in doubtfUl for more
than two years as on 31 March 2012. What is the amount of provision to be made on 31-03-2013?: Rs.9
lakhs (100% of liability as account is doubtful for more than 3 years)
27. Balance Sheet of a firm indicates which of the following – Balance Sheet indicates what a firm
owes and what a firm owns as on a particular date.
28. Bank limit for working capital based on turn over method: 20% of the projected sales turnover
accepted by Banks
29. Banks are required to declare their financial results quarterly as per provisions of : SEBI
30. Banks are required to maintain -a margin of ___ for issuing Guarantee favouring stock exchange on
behalf of share Brokers.
31. Banks are required to obtain audited financial papers from non corporate borrowers for granting
working capital limit of: Rs.25 lakh &above
32. Banks provide term loans and deferred payment guarantee to finance capital assets like plant and
machinery. What is the difference between these two: Outlay of funds.
33. Benchmark Current Ratio under turn over method is: 1.25
34. Break Even Point: No profit no loss. ( TR-TC=Zero)
35. Calculate Debt Equity ratio – Debenture – Rs 200, capital 50; reserves – 80; P& L account credit
balance – Rs 20: 4: 3 ( 200 divided by 150).
36. Calculate Net working capital– Total assets 1000; Long Term liabilities 400; Fixed assets, Intangible
assets and Non current assets (i.e. long term uses) Rs 350; What is net working capital : 400- 350= Rs
50
37. Calculate Tangible Net Worth: Land and building: 200 Lacs; Capital:80000 intangible asset:15000:
65,000
38. CALCULATION OF INTEREST IN LOAN ACCOUNT: MONTHLY
39. CARE stands for : Credit Analysis & Research Ltd
40. Cash Budget method is used for sanctioning working capital limits to : Seasonal Industries
41. CC limit Rs 4 lacs. Stock 6 lacs. Margin 25% . What is drawing power? : NOTIONAL - 4.5 lacs, BUT
ACTUAL Rs. 4 LAC.
42. Central Registry of Securitization Asset Reconstruction and Security Interest of India (CERSAI) is a
government company licensed under Section 25 of the Companies Act, has been incorporated to operate
and maintain the Central Registry under the provisions of _____: SARFAESI Act 2002.
43. CIBIL is the agency that provides information to the member banks on (i) Credit Rating (ii)
Information on credit History: Information on Credit History of borrowers
44. Contribution means : profit + fixed cost
45. Current Assets 600, Long Term sources - 600, Total Assests1000, what is NWC and Current Ratio: CR
1.5 : 1; NWC = 200 .
46. Current Liabilities are those liabilities which are to be paid: within one Year
47. Current Ratio = 2:1, Net working Capital=60000, What is the Current Liability of the firm? : 60000
48. Current ratio indicates: Liquidity of the firm (ability of a firm to pay current liabilities in time)
49. Current Ratio is 1.33:1, Current Assets is 100, what will be the amount of Current Liability: 75 lakhs
50. Debt Equity Ratio indicates: Long term solvency or capital structure of the firm.
51. Debt Securitization refers to: Conversion of receivables into debt instruments.
52. Debt Service coverage ratio is used for: Sanction of Term Loans
53. Deferred Payment guarantee is: Financial Guarantee
54. Deferred payment guarantee issued by a bank is a : Contingent Liability.
55. Difference between Long Term Source and Long Term Use is called: Net Working capital.
56. DSCR indicates: Ability of firm to repay term loan instalments
57. DSCR is for evaluating: Term Loan repayment-surplus generating capacity.
58. Duty of confirming bank: Only to verify the genuineness of L/C.
59. Equitable Mortgage is created by deposit of title deeds with bank at – (a) any where in India; (b)
state capital; (c) only at Mumbai, Chennai or Kolkatta; (d) Any place notified by state government for this
purpose: Correct answer is (d).
60. Excess of current liability over current assets means the firm may face difficulties in meeting its
financial obligations in short term.
61. Expand CRILC: Central Repository of Information on large credits.
62. Expand IRR : Internal Rate of Return
63. Finance for construction of road and port is classified as: Infrastructure Finance.
64. For ascertaining that a firm will be able to generate sufficient profit to repay instalments of term
loan, which ratio is computed?: Debt Service Coverage Ratio
65. For assessing Fund Based Working Capital limit for MSME upto _______Turnover method is followed
under Nayak committee: Rs.5 crore.
66. For classification of assets in consortium accounts, which of the following is to be considered?: In
consortium accounts, each bank will classify the account as per its record of recovery.
67. For Takeover of accounts from other Banks, the account copies of all the borrower accounts with the
present bankers / financial institution shall be obtained at least for the last ______: 12 months.
68. Formation of consortium, when essential : When bank touches its exposure ceiling
69. Full form of DSCR: Debt Service coverage ratio;
70. Gold is pledged with bank as security for a Bank Guarantee by a borrower. Bank Guarantee stands
expired. Whether a temporary overdraft availed by the borrower which is overdue can be got adjusted by
selling the Gold held as security for issue of guarantee: Yes, because Bankers lien is a general lien and is
an implied pledge. Further, the Gold was deposited in the ordinary course of business.
71. Green field project is related to : setting up new projects
72. Guarantee issued by a bank in favour of Custom department that party will fulfill export obligation for
availing exemption from custom duty regarding tax. Such guarantee is called: Financial Guarantee
73. Guarantee issued by a bank which is still outstanding is shown in the Balance Sheet as: Contingent
Liability.
74. Guarantors Liability: Recall the a/c and cause demand against the borrower and guarantor. Balance
in guarantor's SB a/c cannot be appropriated directly.
75. Holiday period given for repayment of installements in a loan is termed as: Moratorium period
76. How DSCR is calculated?: (Profitafter tax + Depreciation + Interest on Term Loan) divided by (Annual
instalment of term loan+ interest on term loan)
77. How much additional risk weight has been provided on restructured loans?: 25%
78. Hypothecation can be converted to pledge by: taking possession with the consent of the borrower.
79. Hypothecation described under SARFEASI Act.
80. If a businessman start a business with a Capital investment of Rs.3,00,000/- and withdraw
Rs.25,000/- later. If Net Profit is Rs.1,20,000/- and income tax paid thereon is Rs.30,000/-, what is the
position of capital account (net worth) at the end of the year – 395000; 365000; 360000; nil:
Rs.3,65,000/-
81. If a LC contains a clause "about" regarding the amount and quantity of goods, how much tolerance is
permitted?: 10%
82. If current ratio is 2:1, net working capital is Rs 20,000, current asset will be: Rs 40,000
83. If debtors are Rs 4 lac, annual sale is 60 lac, what is the Debt collection period: 0.8 months
84. If Debtors velocity ratio increases, it means debt collection period has increased or sales have
decreased.
85. If documents are to be presented in about July month: these can be presented within 5 days before
or 5 days after.
86. If in a Guarantee issued is silent, what will be the limitation period: 3 yrs and in case of Govt
guarantee it is 30 years.
87. If in a LC words around is written with date then variation of is allowed in the period: +/- 5 calendar
days
88. If limit is 3 lacs, margin is 25% what should be stock to avail full limit?: Rs4 lac
89. If on a letter of credit it is not mentioned whether it is revocable or irrevocable, then as UCPDC 600, it
will be treated as : Irrevocable LC
90. If on a Letter of Credit, date is mentioned as "end of the month", then as per UCPDC 600, it will
mean: 21st to last day of the month.
91. If stock statement is not submitted for 3 months from its due date and DP is allowed on the basis of
old stock report, then the account will be considered NPA after:90 days
92. If the projected sale of a-small (manufacturing) enterprise is Rs 80 lakh, margin available with the
borrower is Rs 4 lakh, then as per turnover method, working capital limit will be: Rs 16 lakh.
93. If working capital limit to a borrower is Rs 10 crore and above, then as per RBI guidelines, the loan
component should be at least: as per bank's discretion.(earlier it used to be 80%).
94. In a company, the registration of charges is required for: a)loan against FD b)lien on Govt Securities
c) assignment of Book Debts d) lien on Shares : Book Debts
95. In A current account OD of Rs. 12000 is made. The FDR has become due later on if the right of
appropriation can be used. The borrower has objected that he never requested for overdraft, hence
payment can not be appropriated. The customer is right.
96. In a letter of credit, it is written that documents can be negotiated about 30th June. In this case, the
documents can be negotiated: Before or after 5 clays of 30th June.
97. In case of a loan under consortium, each bank can have Maximum working capital limit of Rs-No
rule in this regard. Rules of consortium to be framed by members of consortium.
98. In case of loan given by more than one bank under a consortium, how the asset classification is done
by various banks?: Each bank will classify the account based on its record of recovery.
99. In case of revaluation of fixed assets, what percentage of revaluation reserve will be added to Tier
II capital of the bank?: 45%
100. In Letter Of Credit jmporter is called: Opener of Letter of Credit
101. In project finance, Debt Equity Ratio requirement for other than Infrastructure finance is: 2:1
102. In respect of a project report, the feasibility which is given least importance by the preparers of the
report, but very important for a banker is : a) Commercial b) Technical c) economic d) financial Ans: C
103. In the Balance Sheet of a bank, Contingent Liabilities are shown as: footnote to the Balance Sheet.
104. In the case of advance to a limited company for purchase of vehicle, the charge is registered with
Regional Transport Authority in addition to registration of charge with. Registrar of Companies. Why this is
done?:So that borrower can not sell the vehicle without intimation to the bank
105. Interest rate on advances is related to – Bank rate; Base Rate; PLR: MCLR Rate
106. Limit sanctioned Rs 5 lac; Stock Rs 6 lac; Margin 25%; What will be Drawing power: Rs 4.5 lac
107. Loan Delivery System is not applicable to: a) Loan to Soft ware industry b) export credit: export
credit
108. Loan Delivery System suggested by Rashid Mani Committee is applicable on borrowers with working
capital limits of: Rs 10 crore and above
109. Loan is in the name of A&B. Both have signed documents. A signs the Balance Confirmation but B
does not. In this case limitation will extend against: both
110. Lorry Receipts issued by Transport Operators approved by IBA are preferred. The reason is the
Transport Operators will take care of: Carriers Risk.
111. Stand by LC is just like : Financial guarantee (A guarantee of payment issued by a bank on behalf of a
client that is used as "payment of last resort" should the client fail to fulfill a contractual commitment with
a third party. Standby letters of credit are created as a sign of good faith in business transactions, and are
proof of a buyer's credit quality and repayment abilities)
112. Standard Score under CIBIL: 300 to 900
113. Stock Audit is required in respect of loans of : Rs.1.00 crore & above
114. Subordinate Debt is shown as part of in the Balance Sheet of a bank: Other Liabilities and
Provisions
115. Tangible Net Worth (TNW) is calculated as: Total paid up capital + Reserves – Intangible Assets.
116. The appraisal of deferred payment guarantee is similar to term loan: The difference is outlay of funds.
117. THE APPRAISAL OF DEFERRED PAYMENT GUARANTEE IS SIMILAR TO: TERM LOAN
118. The Audited Balance sheet for the latest financial year is to be obtained within ______ to finalise
credit rating and re-fix interest accordingly: 6 months.
119. The Bank did not disclose all material facts regarding loan to the guarantor while obtaining
guarantee. Can guarantor escape liability?: Guarantor cannot escape from his liability as it is not
necessary to disclose all the materials facts with regards to the loan.
120. The Borrower has to bring funds as his contribution for loan from: Long term Sources
121. The charge on stocks is created by: Hypothecation ( also by pledge or lien)
122. The concept of Base Rate is not applicable in the case of: Loan against Bank’s own deposit
123. The limitations of financial statements are : only quantitative not qualitative.
124. The long term liability to tangible net worth ratio implies : Long term solvency of the firm .
125. The main distinction between Hypothecation and Pledge is on accountof : Possession
126. The Meaning of Debtor Velocity Ratio is: Cycle of Debt Collection Period
127. The procedure used for ascertaining Customers Credit worth is called: Credit Rating
128. Time Limit for registration of equitable mortgage with CERSAI: 30 days from date of deposit of
title deeds. (Normally 30days and then delay can be condoned up to 30days on payment of penalty).
129. To improve Current Ratio of 2:1, what has to be done? a) Recover cash from Receivables b) Cash
sales c) Decrease the Bills payables.
130. Total Indebtedness Ratio is represented by: Total outside liabilities divided by Tangible Net Worth
131. What is "pari passu" means: Sharing in the ratio of outstanding.
132. What is a Break even point-The level of sales at which a firm does not earn any profit and does not
incur any loss.
133. What is cash loss : net loss before depreciation (Net loss minus depreciation)
134. What is Deffered Payment Guarantee?: Guarantee issued when payment by applicant of
guarantee is to be made in instalments over a period of time.
135. What is Mortgage? Transfer of interest in specific immovable property to secure an existing
or future debt.
136. What is nature of Banker's Lien?: It is implied pledge because Banker can dispose-off the goods after
giving notice to the borrower.
137. What is Pari Passu charge?: In case of consortium advance sale proceeds of security will be
shared among banks in proportion to their outstanding.
138. What is Real Rate of Interest?: Prevailing interest rate minus inflation rate
139. What is the meaning of Group in Exposure Norms: Commonality of management & Effective Control
140. What is the relationship between bank and customers in case of overdraft?: Creditor and Debtor
141. What is the risk weight for Personal Loans? 125%
142. What is the risk weight for Unrated companies?: 100%
143. What is the type of liability for the bank on account of issue of Bank Guarantee?: Contingent Liability
144. What type of bank gaurentee bank gives when a customer purchases a machine on instalment basis?:
Deferred Payment guarantee.
145. What type of Guarantee is Deffered Payment Guarantee: Financial Guarantee
146. What type of liability is represented by Bank Guarantee?: Contingent Liability and shown as a
footnote in the Balance Sheet.
147. What will be the tangible net worth if total assets are Rs 35 crore; total outside liability Rs 30 crore;
intangible assets Rs 3 crore: Rs 2 crore
148. What will happen in case of negative working capital limit: Current Liabilities are more than
Current Assets
149. Which is not a Credit Rating Agency – CRISIL, CARE, SMERA, ICRA, CIBIL: CIBIL
150. Which is not found in operating expenses statement of P&L statement - Salaries, Rent, Power: Power
151. Which is not included in Contingent liability – Bank Guarantee; Letter of Credit; Forward Contract;
Bills Payable: Bills payable
152. Which of the following is a contingent liability – deposits, borrowings, capital, guarantee: Bank
Guarantee
153. Which of the following is a Credit Information company – CIBIL, FIMDA, AMFI, CRISIL: CRISIL
154. Which of the following is part of the Solvency Ratios: debt equity ratio.
155. Which of the following represent Debt Service Coverage Ratio: (Net Profit after tax + Depreciation
+ Interest on Term loan) divided by (Annual instalment of term loan + interest on term loan)
156. Which of the items will not be an asset in banks bal sheet: Advances/Fixed Asset / Deposits :
Deposits
157. Which one of following is credit information company?: Equifax
158. Which system replaced Benchmark Prime Lending rate in banks: Base Rate
159. While arriving Drawing Power for financing against book debts, only Book Debts _____and below are
to be taken in to consideration. (other than MSME advances): 90 days
160. While doing Project Appraisal, sensitivity analysis is useful for: Viability and sustainability of project.
161. While financing for TL, Bank should look for the ability of the firm to generate the income to service
the debt
162. While granting loans to a partnership, banks generally insist that the firm should be registered
whereas registration of a partnership firm is optional. What is the reason for the same?: An
unregistered firm can not sue its debtors for recovery of its dues whereas other can sue the
firm for recovery of their dues
163. While undertaking technical appraisal, the following is not considered: cost of production and sales (it
is used for economic viability).
164. Who is bound to file particulars of charge with the Registrar of Companies under MCA 21, when a
company creates charge of somebody on its movable or immovable property except by way of
pledge?: officials of the company.
165. Why banks do not grant loan to a minor?: A minor is not competent to contract Therefore, Ioan given
to a minor can not be recovered.
166. Why banks ensure that charge created on any asset of the company should be registered with ROC
within stipulated period?: If charge is not registered, bank will become unsecured creditor.
167. Why banks prefer financing of bills?: because the advance is self liquidating
168. Why fund flow statement is taken from the borrower?: To know sources from where funds have been
raised and how funds have been utilized and to know changes in net working capital position.
169. Why loan against Partly Paid Shares are not preferred by banks?: Because partly paid shares
represent contingent liability. In case company makes demand and the borrower does not pay the
amount then the bank will have to pay the amount otherwise share may be forfeited. Moreover it is
prohibited by RBI
170. Working capital requirement of a firm is required to be met through : Short term sources and surplus
of long term sources over long term uses
PRIORITY SECTOR ADVANCES

MSME
1. A Small Manufacturing Enterprise unit is considered as Sick Industrial Unit: when account remains sub
standard for more than six months or there is erosion in the net worth due to accumulated cash losses to
the extent of 50% or more of its net worth during the previous accounting year and the unit has been in
commercial production for at least two years
2. A small scale unit (manufacturing) can be treated as micro unit if the original investment in plant and
machinery does not exceed : Rs.25 lac
3. A unit in service enterprise is considered as medium if the investment in equipment is: more than Rs 2
crore but up to Rs 5 crore.
4. A Unit will be called as Small Service Enterprise if investment in equipments is up to: Rs 2 crore.
5. Amount of maximum loan given to micro and small enterprises that is covered under-CGFTMSE-
scheme : Rs.100 lac
6. As per Micro, small and medium enterprise development Act 2006, a small manufacturing enterprise is
one in which original investment in plant and machinery is: more than Rs 25 lakh and up to Rs 5 crore.
7. As per RBI guidelines, banks are required to provide__% of advance to small enterprises to units in
which original investment in plant & machinery does not exceed Rs 10 lac in the case of manufacturing
units and does not exceed Rs 4 lac in equipment in the case of service enterprises: 40%
8. As per RBI guidelines, Loans to Agro and food processing Units are eligible to be classified under
Agriculture Ancillary Activity under Agril. Finance Priority Per borrower Rs. 100.00 crores.
9. Bank limit for working capital based on turn over method: 20% of the projected sales turnover
10. Banks are required to make 40% of advance to Micro and Small enterprises to manufacturing units
with investment up to Rs 10 lakhs and/or service enterprises with investment in equipment up to: No
criteria (earlier Rs 4 lakh) and now Micro has to reach 7.00% by March 2016 & 7.5% by March
2017 of ANBC/ceobe which ever is higher.
11. Banks will not obtain collateral security in respect of loans to micro and small enterprises which are
covered by Credit Guarantee Scheme for Micro and Small enterprises?: Rs 1 crore
12. CGTMSE fee: For North East & women; Loan up to Rs 5 lakh – 0.75% p.a.; Loan more than
Rs 5 lakh – 0.85% p.a.
13. Composite loan limit for Small Manufacturing enterprises: Rs.1.00 crore
14. For being defined as Medium enterprise, the original investment in plant & machinery should be: More
than Rs 5 crore and up to Rs 10 crore.
15. For being eligible to be classified as small (service) enterprise, the original investment in equipment
should not exceed: Rs 2 crore.
16. Full form of CGTSME: Credit Guarantee Fund Trust for Micro & Small Enterprises.
17. If a small enterprise in manufacturing has a good track record, collateral security can be waived up
to: 25.00 lacs
18. If an MSME units holds a margin of Rs.20 lac and its projected sales are Rs.400 lac, its working
capital limit will be : Rs.80 lacs
19. In case of advance granted to Micro and small enterprises, banks will not obtain collateral security up
to: Rs 10 lakh
20. In case of advance to Micro and Small manufacturing enterprises, working capital limit by a bank as
per turnover method is calculated as: 20% of projected annual turnover.
21. In case of loan guaranteed under CGTMSE, what is the extent of cover for loan upto 50 lac granted to
a women?: 80% of amount in default.
22. In case of loan to micro and small enterprises guaranteed by CGTMSE, no collateral security is
required for loans up to: Rs 100 lac.
23. Khadi Village Industry part of MSE; irrespective of investment in P&M.
24. Maximum Guarantee coverage for loans guaranteed by CGTMSE if loan up to Rs 5 lakh: 85% of the
amount in default with a maximum of Rs 425000.
25. Micro, Small and Medium Enterprises is under which Ministry: Ministry of Micro Small & Medium
Enterprises.
26. SMERA stands for: Small & Medium Enterprises Rating Agency.
27. The definition of Micro and Small enterprise in the manufacturing Sector is based on investment in :
Plant and Machinery.
28. Under CGFT scheme for MSE, for loans up to Rs 50 lac, 80% coverage is not available for: SC/ST
29. What is the maximum amount of loan covered guarantee scheme of CGTMSE for loans made to micro
and small enterprise: Rs.100.00 Lac
30. What is the rate of guarantee fees charged under CGSMSE for loan of more than Rs 5 lac to a
women?: 0.85% p.a. of limit sanctioned.
31. Advantages of Cluster based finance to MSMEs: Risk mitigation.
GOVT. SPONSORED SCHEMES & MISC.
1. __% outstanding under General Credit Card Scheme is to be treated as__ : 100 %, Other Priority
Sector Advance
2. 100% of GCC accounts and up to 50000/- overdraft permitted in no frill accounts will be treated as:
Other Priority Sector.
3. CGFTSI: 80% coverage not allowed to SC/ST (only to beneficiaries in North East states, women
beneficiaries)
4. CGMSE - upto 5 lakhs cover in North East : 0.75% p.a. of limit sanctioned.
5. CGTMSE has been set up by: Govt of India and SIDBI
6. Cluster based approach is applicable for: a) Priority credit advance b) SME c) SHG.
7. Debt Swap meaning: To extend finance to farmers for repayment of loan taken from non-
institution lenders
8. Discontinuation of Service Area Approach is as per recommendations of : Vyas committee report
9. Financial Inclusion aims at : The delivery of banking services at an affordable cost to the vast sections
of disadvantaged and low income group.
10. Internal Rate of Return is arrived at a point where future cash flows on Net Present Value basis should
be: Zero.
11. Jandhan tag line? Mera Khata Mera Bhagya Vidatha
12. Maximum amount of loan to DRI beneficiary was revised as per Union Budget 2007-08. What is the
maximum loan other than the Housing Loan to SC/ST that can be granted to DRI beneficiary: Rs.20,000/-
13. Maximum Number of persons in JLG? : 10 ( 4-10 )
14. Maximum people in SHG? : 20 ( 10-20 ).
15. Minimum qualification for loan under PMEGP if project cost in manufacturing more than 10 lacs: 8th
pass. If up to Rs 10 lakh no min qualification
16. Minimum women Self Help Groups in SGSY? 50% of the total Self Help Groups
17. Mudra Bank full form: Micro Units Development Refinance Agency.
18. Mudra Card will be co branded with: MUDRA Ltd and will be Rupay Card
19. PEMGP Subsidy to be kept as: 3 Years FDR without Interest
20. PMEGP - Margin / Promoter contribution : 10% Genera! & 50/s for Spi category borrowers
21. Prime Minister’s Task Force on loan to micro and small enterprises was headed by: T K A Nair
22. The Committee which issued guidelines on P.S. advances in July 2012 was headed by: M.V.Nair
23. The extent of coverage under CGTMSE for Micro units upto Rs 5 lacs: 85% with maximum amount of
claim upto Rs 4.25 lacs.
24. The maximum amount of guarantee cover for loans granted to small and micro enterprises other than
beneficiaries in the North Eastern Region and women entrepreneurs and guaranteed by CGFT is: 75% of
the amount outstanding up to Rs 50 lakh and 50% thereafter as on the date of account becoming NPA
with a maximum of Rs. 50 lacs (coverage upto 100 lac)
25. Under CGFT, for loans more than Rs 5 lac but upto Rs 50 lakh, 80 % guarantee cover is available for:
Loan to Micro and Small enterprises in NE States, Women.
26. Under CGTMSE liability upto 5 lac how much cover available to micro Enterprises: 85% ( 4.25 lacs )
27. Under MUDRA lending will be for: Non Farm sector
28. What are the benefits of covering advances under CGSMSE: Bank can finance viable projects without
insisting for collateral security.
29. What can be the maximum project cost in case of Agri clinic: Rs 20 lac per individual (Highly
successful case – max Rs 25 lac). For group it is max Rs 1 crore.
30. What does JAM represent?: Jandhan, Aadhar, Mobile
31. What is Composite fee payable to under CGFT for loans more than Rs 5 lac in North East and other
areas: .85% p.a. of limit sanctioned for loans in North East or to woman or to micro enterprise and 1%
p.a. of limit sanctioned in other cases
32. What is financial inclusion: Providing banking services to poor sections at affordable cost.
33. What is the corpus of Guarantee fund under MUDRA?: Rs 3000 crore
34. What is the corpus of MUDRA as per budget of 2015-16: Rs 20000 crore
35. What is the income criteria for classifying a person as economically weaker section for the purpose of
housing loan under Priority sector?: Annual income not more than Rs 200000 (earlier Rs120000)
36. What is the limit for classifying the loan sanctioned to Drip and Sprinker irrigation dealer, for including
under Indirect finance to Agriculture?: - Now in MSME Service irrespective of Amount.
37. What is the margin under MUDRA loans?: For Shishu — Nil; for others — 25%
38. What is the maximum amount of loan that can be granted under DRI: Rs 15000
39. What is the maximum amount of loan under "Kishore" category under MUDRA: Rs 5 lac
40. What is the maximum amount of loan under "Shishu" category under MUDRA: Rs 50000
41. What is the maximum amount of loan under "Tarun" category under MUDRA: Rs 10 lac
42. What is the maximum amount of MUDRA card?: Rs 20000
43. What is the minimum education qualification required for an entrepreneur for a manufacturing project
of Rs.10 Lakhs to be considered under PMEGP? No educational qualification required
44. What is the tenure under MUDRA loans?: Shishu — 36 EMI; Others — 36 to 60 months
45. Which of the following Committees have advised that a full service approach to cater to the diverse
needs of the MSE sector may be achieved through extending banking services to recognized MSE clusters
by adopting a 4 –C approach: Ganguly Committee
46. Which of the following is not the strength of Self Help Group - super profit orientation, saving, internal
lending, mutual help, none of these: Super profit orientation.
NPA & RECOVERY MANAGEMENT

SARFAESI
01. As per a recent judgement of the Supreme Court, while initiating action under SARFAESI, the position
in case of suit filed in DRT would be: that no permission is required from DRT and action under SARFAESI
can be initiated as both the cases can run together.
02. As per provisions of Sarfaesi Act, after taking possession, for making sale, how many days notice is
required to be given to borrower?: 30 days.
03. Bank has served the possession notice under Sarfeasi. The borrower has raised any query. The bank
has to reply within: 15 days.
04. Central Registry provision when started: 31-3-11 under SARFAESI Act.
05. Charge where SARFAESI action can not be taken: Pledge
06. For acquiring securities charged to the bank under SARFAESI, notice of __ days is required to be given
to the borrower u/s 13(2) of the Act and for sale of securities so acquired notice of__ days is required.:
60 days, 30 days
07.For enforcing right under SARFESAI Act, in the case of consortium advances, consent of which bankers
is required?: consent of 60% bankers by value is required
08. For taking action under SARFAESI, the outstanding should be: More than Rs.1.00 lac
09. In case of SARFAESI Act, before preferring appeal to DRAT, how much amount is to be deposited by
the borrower with DRAT?: 50% of the claim amount which can be reduced to 25% by the DRAT. For
making application to DRT, no amount is to be deposited.
10. NBFC with assets size of Rs.500 Crore and registered with RBI can take action under: Sarfaesi.
11. Under SARFAESI Act, in the case of Consortium lending, % of creditors to agree to bring the action
under SARFAESI: 60% of creditors by value.
12.Under SARFESAI, appeal against decision of DRT can be made to DRAT within_____ days and if appeal
by borrower, he should deposit % of bank’s claim with DRAT: 30 days; 50%
13. Which is the latest recovery channel made available to the banks for speedy recovery of NPAs backed
by security: Action can be taken under SARFAESI.
CDR
01. Corporate Debt Restructuring is applicable when a limited company has raised finance from more than
one bank and the outstanding is: Rs 10 crore and above.
02.For implementation of restructuring proposal under CDR mechanism, consent of __ % lenders in value
and __ % in Number is required: 75% by value, 60% by number.
03. CDR 2 - (classified as Doubtful ) Mechanism can be permitted only - if a minimum 75% of creditors
by value and 60% creditors by number should satisfy themselves of the viability of study.
04. For making reference under CDR -I, what are the rules regarding consent of Creditors: Consent of
20% of creditors by value is required. (There is no condition regarding number).
05. Which accounts are not eligible for CDR: Accounts under Loss category
06. In which case CDR is not valid? Finance by single bank
07. Implementation of CDR package of SME to be completed in:60 days
08. CDR covers which type of accounts for restructuring?: Accounts of corporates dealing both in
industrial and non industrial activities. -
09. What conditions have to be satisfied for a loan being eligible for CDR?: Borrowing from more than one
bank; minimum outstanding amount Rs 10 crore and above; account to be standard, sub standard or
doubtful.
PROVISIONING
01.An asset is doubtful for more than 2 years. How much provision is required to be made on the
unsecured portion of the same: 100 %
02. Banks are required to make provision on standard assets at the rate of 0.25% on__ & __accounts :
Direct agriculture and Micro & Small enterprises.
03. General provision on standard assets except specified categories is: 0.40% of the balance outstanding
on global basis.
04. How Interest suspense account is to be treated?: Reduce the balance for calculation of provisioning
purpose
05. Provision in Standard category under Direct Agriculture & SME: 0.25% of outstanding.
06. Provision in sub standard account, which are abi-initio unsecured: 25% for other than infrastructure
07. Provision on secured Sub-Standard Loan: 15% of outstanding.
08. Provisions in case of accounts classified in Doubtful category for 12 months to 3 years is _____: Deficit
+ 40% of RVS
09. Prudential accounting norms include : asset classification, income recognition, provision norms.
10. What is the rate of provision in case of doubtful assets which is in D2 category i.e. which is doubtful
for two years?: Unsecured portion 100%; secured portion: 40%
11.What is the rate of provision on secured Sub Standard Loan:15% of outstanding
12. Where provision required (Standard, Sub Standard, Doubtful, Loss): In all cases
Restructuring
01. The substandard accounts which have been subjected to restructuring, whether in respect of principal
instalment or interest amount, and has satisfactory performance, would be eligible to be upgraded to the
standard category after : one year after the date when first payment of interest or of principal, whichever
is earlier, falls due, subject to satisfactory performance during the period.
02. Decision on debt Restructuring of SME should be taken within a period of ___ days: 60 days.
03. In the case of restructuring of SME which type of accounts are not eligible for restructuring?: Loss
accounts
04. A loan account was restructured. First payment was due on 31.12.2005 and payment was promptly
made on 30.12.2005 and thereafter the-account was regular for 12 months. The account can be treated
as standard from: 31.12.2006
05. An account was restructured on 30th June 2011 and first instalment was due on 31.12.11. The
instalment was deposited on 29.12.11. The account will be considered as standard if instalments are paid
regularly for 12 months with effect from: 31.12.12.
DRT / Lok Adalat
01. Limit for filing suit in DRT: Rs.10 lacs and above
02. For referring cases to Lok Adalat, the cut-off limit is: Upto 20 lacs. More than 20 lacs Lok Adalat set up
under DRT.
Misc
01. Ã Cash Credit account becomes NPA even if regular, when the credit limits have not been reviewed
for more than ____ from due date: 6 months (180 days)
02. Ãgency which purchases NPA from banks is called: Assets Reconstruction Company.
03. A bank can sell its NPA account to another bank only after keeping the same as NPA in the books of
selling book for at least: Anytime
04. A bank who has purchased NPA from other bank can resell the same, after holding the same in its
books for months from the date of purchase: 12 months
05. A company which purchases NPAs from banks and reconstructs or securitises the same is called:
Asset Reconstruction Company (ARC)
06. A loan associated with a short duration crop, becomes sub-standard after remaining special mention
account for a period of : two crop seasons
07. A Sub standard account becomes doubtful after: 12 months from date of becoming NPA.
08. Account need not be classified as NPA as long as adequate margin available: Loan against FDR, Life
Insurance Policy,Govt securities.
09. An NPA has been purchased by a bank from another bank. What will be the risk weight for the
purchasing bank for this account? 100%
10. Bank can sell NPA after it has remained in its books for: No lock in period now.
11. Bank/Fls should submit the list of suit-filed accounts of wilful defaulters of Rs. as at end-March,
June, September and December every year to Credit Information Bureau (India) Ltd. (CIBIL) and submit
the quarterly list of wilful defaulters where suits have not been filed only to RBI: 25 lakh and above
12. CC account credit not enough to meet interest: Out of order.
13. CC/OD A/c out of order for a period of _____ to become NPA: 90 days.
14. Classification of NPA in consortium advances: Each bank will classify the account according to its own
record of recovery.
15. Credit in 9 months in a cc account are not sufficient to recover the interest but outstanding is within
DP. What will be the position of account: It becomes NPA
16. Debt securitisation means: Conversion of receivables into debt instrument.
17. For purpose of classification of Wilful Defaulters for reporting to RBI, the outstanding should be:
Rs.25 lakhs and above
18. Full form of CRILC: Central Repository of Information on Large Credits (CRILC)
19. If in a NPA account, the value of security both primary and collateral deteriorates so much that its
realizable value is 10% and above but less than 50% of the amount outstanding, then this account is
directly classified as: Doubtful asset.
20. If Interest debited in an account is not recovered within _____ will be treated as NPA: 90 days
from the end of the quarter.
21. IF THE PRINCIPAL OR INT PAYMENT REMAINS OVERDUE BETWEEN 31-60 DAYS: SMA 1
CATEGORY
22. If value of security is less than 50%, then sub standard account can be straight way taken to Doubtful
category.
23. Legal Expenses incurred by Bank in respect of suit filed account to be debited to : P & L account
24. Long duration crop means a crop with harvest season of: More than 12 months.
25. NPA ACCOUNT WILL NOT BE CONSIDERED AS WILFUL DEFAULT: IF DUE TO ECONOMIC
RECESSION.
26. Sale of NPA is done on: Without recourse basis
27. Short Duration and long duration crop — who fixes: Agri Deptt of the Govt.
28. State Govt loan can be treated as NPA if a/c is overdue for : 90 days
29. Supervisory Review according to which Central Bank of the country is to ensure that proper capital
has been provided for risk exposure and maintain proper system for the same is provided under?: Pillar II
of Basel IL
30. The Exposure norms for a single borrower in normal case and when .financing to Infrastructure are:
15% and 20% respectively of the capital funds of the bank.
31. The net worth of Asset Reconstruction Company should be: 15% of the assets acquired or Rs 100
crore whichever is less.
32. There is no minimum CRR or SLR as per RBI Act and B R Act.
33. Under OTS, the compromise amount is calculated after taking in _______: Opportunity Cost.
34. What does R stands in ARC: RECONSTRUCTION
35. What is Accrual concept: Mercantile. It means when the amt becomes due you recognize and take it
to P & L account irrespective of the fact that the amount has not been recovered.
36. What is full form of NPA?: Non Performing Asset
37. What is the cut off point for reporting of Willful Defaulter to Credit Information Company?: Rs.25
lakh and above.
38. What is the definition of Quick Mortality: Account becoming NPA with in 12 months from date of first
disbursement.
39. What is the purpose of adopting IRAC (Income Recognition and Asset Classification) norms in India?:
to move towards greater consistency and transparency in the published accounts.
40. When a person does not repay bank’s loan though he has profit to pay, he is called: Wilful Defaulter
41. When account will be out of order, in case of non-receipt of Stock Statement: If statement not
received for last 3 months.
42. When advance is given to a customer by discounting bills, when the account will become NPA?: When
bill is overdue for more than 90 days.
43. Which of the following can purchase NPA? a) ARC b) Banks c) Financial Institutions d) NBFC e) All of
the above.
44. Which of the following entities has released report titled as Framework for Revitalising Distressed
Assets in Economy – Guidelines on Joint Lenders and corrective Action Plan - (i) RBI (ii) Govt of India (iii)
Bank Board (iv) IBA: RBI
45. Which of the following was formed first of all : (a) DRT (b) Lok Adalat (c)SARFAESI (d) CDR
46. Which one of the following is not a method as per any law for recovery of bank loan – (a) Filing a
case with DRT (b) Action under Sarfaesi Act (c) Compromise (d) Lok Adalat: Compromise.
47. Who is not willful defaulter: Default beyond the control of the borrower
RISKS
01. ALM not responsible for: achieving budgets and targets (it helps in managing liquidity risk and
interest rate risk).
02. At present banks are required to maintain capital adequacy ratio of 9% and Tier II capital should
not be more than Tier I. It means that banks are required to bring Tier I capital of at least 4.5% of the
risk weighted assets. With effect from which date, banks will be required to bring Tier I capital of 6% of
the risk weighted assets?: 31't March 2010.
03. Documents not stamped properly is what kind of risk?: Legal Risk
04. For calculation of capital adequacy ratio, the risk weight for Commercial Real Estate for commercial
bldg is : 100%
05. For capital adequacy purposes, risk weight for personal loans is : 125%
06. Fraud – what type of risk : Operational risk
07. General Insurance works on principle of: Spreading the Risk.
08. If an Outsourcing agency does not serve properly – which type of Risk is faced by the bank?:
Reputation Risk and Operational Risk
09. Investment in perpetual bonds is risky because: the interest is not payable if the CRAR falls below
the stipulated target.
10. Legal risk is part of: operational risk.
11. Loss due to inadequacy or failure of system, process, people or due to external events is called:
Operational risk
12. Risk weight for claim on Banks which complies to Min CRAR requirement : Scheduled Banks 20%
13. Risk weight for exposure to Scheduled Commercial Bank that maintains CRAR as per RBI
requirement: 20%
14. Sub-prime is an risk. (Operational and Credit Risk)
15. The capital adequacy ratio is computed by the following formula: Capital/Risk Weighted Assets
16. Tier 2 - general provisioning & loss reserves only up to 1.25% of total risk weighted assets.
17. Tier I should be at least 6% of Risk weighted assets and should be achieved before by all scheduled
commercial banks: 31.3.2010.
18. What are the components of credit risk?: Transaction risk or default risk and portfolio risk
19. When does liquidity risk arises?: Liquidity risk arises when maturing liabilities are more than maturing
assets-
20. While doing Risk Rating, an asset is downgraded from A+ rating to A rating. What type of risk is
involved: Credit Risk.
FOREX :PreShipment
01. A Letter of Credit that contains clause for giving advance for pre-shipment is called: Red Clause LC
02. Adhoc Export Credit to be sanctioned within – 15 days.
03. As per RBI guidelines, concessional interest on Pre Shipment Credit in rupees sanctioned up to 30th June 2010,
can be extended upto days: Ans: 270 days
04. Bill of lading to be submitted within 21 days : if date of shipment is 28th Sep 08, documents to be
tendered on or before 19th Oct 08.
05. In case packing credit in foreign currency is not adjusted within 180 days, what will be the rate of
interest chargeable on such advance after 180 days: Bank's discretion
06. Packing credit is allowed against letter of credit for: purchase of raw material, payment of wages
or power.
07. Packing credit is normally allowed for a maximum period of : as per bank discretion.
08. Packing_credit loan is adjusted out of the proceeds of: Export bills, export incentives and EEFC account
09. PCFC - Refinance - Not available
10. PCFC above 180 days, the rate of interest is: as per bank's discretion.
11. Pre shipment credit is normally linked to : FOB value
12. Rate of Interest on adhoc packing credit limit is: same rate of interest as for normal packing credit loan.
13. Which of the following is not true about "special running A/c" of pre-shipment credit? Bills pertaining to other exports
14. Within how many days, Export documents and Bill of Lading to be submitted to Authorised Dealer for
realization?: 21 days of shipment
UCPDC
01. A clean bill of lading means: a bill of lading in which the condition of goods or packing is not stated to
be defective.
02. As per UCPDC 600, beginning of the Month implies: 1st to 10th of month, Middle – 11th -20th, Last – 21st – last
day of the month.
03. As per UCPDC, the insurance policy should be taken for a minimum amount of : 110% of c.i.f.
value.
04. Expansion of UCPDC: Uniform Customs & Practices for Documentary Credit.
05. If there is no mention in LC regarding type of Bill of Lading that will be acceptable, then as per
UCPDC, bank will ask for: On Board Bill of Lading.
06. In case of Letter of Credit (LC), the importer is also known as - a.beneficiary; b.remitter; c.opener
bank; d. opener: Opener
07. Liability of confirming bank in LC: Bank makes additional undertaking to make payment under
LC in addition to undertaking of issuing bank.
08. UCPDC - for examination of documents – 5 banking-days (Act 14 b)
09. UCPDC is issued by: a) ICC b) RBI c) IMF d) any of these: ICC Paris.
10. Under UCPDC 600, what is the tolerance limit of variation in Quantity, if not specifically mentioned in LC: +/-
5%
11. Which type of documents under LC are preferred? A. On board bill of lading B. Clean Bill of lading C.
Caused bill of lading : On-Board & Clean Bill of lading
12. WHICH IS LATEST UCP- : UCP 600 ( wef 01.07.2007 )
14. TEST YOUR SELF
TEST YOUR SELF : 01
1. Which sector TUF applies to? a)Textile b)Shoe manufacture, c)Food processing,
d)Glass manufacture
2. Which one of the following institution has initiated Project uptech scheme?
a)SIDBI, b)SBI, c) IDBI, d)TIFAC
3. Market failure refers to : a) Imperfect markets, b)Perfect markets, c)Traditional
markets
d)Both (a) and (b) above
4. Which one of the following factors is not included in the Market Gap?
a)Innovations, b)Lack of capital, c)Lack of premises, d)Technology
5. BDS Supervisor is known as : a) Facilitator, b)Team Leader, c) Correspondent ,
d)Group leader
6.Under the Revised RBI Guidelines on Priority Sector Lending, loans to food and agro
processing units are classified under a) Agriculture b) MSME c) Others d) None
7. U nder the Rev ised RBI Guidelines on Priorit y Sector Lend ing, loa ns to
medium enterp rises are not inc luded for the p urp ose of reck oning of adva nces
under the p riority sector. a) True b) False
8. Bank loans up to per unit to Micro and Small Enterprises and to Medium
Enterprises under services sector are classified under priority sector. a) Rs 5 and 10
crore b) Rs 10 and 15 crore c) Rs 10 and 5 crore d) Rs 15 and 10 crore
9. The quantum of loan limit under the revised General Credit Card (GCC) Scheme is
a) 1 lakh b) 2 lakh c) 5 lakh d) no ceiling on the loan amount
10.The maximum claim settlement under Credit Guarantee Trust Scheme for Micro and
Small Enterprises (CGTMSE) is at Rs lakhs. a) 50 b) 62.5 c) 75 d) 100
11. MSME loans covered under Guarantee Fund Trust for Micro and Small Enterprises
(CGTMSE) attracts risk weight for capital adequacy purpose: a) Five b) Fifty c)
Hundred d) Zero
12. Provisioning requirements in respect of Standard Assets under Direct Advances to
agriculture and SME Sectors : a) A general provision of 0.1% of total outstanding
b) A general provision of 0.25% of total outstanding, c) A general provision of
0.4% of total outstanding d) No provision is required to be made
13. The rate of subsidy under PMEGP scheme ranges from ___% to ___% : a) 10&
15 b) 15 & 20 c) 15 & 35 d) 20& 40
14. Advances to MSMEs up to Rs crore may be done on the basis of credit scoring
model.
a) 1 b) 2 c) 3 d) 4
15. The Chairman of Committee on Financial Architecture for Micro, Small and
Medium Enterprises (MSME) sector set up by Government of India is
a) M V Nair b) K C Chakrabarty c) UshaThorat d) K V Kamath
16. The small finance bank shall primarily undertake finance to the following entities
a) unserved and underserved sections ,b)small business units, c) unorganized
sector ,d) micro and small industries, e) all the above
17. MUDRA stands for : a)Metropolitan and Urban Development Regulatory Authority
b)A scheme under Ministry of AYUSH
c)Micro Units Development and Refinance Agency ,d)None of the above
18. As per RBI guidelines, a MSME unit is treated as sick when
a) any of the borrowal account of the enterprise remains NPA for three months or
more
b) There is erosion in the net worth due to accumulated losses to the extent of 50% of its net
worth, c) Any of the borrowal account of the enterprise remains NPA for 6 months or more. d) a and b
19. Micro (manufacturing) enterprises are defined as those whose original investment in Plant and
machinery do not exceed Rs. ... a) 5 lakhs b) 10 lakhs c) 25 lakhs d) 50 lakhs
20. Under the proposed MSMED Amendment Bill, 2014, the revised investment limit in plant and
machinery for micro (manufacturing) enterprises is at Rs
a) 25 lakhs b) 50 lakhs c)75 lakhs d)100 lakhs
21. Under the Debt Restructuring Mechanism for MSMEs, the following entities will be considered.
a) All non-corporate MSMEs irrespective of the level of dues to banks.
b) All corporate MSMEs, which are enjoying banking facilities from a single bank, irrespective of the
level of dues to the bank.
c) All corporate MSMEs, which have funded and non-funded outstanding up to Rs.10 crore under
multiple/ consortium banking arrangement, d)All the above
22. The Code of Bank's Commitment to MSE's which set minimum standards of banking and practices
for banks to follow when they are dealing with MSEs has been formulated by a)BCSBI b) SIDBI c)
RBI d) GOI
23. Which agency provides subsidy for credit rating of SMEs
(a) SIDBI (b) DIC (c) NSIC d) SMERA
24. Banks are mandated not to accept collateral security in the case of loans upto Rs. extended to units
in the MSE sector. a) 25 lakh b) 10 lakh c) 5 lakh d) 1 lakh
25. The quantum of loan limit under the revised General Credit Card (GCC) Scheme is
a) 1 lakh b) 2 lakh c) 5 lakh d)no ceiling on the loan amount
26. The concept of teaching adults is called : a) Anagogy, b) Andragogy, c) Pedagogy, d) Mystagogy
27. An individual needs the following to perform a task (i)
Knowledge (ii) Skill (iii) Attitude iv) All of these
28. The first step in training design is the identification of a) Trainee b) Training Needs
c) Training Institution d) Training Materials
29. Active Methods of Training are, a)Lecture, b)Group Discussion, c) Demonstration, d)Case Study
i) a,b,c ii) b,c,d iii) b,d iv) a,b,c,d
30. Training can solve all performance problems : a) True b)False
31. Make in India programme aims : a) To increase GDP growth b) To increase tax revenue.
c) Aims at high quality standards, d) Minimizethe impact on the environment, e) All of these
32. Governing Council of Skill India Mission is Chaired by a) MSME Minister b) Finance Minister
c) Prime Minister d) Deputy Chairman of NITI Ayog
33. What is eBiz?
a) A single window IT platform for services of all Central GovtDepts and Ministries
b) A single window IT platform for services of all State GovtDepts and Ministries
c) A single window IT platform for services of all International Agencies ,d) None of these
34. What is NICDA?
a) National Institute for Coal Development Authority
b) National Industrial Corridor Development Authority
c) National Information Centre for Data Administration , d) None of these
35. TReDS stands for
a) Treasury Rupee Dealing System
b) Trade Remittance and Discounting System
c) Trade Receivables Discounting System, d) None of these
36.The total loans and advances extended by commercial banks to Micro
and Small Enterprises for 2014-15 is:a) Rs.8,461 bn, b)Rs.6,872 bn, c) Rs.25,229bn, d)Rs.9,645bn
37.Small Finance Banks can lend to :
a)Small business units b) MSEs c)Unorganized Sector d)All of these
38.Ministries/ Govt departments/PSUs to source % of their requirements from MSE units.
a) 10 b)15 c)20 d)5
39.The implementing agencies of CLCSS are : a)SIDBI, b)NABARD c)SIDBI & NABARD d)RBI &
SIDBI
40.UNIDO has identified industrial clusters for development
a)450 b)288 c)388 d)121
41.As per MSMED Act, time limit for buyer to make payment to MSMEs is,
a) 60 days b)180 days c)90 days d)45 days
42.Maximum claim amount settled for micro enterprises with loan upto
Rs.5.00 lakh under CGTMSE is: a)85% b)80% c)75% d)50%
43.Application for guarantee cover should be lodged with CGTMSE within of loan sanctioned.
A )Next months b) next quarter c) within six months d) no time limit
44.Pre-requisites for lodging claims with CGTMSE are,
a) Guarantee Cover is in force , b) Account classified as NPA ,c) Recall Notice issued
d) Lock-in period expired, e) Recovery proceedings initiated : i) a&b, ii)a,b,c iii) a,b,c,d iv)All
45. Debt equity ratio is:
a) Total outside liability/ Tangible Net Worth
b) Long Term Liabilities/Tangible Net Worth ,c) Both the above , d) None of the above
46. A very high debt equity ratio means the unit is :
a) Having more own funds than outside liabilities
b) Having more outside liabilities than own funds
c) Having funds surplus ,d) Having no equity at all
47. The debt-equity ratio of a firm has increased (increase in long term sources) along with its current
ratio. Which of the following is certainly true?
a) Sources of funds have been utilised for purchase of fixed assets
b) Sources of funds have been used for payment of current liabilities
c) Sources of funds have been used for payment of current assets ,d) (b) & (c) both
48. Debt service coverage ratio is (DSCR) :
a) Profit after tax + depreciation - interest on term loan/annual term loan instalment + interest on
term loan
b) Profit before depreciation and Interest / Interest and annual instalment of Term Loan
c) Profit/debt, d) None of the above
49.Desirable current ratio for a borrower is: a) 1:1 b) 1.33:1 c) 2:1 d) None of the above
50. If current ratio is above 2:1, it generally means that the firm :
a) Has very high investment in current assets
b) Does not require working capital from the Bank
c) Liquidity is very high , d) All the above
51. Quick Ratio is:
a) Other name of acid test ratio
b) Equal to quick assets: quick liabilities
c) Both the above ,d) None of the above
52. Assets turnover ratio of a company is increasing, which indicates:
a) Low capacity utilisation
b) Better capacity utilisation
c) Increase in liquidity d) None of the above
53. The term Quasi Equity refers to-
a) unsecured loans from friends and relatives
b) unpaid share capital c) capital reserve, d) all of the above
54. An overdraft/cash credit account is considered as NPA if t remains
a) Out of order for more than 90 days , b)Out of order for more than 180 days
c) Out of order for more than 270 days, d) Out of order for more than 360 days
55. The Standard Provision for MSME loans prescribed by RBI is: a)0.40% b)0.25%, c)1.00%
d)0.75%
56. SMEs are important for the nation's economy because they significantly contribute to:-
industrial production ,b )exports, c) employment, d) innovation, e) all above
57. The minimum and maximum members that can exist in a partnership firm are
___________ & _________ : a)2 & 10, b) 2 & 100, c)2 & 30, d) 2 & 50, e)No restriction
58. Public Ltd Company has minimum shareholders :a)50, b)20, c)100, d)7
59. MSMED Act was enacted in ________ :a) 2005, b)2008, c)2006, d)2010
60.Which one of the following activities is not included in Micro & Small (Service)
Enterprises? : a)Professional persons, b)Small business, c)Dairy, d) Self employed persons
61.PPP denotes ________ :a) Private Public Participation, b) Promoter Partner Participation
c) Public Private Participation, d) Partner Private Public
62. Which one of the following stages of development of SMEs regulations are not required?
a)Entry stage, b) Operational stage, c) Manufacturing stage, d)Implementation stage
63. LLP stands for _________: a)Long term Liability Participation, b) Limited Liability Partnership
c) Legitimate Liability Partnership, d)Liability Limited Partnership
64. Composite Loan limit for SSI that can be sanctioned without security is Rs.__: a)1 Mn. , b)2.5 Mn.
c) 50,000/-, d) Any limit
65. What is the minimum and maximum number of participants in LLP? :a)2, 50, b) 2, 20
c) 2, 100, d)2, unspecified
66. The organizational set up of SSI came into being in : a)1950 , b)1954, c) 1969 , d)1975
67. Which one of the following support services are not provided by MSME DO?
a)Training for entrepreneurship development, b)Financial assistance, c)Tool making
d) Preparation of project and product profiles
68. EDIs stands for ________: a)Export Development Institute, b)Entrepreneurship
Development Institute, c)Entrepreneurship Development of India, d)Entrepreneurship Design
Instruments
69. Which one of the following organizations is not under the control of the State Government?
a) Directorate of Industries, b)District Industries Centre, c) Technical Consultancy Organization
d)EDII
70. What is the maximum amount of guarantee available for Micro Enterprise upto credit limit of
Rs. 5.00 Lakh? : a) Rs. 5.00 Lakh, b)Rs. 3.75 Lakh, c)Rs. 2.50 Lakh, d) Rs. 4.25 Lakh
71. What is 'hurt money'? :a) Equity (b)Loan, c) Debt d) Venture Capital
72. Hybrid Capital means: a) Equity+ debt, b)Debt+ loan,
c)Equity+ Venture capital, d)Insurance+ credit card
73. Venture Capital means: a)High Risk Fund, b)Private equity,
c) Dedicated pools of capital privately held, d)Share capital
74. Pre-shipment credit refers to : a)Financing ships for export ,b)Payment to supplier before shipment
of goods, c)Working capital finance to enable the exporter to procure material for export,
d)Financing for repairs to ships
75. Post Shipment Credit refers to: a) Financing the shipping companies, b)Credit posted after shipping
the goods, c)Working capital finance from the time of export to the time of actual
realization of dues , d) Loans and Advances against documents covering shipment of goods.
76.The objective of Make in India programme is,
a) to encourage companies to manufacture their products in India
b) to encourage foreign companies to manufacture their products in India
c) to encourage companies to manufacture their products in India and export abroad
d) to encourage companies to manufacture their products in India for domestic markets
77. The Make in India Programme is focusing on sectors of the economy for job creation and skill
enhancement : a) 10 sectors b) 17 sectors c) 22 sectors d) 25 sectors
78. MSE credit by scheduled commercial banks as per cent of ANBC as at the end of March 2014 stood
approximately at a) 15.0 b) 30.5 c) 50.5d) 75.5
79. As per 4th NSSO survey, extent of financial exclusion in MSME sector is around
a) 25% b) 50% c)75% d) 93%
80. Under the Revised RBI Guidelines on Priority Sector Lending, the sub-target for lending to micro
enterprises is fixed at a) 8% b) 9% c)7.5% d) 7.0%
81. Which one of the following is not a characteristic of a successful cluster? : a) Inter-firm cooperation
b)Cooperation blended with competition , c) Sectoral specialization d)Sharing of capital resources
82. Which one of the following approaches is not applicable in respect of MSMEs? a) Work together
b)Produce together goods and services, c) Share benefits individually d)Come together
83. Which one of the following steps is not involved for launching a Cluster Development project?
a) Identification of cluster, b)Capacity building, c) Creation of cluster, d)Formulation of final selection
84. UNIDO Projects evolve following various steps for promoting networking and development.
i) Mapping the competitiveness, ii)Assisting the cluster's actors for efficient supply chain management
Capacity building , iii) Providing advisory services, iv) Setting special financial institutions for SMEs
a) (i), (iii), (iv), (v) is correct, b)(ii), (iii), (iv), (i) is correct
c) (iii), (v), (iv), (ii) is correct, d) (v), (i), (ii), (iv) is correct
85. UNIDO stands for : a)United Nations Institution Development Organisation
b)United Nations Innovative Design Organisation
c) United Nations Industrial Development Organisation, d) None of the above
86. Rehabilitation of a sick unit can be taken up if it : a)creates employment, b) is a profitable unit
c) proves viable after rehabilitation, d)repays all outstanding dues immediately.
87. Viability should be examined and approved by: a)State level Inter-institutional Committee, b) The
concerned Bank, c)Commissioner of Industries of the State Government, d)Association of Sick
Industries
88. OTS scheme refers to : a)Sanctioning of ad hoc limits to the Sick Units, b) Settlement of all
outstanding dues as on a specified date as agreed to between the Bank and the Borrower,
c) Sanction of rehabilitation package, d)Consortium lending of banks to the sick unit.
89. Fill in the blanks:
a. viable Unit should be brought under rehabilitation package within 06 Months after it is identified as
sick. b. SEBI: Securities & Exchange Board of India
c. Calling up of Advance refers to: (Tick appropriately)
1. Calling the borrower for discussion, 2.Calling all agencies for a discussion on the rehabilitation
package
3. Calling the borrower to pay up all outstanding dues within specified time limit
90.. Securitization means: (Tick appropriately) : a) Pooling of financial assets for forming into a
scrip for sale in a financial market, b) Pooling of loans of a single borrower, c) Converting loans to
capital of banks, d)Arranging for repayment of dues
91. Which one of the following features of Microfinance is incorrect? : a) Borrowers are from low
income group, b)Long duration loans, c)Loans without collaterals, d) High frequency of repayment
92. Relationship banking allows several special contractual features as under:- i) Discretion
,ii)Flexibility
iii) Inclusion of collateral requirements, iv) Decision, v) Use of covenants
a) (i), (ii), (iii) (iv) is correct , b)(ii), (iii), (iv), (v) is correct
c) (v), (iii), (i), (ii) is correct, d) (iv), (v), (iii), (i) is correct
93. Which one of the following grey areas of concern for growth is not related to Microfinance sector?
a) Regulation, b)Pricing, c) Cluster formation, d) Technology
94. Which one of the following factors is not related to pricing?
a) Character of the customer, b)Elasticity of demand, c) Cost structures, d)Economic conditions
95. SMEs are facing various challenges under WTO regime as under:- i) Technology, ii) Removal of
Quantitative Restrictions, iii) Funding through FDI/JVs, iv) Infrastructure, v)Quality of goods
a) (ii), (i), (v), (iv) is correct, b) (i), (iii), (v), (ii) is correct, c)(iii), (v), (iv), (i) is correct
d) (iv), (v),(ii), (i) is correct
96 National Bank is maintaining a current account of a Public Trust with 4 trustees. Bank receives an
information that two of them have died in a road accident while going for a pilgrimage. The remaining
trustees now want to operate the account.
a bank would permit them to operate the account as they are now the surviving trustees
b bank will refuse the operations as the power was vested with all of them
c bank will examine the trust deed to determine the future course of action
d if the trust deed allows the surviving trustees to operate the
account they will be allowed. Otherwise the bank would insist on a direction from a competent court
e c and d both
97. The Secretary of Seth Chanan Mal Public Trust, a reputed trust having 3 Trustees, has approached
you to open a saving bank account in favour of the Trust. While going through the Trust Deed
submitted alongwith the application you find that there is no provision for operation of the bank
account. What would you do under such circumstances ?
a the account would be allowed to be opened by the Secretary
b operation in the account will be allowed jointly with the Chairman of the Trust
c operation can be allowed against the joint signatures of all the Trustees
d account will be opened only when the trust deed is modified.
e account cannot be operated in the absence of any provision
98. Ramesh and Ashok are trustees of a trust and execute a power of attorney in favour of Tarun.
Trust deed is silent regarding the delegation of power. Tarun comes to operate the account:
a Tarun can be permitted to operate the account
b Tarun can be permitted after obtaining consent of beneficiaries.
c Tarun cannot be permitted to operate.
d Tarun can be allowed if credit balance is there. e b and d
99. Universal Bank is having a current account of Dhara Charitable Trust which is operated by their
two trustees. In road accidents, both the trustees expire and this fact comes to the notice of the bank.
What precautions should be taken by the bank for future operations in the account?
a the beneficiaries will have to appoint another trustee and on the basis of their resolution the
next trustee would be allowed to operate the account.
b the beneficiaries will be allowed to operate the account themselves.
c the operations in the account will be stopped
d the beneficiaries will be told to approach a court for appointment of new trustee in case the
trust deed is silent about this e b and c
100. Your branch receives from the trustees of a trust, a resolution passed by the trustees resolving that the
current account would be operated by two out the three trustees, as the Td trustee is proceeding abroad. The
account is presently operated by all the three in terms of the trust deed.
a the bank will accept the resolution and the request and permit the remaining trustee to operate the
account, strictly as per the resolution.
b the bank will not accept the resolution since the Trust Deed provides for operation of
the account by all the three
c the bank will not accept the resolution and will suggest for power of attorney to be given by the third
trustee.
d the bank will allow operations, since they are working as agents. e none of the above
101 A partnership firm with three partners, named M/s Durani Brothers opened a current account with
Corporate Bank with the operational instruction that 151 two partners will operate the account. The firm
received a cheque in its favour and in order to meet the urgent payment requirement, on behalf of M/s
Durani Brothers, the 3Ni partner endorsed the same in favour of another firm M/s Shivani Cables, from
whom the raw material was purchased:- a Shivani Cables will become holder in due course if it
is not known to them that the 3rd partners has no authority to endorse, b Shivani Cables will not
become holder in due course if they know that only 1st and 2nd partner have authority to operate the
bank account, c Shivani Cables's title will remain doubtful in all circumstances, d a and b,
e a to c
102 Universal Bank has granted cash credit limit of Rs:10 lac to M/s Kale Traders, a partnership
firm. The account is showing a debit balance of Rs.9.50 lac when the notice is received about the
insolvency of one of the partners. Which among the following steps should be initiated by the bank to
safeguard its interest? a account should be recalled and party be asked to adjust the
account, b operations in the account to be stopped and balance confirmation letter to be
obtained from all the partners, c operations in the account to be stopped and notice of
demand to be issued on the remaining partners, d notice about the outstanding dues
to be sent to the official assignee in whom the estate of the insolvent partner has been vested,
e c and d above
103 Your branch maintains a current account in the name of M/s Site Ram Gita Ram & Sons. A new
partner, the younger son of Mr. Gita Ram joins the firm and bank gets information about this
development. Which among the following actions would be more appropriate to deal with this
account:- A operations in the account should be stopped failing which the rule in Clayton case can
apply, B account should be closed and new account should be opened observing all formalities
C new partner can be admitted with the approval of the bank only. Hence the firm should be advised
to obtained permission from the bank, d bank can obtain new partnership declaration
letter and allow operations as per new mandate, e bank can insist on for new partnership
deed duly registered with Registrar of firms
104 Two partners of a partnership firm M/s Hyderabad Trading Company with three partners,
approaches you to open a current account with initial deposit of Rs.10 lac and promise that the
signatures on the account opening, form shall be obtained on the return of 3 rd partner from abroad,
although the said partner is not to actively engage himself in the business and he will function as a
dormant partner. They also do not have any partnership deed in writing.
A the bank will open the account as the 3rd partner is not to operate the account
B the bank will open the account and will not permit any withdrawaltill the 3rd partner signs the account
opening form C the account will be opened but cheque book will be given when the 3rd partner returns,
D the account will not be opened unless all the partners have signed, E none of the above
105 Capital Bank maintains a current account of M/s Bihari Lal Sham Lai with the same name
partners having operating instructions as 'any one can operate'. Mr. Sham Lai informs the bank that
due to some dispute amongst the partners, the cheques signed by Mr. Bihari Lal should not be paid
as he has acquired the whole share from Mr. Bihari Lal and is shortly introducing another partner.
Meanwhile a cheque signed by Mr. Sham Lal is presented for payment. What should the bank do?
A The operations in the account will be stopped and the mandate for operation of the
account by any one, shall become inoperative, B The operations in the account will be stopped
only after receipt of the notice from both of them. C The cheque signed by Mr. Sham Lal shall be
passed since he has acquired the whole share now, D The partners will be advised to sort out the issue
quickly and meanwhile the cheques signed by any of them will be honoured.
106 Corporate Bank opens a letter of credit in favour of an Exporter in Japan on the request of their
import customer Nishikawa Trading Company which is in lieu of a bank guarantee. Such letter of credit
is known as:- a back to back letter of credit, b clean letter of credit, c standby letter of
credit, d irrevocable transferable letter of credit, e none of the above, as it is called foreign
guarantee
107 Your branch has received a letter of credit from an overseas Bank, in favour of M/s Rama
Exports which provides for allowing the exporter the advance at pre-shipment stage and also the
warehouse facility to the exporter. Which among the following is the classification of this letter of
credit? A Transferable letter of Credit, b Stand by letter of credit, c Back to back letter
of credit, D Red Clause letter of Credit, e Green Clause letter of credit
108 An export client M/s Shanbeg Exports of your branch receives an export order for export of
handcraft items to US under a letter of credit of $ 30000. It is stated that your bank can issue
another credit in favour of local supplier/manufacturer from whom the exporter is to procure the
material. Under which of the following categories, such letter of credit can be classified:- A red
clause letter of credit, b green clause letter of credit, c stand by letter of credit,
d transferable letter of credit, e back to back letter of credit
109 Your branch had sanctioned a pre-shipment credit to an exporter who has sent the goods for
shipment but so far he has not handed over the bill of lading, although shipment has taken place few
weeks back:- a if it not presented to bank within 7 days of shipment it will become stale,
b if it is not negotiated within 10 banking days it cannot be negotiated, c if it is not
presented to the bank for negotiation within 21 days of date of shipment, it will become
stale, d if it not presented for negotiation within 21 days of date of shipment it will be claused bill of
lading, e : none of the above
110 International Bank Limited negotiated documents worth Euro 15000 against a without-
recourse irrevocable letter of credit issued by a bank in UK. When the documents were sent to the opening
bank in UK, these were returned with the reason that the bill of lading and the insurance certificate
attached to the documents are fake. Opening bank also refused to make the payment against these
documents, which are otherwise as per terms of the letter of credit. What is the position of International
Bank Limited? a Bank has acted negligently by accepting fake documents due to which it cannot
recover the money from opening bank, b Bank has the option to recover the money from the
seller who has tendered fake documents, c Bank can rightly claim the money from opening
bank under UCF)DC provisions since the bank was to see the regularity of the documents and
was not responsible for their being fake d Bank will have to approach international court, e
a and b above
111 State Bank opened a letter of credit on behalf of its customer M/s Devki Lai and Company for
purchase of goods for trading purpose. Their managing partner comes to your branch and informs that
their booking agent has informed him over phone that the supplier has sent the goods of a different
specification, which are substandard also. He makes a request to the bank not to make payment of the
documents when received from the negotiating bank:- athe request of the party will be accepted by the
bank since the bank has to deal with the party for business.,
b. bank can accept the request of the party since it is a fraud both on the borrower and also the bank.
c bank cannot accept the request of the party since all the parties deal with documents in
letter of credit instead of goods and services
d borrower can be advised to file a suit in a court of law and bring a stay from court.
112 A company is allowed an advance of Rs.30 lac by your branch as a cash credit pledge. While
inspecting the branch, the inspecting official observe that the branch has not got the charge registered
with Registrar of Companies within the prescribed period of 30 days. How you will rectify this error ?
a by obtaining a fresh set of documents, b by making a request to National Company Law
Tribunal to condone the delay, c by getting the loan account adjusted, d fresh loan will be
allowed in consideration of the previous loan, e there is no need to get the charge registered
113 Your branch in Chandigarh decides to sanction working capital limits to a public limited company
and proposes to obtain equitable mortgage of immovable property of the company located in Jaipur.
The registration of the mortgage will be required to be done:- a with the Registrar of Companies
having jurisdiction over Chandigarh, b with the registrar having jurisdiction over Jaipur if its
registered office is in Jaipur, c with both the registrars, d with any of the registrars, e
none of the above
114. Under SARFAESI Act, where the borrower fails to pay in full, after issue of notice for possession of
security, which of the following options are not available to the bank:- a take possession of the
asset, b take over management of the secured assets, c appoint a person to
manage the security asset the possession of which has been taken, d to sell the security
without going to the court after possession without giving any notice before safe
115. For taking possession of the assets under provisions of SARFAESI Act, the banks can seek help of
which of the following agency/institution:
a Distt. Magistrate or Chief Metropolitan Magistrate, b Recovery officer of DRT, c
Local Police, d CRPF and other central forces
84 The presiding officer of DRAT is called , who is appointed by for or until he achieves age
of a President, Central Govt., 5 years, 65 years, b President, High Court., 5 years, 62 years, c
Chairperson, Central Govt., 3 years, 62 years, d Chairperson, Central Govt., 5 years, 65 years
116. Which of the following document in respect of a company is a conclusive proof of existence of a
company: A Memorandum of Association, b Articles of Association, c
Certificate of Incorporation, d Certificate of Commencement of Business
117 A contractor has received a contract from a multinational company to construct a building
according to international standards. The multinational company wants guarantee that the building
would be constructed in time and as per specification. What kind of guarantee would be issued by the
banks:- a financial guarantee, b performance guarantee, c statutory
guarantee, d deferred payment guarantee, e all the above
118 Customs deptt. has issued a notice on D for recovery of some duty which D finds is not lawful.
He approaches the court for stay. Court has given stay against this recovery subject to D's furnishing a
guarantee to be available during the pendency of the case. What kind of guarantee would be issued by
the bank:- A financial guarantee, b performance guarantee, c statutory guarantee,
d deferred payment guarantee, e all the above
119 A company has gone in liquidation and the bank has given guarantee on behalf of this
company, which has been invoked. What the bank should do:- A since company has gone in
liquidation, bank should not pay, b bank should not pay till liquidator gives an
undertaking, c bank should make the payment since contract of guarantee is
independent, d bank should await court order, e none of the above
120 An exporter M/s Delhi Exports dealing with your branch receives an export order for export of
certain spices. As per terms of the contract for sale of which a letter of credit is to be received
subsequently, the goods are to be delivered by the exporter to the shipping company without putting
the goods on board the ship (i.e. to be kept by the side of the ship). Which of the following kinds of
contract it will be termed? A Free on Board (FOB), b Ex-Quay, c Cost and
freight (C&F), d Free alongside the ship (FAS), e Ex-works
121. When a suit is filed by bank in DRT under RDDB Act, after receipt of the case from
applicant, the court issues summons to the borrower within days asking him as to why the relief
should not be given to the bank:- a 45 days, b 30 days, c 21 days, d 14 days
122. Which among the following is not correct regarding pecuniary (financial) jurisdiction of Debt
Recovery Tribunals:
a under Recovery of Debt due to Banks & Financial Institutions Act 1993 it begins from Rs.10 lac
and above, b under SARFAESI Act it starts from above Rs.1 lac, c under Lok Adalt
provisions it begins from Rs.10 lac, d none of the above
123. If the service provider fails to comply with the order of a Distt. Forum under the Consumer
Protection Act, the punishment can be:- a fine up to Rs.10000 and imprisonment up to 3
years, b fine up to Rs.10000 and imprisonment up to 2 years, c fine up to Rs.5000 and
imprisonment up to 3 years, d fine up to Rs.1000 and imprisonment up to 1 years
124. The expiry. date for shipment in a letter of credit is mentioned as 'on and above' Dec 31,
2007:- a the LC is not valid, b the date will be treated as 5 calendar days,
before or after, c the date will be treated as 7 calendar days, before or after,
d the date will be treated as 10 days, before or after
125. Under SARFAESI Act, the Central Register shall register the following types of transactions
(which is not correct): a securitization of financial assets, b reconstruction of financial
assets, c creation of security interest, d sale of financial assets
126. The constitutional validity of Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act was questioned before the Supreme Court in which of the
following cases:- a Transcore vs Union of India, b. Mardia Chemicals vs Union of
India, c Madurai Chemicals vs Union of India, d Marshal Chemicals vs ICICI bank
127.Bank-B failed to file an appeal against DRT order to DRAT within the mandatory 45 days period.
Which of the following remedy is available:- a bank has no option except to follow the decree
passed by DRT, b bank can make a request to DRT to extend the period, which it can
consider, c bank can request DRAT explaining the circumstances and if satisfied,
DRAT may permit the bank, d bank can request High court which has the authority to permit the
bank
128. If the provisions of Transfer of Property Act and SARFAESI Act relating to an immovable
property are different:- a provisions of Transfer of Property Act would prevail,
b'provisions of SARFAESI Act would prevail, c provisions of Transfer of Property Act
or SARFAESI Act would prevail at the discretion of the creditor, d provisions of Transfer of
Property Act or SARFAESI Act would prevail at the discretion of the debtor
129. Which of the following statement is not correct in relation to a Securitization Company under
SARFAESI Act: a it is a company registered with Registrar of Companies, b it requires
registration with Reserve Bank for conducting securitization business, c it can set up
separate trusts, for separate securitization transactions, d none of the above
130. A normal Lok Adait (other than organized by DRT) can entertain disputes involving:- a
up to Rs.20 lac, b up to Rs.15 lac, c up to Rs.10 lac, d up
to Rs.5 lac
(Answer is bold)
TEST YOUR SELF -2

1) The decision to develop a Monetary Policy Framework follows from the recommendation of the
Expert Committee to Revise and Strengthen the Monetary Policy Framework or what is popularly
known as the committee report, which had suggested that RBI target to bring down retail inflation to
8% by January 2015 and 6% by January 2016. a) Dr. Urjit Patel*. b) Dr. Usha Thorat,
c) Dr. Nachiket Mor d) Vijaya Bhaskar
2) As per the Monetary Policy Framework, the objective of monetary policy is to primarily maintain
price stability, while keeping in mind the objective of growth. The monetary policy framework in India
shall be operated by the Reserve Bank of India. Inflation means :
a) The monthly change in the CPI-C expressed in percentage terms.
b) The year-on year change in the half yearly CPI-C expressed in percentage terms.
c) The year-on year change in the monthly CPI-C expressed in
percentage terms* d) None of these.
3) As per the Monetary Policy Framework, the Reserve Bank will aim to bring inflation below ____
percent by January 2016. The Target for financial year 2016-17 and all subsequent years shall be ____
% with a band of +/- ____%.
a) 5;4; 2 b)7;5; 3 c)7 ; 4; 2 d) 6;4;2*
4) As per the Monetary Policy Framework, once every six months, the Reserve Bank shall publish a
document explaining Sources of Inflation; Forecasts of Inflation for the period between _____ to ______
months from the date of the publication of the document; and Flexible inflation target. a) Six ;
Eighteen* b) Five ; Fifteen, c) Four ; Ten d) Six ; Ten
5) As per the Monetary Policy Framework, the Reserve Bank shall be seen to have failed to meet the
target if inflation is more than ____ percent for three consecutive quarters for the financial year 2015-
16 and all subsequent year; Less than ____ percent for three consecutive quarters in 2016-17 and all
subsequent years. a) 8;4 b) 5;2 c) 6;2* d) 5;3
6) As per the Monetary Policy Framework, if the Reserve Bank fails to meet the Target it shall set out
in a report to the Central Government covering which of the following aspects:
a) The reasons for its failure to achieve the Target;
b) Remedial actions proposed to be taken by the RBI;
c) An estimate of the time-period within which the Target would be achieved pursuant to timely
implementation of proposed remedial actions.
d) All of the above*
7) The Government of India, Ministry of Housing and Urban Poverty Alleviation (MoHUPA), has
restructured the existing Swarna Jayanti Shahari Rozgar Yojana (SJSRY) and launched the ___.
a) National Urban Livelihood Mission(NULM)*, b) Prime Minister Rojgar Yojana., c) National Rural
Livelihood Mission (NRLM), d) Jan Dhan Yojana.
8) Under National Urban Livelihood Mission the maximum unit project cost for individual micro
enterprise cases is Rs.
_____ : a) 4 lac b) 3 lac c) 2 lac* d) 5 lac
9) As per National Urban Livelihood Mission scheme, which of the following statement is incorrect:
a) Two sub components in terms of beneficiaries are covered namely: Individual Enterprises (SEP-I), &
Group Enterprises (SEP-G).
b) In case of Individual Enterprises (SEP-I), Banks are mandated not to accept any collateral security.
c) In case of Individual Enterprises (SEP-I), the banks may approach Credit Guarantee Fund Trust for
Micro and Small Enterprises setup by SIDBI and Government of India for the purpose of
availing guarantee cover for SEP loans as per the eligibility of the activity for guarantee
cover.
d) In case of Individual Enterprises (SEP-I), repayment schedule ranges from 5 to 7 years after initial
moratorium of 6-18 months as per norms of bank.
e) None of the above*
10) Under the Group Enterprises (SEP-G) component of National Urban Livelihood Mission scheme,
which of the following statement is incorrect:
a) A Self Help Group (SHGs) or members of an SHG constituted under SJSRY / NULM or a group of
urban poor desirous of setting up a group enterprise for self-employment can avail benefit of
subsidized loans under this component from any bank.
b) The group enterprise should have minimum 5 members with a minimum of 70% members from
urban poor families.
c) The maximum unit project cost for a group enterprise is 10,00,000 (Rs. Ten lakhs) and no collateral
to be obtained.
d) The repayment schedule ranges from 5 to 7 years after initial moratorium of 6-18 months as
decided by bank.
e) The target is Women – 30%; Disabled – 3%; and SC / ST – on Pro – rata to local population.
f) None of the above*
11) With respect to loan against shares, debentures and bonds, which of the following is incorrect as
per RBI guidelines:
a) Loans against the security of shares, debentures and bonds should not exceed the limit of Rupees
Ten lakhs per individual if the securities are held in physical form and Rupees Twenty lakhs per
individual if the securities are held in dematerialised form.
b) Banks should maintain a minimum margin of 50 percent of the market value of equity shares /
convertible debentures held in physical form.
c) In the case of shares / convertible debentures held in dematerialised form, a minimum margin of 25
percent should be maintained. These are minimum margin stipulations and banks may stipulate higher
margins for shares whether held in physical form or dematerialised form.
d) The margin requirements for advances against preference shares / non-convertible debentures and
bonds may be determined by the banks themselves.
e) None of the above.*
12) As per RBI directions, all Credit Institutions (CI’s) should become member of Credit Information
Companies (CICs) and submit data (including historical data) to them with in a period of ____ months.
a) 6 b) 2 c) 3 * d) 1
13) How many CIC’s have been granted Certificate of Registration by RBI ?
a) 4* b) 3 c) 2 d) 1
14) The one-time membership fee charged by the CICs, for CIs to become their members, shall not
exceed Rs._____ each and annual fees charged by the CICs to CIs shall not exceed Rs. ______ each.:
a) Rs.5,000; Rs.2,500 b) Rs.10,000; Rs.2,500, c) Rs.10,000*; Rs.5,000* d) Rs. 20000;
Rs.5,000
15) As per RBI guidelines to banks, a credit card a/c will be treated as NPA if the minimum amount due,
as mentioned in the statement, is not paid fully within ____ days from the next statement date and the
gap between two statements should not be more than one month. a) 90* b) 60 c) 50 d) 30
16) Reserve Bank of India has decided that the interest rates charged by an NBFC-MFI to its borrowers
will be the cost of funds plus margin, or the average base rate of the five largest commercial banks by
assets multiplied by____:
a) 5 b) 2.50 c) 2.75* d) 3.5
17) Securitisation Companies / Reconstruction Companies (SC / RCs) are permitted to convert a portion
of debt into shares of the borrower company as a measure of asset reconstruction provided their
shareholding does not exceed ____ of the post converted equity of the company under reconstruction.
a) 30% b) 20% c) 26%* d) 28%
18) Securitisation Companies / Reconstruction Companies (SC/RCs) are required to obtain, for the
purpose of enforcement of security interest, the consent of secured creditors holding not less than
____of the amount outstanding to a borrower as against ____hitherto. a) 30%, 75% b) 75%,
60% c) 60%,75%* d) 50%,75%
19) A person makes a draft payable in the name of another person from any particular bank for
an amount less than Rs.49,000/-. This person, on whose name the draft is made, further
endorses it in the name of another person in lieu of payment for purchase of goods or services.
The draft is used as a payment cheque without real money changing hands. In the end, there is
a specific group of people who deposits these drafts in their bank accounts, and takes a
commission of 1-2% to encash them. This process of conducting transactions is called:
a) Money Laundering b) Money Mules, c) Street Financing* d) Financial frauds
20)are individuals with bank accounts recruited by fraudsters to receive cheque deposit or wire
transfer for the purpose of money laundering. They receive cheque deposits or wire transfers and then
transfer these funds to a/cs held on behalf of another person or other individuals, minus a certain
commission.
a) Street Financing b) Money Mules*, c) Money Laundering d) Financial frauds
21) For Money Transfer Service Scheme, Indian Agent should be an Authorized Dealer Category-I bank
or an Authorized Dealer Category-II or a Full Fledged Money Changer with minimum Net Owned Funds
of ________:
a) 30 lakhs b) 35 lakhs c) 40 lakhsd) 50 lakhs*
22) A cap of ________has been placed on individual remittance under the Money Transfer Service
Scheme. Amounts up to Rs.50,000/- may be paid in cash to a beneficiary in India. Further, only 30
remittances can be received by a single individual beneficiary under the scheme during a calendar
year. a) US $2000 b) US $2500* c) US $ 3000 d) US $3500
23) The outstation cheques under Speed Clearing will be paid on T+1 or 2 basis within______:
a) 48 hrs* b) 24 hrs c) 6 hrs d) 12 hrs
34) Presenting branches are currently permitted to levy charges at a rate not exceeding _____per
cheque (inclusive of all charges other than Service Tax) for cheques of above Rs. 1 lakh presented
through Speed Clearing. No charges are payable for cheques of value up to Rs. 1 lakh from Savings a/c
customers. Banks would be free to fix charges for collection of other types of accounts for all values
and also from Savings a/c customers for cheque of value above Rs. 1 lakh.
a) Rs. 100 b) Rs. 150* c) Rs. 200 d) Rs. 250
24) For evaluation and ratings of banks, RBI uses the_______. The new system is termed as _______.
The new system to capture the risks that may cause a bank to fail. a) CAMELS; INROADS* b)
INROADS; CACS, c) CAMELS; CACS e) CRISIL; CARE
25) As per the new module advised by CERSAI, for delay condonation w.e.f. 1st December, 2014,
whereby any transaction which is filed after 30 days of creation of security and upto _____will
attract additional fee.
a) 45 days b) 60 days*, c) 90 days d) None of these
st th
26) If the registration on CERSAI is done from 31 to 40 day after the date of transaction, the
additional fee will be charged _______ if loan amount is upto Rs. 5 lakh. The amount of additional
fee will be ______if loan amount is above Rs. 5 lakh.
a) Rs. 500 & 1,000* b) Rs. 1000 & 1,500, c) Rs. 1,000 & 2000 d) Rs. 500 & 1,500
st th
additional fee will be charged ______ if loan amount is upto Rs. 5 lakh. The amount of additional
fee will be _______if loan amount is above Rs. 5 lakh.
a) Rs. 750 & 1,000 b) Rs. 1250 & 2,500*, c) Rs. 1,250 & 2000 d) Rs. 1000 & 1,500
st th
additional fee will be charged _________ if loan amount is upto Rs. 5 lakh. The amount of
additional fee will be if loan amount is
above Rs. 5 lakh. a) Rs. 2000 & 2500 b) Rs. 2000 & 3000, c) Rs. 2500 & 5000* d) Rs.
3000 & 5000
29) While doing Risk Rating, an asset is downgraded from A+ rating to A rating. What type of risk is
involved?
a) Market Risk b) Credit Risk*, c) Interest Rate Risk d) None of these
30) To help in the government's 'smart cities' programme, SEBI approved a new set of norms for
listing and trading of municipal bonds on stock exchanges, while channelising household
investments for urban infrastructure development. These municipal bonds, also known as _____
bonds. a) Muni Bonds* b) Corporation Bonds, c) Smart Bonds d) None of these
31) The Reserve Bank notified the decision to raise foreign direct investment (FDI) cap in the
Insurance sector to ____ from existing cap of 26%. a) 45% b) 49%* c) 50% d)
51%
32) As per new Foreign Trade Policy, value of Export Performance FOB / FOR for ‘Two Star Export
House’ category during current and previous 2 years is : a) 10 b) 15 c) 25* d) 20
33) As per new Foreign Trade Policy, value of Export Performance FOB /FOR for ‘Four Star Export
House’ category during current & previous 2 years is : a) 100 b) 500*, c) 1000 d) 2000.
Records of transactions to be maintained for at least _____from the date of transaction, instead
of ten years from the date of cessation of transactions, and records pertaining to identification of
the customer and his address to be preserved for at least ____ after the business relationship is
ended.
a) 10,10* b) 10,15 c) 15,10 d) 5,10
35) The Suspicious Transaction Report (STR) bank as a whole, should be furnished to the FIU–
IND, within _____ days of arriving at a conclusion that any transaction, including an attempted
transaction, whether cash or non-cash, or a series of transactions integrally connected are of
suspicious nature:
a) 10 days b) 7days* c) 15 days d) 5 days
36) Under Pradhan Mantri Suraksha Bima Yojana – Premium payable is Rs.____ per annum per
member and sum insured on death is ____and partial disability is ____. a) Rs.10; 2 lakhs; 1 lakh b)
Rs. 12; 2 lakhs; Rs. 50,000
c) Rs.25; Rs.1 lakh; Rs. 50,000 d) Rs.12; Rs.2 lakh; Rs. 1 lakh*
37) To be eligible for claim under PM Jeeven Jyoti Yojna, the age limit for all saving accounts holder
should be between:
a) 18 to 45 yrs b) 18 to 50 yrs* c) 18 to 55 yrs d) 18 to 60 yrs
38) The premium payable under PM Jeeven Jyoti Yojna, is _______ p.a. and assures benefits of Rs.
____ on death due to any reason. a) Rs. 330 & Rs. 2 lakh* b) Rs. 250 & Rs. 2 Lakhs, c) Rs.300 &
Rs. 2.50 lakhs d) Rs. 230 & Rs. 3 lakhs
39) The limit of Education loan for vocational purpose in India for course duration upto 3 months is Rs.
________.
a) 20,000* b) 30000 c) 40000 d) 25000
40) What is the Full form of MUDRA?
a) Micro Units Development and Refinance Agency Ltd *, b) Modern Units Development and
Refinance Agency Ltd, c) Micro Units Development and Reconstruction Agency Ltd, d) None of
these
41) Which tax has been abolished in Budget 2015-16:- a) Goods and Service Tax b) Wealth Tax*,
c) Corporate Tax d) Property Tax
42) MUDRA is set up with a corpus of ___ and a credit
guarantee corpus of Rs 3,000 crore.
a) Rs.15,000 Crore b) Rs. 20,000 Crore*, c) Rs. 30,000 Crore d) Rs. 50,000 Crore
43) As per the new budget, Surcharge has been increased to ____ for individuals earning 1 crore and
above annually and on firms with an annual income of Rs. 10 crore or more. a) 10% b) 12%*
c) 14% d) 15%
44) The full form of GIFT City is:-
a) Gandhinagar International Finance Tec-City, b) Gujarat International Finance Tec-City*, c)
Gujarat Indian Financial Tec-City, d) Gandhinagar Indian Financial Tec-City
45) Full Form of CRILC City is:
a) Central Repository of Information on Large Credits*, b) Central Reserve of Information on Large
Credits, c) Central Repository of Information on, d) None of the above
46) Full form of MIBOR;
a) Mumbai Inter bank Offered Rate*, b) Mutual Inter bank Offered Rate, c) Mumbai International
Offered Rate
b) Mumbai Inter bank Offer & Bid Rate
47) The limit of Education loan for vocational purpose in India for course duration for 3 to 6 months is
______:
a) 40,000 b) 50000* c) 60000 d) 75000
48) The limit of Education loan for vocational purpose in India for course duration of 6 months to 1
year is ______:
a) 60,000 b) 85,000 c)1,00,000 d) 1,25,000*
49) The limit of Education loan for vocational purpose in India for course duration above 1 year is :
a) Rs.1.5 lakh* b) Rs. 2 lakhc) Rs.2.5 lakh d) Rs.3 lakh
50) Under SHG all the members of the group must be from BPL, however, a maximum of 20% in
general and 30% in exception can be from marginally above poverty line subject to the condition that
APL members not eligible for subsidy
a) 20%, 30%* b) 25%, 35%, c) 20%, 25% d) 15%, 25%
51) If the bank has raised an unauthorized/erroneous direct debit to an account and on verification of
the entry it is found to be erroneous and the customer does not involve a third party, the bank will
endeavor to complete the process of verification within a maximum period of _____ working days from
the date of reporting of erroneous debit. In case, the verification involves a third party or where
verifications are to be done at overseas centers, the bank shall complete the verification process within
a maximum period of _____ month from the date of reporting of erroneous transaction by the
customer.
a) 7 : one* b) 5; one c)14; two d) 10; three
52) The Bank will undertake to carry out direct debit / ECS debit instructions of customers in time. In
the event the bank fails to meet such commitments customer will be compensated to the extent of on
account of delay
in carrying out the instruction/failure to carry out the instructions.
a) Any financial loss the customer would incur* b) Rs. 1000/- c) Rs. 2500/- d) Rs. 5,000/
53) Where it is established that the bank had issued and activated a credit card without consent of the
recipient, the bank would not only reverse the charges immediately but also pay a penalty without
demur to the recipient amounting to _______ as per regulatory guidelines in this regard.
a) Twice the value of charges reversed*, b) Thrice the value of charges reversed, c) Value of
charges reversed
b) None of these
54) In case a cheque has been paid after stop payment instruction is acknowledged by the bank, the
bank shall reverse the transaction and give value-dated credit to protect the interest of the customer.
Any consequential financial loss to the customer will be compensated. Such debits will be reversed
within ____ working days of the customer intimating the transaction to the bank a) 3 b) 5 c)
2* d) 7
55) The bank will compensate the customer for undue delays in affording credit once proceeds are
credited to the Nostro Account of the bank with its correspondent. Such compensation will be given for
delays beyond
week / weeks from the date of credit to Nostro Account/ due date after taking into account normal
cooling period stipulated. The compensation in such cases will be worked out keeping in view interest
for the delay in crediting proceeds and compensation for any possible loss on account of adverse
movement in foreign exchange rate.
a) One*, b) Two, c) Three, d) Four
56) As part of the compensation policy of the bank, the bank will pay interest to its customer on the
amount of collection instruments in case there is delay in giving credit beyond the time period specified
in banks cheque collection policy. Interest for delayed collection shall be paid at the Savings Bank rate
for the period of delay beyond ____, ____, _____ days as the case may be in collection of outstation
cheques.
a) 5/10/15 b) 7/10/14* c) 3/5/7d) none of these
57) The bank will pay interest to its customer on the amount of collection instruments in case there
is delay in giving credit beyond 14 days. Interest will be paid at the rate applicable for term deposit for
the corresponding respective period or Saving Bank rate, whichever is higher. In case of extraordinary
delay, i.e. delays exceeding ____ days interest will be paid at the rate of ___% above the
corresponding Term Deposit rate. a) 60;2 b) 30;3 c) 90; 2* c) 45;2
58) In the event the proceeds of cheque under collection was to be credited to an overdraft/loan
account of the customer, interest will be paid at the rate applicable to the loan account. For
extraordinary delays, interest will be paid at the rate of ____above the rate applicable to the
loan account. a) 4% b) 3% c) 2%* d) 2.5%
59) In line with the compensation policy of the bank, the bank will compensate the account holder in
respect of instruments lost in transit. In case intimation regarding loss of instrument is conveyed to
the customer beyond the time limit stipulated for collection_____, ____, _____ days as the case
may be) interest will be paid for the period exceeding the stipulated collection period at the rates
specified above. a) 4/8/12 b) 5/10/15 c) 7/10/14* d) 6/10/13
60) Issue of Duplicate Draft and Compensation for delays Duplicate draft will be issued within a
_______ from the receipt of such request from the purchaser thereof. For delay beyond the
above stipulated period, interest at the rate applicable for of corresponding period will be
paid as compensation to the customer for such delay.
a) Fortnight; Fixed Deposit* b) 10 days; Fixed Deposit, c) Fortnight; cumulative Deposit d) 30 days
/ Fixed Deposit
61) In addition, bank will pay interest on the amount of the cheque for a further period of ________
days at Savings Bank rate to provide for likely further delay in obtaining duplicate cheque /
instrument and collection thereof.
a) 15* b) 10 c) 7 d) 12
62) Violation of the Code by banks agent In the event of receipt of any complaint from the customer
that the bank’s representative / courier or DSA has engaged in any improper conduct or acted in
violation of the Code of Bank’s Commitment to Customers which the bank has adopted
voluntarily, the bank is committed to investigate the matter and endeavor to communicate the
findings to the customer within _____ working days from the date of receipt of complaint and
wherever justified, compensate the customer for financial loss, if any, as contemplated under this
policy.
a) 10 b) 7* c) 12 d) 15
In terms of the guidelines for lenders liability, and the Code of Bank’s Commitment to customers, the
bank would return to the borrowers all the securities / documents / title deeds to mortgaged property
within _____ days of repayment of all dues agreed to or contracted The bank will compensate the
borrower for monetary loss suffered, if any due to delay in return of the same. In the event of loss of
title deeds to mortgage property at the hands of the banks the compensation will cover out of pocket
expenses for obtaining duplicate documents plus a lump sum amount as decided by the bank.
a) 7 b) 15*, c) 21 d) 25
64) It is mandatory for bank to reimburse the customer, the amount wrongfully debited on account of
failed ATM within a maximum period of _____ working days from the receipt of the complaint. For any
failure to re-credit the customer’s account within the stipulated period from the date of receipt of the
complaint, bank shall pay compensation of Rs._____ - per day to the aggrieved customer. This
compensation shall be credited to the customer’s account automatically without any claim from the
customer, on the same day when bank affords the credit for the failed ATM transactions.
a) 5;100 b) 10;150, c) 14;150 d) 7;100/-*
65) Which of the following statement is incorrect?
a) The bank will not honour cheques drawn on current accounts maintained by other banks with it
unless arrangements are made for funding cheques issued. Issuing bank should be responsible to
compensate the cheque holder for non payment / delayed payment of cheques in the absence of
adequate funding arrangement.
b) The Bank would not compensate the customer for delays in collection of cheques designated in
foreign currencies sent to foreign countries as the bank would not be able to ensure timely credit
from overseas banks.
c) In the event a cheque or an instrument accepted for collection is lost in transit or in the clearing
process or at the paying bank’s branch, the bank shall immediately on coming to know of the loss,
bring the same to the notice of the account holder so that the account holder can inform the
drawer to record stop payment and also take care that cheques, if any, issued by him / her are not
dishonoured due to non-credit of the amount of the lost cheques / instruments. The bank would
provide all assistance to the customer to obtain a duplicate instrument from the drawer of the
cheque.
d) The bank would not compensate the customer for any reasonable charges he/she incurs in getting
duplicate cheque / instrument upon production of receipt. The instrument is to be obtained from a
bank/ institution who would charge a fee for issue of duplicate instrument.*
66) The Reserve Bank has set out a five-pillar framework to guide its developmental and regulatory
measures. Which of the following is not the regulatory pillar:
a) PILLAR – I: Clarifying and strengthening the monetary policy framework.
b)PILLAR – II: Strengthening banking structure through new entry, branch expansion, encouraging
new varieties of banks, and moving foreign banks into better regulated organisational forms.
c) PILLAR – III: Broadening and deepening financial markets and increasing their liquidity and
resilience so that they can help absorb the risks entailed in financing India’s growth.
d) PILLAR – IV : Expanding access to finance to small and medium enterprises, the unorganised
sector, the poor, and remote and underserved areas of the country through measures to foster
financial inclusion.
e) PILLAR – V: Improving the system’s ability to deal with corporate distress and financial institution
distress by strengthening real and financial restructuring as well as debt recovery.
f) None of the above*
68) Which pillar of RBI’s developmental and regulatory measures emphasizes on
Strengthening banking structure through new entry, branch expansion, encouraging new
varieties of banks, and moving foreign banks into better regulated organisational forms. a) Pillar I b)
Pillar III c) Pillar II* d) Pillar V
69) Which pillar of RBI’s developmental and regulatory measures emphasizes expanding access to
finance to small and medium enterprises, the unorganised sector, the poor, and remote and
underserved areas of the country through measures to foster financial inclusion. a) Pillar I b)
Pillar IV* c) Pillar II d) Pillar V
90) On a review of the permitted transactions under the Rupee Drawing Arrangements (RDAs), the
Reserve Bank increased the limit of trade transactions from the existing Rs.5,00,000/- per transaction
to Rs._______ per transaction, with immediate effect.
a) 10,00,000 b) 12,00,000 c) 15,00,000*d) 17,50,000
91) The concept of a _______ account was introduced in the current framework as an important step in
fraud risk control.
a) Special Mention account. b) Red Flagged *, c) High Risk account. d) Early Mortality account.
92) A is one where suspicion of fraudulent activity is thrown up by the presence of one or more Early
Warning Signals (EWS). This concept has been introduced in the current framework as an important
step in fraud risk control. a) Red Flagged Account* b) Special Mention account., c) High Risk account.
___________________ d) Early Mortality account.
93) The threshold for Early Warning Signals and Red Flagged Account is an exposure of ________ or
more at the level of a bank irrespective of the lending arrangement (whether solo banking, multiple
banking or consortium). a) 100 million b) 250 million c) 500 million* d) 1000 million
94) The officer responsible for the operations in the account should be sensitized to observe and report
any manifestation of the Early Warning Signal promptly to the or any other group constituted by the
bank
for the purpose immediately.
a) Fraud Monitoring Group (FMG) *, b) Fraud Management Group (FMG), c) Core Monitoring Group
(CMG), d) Fraud Surveillance Group (FSG)
95) The Framework for fraud risk management in banks also includes broad guidelines relating to the,
which of the following?
(i) Reporting to the Central Repository of Information on Large Credits (CRILC).
(ii) Lending under consortium or multiple banking arrangements
(iii) Staff accountability.
(iv) Filing complaints with law enforcement agencies.
(v) Penal measures for fraudulent borrowers
(vi) Central Fraud Registry.
a) (i) & (ii) only b) (iii) to (vi) only, c) All of the above* d) None of these
96) The Reserve Bank has advised all public sector banks and select private sector and foreign banks
to appoint an internal Ombudsman. The internal Ombudsman would be designated as :-
Chief Ombudsman Service Officer, B) Chief Customer Ombudsman Officer, C) Internal
Ombudsman Customer Service Officer, D) Chief Customer Service Officer*
97) The Reserve banks has directed all ______ and few to appoint Chief Customer Service
Officers. (Internal Ombudsman).
a) Public Sector Banks; Private Sector & Foreign Banks*
b) Private Sector Banks; Foreign Banks
c) Private Banks & Foreign Banks a) Monitoring of critical areas
d) Private Sector Banks; Public Sector Banks
98) As per the revised norms, the procedures for acquisition of accommodation on lease / rental basis
by all commercial
banks will now be determined by the ____ :- a) State Govt. b) RBI, c) Banks themselves* d)
Ministry of Finance
99) P.J. Nayak Committee has prescribed seven broad themes to the Reserve Bank to advise all public
sector banks to suitably determine the agenda items and the periodicity thereof, keeping in view that
there is adequate focus on matters of strategic and financial importance. The seven themes include
business strategy, financial reports and their integrity, risk, compliance,_______, and human
resources.
a) Customer protection, Financial inclusion*
b) Customer awareness, Financial integrity
c) Customer awareness, Fraud management.
d) Strategic Marketing, Financial inclusion
100) The Reserve Bank had, in the first bi-monthly monetary policy statement 2015-16, proposed to
do away with the _____ and instead, replace it with the seven critical themes. b) Calendar of Reviews*
c) Monitoring of strategic assets, D) Calendar of performance parameters
101) In order to enable Private Sector Banks to attract and retain professional directors, the Reserve
Bank has issued guidelines on compensation for non-executive Directors for implementation by private
sector banks, that will reflect market realities and will be within the parameters specified in the
Banking Regulation Act, 1949 and the Companies Act, 2013. Such compensation, however, shall not
exceed _____ per annum for each director. a) 1 million* b) 1.5 million c) 0.5 million d) 2
million
102) The Board may, at its discretion, provide for in the policy, payment of compensation in the form
of ______ to the non-executive directors (other than the Part-time Chairman), subject to the bank
making profits. a) Bonus b) Commission on profits*, c) Additional Shares d) None of these
103) In addition to the directors’ compensation, the bank may pay _______ to the non-executive
directors and reimburse their expenses for participation in the Board and other meetings. a) Sitting
fees* b) Commission, c) Bonus d) Additional allowances
104) Banks in private sector would be required to obtain prior approval of the Reserve Bank for
granting _______ to the part-time non-executive Chairman. a) Bonus b) Commission, c)
Remuneration* d) Loans
105) The compensation policies of banks would be subject to supervisory oversight including review
under the Supervisory Review and Evaluation Process (SREP) under ______ framework.
a) Pillar 2 and Basel III framework
b) Pillar 3 and Basel III framework
C) Pillar 2 and Basel II framework* D) Pillar 1 and Basel II framework
106) Banks are required to make disclosure on remuneration paid to the directors on an ______ basis
at the minimum, in their Annual Financial Statements. a) Semi annual b) Quarterly c) Monthly
d) Annual*
107) Under the revised criteria for opening of branches / extension counters / specialised branches
within the area of operation of the StCBs, Capital to Risk (Weighted) Assets Ratio (CRAR) should not
be less than :- a) 9 percent * b) 10 percent c) 8 percent d) 10.5 percent
108) Under the same revised criteria, net Non Performing Assets (NPA) should be less than ______:
a) 9 percent b) 5 percent*, c) 8 percent d) 6 percent
109) The Reserve Bank has relaxed its requirement of additional factor of authentication (AFA) for
across all merchant categories to enhance customer convenience while ensuring security in card based
transactions.
a) Low Value Card Present Transactions, b) High Value Card Present Transactions, c) Small Value
Card Present Transactions, d) None of the above.
110) The Reserve Bank has advised all scheduled commercial banks that relaxation for additional
factor of authentication (AFA) requirement is permitted for transactions for a maximum value of
______: a) Rs. 2000 per transaction* b) Rs. 2500 per transaction, c) Rs. 5000 per transaction
d) Rs. 10000 per transaction
111) For additional factor of authentication (AFA) beyond the transaction limit prescribed by RBI, the
card has to be processed as a contact payment and authentication with:- _ a) PAN (AFA) b) MICR
(AFA), c) PIN (AFA)* d) IFSC (AFA)
112) Even for transaction values below the limit prescribed by RBI, the customer may choose to make
payment as a contact payment. In other words, customers cannot be compelled to do a ________
payment.
a) On the spot b) Contactless* c) Cash less d) None
113) The Contactless cards should necessarily be chip cards adhering to _________ compliant
payment standard, so as to be acceptable across the existing card acceptance infrastructure.
a) Europay, MasterCard and Visa (EMV)*
b) RuPay, MasterCard and Visa (RMV)
c) Only MasterCard and Visa. d) Europay and RuPay only.
114) The Reserve Bank has advised all scheduled commercial banks, that with effect from ________,
all new cards issued – debit and credit, domestic and international by banks shall be EMV chip and PIN
based cards. a) 16-8-2015 b) 1-9-2015* c) 1-1-2016 d) 1-4-2016
115) The Reserve Bank has advised authorised dealer (category–I) banks that recognised non-resident
External Commercial Borrowing (ECB) lenders may enter into swap transactions with their overseas
bank which shall, in turn, enter into a back-to- back swap transaction with any AD Category-I bank in
India for mobilizing ______as per the prescribed procedure.
a) INR* b) $ c) Euro d) Discretion of the bank
116) On a review of the permitted transactions under the Rupee Drawing Arrangements (RDAs), the
Reserve Bank increased the limit of trade transactions from the existing Rs.5,00,000/- per transaction
to Rs. _______ per transaction, with immediate effect. a) 7,50,000 b)10,00,000 c) 12,50,000 d)
15,00,000*
117) Recently, which category of banks were advised by RBI under the framework for Revitalising
Distressed Assets in the Economy – Guidelines on Joint Lenders’ Forum (JLF) and Corrective Action
Plan:
a) All Scheduled Commercial Banks (excluding RRB’s), b) Exim Bank c) SIDBI d) NHB e)
All of these*
118) With a view to ensuring more stake of promoters in reviving stressed accounts and provide banks
with enhanced capabilities to initiate change of ownership in accounts which fail to achieve the
projected viability milestones, banks may, at their discretion, undertake a by converting loan dues
to equity shares.
a) Strategic Debt Restructuring (SDR)*, b) Corporate Debt Restructuring (CDR), c) Organizational
Debt Restructuring (ODR), d) Stressed Debt Restructuring (SDR)
119) At the time of initial restructuring, the JLF must incorporate, in the terms and conditions, an
option to convert the entire loan (including unpaid interest), or part thereof, into ______ in the
company in the event the borrower is not able to achieve the viability milestones and/or adhere to
‘critical conditions’ as stipulated in the restructuring package. a) Bonds b) Shares* c)
Debentures d) All above
120) If the borrower is not able to achieve the viability milestones and/or adhere to the ‘critical
conditions’ referred to above, the JLF must immediately review the account and examine whether the
account will be viable by effecting a change in_______.
a) Structure b) Ownership* c) Legal Statusd) None
121) The decision on invoking the Strategic Debt Restructuring (SDR) by converting the whole or part
of the loan into equity shares should be taken by the Joint Lenders’ Forum ( JLF) as early as possible
but within _______days from the above review of the account.
a) 60 b) 45, c) 30* d) 90
122) The decision on invoking the Strategic Debt Restructuring (SDR) should be well documented
and approved by the majority of the Joint Lenders’ Forum members which comprise of minimum of
______ percent of creditors by value and _____ percent of creditors by number.
a) 60, 50 b) 80, 50, c) 55, 60 d) 75, 60*
123) Post the conversion, all lenders under the Joint Lenders’ Forum must collectively hold ______
percent or more of the equity shares issued by the company. a) 49 b) 60 c) 51* d) 45
124) For accounts which have been referred by the JLF to CDR Cell for restructuring, JLF may decide
to undertake the SDR either directly or under the ______ Cell.
a) Strategic Debt Restructuring, b) Corporate Debt Restructuring*, c) Organizational Debt
Restructuring (ODR), d) Stressed Debt Restructuring (SDR)
125) On completion of conversion of debt to equity as approved under Strategic Debt Restructuring,
the existing asset classification of the account, as on the reference date, will continue for a period of
______ months from the reference date.
a) 15 months b) 18 months* c) 12 months d) 10 months
126) Banks should ensure compliance with the provisions of _______ and JLF should closely monitor
the performance of the company and consider appointing suitable professional management to run the
affairs of the company.
a) Banking Regulation Act* b) Companies Act, 2013, c) Reserve Bank of India Act. d)
SARFAESI Act
127) On divestment of banks’ holding in favour of a ‘new promoter’, the asset classification of the
account may be upgraded to ______ , subject to the prescribed conditions.
a) Special Mention Account. b) Sub Standard, c) Standard* d) None of the above
128) At the time of divestment of their holdings to a ‘new promoter’, banks may the existing debt
of the company considering the changed risk profile of the company without treating the exercise as
‘restructuring’ subject to banks making provision for any diminution in fair value of the existing debt on
account of the refinance.
a) Refinance* b) Rephrasec) Reschedule d) Capitalise
129) The Joint Lender Forum must approve the Strategic Debt Restructuring (SDR) conversion
package within ___ days from the date of deciding to undertake SDR. a) 90* b) 45 c) 60 d)
30
130) Which of the following documents have been recently advised by RBI to be deemed to be
Officially Valid Documents (OVD’s) under simplified measures relating to KYC norms for ‘low risk’
customers for the limited purpose of proof of address where customers are unable to produce any
officially valid document:
i) Utility bill which is not more than two months old of any service provider (electricity, telephone,
postpaid mobile phone, piped gas, water bill);
ii) Property or Municipal Tax receipt;
iii) Bank account or Post Office savings bank account statement
iv) Pension or family pension payment orders (PPOs) issued to retired employees by Government
Departments or Public Sector Undertakings, if they contain the address;
v) Letter of allotment of accommodation from employer issued by State or Central Government
departments, statutory or regulatory bodies, public sector undertakings, scheduled commercial
banks, financial institutions and listed companies. Similarly, leave and license agreements with
such employers allotting official accommodation; and
vi) Documents issued by Govt. deptt. of foreign jurisdictions and letter issued by Foreign Embassy or
Mission in India.
a) Only (i), (ii), (iii)b) Only (iv), (v), (vi), c) All except (v) & (vi) d) All of the above*
131) The compensation policies of banks would be subject to supervisory oversight including review
under the Supervisory Review and Evaluation Process (SREP) under framework.
a) Pillar 2 and Basel III framework, b) Pillar 3 and Basel III framework, c) Pillar 2 and Basel II
framework*, d) Pillar 1 and Basel II framework
132) With a view to developing strong risk management capabilities to manage agri-commodity price
risk, the Reserve Bank advised all scheduled commercial banks (excluding regional rural banks) to
encourage by the agri-borrowers through agri-commodity derivatives. a) Speculation b)
Crystalisation c) Hedging* d) Forward sale
133) The Reserve Bank advised all-India Term Lending and Refinancing Institutions (AIFI) to make
certain disclosures in addition to the extant disclosure requirements in the Notes to Accounts in their
Annual Financial Statements relating to sale of ______ to Securitisation Companies / Reconstruction
Companies.
a) Fixed assets. b) Non-Performing Assets*, c) Intangibles d) Investments.
134) On a review, the Reserve Bank allowed all scheduled commercial banks (excluding RRBs) to
invest in the
issued by other banks for financing of infrastructure and affordable housing. In order to prevent
double counting of regulatory exemptions allowed, such investments will be subject to prescribed
conditions. a) Long term debentures b) Long term loans
c) Long term bonds* d) Equity & preference shares
135) The RBI has continued to provide liquidity under overnight repos at ____ per cent of bank-wise
NDTL at the LAF repo rate and liquidity under 14-day term repos as well as longer term repos of up to
____ per cent of NDTL of the banking system through auctions. a) 0.50 ; 1 b) 0.25; 0.50 c) 0.25;
0.75* d) 0.50; 0.75
136) The Reserve Bank released the final guidelines for introduction of 6-year and 13-year cash
settled Interest Rate Futures (IRF) on Government of India Securities with residual maturity of
__________and _______respectively.
a) 4-8 years, 11-15 years* b) 6-8 years, 10-15 years, c) 7-8 years, 12-15 years d) 8-10 years,
12-5 years
137) Agency banks may also promote the use of among pensioners, which would eliminate the need
for physical presence at branches and issue of acknowledgement. b) Digital Life Policy, c) Pension
Life code _____________ d) Digital Life Certificate*
138) The Government of India has also launched a scheme for introduction of Aadhaar based digital
life certificates known as_________: a) Jeevan Life certificate, b) Jeevan Life code, c) Jeevan
Praman*, d) Jeevan Praman certificate
139) The RBI has permitted all banks authorised to deal in foreign exchange to allow remittances by a
resident individual up to _______ per financial year for any permitted current or capital account
transaction or a combination of both under Liberalised Remittance scheme.
a) Pension Life Certificates
a) USD 1,50,000 b) USD 2,00,000, c) USD 2,50,000* d)
USD 1,75,000
140) As per the revised guidelines, the PAN Card is mandatory if the sale/purchase of Immoveable
property is valued excceding Rs. _____. Further, PAN is also needed if properties valued by stamp
valuation authority exceeds the amount of Rs. :
a) Rs 5 lakh and Rs 10 lakh b) Rs 10 lakh and Rs 10 lakh*, c) Rs 10 lakh and Rs 15 lakh d) Rs 10
lakh and Rs 20 lakh
141) Which of the following is correct regarding Time Deposit with a Banking Company w.r.t PAN Card:
a) The PAN Card is mandatory if deposits aggregating is more than Rs. 5 lac during the year.
b) The PAN Card is mandatory even if depositor has an account with Co-op Banks, Post office, Nidhi,
NBFC companies.
c) The PAN Card is mandatory if deposits aggregating is more than Rs. 50,000/- during the year.
d) The PAN Card is mandatory if deposits aggregating is more than Rs. 1,00,000/- during the year.
a) Only a & b are true* b) All b & c are true
c) Only b & d are true d) All are true.
142) In case of deposits with Post office and Saving Bank, the PAN Card is mandatory if the amount is
exceeding Rs. _______: a) Rs 10,000 b) Rs 20,000, c) Rs 50,000 d) Discontinued*
143) In case of Sale or Purchase of securities, the PAN Card is mandatory if the contract of
sale/purchase value is exceeding Rs. ____: a) Rs 5 lakh b) Rs 4 lakh, c) Rs 2 lakh d) Rs 1
lakh*
144) Which of the following statement is correct regarding Opening of an account (other than time
deposit) with a Banking Company:
a) PAN Card is compulsory for all the new accounts that are being opened with the banking company.
b) In case of opening of Basic Saving Bank Account there is no requirement of PAN Card.
c) Co-operatives banks also need to comply with the guidelines on Pan.
145) As per the revised guidelines, for installation of telephone / cellphone connections, the PAN Card
is : a) Mandatory b) Discontinued*, c) Varies from State to State. d) None of above
146) In case of Hotel / restaurant bill(s), the PAN Card is required if the cash payment on account of
the bill is exceeding Rs. _____: a) Rs 30,000 b) Rs 40,000 c) Rs 50,000* d) Rs 60,000
147) In case of cash purchase of bank Drafts / Pay orders / Banker’s cheque, the PAN Card is
mandatory if the amount aggregating exceeds Rs. _______ in a day: a) Rs 25,000 b) Rs 50,000*
c) Rs 60,000 d) Rs 80,000
148) In case of Cash deposits with the Banking Company exceeding Rs. _____ in a day, then the PAN
Card is compulsory: a) Rs 50,000* b) Rs 30,000 c) Rs 25,000 d) Rs 40,000
149) PAN Card is mandatory if the cash payment in connection with foreign travel for fare, payment to
travel agent, purchase of foreign currency is exceeding Rs. _______ at any one time:-
a) 20,000 b) 50,000* c) 1,00,000 d) 5,00,000
150) In case of Mutual funds unit transactions, the PAN Card is compulsory if the payment for
purchase of mutual funds units exceeds Rs. _______: a) Rs 35,000 b) Rs 50,000* c) Rs 45,000 d)
Rs 60,000
151) Which of the following statement is true regarding purchase/sale of Shares, Debentures, RBO
bonds w.r.t PAN Card:
a) PAN Card is required if the purchase/sale of shares is exceeding Rs. 1 lac per transaction.
b) PAN Card is required if a person opens a demat account.
c) PAN is mandatory in case of purchase of debentures/bonds, RBI bnds is exceeding Rs. 50,000/
d) All of above*
152) PAN Card is compulsory if the payment of the premium is exceeding Rs. _______ in a year:
a) Rs 20,000 b) Rs 30,000, c) Rs 45,000 d) Rs 50,000*
153) In case of Purchase or sales of goods and services, including jewellery/bullion PAN Card is
mandatory if the purchase/sale of any goods and services is exceeding Rs. _____ per transaction:
a) Rs 50,000 b) Rs 1 lakh, c) Rs 2 lakh* d) Rs 2.5 lakh
154) In case of Cash cards/Prepaid instruments issued under Payment and Settlement Act, PAN Card is
mandatory if the cash payment aggregating is more than ____ in a year:
a) Rs 30,000 b) Rs 40,000, c) Rs 50,000* d) Rs 60,000
155) The Reserve Bank in its Fourth Bi-monthly Monetary Policy Statement, 2015-16, announced on
Sept. 29, 2015, decided to reduce the policy Repo rate under the liquidity adjustment facility (LAF) by
50 basis points and now it stands at _______: a) 6.00% b) 6.25 % c) 6.75%* d) 7.00%
156) The RBI has decided to continue to provide liquidity under overnight
repos at 0.25 per cent of bank-wise NDTL at the LAF 158) All penal interest repo rate and liquidity
under 14-day term repos as well as longer term repos of up to 0.75 per cent of NDTL of the banking
system through auctions and continue with daily variable rate repos and reverse repos to smooth
liquidity.
a) 0.25 %, 0.50 % b) 0.25%, 0.75 %*, c) 0.5%; 0.75% d) None of these
157) Consequent to the changes in the Repo rate, the Reverse Repo rate under the LAF stands
adjusted to ______, and the marginal standing facility (MSF) rate and the Bank Rate to _____. a)
5.75 %; 7.75%* b) 4.75 %; 6.75 %, c) 4.50%; 6.50% d) 5.50%; 7.50%
158) rates on shortfall in reserve requirements, which are specifically linked to the Bank Rate stand
revised. Effective rate from 29th Oct 2013, the penal interest is Bank Rate plus _____ percentage
points or Bank Rate plus ____ percentage points depending upon the duration of the shortfalls. a)
1.0; 3.0 b) 3.2; 5.1 c) 3.0; 5.0* d) 2.5; 5
159) Government of India has approved the extension of the Interest Subvention Scheme for the year
2015-16 for short term crop loans. Interest subvention @ _____% per annum will be made
available to the Public Sector Banks and the Private Sector Scheduled Commercial Banks (in respect
of loans given by their rural and semi-urban branches) on their own funds used for short-term crop
loans up to Rs.______ lac per farmer provided the lending institutions make available short term
credit at the ground level at ____ % per annum to the farmers. a) 2 ; 3; 7* b) 3; 4; 7 c) 3
;5;7 d) 3; 4; 8
160) The Interest Subvention of _______ will be calculated on the crop loan amount from the date of its
disbursement / drawal up to the date of actual repayment of the crop loan by the farmer or up to
the due date of the loan fixed by the banks whichever is earlier, subject to a maximum period of one
year. a) 1% b) 2 %* c) 4% d) 8%
161) Additional interest subvention @ _____% per annum will be available to the farmers repaying the
loan promptly from the date of disbursement of the crop loan up to the actual date of repayment or
up to the due date fixed by the bank for repayment of crop loan, whichever is earlier, subject to a
maximum period of one year from the date of disbursement. This also implies that the farmers
paying promptly would get short term crop loans @ _____% per annum during the year 2015-16.
This benefit would not accrue to those farmers who repay after one year of availing of such loans.
a) 3; 4* b) 4; 6 c) 5; 8 d) 7 ; 10
162) In order to discourage distress sale by farmers and to encourage them to store their produce in
warehouses against warehouse receipts, the benefit of interest subvention will be available to small
and marginal farmers having Kisan Credit Card for a further period of up to ______ months post-
harvest on the same rate as available to crop loan against negotiable warehouse receipt for keeping
their produce in warehouses. a) three b) five c) six* d) eight
163) To provide relief to farmers affected by natural calamities, the interest subvention of 2% for
short term crop loans will continue to be available to banks for the ______ on the restructured amount.
Such restructured loans may attract normal rate of interest from the second year onwards as per the
policy laid down by the RBI.
a) 3 months b) 6 months c) 9 months d) first year*
164) In respect of 2% interest subvention for short term crop loans, banks are required to submit their
claims on a
of which, the latter needs to be accompanied by the Statutory Auditor's certificate certifying the
claims for subvention for the entire year ended March 31, 2016 as true and correct.
a) Quarterly basis b) Half-yearly basis*, c) Yearly basis d) None of the above
165) is essentially a management process integral to the establishment of sound internal accounting
functions and effective controls and setting the tone for a vigilant internal audit to preclude the
incidence of serious errors and fraudulent manipulations.
a) Concurrent* b) Separate c) Monthly d) Quarterly
166) Which of the following statement is correct with respect to modified provisions of
Concurrent Audit?
a) New areas posing risk and Non-branch units may be brought under the purview of concurrent audit
and the branches with high risk are to be subjected to concurrent audit irrespective of their business
size.
b) All specialised branches viz., agriculture, small and medium enterprises(SME), corporate,
retail assets, portfolio management, treasury, forex, back office, etc., may be covered under
concurrent audit.
c) Certain areas where risk has reduced on account of computerisation, implementation of core
banking system may be excluded from the purview of concurrent audit.
d) All of the above *
167) Concurrent audit at branches should cover at least __ % of the advances and ____ per cent of
deposits of a bank.
a) 50,50* b) 40,60 c) 30,70 d) 60,40
168) Concurrent Audit should be conducted in:
a) Branches rated as high risk or above in the last Risk Based Internal Audit or serious deficiencies
found in Internal Audit;
b) All specialised branches like large corporate, mid corporate, exceptionally large/very large branches
(ELBs/VLBs), SME;
c) All centralised processing units like Loan Processing Units (LPUs), service branches, centralised a/c
opening divisions, etc.
d) Any specialised activities, such as, wealth management, portfolio management services, card
products division, etc., data centres, treasury / branches handling foreign exchange business,
investment banking, etc. and bigger overseas branches, critical head office departments.
e) Any other branches or departments where, in the opinion of the bank, concurrent audit is desirable.
f) All of these *
169) The Reserve Bank has set up _______ to collect, store, and disseminate data on all borrowers’
credit exposures.
a) Central Repository of Information on Large Credits (CRILC)*, AMFI c) ICRA d) ICAI
170) Out of the following which points determine the scope of Concurrent Audit?
a) To supplement the efforts of the bank in carrying out simultaneous internal check of the transactions
and other verifications and compliance with the procedures laid down.
b) To cover certain fraud - prone areas, such as, handling of cash, deposits, advances, foreign
exchange business, off-balance sheet items, credit-card business, internet banking, etc.
c) To keep a check on high-risk transactions having large financial implications as opposed to
transactions involving small amounts.
d) Areas, where the Reserve Bank has specifically advised the banks to be covered under concurrent
audit, may also be part of the checklist of the concurrent auditor.
e) All of the above*
171) The option to consider whether concurrent audit should be done by bank’s own staff or external
auditors (which may include retired staff of its own bank) is left to the discretion of individual banks.
Appointment of an external audit firm may be initially for one year and extended upto ____ years, after
which an auditor could be shifted to another branch subject to satisfactory performance. a) 2 years
b) 3 years* c) 4 years d) 5 years
172) If external firms are appointed and any serious acts of omission or commission are noticed in
their working, their appointments may be cancelled and the fact may be reported to:- a) RBI b)
ICAI, Bank’s Audit Committee of the Board of Directors (ACB), c) All of These e) Only a and b*
173) The Reserve Bank has further advised banks to review the present system of concurrent audit
immediately and incorporate necessary changes therein. The modified concurrent audit system of the
bank should then be placed before the .
a) ICAIb) Audit Committee of Board of Directors (ACB)*, c) Shareholders d) None of these
174) The Reserve Bank has advised Scheduled Commercial Banks (excluding regional rural banks) to
make use of the information available in Central Repository of Information on Large Credits (CRILC) and
not limit their due diligence to seeking no-objection certificate (NOC) from the bank with whom the
customer is supposed to be enjoying the credit facilities as per the declaration. Further banks may also
seek ‘No Objection Certificate’ from the ____ bank where the initial deposit to current account is made
by way of a _____ a) Drawee, Cheque* b) Drawer, Cash, c) Drawer, Cheque d) Drawee, Cash.
175) The Reserve Bank has advised that banks which have capital to risk weighted assets ratio (CRAR)
of 10 per cent or more and have also made net profit as of March 31 of the previous year need not
approach the Reserve Bank for prior approval for equity investments in cases where after such
investment, the holding of the bank remains less than 10 per cent of the investee company’s paid up
capital, and the holding of the bank, along with its subsidiaries or joint ventures or entities continues to
remain less than ____ per cent of the investee company’s paid up capital. a) 10 % b) 12.5 % c)
15% d) 20 %*
176) In order to streamline the existing processes and to obviate the need to approach the Reserve
Bank on case-tocase basis, the Reserve Bank has permitted commercial banks to grant loans and
advances to the
without seeking prior approval of the Reserve bank.
a) Chief Executive Officer / Whole Time Directors*, b) Chief Executive Officers / Managing Director,
c) Chief Financial Officer/ Managing Director, d) Chief Operating Officer / Whole Time Director
168) Which of the following category of loans can be granted to these officials:
a) Loan for purchasing of car, b) Loan for purchasing of personal computer, furniture, c) Loan for
constructing / acquiring a house for personal use., d) Festival advance and credit limit under
credit card facility, e) All of these*
179) Which of the following statements is true with regards to loans and advances to these officials?
a) The loans and advances should form part of the compensation / remuneration policy approved by
the Board of Directors or any committee of the Board to which powers have been delegated or the
Appointments Committee, as the case may be.*
b) Guidelines on Base Rate will be applicable on the interest charged on such loans.
c) The interest rate charged on such loans can be lower than the rate charged on loans to the bank’s
own employees. d)Other loan can also be sanctioned to Directors.
180) The Reserve Bank is issuing Banknotes in Mahatma Gandhi Series 2005 with a new numbering
pattern and special features for the visually impaired in ____, ____ and ______ denominations. a) 10,
50,100 b) 100, 500 and 1000 *, c) 50,100 and 500 d) 10, 500 and 1000
181) In the new Banknotes in Mahatma Gandhi Series 2005, in the numbering pattern, the numerals
in both the number panels of these denominations ____ in size from left to right, while the first ____
alphanumeric characters (prefix) remain constant in size. a) Ascend, 3* b) Descend, 3 c)
Ascend, 4 d) Descend, 4
182) With regards to special features for the visually impaired, in order to make it easier for them to
identify banknotes, the size of the identification mark in these denominations has been increased by
_____. a) 25% b) 50 %* c) 75 % d) 85%
183) The structure of Angular bleed lines in Banknotes in Mahatma Gandhi Series 2005 has been
introduced as
in 3 blocks in Rs. 500 & ____ lines in 4 blocks in Rs.1000 denominations. a) 1, 2, 3 b) 2,3,4
c) 3,4,5 d) 4,5,6*
184) The Reserve Bank has reviewed the procedure for detection of counterfeit notes in consultation
with the Government. Which of these points are true regarding these guidelines?
a) Banknotes tendered over the counter or received directly at the back office / currency chest through
bulk tenders should be examined for authenticity through machines and such of these determined
as a counterfeit one, shall be stamped as “COUNTERFEIT NOTE” and impounded.
b) When a banknote tendered at the counter of a bank branch or treasury is found to be counterfeit, an
acknowledgement receipt in the prescribed format must be issued to the tenderer, after stamping
the note.
c) No credit to customer’s account is to be given for counterfeit notes, if any, in the tender received
over the counter or at the
back-office / currency chest. d) All of these*
185) Customer charges, if any, levied on cash withdrawals shall not exceed ______ per cent of the
transaction amount at all centres irrespective of the limit of Rs.1000 / Rs.2000. a) 1 %* b)
1.5 % c) 1.75% d) 2%
186) The instructions on compensation to banks of the notional value of counterfeit notes detected and
reported and the system of lodging claims for compensation by Forged Note Vigilance Cell of banks
stand withdrawn and a penalty at__ of the notional value of counterfeit notes, in addition to__the
recovery of loss to the extent of the notional value of such notes, will be imposed. a) 40 % b)
60 % c) 80 % d) 100 %*
187) The Reserve Bank has reviewed and enhanced the limit for cash withdrawal at Point of Sale (POS -
for debit cards and open system prepaid cards issued by banks in India) from Rs.1000 to ________
per day in Tier III to VI centres.
a) Rs. 1500 b) Rs.2000* c) Rs. 2,500 d) Rs. 3000
188) The RBI has decided to pay agency commission to authorised banks for handling the work relating
to the _Kisan Vikas Patra (KVP), 2014, Sukanya Samriddhi Account*
a) Kisan Vikas Patra (KVP), 2014, Atal Pension Yojana
b) Pradhan Mantri Jan Dhan Yojana & Atal Pension Yojana
c) PM Jeevan Jyoti Bima Yojana & PM Suraksha Bima Yojana
189) As part of the endeavour to smoothen the liquidity management operations, the Reserve Bank
has introduced STP in fixed rate Liquidity Adjustment Facility (LAF) Repo, fixed rate LAF Reverse Repo
and Marginal Standing Facility (MSF) operations. What does STP stand for? a) Short Term Processing
b) Straight Through Processing* c) Structured Total Processing d) None of these
190) Which of the following statement is correct with respect to the implementation of STP?
a) It will enable eligible participants to receive the credit or debit immediately on placement of the bids
or offers, subject to the availability of collateral or funds, within prescribed time window.
b) Through STP, Eligible participants can, as hitherto, place and ______ schemes as per the extant rates.
multiple bids/offers in the respective liquidity facilities.
c) Settlement of the transaction will be automatic and immediate after the placement of the bid/offer.
The transactions undertaken by a participant will be final and request for cancellation of bids or
offers will not be entertained.
d) The automation of these facilities will, in no way, affect the discretionary character of these facilities
and the Reserve Bank will continue to determine the extent of liquidity injection / absorption
depending upon the prevailing liquidity conditions in
the system. e) All of these*.
191) The Reserve Bank has now allowed commercial banks (excluding regional rural banks and local
area banks) to slot their excess statutory liquidity ratio (SLR) securities and marginal standing facility
(MSF) eligible securities under the ______ bucket.
a) Day 1* b) 2-7 Days c) 8-14 Daysd) 15-28 Days
192) On a review, the Reserve Bank advised all scheduled commercial banks (excluding regional rural
banks) that a rate____ to the actual interest rate charged to the borrower before restructuring may be
used to discount the future cash flows for the purpose of determining the diminution in fair value of
loans on restructuring.
a) Less than b) Greater than, c) Equal to* d) None of these,
193) The existing overnight benchmark interbank rate in India is replaced from July 22, 2015 by a new
benchmark called the .
a) Financial Benchmarks India Private Ltd Overnight Mumbai Interbank Outright Rate (FBIL-Overnight
MIBOR)* b) LIBOR c) MIBOR d) None of these
194) The FBIL-Overnight MIBOR will be based on actual traded rates and will be administered by a
new company called the Financial Benchmarks India Private Ltd (FBIL). The existing rate called the
Overnight MIBID/MIBOR based on polled rates is set by . a) FIMMDA-BSE b) FIMMDA-NSE*, c)
FIMMDA-OTC d) FIMMDA-SHCIL
195) Financial Benchmarks India Private Ltd (FBIL) has been jointly formed as an independent
company for administration of benchmarks in financial markets by the which of the following
institutions?
a) Fixed Income Money Market and Derivative Association of India (FIMMDA)
b) Foreign Exchange Dealers’ Association of India (FEDAI)
c) Indian Banks’ Association (IBA) d) All of these*
196) To facilitate greater level of participation in Corporate Bonds by Stand alone Primary Dealers
(SPDs), the Reserve Bank has increased exposure ceiling limits in respect of single borrower/
counterparty from 25 per cent to _____ of latest audited Net Owned Funds (NOF) and in respect of
group borrower from 40% to of the latest audited NOF
only for investments in AAA rated corporate bonds. a) 50%; 65%* b) 40%; 50% c) 45%;55% d)
40%;60%
197) The Gold Monetisation Scheme, 2015 will replace the existing . However, the deposits
outstanding under
the Gold Deposit Scheme will be allowed to run till maturity unless the depositors prematurely
withdraw them.
a) Gold Deposit Scheme, 1995, b) Gold Deposit Scheme, 1999*, c) Sovereign Gold Bond Scheme,
d) None of these
198) Which of the following are eligible to make deposits under Gold Monetization Scheme?
a) Resident Indians & HUF, b) Trusts including Mutual Funds / Exchange Traded Funds registered
under SEBI (Mutual Fund) Regulations, c) Companies. d) All of these*
199) The minimum deposit at any one time shall be raw gold (bars, coins, jewellery excluding stones
and other metals) equivalent to grams of gold of 995 fineness. a) 10 gm b) 20 gm c) 30 gm*
d) 40 gm
200) The maximum limit for deposit under the Gold Monetization Scheme is _______:- a) Rs. 1 lac
b) Rs. 5 lac c) Rs. 10 lac d) No limit*
201) Consequent to the reduction in the Repo rate on 29th Sept, 2016, the reverse repo rate under the
LAF will be reduced to ____ per cent, and the marginal standing facility (MSF) rate and the Bank Rate
at ____ per cent. a) 5.75; 7.75* b) 6.75; 8.75 c) 6;8 d) 7; 8
202) The Govt has launched MUDRA Bank. Which of the following is not true about the MUDRA Bank:
b) a) It will provide credit of upto Rs.10 lac to small entrepreneurs, It will act as a regulator for micro
finance institutions (MFIs).
c) It will have a corpus of Rs. 20,000 cr.
d) It will have a Credit Guarantee corpus of Rs. 3,000 cr.
e) None of these.*
203) Which of the following is an objective of Monetary Policy?
a) Regulate capital market., b) Regulate insurance trade, c) Regulate commodity markets, d)
Accelerate economic growth with price stability and stabilization of exchange rates.*
204) Which amongst the following is an opposite activity of ‘SPECULATION’?
a) Arbitrage b) Securitisation, c) Short & Long positions d) Hedging*, e) Spread
199) Which of the following is an Indian credit rating agency? a) CRISIL* b) SIDBI c) CIBIL
d) IBA e) IDFC
205) Which of the following terms is NOT directly related to the functioning of the RBI?
a) Ombudsman b) Marginal Standing Facility, c) SENSEX* d) Foreign Exchange Reserves,
e) None of these
206) The Government is contemplating tariff rationalization to raise India’s share in global trade to 3.5
percent by 2020. What is India share in the global trade at present? a) 1 percent b) 1.5 percent
c) 2 percent*, 2.5 percent e) 3 percent
207) The Reserve Bank of India has granted ‘in-principle’ approval to _____ applicants to set up
Payments Banks under the Guidelines for Licensing of Payments Banks. a) 10 b) 11*c) 12 d) 13
208) During the validity of ____ months of the ‘in-
principle’ approval, the applicants have to comply with the requirements under the guidelines and fulfil
the other conditions as stipulated by the Reserve Bank. a) 12 months b) 15 months, c) 18
months* ___________________ d) 24 months
209) All scheduled and non-scheduled banks i.e public, private, foreign, cooperative, regional rural and
local area banks will observe public holiday on ____ and ____ Saturdays from September 1, 2015; and
will observe full working days on Saturdays other than referred to as non working Saturdays. a) 1st
rd nd rd st nd th
and 3 b) 2 and 3 , c) 1 and last d) 2 and 4 *
210) means shifting / part shifting some activities of a branch in any centre without seeking prior
approval of Reserve Bank.
a) Branch shifting b) Premises shifting, c) Para shifting of branches * d) Merger of
branches
211) The Reserve Bank has dispensed with the existing instructions permitting domestic scheduled
commercial banks (excluding regional rural banks) to undertake which of the following activities?
a) Merger b) Closure, c) Shifting or part shifting, d) Opening of extension
counters, e) All of these*
212) The new location for part shifting would have to be within ____ Kilometer / Kilometers of the
existing location. a) 1* b) 2 c) 3 d) 4
213) Banks are no longer required to report details of opening of a new place of business including
Mobile branch / Mobile ATMs / call centres, closure, merger, shifting or conversion of any existing
place of business including call centres to the Regional Office concerned. They may, however,
ensure to continue submitting within ____ days of every quarter, information relating to opening,
closure, merger, shifting and conversion of branches to RBI. a) 7 days b) 14 days* c) 21 days d) 28
days
214) The maximum unit project cost for individual micro enterprises cases is Rs. .
a) 2,00,000* b) Rs. 4,00,000, c) Rs. 6,00,000 d) Rs. 8,00,000
215) The maximum unit project cost for a group enterprise is Rs. : a) 5 lakh b) 7 lakh c)
10 lakh* d) 15 lakh
216) For loans disbursed under NULM scheme, Repayment schedule ranges from 5 to 7 years after
initial moratorium of _____ as per norms of the banks. a) 6-12 months b) 10-15 months,
c) 6-18 months* d) 10-12 months
217) A self help group (SHG) or members of an SHG constituted under NULM or a group of urban poor
desirous of setting up a group enterprise for self-employment can avail benefit of subsidised loans
from any bank. The group enterprise should have minimum ________ members with a minimum of
70 percent members from urban poor families.
a) 5* b) 7 c) 9 d) 10
218) In an effort to increase direct lending to agriculture, the target for direct lending to small and
marginal farmers under the recently revised Priority Sector Norms has been increased to ________
percent for 2015-16 and to percent for 2016-17. a) 6;7 b) 7;8* c) 7;9 d) 8;9
219) The Union Government has unleashed second generation banking reforms with a number of
measures collectively named as ________. a) Rainbow b) Indradhanush*, c) Modified
Reforms d) Revamped measures
220) These reforms include ____ point agenda to revitalize capital starved public sector banks.
a) 4 point b) 5 point c) 6 point d) 7 point*
221) The points included in reform plan include a series of proposals in alphabetical order staring from
Appointments, Bank Board Bureau, Capitalization, De-stressing, Empowerment, Framework of
Accountability and Governance reforms.
a) Appointments, Capitalization* b) Audit, Cost Cutting, c) Advances, Credit portfolio d)
Amalgamation, Capitalization
222) As per the reforms, the Government has decided to separate the post of Chairman and Managing
Director by prescribing that in the subsequent vacancies to be filled up the _____ will get the
designation of MD & CEO.
a) Chairman b) CEO*, c) Executive Director d) Director
223 ) The Bank Board Bureau ‘BBB’ will be a body of eminent professionals and officials and will
comprise of a Chairman and ____ more members of which ____ will be officials and _____ experts (of
which two would necessarily be from the banking sector). a) 6,2,4 b) 8, 4,4 c) 7,3,4 d)
6,3,3*
224) As per the revised guidelines, the PAN Card is mandatory if the sale/purchase of Immoveable
property is valued exceeding Rs. _____. Further, PAN is also needed if properties valued by stamp
valuation authority exceeds the
amount of Rs._____ :- Rs 5 lakh and Rs 10 lakh, b) Rs 10 lakh and Rs 10 lakh*, c) Rs 10 lakh
and Rs 15 lakh, d) Rs 10 lakh and Rs 20 lakh
225) Which of the following is correct regarding Time Deposit with a Banking Company w.r.t. PAN
Card:
a) The PAN Card is mandatory if deposits aggregating is more than Rs. 5 lac during the year.
b) The PAN Card is mandatory even if depositor has an account with Co-op Banks, Post office, Nidhi,
NBFC companies.
c) The PAN Card is mandatory if deposits aggregating is more than Rs. 50,000/- during the year.
d) The PAN Card is mandatory if deposits aggregating is more than Rs. 1,00,000/- during the year.
a) Only a & b are true* b) All b & c are true, c) Only b & d are true d) All are true.
226) In case of deposits with Post office and Saving Bank, the PAN Card is mandatory if the amount is
exceeding Rs. _______:
a) Rs.10,000 b) Rs 20,000, c) Rs.50,000 d) Discontinued*
227) In case of Sale or Purchase of securities, the PAN Card is mandatory if the contract of
sale/purchase value is exceeding Rs. ____:- a) Rs 5 lakh b) Rs 4 lakh, c) Rs 2 lakh d)
Rs 1 lakh*
228) Which of the following statement is correct regarding Opening of an account (other than time
deposit) with a Banking Company:
a) PAN Card is compulsory for all the new accounts that are being opened with the banking company.
b) In case of opening of Basic Saving Bank Account there is no requirement of PAN Card.
c) Co-operatives banks also need to comply with the guidelines on Pan.
229) As per the revised guidelines, for installation of telephone / cellphone connections, the PAN Card is
________: a) Mandatory b) Discontinued*, c) Varies from State to State. d) None
230) In case of Hotel / restaurant bill(s), the PAN Card is required if the cash payment on account of
the bill is exceeding Rs. _____:- a) Rs 30,000 b) Rs 40,000, c) Rs 50,000* d) Rs 60,000
231) In case of cash purchase of bank Drafts / Pay orders / Banker’s cheque, the PAN Card is
mandatory if the amount aggregating exceeds Rs. _______in a day:- a) Rs 25,000 b) Rs
50,000*, c) Rs 60,000 d) Rs 80,000
232) In case of Cash deposits with the Banking Company exceeding Rs. _____ in a day, then the PAN
Card is compulsory: a) Rs 50,000* b) Rs 30,000, c) Rs 25,000 d) Rs 40,000
233) PAN Card is mandatory if the cash payment in connection with foreign travel for fare, payment
to travel agent, purchase of foreign currency is exceeding Rs. _______ at any one time:
a) 20,000 b) 50,000* c) 1,00,000 d) 5,00,000
234) In case of Mutual funds unit transactions, the PAN Card is compulsory if the payment for
purchase of mutual funds units exceeds Rs. _______:-
a) Rs 35,000 b) Rs 50,000*, c) Rs 45,000 d) Rs 60,000
235) Which of the following statement is true regarding purchase/sale of Shares, Debentures, RBO
bonds w.r.t. PAN Card:
a) PAN Card is required if the purchase/sale of shares is exceeding Rs. 1 lac per transaction.
b) PAN Card is required if a person opens a demat account.
c) PAN is mandatory in case of purchase of debentures/bonds, RBI bonds is exceeding Rs. 50,000/-
d) All of above*
236) PAN Card is compulsory if the payment of the premium is exceeding Rs. _______ in a year:- a)
Rs 20,000 b) Rs 30,000, c) Rs 45,000 d) Rs 50,000*
237) In case of Purchase or sales of goods and services, including jewellery/bullion PAN Card is
mandatory if the purchase / sale of any goods and services is exceeding Rs. _____ per transaction:-
b) Rs 1 lakh, d) Rs 2.5 lakh
238) In case of Cash cards/Prepaid instruments issued under Payment and Settlement Act, PAN Card
is mandatory if the cash payment aggregating is more than ____ in a year:- a) Rs 30,000 b) Rs
40,000, c) Rs 50,000* d) Rs 60,000
Note: (ANSWER is * )
TEST YOURSELF – 3
PRIORITY SECTOR ADVANCES
1.The Reserve Bank has revised Priority Sector lending guidelines w.e.f. 23-4-2015, on the basis of
Internal Working Group headed by: a) Mr. Lily Vadera b) Mr. M.V. Nair c) Dr. Urjit Patel d) Mr. C.S.
Murthy committee
2.As per the revised guidelines, bank loans up to a limit of Rs. ___ cr per borrower for building social
infrastructure for activities namely schools, health care facilities, drinking water and sanitation facilities in
Tier II to Tier VI centres. a) 3 b) 5 c) 8 d) 10
3.Bank loans up to a limit of Rs. ____crore to borrowers for purposes like solar based power generators,
biomass based power generators, wind mills, micro-hydel plants and for non-conventional energy based
public utilities viz. street lighting systems, and remote village electrification. For individual households,
the loan limit will be Rs. ____ lakh per borrower. a) 10 ; 5 b) 15; 10 c) 20 ; 15 d) 25 ; 15
As per the revised____ lac & Rs. ___ lakh espectively.
a) 20;15;25; 20 b) 28; 20;35;
c) 25; 20;30;35 d) 30; 25;35;
5.Micro (Manufacturing) Enterprises are those having original investment in plant and machinery up
to_______: a) Rs. 25 lakh b) Rs 30 lakh c) Rs 35 lacs d) Rs 40 lacs
6.As per revised guidelines, Net bank credit for priority sector is calculated as bank credit in India minus
(1) bills rediscounted with RBI or other approved FIs (2) Net NPA provisions (3) Interest receivable on
loans: a) 1 to 3 all b) 1 & 2 only c) 2 only d) 1 only
7.As per revised guidelines, loans to individuals other than farmers can be sanctioned upto Rs _______ to
prepay their debt to non- institutional lenders. a) 25,000 b) 50,000 c) 1 lac d) no limit
8.Small (Manufacturing) Enterprises are those engaged in the manufacture, processing or preservation
of goods and whose investment in plant and machinery [original cost excluding land and building) does
not exceed ____ a) Rs 1 crore b) Rs 2 crore c) Rs 2.5 crore d) Rs. 5 crore
9.Micro (Service) Enterprises are those enterprises engaged in providing / rendering of services and
whose investment in equipment (original cost excluding land and building and furniture, fittings) does not
exceed :
a) Rs. 10 lacs b) Rs 20 lacs c) Rs 30 lacs d) Rs 40 lacs
10.Small (Service) Enterprises are enterprises engaged in providing / rendering of services and whose
investment in equipment (original cost excluding Land and Building and furniture, fittings and other items
not directly related to the service rendered) does not exceed :
a) Rs 1 crore b) Rs 2 crore c) Rs 2.5 crore d) Rs. 5 crore
11 Bank loans to Housing Finance Companies (HFCs), approved by NHB for their refinance, for on
lending for the purpose of purchase / construction / reconstruction of individual dwelling units or for
slum clearance and rehabilitation of slum dwellers, will be classified as priority sector provided
a) Maximum loan per borrower does not exceed Rs.10 lac. b) Maximum loan per borrower does not
exceed Rs.20 lac. d) The overall eligibility under PS loans to HFC is restricted to 5% of the individual
banks total PS lending on an ongoing basis. d) Both (a) and (c)
12) Bank loans to Micro and Small Enterprises (MSE) engaged in providing or rendering of services will be
eligible for classification as direct finance to MSE Sector under priority sector up to an aggregate loan limit
of Rs. ___ cr. per borrower / unit provided they satisfy the investment criteria for equipment as defined
under MSMED Act, 2006. a) 2 b) 5 c) 7.5 d) 10 e) 15
13) Bank loans to any Governmental agency for construction of dwelling units or for slum clearance and
rehabilitation of slum dwellers will be treated as priority sector provided the amount of loan does not
exceed _______ per dwelling unit. a) Rs. 5 lac b) Rs. 10 lac c) Rs. 15 lac d) Rs. 20 lac
14) Under Priority sector, the loans can sanctioned by banks up to Rs. _____ for solar based power
generators, biomass based power generators, wind mills, micro-hydel plants and for non-conventional
energy based public utilizes viz. street lighting systems, and remote village electrification: a) Rs.1 cr b)
Rs. 5 cr c) Rs.15 cr d) Rs. 20 cr
15) Loans for Food and Agro-processing up to an aggregate sanctioned limit of Rs. _____ crore per
borrower from the banking system. a) 25 b) 50 c) 75 d) 100
16) The loans sanctioned by banks for housing projects exclusively for the purpose of construction of
houses for economically weaker sections and low income groups, the total cost of which does not
exceed Rs. ___ lakh per dwelling unit. For the purpose of identifying the economically weaker sections
and low income groups, the family income limit of Rs. ___ lakh per annum, irrespective of the location,
is prescribed a) 5; 1 b) 10; 2 c) 15; 5 d) 20; 10
17) The eligibility under priority sector loans to HFCs is restricted to _____ percent of the individual
bank’s total priority sector lending, on an ongoing basis. The maturity of bank loans should be co-
terminus with average maturity of loans extended by HFCs. Banks should maintain necessary borrower-
wise details of the underlying portfolio. a) Five b) Ten c) Fifteen d) Twenty
18) Loans to distressed persons other than farmers already included not exceeding______ per borrower
to prepay their debt to non-institutional lenders; a) Rs.100,000 b) Rs.200,000 c) Rs.300,000 d)
Rs.400,000
19) Individual Women beneficiary up to _______ per borrower is covered under weaker section:
a) Rs. 1 lakh b) Rs. 2 lakh c) Rs. 3 lakh d) Rs. 5 lakh
20) Foreign Banks with less than 20 Branches to achieve _______ percent of ANBC or Credit Equivalent
Amount of Off-Balance Sheet Exposure, whichever is higher to be achieved in a phased manner by
______:
a) 40; 2020 b) 32; 2020 c) 40; 2022 d) 32; 2022
21) Within the 18% target for agriculture, a target of ____% of ANBC or CEOBE, whichever is higher is
prescribed for Small and Marginal Farmers, to be achieved in a phased manner i.e., ___% by March 2016
& ____% by March 2017 a) 6; 5; 6 b) 8; 7; 8 c) 5 ; 6; 5 d) 7; 8; 7
22) As per the revised guidelines Agriculture target for Scheduled Commercial Banks is _____% of ANBC
or CEOBE whichever is higher. a) 12 b) 15 c) 18 d) 20
23) As per the revised guidelines, Micro Enterprises target for Scheduled Commercial Banks is ______%
of ANBC or CEOBE, whichever is higher to be achieved in a phased manner i.e. ____% by March 2016 &
____% by March 2017. a) 5 ; 4 ; 5 b) 6 ; 5; 6 c) 7.5; 7; 7.5 d) 7; 8 ; 7
24) The Total Priority Sector target of 40% for foreign banks with less than _____ branches has to be
achieved in a phased manner as under: 2015-16 -32%; 2016-17 -34%; 2017 18 -36%; 2018-19 -38%;
2019-20 - 40%. a) 15 b) 18 c) 20 d) 22
25) As per the revised guidelines, the distinction between direct and indirect agriculture has been
dispensed with. Instead, the lending to agriculture sector has been redefined to include three categories.
Which of the following is not part of the categories?
Farm Credit (which will include short-term crop loans and medium / long-term credit to farmers);
Agriculture Infrastructure c) Ancillary Activities. d) Non Farm Credit
26) As per the revised guidelines, loans to Corporate farmers, farmers' producer organizations / companies
of individual farmers, partnership firms and co-operatives of farmers directly engaged in Agriculture and
Allied Activities, viz., dairy, fishery, animal husbandry, poultry, bee-keeping, sericulture upto an aggregate
limit of Rs. __ cr per borrower. a) 2 b) 3 c) 5 d) 10
27) As per the revised guidelines, the Export target for foreign banks with 20 branches and above, would
be classified as priority sector to the extent of incremental export credit over corresponding date of the
preceding year, up to ____ percent of ANBC or CEOBE, whichever is higher, effective from April 1, _____;
a) 2; 2016 b) 2; 2017 c) 5; 2016 d) 5; 2017
28) As per the revised guidelines, the Export target for foreign banks with less than 20 branches will be
allowed up to ____% of ANBC or CEOBE whichever is higher. a) 12 b) 20 c) 32 d) 40
29) As per the revised guidelines, loans to individuals for educational purposes including vocational
courses upto Rs. ____ lakh irrespective of the sanctioned amount will be considered as eligible for priority
sector.
a) 10 b) 15 c) 20 d) 25
30) As per the revised guidelines issued by RBI which are operational w.e.f April 23, 2015, there are 8
categories under Priority Sector. Which of the following pair is not part of the category:
a) Agriculture; Micro, Small and Medium Entt.; b) Export Credit; Education; Housing; c) Social
Infrastructure; Renewable Energy; Others. d) Agriculture Infrastructure; Retail trade; Financial inclusion.
31) As housing loans which are backed by long term bonds are exempted from ANBC, banks should either
include such housing loans to individuals up to Rs. ____ lakh in metropolitan centres and Rs. _____ lakh
in other centres under priority sector or take benefit of exemption from ANBC, but not both. a) 30; 20 b)
25; 30 c) 28; 20 d) 28; 25
32) Loans for repairs to damaged dwelling units of families up to Rs. ____ lakh in metropolitan centres
and up to Rs. ___ lakh in other centres are eligible to be covered under priority sector. a) 3; 1 b) 5; 2 c)
5; 3 d) 7.5; 5
33) Bank credit to MFIs extended for on-lending to individuals and also to members of SHGs / JLGs will be
eligible for categorisation as priority sector advance under respective categories viz., Agriculture, Micro,
Small and Medium Enterprises, and 'Others', as indirect finance, provided not less than ____ percent of
total assets of MFI (other than cash, balances with banks and financial institutions, government securities
and money market instruments) are in the nature of “qualifying assets”. In addition, aggregate amount of
loan, extended for income generating activity, should be not less than ____ percent of the total loans
given by MFIs. a) 75 ; 50 b) 80; 50 c) 85; 50 d) 90 ; 60
34) As per the revised guidelines, under Agriculture Infrastructure, loans for construction of storage
facilities (warehouses, market yards, godowns and silos) including cold storage units / cold storage chains
designed to store agriculture produce / products, irrespective of their location, Soil conservation and
watershed development; Plant tissue culture and agri-biotechnology, seed production, production of bio-
pesticides, bio-fertilizer, and vermi composting - an aggregate sanctioned limit of Rs. _____ crore per
borrower from the banking system, will apply. a) 100 b) 70 c) 50 d) 25
35) All loans to units in the Khadi and Village Industries Sector (KVI) will be eligible for classification
under the sub-target of ____ percent / _____ percent prescribed for Micro Enterprises under priority
sector.
a) 5 ; 7 b) 5 ; 10 c) 7; 7.5 d) 7.5 ; 10
36) As per the revised guidelines, the Export target for domestic banks, would be classified as priority
sector to the extent of incremental export credit over corresponding date of the preceding year, up to
____% of ANBC or CEOBE, whichever is higher, effective from April 1, 2015 subject to a sanctioned limit
of Rs. ____ crore per borrower to units having turnover of up to Rs. ____ crore. a) 2;50;75 b)
2;25;100 c) 2;50;105 d) 5;50;100
37) A “qualifying asset” shall mean a loan disbursed by MFI, which satisfies the stipulated criteria. Which
of the following is not a part of the criteria?
a.The loan is to be extended to a borrower whose household annual income in rural areas does not exceed
Rs.1,00,000/ while for non-rural areas it should not exceed Rs.1,60,000/-.
b.Loan does not exceed Rs.60,000/- in the first cycle and Rs. 100,000/- in the subsequent cycles.
c.Total indebtedness of the borrower does not exceed Rs. 1,00,000/-;
d) Tenure of loan is not less than 24 months when loan amount exceeds Rs.15,000/- with right to
borrower of prepayment without penalty. e) None of the above.
38) For bank credit to Micro Finance Institutions, interest cap on individual loans will be the average Base
Rate of five largest commercial banks by assets multiplied by ____ per annum or cost of funds plus
margin cap, whichever is less. The average of the Base Rate shall be advised by RBI. Further, only three
components are to be included in pricing of loans viz., namely a processing fee not exceeding 1 percent of
the gross loan amount; the interest charge and the insurance premium. a) 2.50 b) 2.75 c) 3.0 d)
3.5
39) For bank credit to Micro Finance Institutions the margin cap should not exceed ____ % for MFIs having
loan portfolio exceeding Rs. ____ crore and ____ percent for others. a) 10;50;10 b) 10;100;12 c)
10;100;15 d) 15;100;20
40) Loans upto Rs _____crore to Producer Companies set up exclusively by only small and marginal
farmers under Part IXA of Companies Act, 1956 for agricultural and allied activities is covered under
Indirect finance to agriculture. a) 2 b) 5 c) 7.5 d) 10
41) Under revised Priority sector guidelines, loans up to Rs _____ crore can be sanctioned to Co-operative
societies of disposing of the produce of members. a) 2
farmers for b) 5 c) 7.5 d) 10
42) As per revised Priority sector guidelines, loans to individuals can be sanctioned up to Rs. ______
lakh in metropolitan centres with population above ten lakh and Rs. _______lakh in other centres for
purchase / construction of a dwelling unit per family excluding loans sanctioned to bank’s own
employees.
a) 25;10 b) 28;35 c) 28;10 d) 28;20
43) RBI has issued guidelines as per which loans for repairs to the damaged dwelling units of families can
be sanctioned up to Rs. ____ lakh in rural and semi-urban areas and up to Rs. ____ lakh in urban and
metropolitan areas. a) 1;3 b) 2;3 c) 2; 5 d) 3;5
44) As per revised Priority sector guidelines, loans, not exceeding Rs. per borrower can be
sanctioned directly by banks to individuals and their SHG/JLG, provided the borrower’s household annual
income in rural areas does not exceed Rs ______ and for non-rural areas it
should not exceed Rs . a) 50,000; 1,00,000; 1,60,000 b) 1 lac; 1,00,000;1,60,000 c) 2 lac;
60,000;1,00,000 d) 2 lac; 1,00,000;1,60,000
45) The amount of education loan that can be classified as
priority sector is restricted to :
a.Education in India Rs.10 and education abroad Rs. 10 lac
b. Education in India Rs.20 and education abroad Rs. 10 lac
c. Education in India Rs.10 and education abroad Rs. 20 lac
d. Education in India Rs.20 and education abroad Rs. 20 lac
46) Loans to distressed persons can be granted for amount not exceeding Rs _______ per borrower to
prepay their debt to non-institutional lenders. a) 50,000 b) 75,000 c) 1lac d) 2 lac
47) Farmers with landholding of up to 1 hectare is considered as ___. Farmers with a landholding of more
than 1 hectare but less than 2 hectares are considered as _____. a.Ultra Small Farmers; Micro Farmers
b.Oral Lessees; Ultra Small Farmers , c.Micro Farmers; Share croppers d) Marginal Farmers; Small
Farmers
48) As per RBI guidelines, the banks should not insist for collateral security from Micro & Small ( Mfg)
with good track record units upto Rs. _____ lacs: a) Two b) Five c) Ten d) Twenty five
49) Priority Sector targets are linked to (a) adjusted net bank credit (b) credit equivalent of off-balance
sheet exposure (c) whichever is lower (d) whichever is higher.
a) Only a b) a and b both c) a, b and c together d) a, b and d together
50) Adjusted net bank credit (ANBC) is calculated as:
a) Bank credit in India - Bills rediscounted with RBI or other approved FIs + investment in non-SLR bonds
in HTM categories - investments eligible to be treated as priory sector.
b) Bank credit in India minus bills rediscounted with RBI and other approved financial institutions = net
bank credit + bonds / debentures in HTM categories + other Investments eligible to be treated as
priority sector + Outstanding Deposits under RIDF and other eligible funds with NABARD, NHB and
SIDBI on account of priority sector shortfall + outstanding PSLCs (-) issuance of long-term bonds for
infrastructure and affordable housing (-) eligible advances in India against the incremental FCNR (B) /
NRE deposits, qualifying for exemption from CRR / SLR requirements.
c)Bank Credit in India minus bills rediscounted with RBI or other approved FIs + Investment in non-SLR
bonds in HTM categories minus investments eligible to be treated as Priority Sector (-) eligible advances
in India against the incremental FCNR (B) / NRE deposits, qualifying for exemption from CRR / SLR
requirements.
d) Bank credit in India minus bills rediscounted with RBI or other approved FIs minus investment in non-
SLR bonds in HTM categories + investments eligible to be treated as priority sector + Outstanding
Deposits under RIDF and other eligible funds with NABARD, NHB and SIDBI on account of priority sector
shortfall + outstanding PSLCs.
51) Which of the following statement is correct?
a.Bank loans to only Micro and Small Enterprises, for both manufacturing and service sectors are eligible
to be classified under the priority sector.
b. Bank loans to Micro, Small and Medium Enterprises, for both manufacturing and service sectors are
eligible to be classified under the priority sector.
c. Bank loans to Micro, Small & Medium Enterprises, for only manufacturing sector is eligible to be
classified under the PS.
d. Bank loans to Micro and Small Enterprises, for manufacturing sector only is eligible to be classified
under the priority sector.
52) As per the revised guidelines, Bank loans up to Rs. ____ crore per unit to Micro and Small Services
Enterprises and Rs. ____ crore to Medium Service Enterprises engaged in providing or rendering of
services and defined in terms of investment in equipment under MSMED Act, 2006 - a) 3 ; 5 b) 5 ; 10
c) 7.5 ; 15 d) 10; 20
53) Which of the following statement regarding Rural Infrastructure Development Fund (RIDF) is not
correct:
a.Domestic banks deposit short fall in priority sector lending targets, or weaker section lending or
agriculture lending in RIDF.
b. RIDF corpus is estimated annually and for 2015-16 it is Rs. 25,000 crore.
c. Interest is Bank Rate less 2% to 4% and period of deposit for RDIF is determined by RBI
d. Amount deposited in RIDF by banks is not eligible investment for priority sector classification.
54) Micro (Service) Enterprises is defined as enterprise having investment in equipment up to _____:
a) Rs. 10 lakh b) Rs 5 lakh c) Rs 3 lakh d) Rs 2 lacs
55) Domestic SCBs having shortfall in lending to Priority sector and / or Agriculture sector target will be
allocated amounts for contribution to ____ established with NABARD - a) RIDF b) SEDF c) NEF d)
Any of the above
56) Bank loans up to Rs _____ per unit to Micro and Small Enterprises engaged in providing or rendering
of services and defined in terms of investment in equipment under MSMED Act, 2006. - a) 150 lac b) 200
lac c) 250 lac d) 500 lac
57) Priority Sector loan application should be disposed off in the following time schedule:
a.2 weeks for loan up to Rs.25000 and 5 weeks for loan above Rs.25,000
b. 2 weeks for loan up to Rs.25,000 and 4 weeks for loan above Rs.25,000
c. 2 weeks for loan upto Rs.25000 and 8 to 9 weeks for loan above Rs.25000 d) At discretion of banks
58) Loans for Food and Agro Processing Units are to be classified as: a) Direct MSE advance b) Direct
agriculture advance , c) Agriculture advance d) Indirect agriculture advance
59) Inter Bank Participation Certificates (IBPCs) bought bybanks, on a , are eligible for classification
under respective categories of priority sector, provided the underlying assets are eligible to be categorized
under the respective categories of priority sector and the banks fulfil the Reserve Bank of India guidelines
on IBPCs.
a) Risk sharing basis b) Credit basis c) Profit sharing basis d) None of these
60) Priority sector loans to Artisans, village and cottage industries where individual credit limits do not
exceed Rs. ____ are covered under weaker section: a) 50,000 b) 1 lac c) 1.25 lac d)1.50 lac
61) Overdrafts upto Rs. ______ under Pradhan Mantri JanDhan Yojana (PMJDY) accounts, provided the
borrowers’ household annual income does not exceed Rs. ______ for rural areas and Rs. _______- for
non-rural areas.- a) 5,000/-;100,000/-;1,60,000 b) 10,000/-; 100,000/-; 1,60,000
c) 5,000/-; 100,000/-; 1,80,000 d) 5,000/-; 100,000/-; 1,80,000
62) Scheduled Commercial Banks having any shortfall in lending to priority sector shall be allocated
amounts for contribution to the _______ established with NABARD and other Funds with NABARD / NHB /
SIDBI, as decided by the Reserve Bank from time to time. For the year 2015-16, the shortfall in achieving
priority sector target / sub-targets will be assessed based on the position as on March 31, 2016.
a.Rural Infrastructure Development Fund (RIDF)
b. Small Enterprises Development Fund (SEDF)
c.Infrastructure Development Fund ( IDF)
d. Priority Sector Deficit Fund (PSDF)
63) You have sanctioned CC (Hyp) limit of Rs.3 lac to a Private Retail trader. The same to be classified
under _____:a. Private retail trade under non priority sector. B.Private retail trade under priority sector
c. mall and Micro services under priority sector. D.Discretion of the bank
64) As per Weaver Card Scheme, what is the maximum amount of loan that can be granted to a
beneficiary: a) Rs.50,000 b) Rs.1,00,000 c) Rs.2,00,000 d) Rs.5,00,000
65) With respect to Joint Liability Group (JLG), which of the following is correct?
a.The group size is 4 -10 people. b.The members may be availing loan singly/jointly. C.The maximum
credit facility to a member is Rs.50,000/- and to the Group is Rs.5,00,000/-. d) All the above
66) Under PMEGP Scheme what is margin requirement for General and Special category beneficiaries?
a) Gen -15%, Spl - 5% b) Gen - 5%, Spl - 5% c) Gen -10%, Spl - 5% d) Gen -10%, Spl - 10%
67) As per revised guidelines, loans to individual women beneficiaries upto Rs per borrower is
covered under weaker section. a) 25,000 b) 50,000 c) 1,00,000 d) 2,00,000
68) Swarnjayanti Gram Swarozgar Yojana (SGSY), has been renamed as :
a.National Gram Swarozgar Yojana (NGSY). b. Swarnjayanti Rural Livelihood Mission (SRLM)
c.National Rural Livelihood Mission (NRLM), d.National Rural Mission Yojana (NRMY)
69) When Business Correspondent has to update Current Account, Saving Fund account:
a) Next working day b) Within 2 days c) Within 5 days. d) Within 7 days
70) Under NRLM scheme, the second dose of loan will be repaid in _______ months:
a) 6-12 b) 12-24 c) 12-36 d) 24-36
71 Pursuant to the Government of India extending the scheme of 1% interest subvention to housing loans
up to Rs. ____ lakh where the cost of the house does not exceed Rs. ____ lakh:
a) 5; 15 b) 10; 15 c) 15; 25 d) 20; 30
72Under Janashree Bima Yojana the annual premium is Rs. _____, of which Rs. _____ is to be
contributed by the artisan, Rs._____ by the Govt. and Rs. _____ by LIC.-
a) 100 ;20 ;40 ; b) 100 ; 10 ;45 ;45
c) 200; 20 ; ; 100 d) 200; 40 ;60 ;100
73 Under National Rural Livelihood Mission (NRLM) scheme a women’s self help group consisting of
_____ members, coming together on the basis of mutual affinity is the primary building block of the
NRLM community institutional design. In case of special SHGs i.e. groups in the difficult areas, groups
with disabled persons, and groups formed in remote tribal areas, this number may be a minimum of
____ persons. The mission will provide a continuous hand-holding support to the institutions of poor for
a period of _______years till they come out of abject poverty.
a) 5-10; 3; 5-5 b) 7-10; 5; 3-8 c) 10-15; 5; 5-7 d) 15-20; 10; 7-10
74 Under NRLM scheme, the second dose covers _____ times of existing corpus and proposed saving
during the next twelve months or Rs.______ whichever is higher. a) 1-5, 50,000 b) 2-10, 1 lac c) 5-10, 1
lac d) 10-20, 5 lac
75 NRLM would provide a Revolving Fund (RF) support to SHGs in existence for a minimum period of
_______months. Only such SHGs that have not received any RF earlier will be provided with RF, as
corpus, with a minimum of Rs. ______and up to a maximum of Rs. _______ per SHG.
a) 1 to 5; 5,000; 10,000 b) 3 to 6; 10,000; 15,000
c) 5 to 7; 12,000; 20,000 d) 7 to 10; 15,000; 25,000
76 Under Janashree Bima Yojana, in addition to the insurance cover, a scholarship of Rs.____ per quarter
per child for the education of two children from 9th to 12th Standard is also provided under the Shiksha
Sahyog Yojana.
a) 200 b) 300 c) 500 d) 600
77 State level bankers' committees (SLBCs) mandated to prepare a roadmap covering all unbanked
villages of population less than ____ and notionally allot these villages to banks for providing banking
services, in a time-bound manner. While preparing the roadmap for providing banking services in all
unbanked villages with population of less than 2000 through a combination of banking correspondent (BC)
and branches, it should be ensured that there is a brick and mortar branch to provide support to a cluster
of BC units, i.e., about 8-10 BC units, at a reasonable distance of 3-4 kilometres. a) 1000 b) 1500
c) 2000 d) 2500
78 Which of the following has/have been included as part of priority sector?
a) Medium enterprises b) Social Infrastructure
c) Renewable Energy d) None of these
e) All of these
79 As per April 15 guidelines on Priority Sector, which of the following distinctions have been dispensed
with?
a) Micro and Small Enterprises
b) Marginal and Small farmers
c) Direct and indirect agricultural advances
d) Self Help Group and Joint Liability Group
80 The target for lending to Micro enterprises has been prescribed as ___% of ANBC or CEOBE whichever
is higher.
a) 5% b) 6% c) 7.5% d) 8%
81 As per April 15 guidelines on Priority Sector, the target for lending to weaker sections has been
increased of ANBC or CEOBE, whichever is higher.
a) 8% b) 10% c) 12%
d) There is no change in the target for weaker sections.
82 Foreign Banks with less than 20 branches in India are required to achieve priority sector targets and
sub-targets for Agriculture and Weaker Sections by ___.
a) 2018-19 b) 2019-20
c) 2020-21 d) 2015-16
83 Bank loans to food and agro processing units will form part of _____.
a) Agriculture b) Small Enterprises
c) Indirect agriculture d) Medium enterprises
84 For domestic commercial banks and foreign banks with 20 or more branches in India, the incremental
export credit over corresponding date of the preceding year will be reckoned as priority sector upto
____% of ANBC or CEOBE, whichever is higher.
a) 1% b) 2% c) 5% d) 10%
85 The priority sector non-achievement will be assessed on _____ average basis at the end of the
respective year from 2016-17 onwards. a) fortnightly b) monthly c).quarterly d) half yearly e) yearly
86.The target for Micro Enterprises i.e. 7.5% of ANBC or CEOBE, whichever is
higher to be achieved in a phased manner i.e. 7% by ______and 7.5% by _____
a)March 2017, March 2018 ; b) March 2018, March 2019 c)March 2016, March
2017 ; d)March 2015, March 2016
87. Lending to agriculture sector has been re-defined to include which of the following? : a) Farm Credit
; b) Agriculture Infrastructure c) Ancillary activities d) Both (a) and (b) only & e) All of these
88. Which of the following is not part of agricultural advance?
a) Crop loans to farmers, which will include traditional/non-traditional plantations and horticulture, and,
loans for allied activities.
b) Housing Loan to farmers for their own residence. ;
c) Medium and long-term loans to farmers for agriculture and allied activities
d) Loans to farmers for pre and post-harvest activities, viz., spraying, weeding, harvesting, sorting,
grading and transporting of their own farm produce
89.As per revised guidelines on PS (April 15), loans to farmers up to _____ against pledge/hypothecation
of agricultural produce (including warehouse receipts) for a period not exceeding 12 months ; a) Rs 10
lakh b) Rs 20 lakh; c) Rs 50 lakh d) Rs 100 lakh
90 Which of the following is not an agricultural advance?
a) Loans to distressed farmers indebted to non-institutional lenders.
b) Loans to farmers under the Kisan Credit Card Scheme.
c) Loans to all farmers for purchase of land for agricultural purposes. e) None of these
91 Loans to corporate farmers, farmers' producer organizations/companies of individual farmers,
partnership firms and co-operatives of farmers directly engaged in Agriculture and Allied Activities, viz.,
dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture will be part of priority sector
provided loan is up to _____ per borrower.a) Rs 2 crore b) Rs 5 crore c) Rs 10 crore d) None of these
92 Loans for construction of storage facilities (warehouses, market yards, godowns and silos) including
cold storage units/ cold storage chains designed to store agriculture produce/products, irrespective of
their location will be part of priority sector provided aggregate sanctioned limit from the banking system is
up to Rs ________ per borrower a) Rs 10 crore b) Rs 20 crore c) Rs 50 crore d) 100 crore
93 Which of the following is not part of agriculture infrastructure as per PS guidelines issued in April 15?
a) Loans for construction of storage facilities to store agriculture produce/products.
b) Soil conservation and watershed development.
c) Plant tissue culture and agri-biotechnology, seed production, production of bio-pesticides, bio-fertilizer,
and vermi composting. d) None of these
94 Loans to co-operative societies of farmers for disposing of the produce of members will be part of
agriculture provided loan is up to Rs -a) Rs 1 crore b) Rs 2 crore c) Rs 5 crore d) Rs 10 crore
95 Loan for Food and Agro-processing will be part of Agricultural advance provided sanctioned limit from
the banking system is up to _____ per borrower - a) Rs 10 crore b) Rs 20 crore
c) Rs 50 crore d) Rs 100 crore
96 Which of the following is not part of agricultural advance?
a) Loans for setting up of Agriclinics and Agribusiness Centres.
b) Bank loans to Primary Agricultural Credit Societies (PACS), Farmers’ Service Societies (FSS) and Large-
sized Adivasi Multi-Purpose Societies (LAMPS) for on-lending to agriculture
c) Loans sanctioned by banks to MFIs for on-lending to agriculture sector.
d) Outstanding deposits under SEDF and other eligible funds with SIDBI on account of priority sector
shortfall.
97 Farmers with landholding of up to ______ are considered as Marginal Farmers and farmers with a
landholding upto ____ are considered as Small Farmers
a) 1 hectare, 2 hectares b) 2.5 hectare, 5 hectare
c) 1 hectare, 2.5 hectare d) 5 hectare, 10 hectare
98 Loans to farmers' producer companies of individual farmers, and co-operatives of farmers directly
engaged in Agriculture and Allied Activities, is classified as Small and Marginal farmer where the
membership of Small and Marginal Farmers is not less than ____ by number and whose land-holding
share is also not less than ____of the total land-holding - a) 50%; 50% b) 50%; 75%
c) 75%; 75% d) 75%; 50%
99 Bank loan to Micro, Small and Medium manufacturing Enterprises will be part of priority sector
provided the loan is up to _____. a) Rs 5 crore b) Rs 10 crore c) Rs 20 crore d) Irrespective of amount
of loan
100 Bank loan to Micro and Small service Enterprises will be part of priority sector provided the loan is up
to _____. a) Rs 2 crore b) Rs 5 crore c) Rs 10 crore d) Rs 20 crore e) None of these
101Bank loan to Medium service Enterprises will be part of priority sector provided the loan is up to
_____.
a) Rs 2 crore b) Rs 5 crore c) Rs 10 crore d) Rs 20 crore e) None of these
102Credit outstanding under General Credit Cards (including Artisan Credit Card, Laghu Udyami Card,
Swarojgar Credit Card, and Weaver’s Card etc. catering to the non-farm entrepreneurial credit needs of
individuals) will be part of advance to Micro and Small enterprises provided the loan is up to _____.
a) Rs 50,000 b) Rs 500,000 c) Rs 10,00,000 d) None of these
103Which of the following is not part of Micro, Small and Medium enterprises under priority sector
advance?
a) Loans to entities involved in assisting the decentralized sector in the supply of inputs to and marketing
of outputs of artisans, village and cottage industries.
b) Loans to co-operatives of producers in the decentralized sector viz. artisans, village and cottage
industries.
c) Loans sanctioned by banks to MFIs for on-lending to MSME sector.
d) Outstanding deposits with SIDBI on account of priority sector shortfall.
e) None of these
104As per revised PS guidelines (April 15) banks are required to lend 40% of advance to Micro and Small
enterprises to units with investment in plant and machinery up to_____.
a) Rs 2 lakh b) Rs 4 lakh c) Rs 10 lakh d) None of these as there is no such target.
105 The MSME units will continue to enjoy the priority sector lending status up to _____years after they
grow out of the MSME category concerned. a) one b) two c) three d) four e) None of these
106 Loans to individuals for educational purposes including vocational courses in India will be part of
Priority sector provided loan is up to _____. a) Rs 5 lakh b) Rs 10 lakh Rs 20 lakh d) Rs 25 lakh
107 Loans to individuals for educational purposes for studies abroad will be part of Priority sector provided
loan is up to ____.a) Rs 5 lakh b) Rs 10 lakh c) Rs 20 lakh d) Rs 25 lakh e) None of these
108 A loan of Rs 20 lakh has been sanctioned to an individual for studies in India. How much of it will be
part of priority sector? a) Rs 5 lakh b) Rs 10 lakh c) Rs 20 lakh
d) None of these as it will not be part of priority sector.
109 Loans for repairs to damaged dwelling units will be part of priority sector provided loan is up to
____in metropolitan centres and up to _____ in other centres. a) Rs 2 lakh, Rs 1 lakh b) Rs 5 lakh, Rs 2
lakh
c) Rs 4 lakh; Rs 2 lakh d) Rs 10 lakh; Rs 5 lakh
110 Bank loans to any governmental agency for construction of dwelling units or for slum clearance and
rehabilitation of slum dwellers will be part of priority sector provide loan is up to ______ per dwelling unit.
a) Rs 2 lakh b) Rs 5 lakh c) Rs 10 lakh d) Rs 20 lakh e) None of these
111 Loans for housing projects exclusively for the purpose of construction of houses for economically
weaker sections and low income groups, will be part of priority sector provide the total cost of the house
does not exceed _____ per dwelling unit a) Rs 1 lakh b) Rs 2 lakh c) Rs 5 lakh d) Rs 10 lakh
112 Loans for housing projects exclusively for the purpose of construction of houses for economically
weaker sections and low income groups, the total cost of which does not exceed Rs 10 lakh per dwelling
unit for the purpose of identifying the economically weaker sections and low income groups, the annual
family income should not be more than_____.
a) Rs 50,000 in rural areas and Rs 100,000 in other areas
b) Rs 100,000 in rural area and Rs 200,000 in other areas
c) Rs 160,000 irrespective of location
d) Rs 200,000 irrespective of location
113 Bank loans for building social infrastructure for activities namely schools, health care facilities,
drinking water facilities and sanitation facilities in Tier II to Tier VI centres will be part of priority sector
provided loan is up to ____per borrower. a) Rs 5 crore b) Rs 1 crore c) Rs 2 crore d) Rs 10 crore
114 Bank loans to borrowers for purposes like solar based power generators, biomass based power
generators, wind mills, micro-hydel plants and for non-conventional energy based public utilities viz.
street lighting systems, and remote village electrification will be part of priority sector provided loan
amount is up to______. a) Rs 5 crore b) Rs 10 crore c) Rs 15 crore d) Rs 20 crore e) Rs 25 crore
115 Loans to distressed persons other than farmers to prepay their debt to non-institutional lenders will
be treated as other priority sector provided loan per borrower is limited up to _____ a) Rs 25000
b) Rs 50,000 c) Rs 100,000 d) Rs 200,000
116 Overdrafts upto Rs 5,000/- under Pradhan Mantri JanDhanYojana (PMJDY) accounts will be classified
as other priority sector provided the borrowers household annual income does not exceed ____for rural
areas and for non-rural areas.
a) Rs 60,000; Rs 120,000b) Rs 80,000; Rs 160,000
c) Rs 100,000; Rs 1,60,000 d) Rs 100,000; Rs 200,000
117 Artisans, village and cottage industries are classified as weaker section provided individual credit
limits do not exceed _____. Rs. 50,000 ; b. Rs. 1.00 lac ; c. Rs. 2.00 lacs & d. Rs.5.00 lacs
ANSWER
1 A 2 B 3 B 4 B 5 A
6 D 7 C 8 D 9 A 10 B
11 D 12 B 13 B 14 C 15 D
16 B 17 A 18 A 19 A 20 A
21 B 22 C 23 C 24 C 25 D
26 A 27 B 28 C 29 A 30 D
31 C 32 B 33 C 34 A 35 C
36 B 37 E 38 B 39 B 40 B
41 B 42 D 43 C 44 A 45 A
46 C 47 D 48 D 49 D 50 B
51 B 52 B 53 D 54 A 55 A
56 D 57 D 58 C 59 A 60 B
61 A 62 A 63 C 64 C 65 D
66 C 67 C 68 C 69 A 70 B
71 C 72 D 73 C 74 C 75 B
76 B 77 C 78 E 79 C 80 C
81 D 82 B 83 A 84 B 85 C
86 C 87 E 88 C 89 C 90 C
91 A 92 D 93 D 94 C 95 D
96 D 97 A 98 C 99 D 100 B
101 C 102 D 103 E 104 D 105 C
106 B 107 B 108 B 109 B 110 C
111 D 112 D 113 A 114 C 115 C
116 C 117 B
Govt.Sponsored Schemes
PMEGP
1. The Prime Minister's Employment Generation Programme (PMEGP):
(a) has been designed to generate employment opportunities in Rural & Urban areas.
(b) relates to the setting up of new self-employment ventures for industries, services and business.
(c) covers whole of the country including J & K
(d) has replaced PMRY & KVIC-REGP scheme (e) all above
2. To be eligible for loan under PMEGP, minimum qualification required is class pass in case project
cost is above Rs 10 lakh in the manufacturing sector and above Rs. 5 lakh in the business or service sector –
(a) 8 th (b) 9th (c)5th (d)7th (e) none of the above
3. To be eligible under PMEGP, the applicant's age should be :
(a) not-more than 40 years (b) not less than 18 years (c) between 25 to 40 years (d) abovel 8 years
4. Under PMEGP, ________ % of the margin money (subsidy) should go to projects in rural areas:
(a) 25% (b) 40% (c) 30% (d) 60% (e) 50%
5. To be eligible for assistance under PMEGP, family income of the applicant should not exceed:
(a) Rs. 24,000 p.a. (b) Rs. 30,000 p.a. (c) Rs.40,000 p.a. (d) Rs. 60,000 p.a. (e) No limit
6. Under PMEGP, the repayment period can be after moratorium period as per bank discretion.
(a) 3 to 5 year (b) 3 to 7 year (c) 5 to 7 year (d) 5 to 9 year (e) None of these
7. Rate of subsidy available under PMEGP is :
(a) General-category borrowers: 15% of project cost in urban areas and 25%o. in rural areas;
(b) Special category borrowers: 25% of project cost in urban areas and 35% in rural areas.
(c) 15% in rural areas and 25% in urban areas for general category borrowers
(d) Both (a) & (b) above (e) None of these
8. Under PMEGP, the borrower is required to contribute% of project cost as margin money :
(a) 5% for special category and 10% for general category
(b) 10% for special category and 5% for general category
(c) 5% for special category as well as general category
(d) 10% for special category as well as general category (e) none of the above
9. Maximum Project cost in the case of single borrower for business & service category under PMEGP is:
(a) Rs. 10 lakhs (b) Rs. 25 lakh (c) Rs.5 lakhs (d)Rs. 2 lakh (e) None of these
10. Under PMEGP scheme, rural area means place notified as rural area in revenue records and with
population:
(a) up to 10,000 (b)less than 10,000 (c) up to 50,000 (d)up to 20,000 (e) None of these
11. Banks will not insist on collateral security from beneficiaries under PMEGP for loans up to:
(a) Rs. 10 latch (b) Rs. 5 lakh (c) Rs. 1 lakh (d) Rs. 50,000 (e) Rs. 3 lakh
12. Banks should lend at least ___ % of advances under PMEGP to SC/ST
(a) 10% (b) 22.5% (c) 35% (d) 50% (e) None of these
13. Which of the following is not true about PMEGP scheme:
(a) There is no condition for education for project up to Rs 10 lac for industry and Rs 5 lac for service.
(b) There is no limit on Family income. (c) It is not applicable in J&K.
(d) it covers both the rural as well as urban centres
(e) The maximum cost of project for industry is Rs.25 lac and for service & business Rs 10 lakh.
14. Maximum Project cost in the case of single borrower for business & service category under PMEGP is:
(a) Rs. 10 lakhs (b) Rs. 25 lakh (c) Rs.5 lakhs (d)Rs. 2 lakh (e) None of these
15. For which of the following category of beneficiaries, targets have been set up under PMEGP?
(a) SC/ST (b) Women (c) physically handicapped (d) all of these (e) None of these
16. PMEGP is applicable in which of the following areas?
(a) Rural only (b) urban areas only (c) Both Rural and urban areas (d) None of these
17. Which of the following is not correct regarding PMEGP scheme?
(a) Both existing and new projects are eligible (b) Only one person from one family is eligible
(c) Family includes beneficiary and spouse (d) No concession in interest rate(e) None of these
18. Village Industry under PMEGP, means a unit located in the rural area which produces any goods or
renders any service with or without the use of power and in which the fixed capital investment per head
of a full time artisan or worker does not exceed :
(a) Rs. 1 lakh in plain areas (b) Rs.1.50 lakh in hilly areas (c) Rs 2 lac in North East
(d) Both (a) & (b) (e) All of these
9. Identification of beneficiaries under PMEGP will be done at the district level by a Task Force consisting
of representatives from:
(a) KVIC/State KVIB (b) State DICs (c) Banks (d) Both (a) & (b)(e) All of these.
!0. For the purpose of PMEGP scheme, which of the following is not included in special category?
(a) SC / ST, OBC (b) Minorities, Women (c) Ex servicemen & Physically handicapped
(d) North East, Hill and Border areas . (e) None of these
1. Which of the following is not correct regarding margin money (subsidy) under PMEGP?
(a) Subsidy should be kept in the Term Deposit Receipt of three years
(b)No interest will be paid on the TDR & no interest to be charged on loan on corresponding amount of TDR
(c) Subsidy will be credited to the Borrowers loan account after three years from the date of
first disbursement to the borrower.
(d) If loan goes bad before 3 year period, due to reasons, beyond the control of the beneficiary, subsidy can
be credited to loan account before 3 years (e) None of these
22. Under which situations, proportionate or entire subsidy for working capital component has to be returned?
(a) When utilization of limit does not touch 100% limit of CC on any day within three years of lock in period.
(b) When utilization of the sanctioned limit is less than 75% (c) either (a) or (b) (d) None of these
23. Which of the following is correct regarding training of beneficiaries under PMEGP?
(a) First instalment of loan will be released only after completion of EDP training of at least 2 weeks
(b) If beneficiary has undergone training from the recognized institution, no further EDP training is required.
(c) Both (a) & (b) (d) None of these
24. Which of the following is not correct regarding project cost in case of PMEGP scheme?
(a) Project cost will include Capital Expenditure and one cycle of Working Capital.
(b) Projects without Capital Expenditure are not eligible for financing under the Scheme.
(c) Projects. costing more than Rs.5•Iakh, not requiring working capital, need clearance from RO.
(d) Cost of the land should not be included in the Project cost. (e) None of these
25. Under which situations, proportionate or entire subsidy for working capital component has to be returned?
(a) When utilization of limit does not touch 100% limit of CC on any day within three years of lock in period.
(b) When average utilization of the sanctioned limit is less than 75%
(c) When average utilization of the sanctioned limit is lesS than 80%
(d) either (a) or (b) (e) Either (a) or (c)
26. Which of the following is correct regarding training of beneficiaries under PMEGP?
(a) First instalment of loan will be released only after completion of EDP training of at least 2 weeks
(b) If beneficiary has undergone training from the recognized institution, no further EDP training is required.
(c) Both (a) & (b) (d) None of these
27. Which of the following is not correct regarding project cost in case of PMEGP scheme?
(a) Project cost will include Capital Expenditure and one cycle of Working Capital.
(b) Projects without Capital Expenditure are not eligible for financing under the Scheme.
(c) Projects costing more than Rs.5 lakh, not requiring working capital, need clearance from RO.
(d) Cost of the land should not be included in the Project cost. (e) None of these
28. Which of the following is not eligible for loans under the scheme?
(a) Self Help Groups (b) Institutions registered under Societies Registration Act, 1860
(c) Production Co-operative Societies (d) Charitable Trusts (e) None of these
ANSWER
Q A Q A Q A Q A Q A
1 E 2 A 3 D 4 E 5 E
6 B 7 D 8 A 9 A 10 D
11 A 12 E 13 C 14 A 15 E
16 C 17 A 18 C 19 D 20 E
21 D 22 E 23 E 24 E 25 D
26 B 27 E 28 E
15. Case Studies (Memory Based)
Case : 1
An exporter submitted an export bill of USD 100000 drawn on 120 days usance basis from date of shipment, which
took place on Aug 03, 2012. The following further information is provided:
(1) The due date is Dec 01, 2012.
(2) The exchange margin is 0.20%.
(3) Spot inter-bank USD rate is Rs.45.00/05.
(4) Premium spot Nov 0.40/45
(5) Rate is quoted to nearest 0.25 paise and rupee amount to be rounded off
(6) Interest rate is 8% for period up to 180 days.
(7) Commission on bill purchase is 0.50%
Answer the following questions.
01 What is the rate at which the bill will-be purchased if it is a demand bill after adjustment of bank margin, without
taking into account, the premium?
a) Rs.44.91 b) Rs.45.09 c) Rs.45.31 d) Rs.45.51
02 What is the rate at which the bill will-be purchased if it is a demand bill after adjustment of bank
margin and the premium? -
a) Rs.44.91 b) Rs.45.09 c) Rs.45.31 d) Rs.45.51
03 What is the gross amount before application of interest and commission:
a) R5.4531000 b) Rs.4410174 c) Rs.4407908.50 d) Rs.4507909
04 What is the amount of the bill without bank commission
a) Rs.4531000 b) Rs.4410174 c) Rs.4407908.50 d) Rs.4407909
05 What amount will be credited to exporter's account:
a) Rs.4531000 b) Rs.4410174 c) Rs.4407922.50 d) Rs.4407909
Ans. 1-a 2-c 3-a 4-b 5-d
Explanation :
Your export customer has received an advance of US 10000 against export to UK, which the importer in UK
has got credited to NOSTRO account of the bank in London. The current inter-bank market rate USD = 45.10/15.
Bank retains a margin of 0.15% on purchase and 0.16% on sale. What amount will be credited to customers
account:
a. Rs.451676.50 b. Rs.450323.50 c. Rs.451721.60 d. Rs.450278.40 Ans.1-b
Explanations:
1: It is a purchase transaction for the bank. Hence inter-bank purchase rate of Rs.45.10 will be used. Bank will
deduct the purchase margin of 0.15%. Gross amount = 45.10 x 10000 = 451000:
Net amount which will be credited to customer's account = 451000 - 676.50 (0.15% margin) = 450323.50
Case : 2
Following are the Inter bank quotes on a certain date: Spot USD 1NR 44.60/65
1 month 8/10 2 month 18/20 3 month 28/30
Spot GBP USD 1.7500/7510 1 month 30/20 2-month 50/40 3 month 70/60
All the above differences are for the month and fixed dates and the bank margin is 3 paise.
01 An exporter has presented an export demand bill (sight document) for USD 300000 under irrevocable letter of
credit. What will be the rate at which the documents will be negotiated?
a) 44.5700 b) 44.6000 c) 44.6500 d) 44.6800
02- An Exporter has submitted 60 days usance bill for USD 25000 for purchase. At what rate the
document will be purchased?
a) 44.7500 b) 44.7800 c) 44.8400 ' d) 44.8700
03 Your bank has opened a letter of credit for import at the end of 2 months for GBP 30000. At what
rate, the forward exchange will be booked?
a) 78,4700 b) 78,4725 c) 78,6300 d) 78,6325
04 If the exchange margin is 3 Paise for buying as well as selling, what is the bank's spread in % on
customer transaction?
a) 0.2465 b) 0.3000 c) 0.6000 d) 0.6275
05 A customer tenders export bill for GBP 10,00,000 payable 45 days from sight. The transit period is 15 days he
wants to retain 10% of bill value in the foreign currency. Bank's margin is 10 paise. What will be credited to
customer's account?
a) 71310030 b) 70317630 c) 70110270 d) 70018510
Ans. 1-a 2-a 3-b 4-a 5-b
Explanations:
1. It is a demand bill which means the payment is immediate upon negotiation. So, spot rate will be
applied, which is USD/INR SPOT 44.60/44.65.
Being an export bill, from bank's point of view, it is a buying transaction. Hence Buying (Bid) Rate of 44.60 (and
an inter-bank rate) will be applied. To arrive at the customer rate, the margin will be deducted.
inter Bank Rate 44.6000 Less : Margin 00.0300 Customer Rate 44.5700
2. The payment terms in this case are 60 days usance. Hence, 2 months forward rate will be
applied, which will be calculated as under:
Spot USDIINR 44.6000/44.6500 Forward 2 Months 00.1800100.2000 (small/Big> Premium >Add)
Total 2 Months 44.7800/44.8500 Being an export bill, from bank's point of view, it is buying of
FC. Hence Buying (Bid) Rate will be applied, which is 44.78. To arrive.at the customer rate, exchange
margin will be deducted. Inter Bank Rate 44.7800 Less: Margin 00.0300
Customer Rate 44.7500
3. The fetter of credit is for 2 months. Hence, 2 months forward rate will be a applied which will be calculated
on the basis of 2 Months GBP/INR rate through a cross rate (GBP/USD and USD/INR rates).
USD/INR SPOT 44.6000/44.6500 Forward 2 Months 00.1800/00.2000 (Small/Big-> Premium->Add)
Total 2 Months 44.7800/44.8500 GBP/USD SPOT 1.7500/1.7510
Forward-2 Months 0.0030/0.0020 (Big/Small-> Discount ->Less) Total 2 Months 1.7470/1.7490
It is an import transaction and from bank's point of view, it is selling. Hence selling (offer) Rate will be applied.
GBP/INR = GBPIUSD x USD /INR = 44.8500 X 1.7490 = 78.44265
This is an inter-bank rate. To arrive at the customer rate, exchange margin will be added.
Inter Bank Rate 78.4427 Add: Margin 00.0300 Customer Rate 78.4727 rounded to 78.4725
4. USDANIR Spot 44.6000/44.6500 inter Bank Buying Rate 44.6000
Less: Exchange Margin 00.0300 Merchant Buying Rate 44.5700
Inter bank Selling Rate 44.6500 Add: Exchange Margin 00.0300
Merchant Selling Rate 44.6800
% Spread = ((Selling Rate-Buying Rate) X 100)1 /{(Selling Rate + Buying Rate)/2}
=((44.68-44.57)X100))/{44.68+44.57)/21 = 00.11 X 100/44.625 = 0.2465 %
5. The Bill period is 45 Days. The transit period is 15 Days.
Total period is 2 months. Hence, 2 months forward rate will be applied. 2 Months GBP/INIR rate is
required for which cross-rate will be calculated.
USD/INR SPOT 44.6000/44.6500 Forward Points 2 Months 00.1800/00.2000 (Small/Big-> Premium ->
Add)
Spot 2 Months 44.7800/44.8500 GBP/USD SPOT 1.7500/1.7510
Swap Points 2 months 0.0030/0.0020 (Big/Small-> Discount->Less) Outright 2 Months
1.7470/1.7490
Being an export from bank's point of view, it is Buying. Hence Buying (Bid) Rate will be applied).
GBP/INRBID = GBP/USDBID X USD/INRSID = 44.7800 X 1.7470 = 78.2307
This is an inter-bank rate. To arrive at the Customer Rate, Exchange margin will be deducted.
Inter Bank Rate 78.2307 Less: Margin 00.1000 Customer Rate 78.1307
The bill is for 10,00,000 GBP. Of this, the customer wants to retain 10% in EEFC account. Hence he
would be converting 9,00,000 GBP.For 9,00,000 GBP, his account would be credit with = 78.1307 X 900000
= Rs.70317630
CASE STUDIES ON LETTER OF CREDIT

Case : 3
M/s Exports Private Limited have received a letter of credit for export-of textile items for an amount of $ 50000
approximately. The company manufactured the goods, made the shipment and presented the documents for
negotiation to the negotiating bank for a total invoice value of $ 52356. The negotiating bank refused to negotiate
the document as the amount exceeded the amount of letter for credit. What is the position of exporter in the given
situation:
a) Negotiating bank has all discretion to point out any discrepancy. Hence, it need not pay.
b) The discrepancy pointed out by the negotiating bank is not correct. Hence it should pay.
c) The negotiating bank should seek advice of the opening bank in such matters
d) The information given is incomplete to take a decision.
Answer:
Solution : The decision of the negotiating bank in refusing to negotiate. the documents on the basis of variation in the
amount is not correct. As per Article 30 of Uniform Customs and Practices for Documentary Credits 600, the words
"about" or "approximately" used in connection with the amount of the credit or the quantity or the unit price stated in
the credit, are to be construed as allowing a tolerance not to exceed 10% more or 10% less, than the amount, the
quantity or the unit price to which they refer.
Hence the amount stated in the invoice is well within the tolerance of 10% and objection raised by the
bank is not correct.
Case : 4
M/s Exports Private Limited received a letter of credit for export of certain products but the letter of credit does not
state the quantity in terms of a stipulated number of packing units or individual items. The exporter manufactured the
goods and presented the documents for negotiation which have been negotiated by the negotiating bank. However,
the opening bank refused to honour the documents on the premise that there is variation of around 3 percent in the
quantity of goods supplied. The negotiating bank demands the return of money from the exporter. What is the
exporter's position in this case:
a) Once the documents have been found correct, the negotiating bank cannot ask for refunds of the
money from the beneficiary
b) If the applicant refuses to pay, the beneficiary will have to return the money
c) The objection raised by the opening bank is justified and this should have been seen by the
negotiating bank before hand
d) The opening bank's objection is not justified and it has to pay the documents
Answer:
Solution: The demand of the negotiating bank for refund of the money from the exporter is not justified. As per
provisions of Artide 30 of Uniform Customs and Practices for documentary Credits (UCPDC-600), a tolerance not to
exceed 5% more or 5% less than the quantity of the goods is allowed, provided the credit does not state the quantity
in terms of a stipulated number of packing units or individual items and the total amount of the drawings does not
exceed the amount of the, credit. In the given case, the quantity variation falls within the tolerance level. The
negotiating bank, instead of seeking refund fro-m the exporter should take up the matter with the issuing bank for
payment.
Case : 5
International Bank, New Delhi received a letter of credit issued by a bank in UK in favour of M/s Exports Private
Limited, a customer of International Bank. The negotiation is restricted to International Bank. On the date of
receipt of LC, riots took place in the locality Where the branch of the bank is located. As a result the LC could not be
advised by the bank to the exporter immediately. Later on when the situation became normal the bank advised the
LC to the exporter but by that time the expiry date for negotiation of documents had expired. The exporter insists on
negotiation of documents by the International Bank, as delay is not on the part of the exporter but on the part of
International Bank. What is the position of the International Bank vis-à-vis the exporter in the given situation:
a) International Bank is liable due to which it should negotiate the documents
b) Exporters Pvt Limited has the right to get the payment of the documents
c) International Bank is not liable
d) Given information is not enough to take any decision
Answer: c
Solution: The insistence of the exporter to negotiate the documents is not correct when the date of negotiation of
the LC has expired. As per Article 36 of Uniform Customs and Practices for Documentary Credits (UCPDC 600), a
bank assumes no liability or responsibility for the consequences arising out of the interruption
of its business by acts of God, riots, civil commotions, insurrections, wars, acts of terrorism, or by any strikes.or
lockouts or any other causes beyond its control. A bank will not, upon resumption of its business, honour or negotiate
under a credit that expired during such interruption of its business. Under the given circumstances, the bank has no
obligation to negotiate the documents and make .the payment since the credit has-expired. The beneficiary has to get
the negotiation date extended by amendment of the LC.
Case : 6
M/s Exports Private Limited have received a letter of credit in their favour for export of certain goods to UK. The date
of expiry of the credit is around 31st December 2011. Since the process involved in manufacturing of goods was little
longer, the exporter could present the documents for negotiation on 3rd January 2012. The documents were
negotiated by the negotiating bank under reserve to which the exporter objected. In the opinion of the exporter,
there is no deficiency in the documents and in the opinion of the bank, the documents have not been presented for
negotiation in time. What is the position of the bank and the exporter:
a) Bank has to negotiate the documents as it gets 5 banking days to check the documents and the
documents have been presented during that period.
b) The beneficiary has the right to present the documents within 5 calendar days since date is
written as around Dec 31. Hence, the negotiating bank cannot refuse payment
c) The bank is not under obligation to negotiate the document as the last date for negotiation is over
d) The bank should seek instruction of the opening bank and applicant and move accordingly.
Answer:
Solution: The stand taken by the bank that the documents have been presented after expiry date, is not correct. As
per Article 3 (Interpretations) of Uniform Customs and Practices for Documentary Credits (UCPDC 600), the
expression 'ton or about" or similar, will be interpreted as a stipulation that an event is to occur during a period of five
calendar days before until five calendar days after the specified date, both start and end dates included. The
documents have been presented by the exporter within 3 calendar days after the specified date i.e. Dec 31, 2011.
Hence, the bank should negotiate the documents if otherwise in order.
Case : 7
Popular Bank issued an LC of USD 50000 on Jan 05, 2012, in favors of John and John of London. The last-date for
shipment is Jan 15 and last date for negotiation is Jan 31, 2012. The goods were shipped on Jan 02, 2012 and
documents were presented for shipment by the beneficiary for negotiation to South Hall Bank on Jan 14, 2012, which
were negotiated on Jan 16, 2012. When the documents were sent to Popular Bank for reimbursement by the South
Hall Bank, the opening bank found the following discrepancies:
1. The date of shipment as Jan 02, 2012 while the date of LC was Jan 05, 2012.
2. The date of invoice was Jan 03, 2012 and date of packing list and
inspection certificate was Dec 31, 2011. The opening bank returned the
documents to the negotiating bank.
a) The return is not justified due to which the negotiating bank should send the documents back to
opening bank for payment
b) The return is justified, as the date of LC is subsequent to date of documents
c) The return is justified, as the date of different documents is different
d) The opening bank should seek opinion of the applicant and then take decision
Answer: a
Solution: The discrepancies pointed out by the opening bank are not justified. As per Article 14 of UCPDC 600, the
documents under an LC can be dated prior to the date of LC but these should not be dated later than the date of
presentation. Further, Data in a document, when read in context with the credit, the document itself and
international standard banking practice, need not be identical to, but must not conflict with, data in that document,
any other stipulated document or the credit. Therefore, if the documents do not carry any other discrepancy, the
opening bank or the applicant cannot refuse payment, on this basis.
Case : 8
An LC provides for shipment of 500 pieces of trousers in 200 cartons. It also provides that partial shipment is not
allowed. The beneficiary hands over 100 cartons to the shipping company on Jul 10 and another 100 cartons on Jul
16. Two bills of fading with dates Jul 10 and Jul 16, are issued. The cartons are to be carried in a single vessel to sail
on Jul 20. The documents are negotiated by the negotiating bank but these are returned back by the opening bank,
stating that the LC did not permit partial shipment:
a) Opening bank cannot be forced to pay because the part shipment is not permitted
.b) Opening bank should pay, as it is not partial shipment, since vessel is one
c) By negotiating defective documents, the negotiating bank has made mistake, hence it cannot force the
opening bank to reimburse
d) Negotiating bank has made mistake. It should recover the payment from the beneficiary
Answer:
Solution: As per Article 31 of UCPDC 600, documents with 2 or more sets of transport documents covering
shipment of goods on the same means of transport and same journey, are not considered partial shipment. Hence,
the stand taken by the opening bank is not correct.
Case : 9
Universal Bank (the issuing bank) received the documents under LC from Popular Bank (the negotiating bank) on
Dec 22 (Tuesday). It took one day to check the documents and forwarded the documents for acceptance by the
applicant. On Dec 29, the applicant pointed out that the insurance policy was in a currency different from the one as
mentioned in LC. (Dec 25 was a holiday due to Xmas and Dec 27 was Sunday). The opening bank immediately
informed the negotiating bank about this discrepancy by way of an Email and sought directions for disposal of the
documents. The negotiating bank pointed out that the opening bank could convey the objection if any, within 5 days
and not later, due to which it should make the payment:
--
a) Observation made by the negotiating bank is not correct. It has received the objection in time.
b) Observation made by the negotiating bank is correct. Opening bank has conveyed the objection 2 days
late.
c) Observation made by the negotiating bank is not correct. It should convey this to the beneficiary and
recover the amount
d) Loss would be to the account of applicant, as he took more than 5 days.
Answer: a
Solution: As per Article 16 of UCPDC, the issuing bank gets 5 banking days to determine whether the documents
carry discrepancy or not. Dec 25 being Xmas holiday and Dec 27 being Sunday (which are to be excluded from
counting), the issuing bank conveyed the discrepancy within 5 banking days. Hence negotiating bank cannot refute
the claim of the opening bank.
EXPORT FINANCE
Case : 10
An exporter approaches the popular bank for pre-shipment loan with estimated sales of Rs.100 lakh. The bank
sanctions a limit of Rs.50 lakh, with following margins: Pre-shipment loan on FOB value — 25%; Foreign Demand Bill
-10%; Foreign usance bilis —20%.
The firm gets an order for USD 50,000 (CIF) to Australia. On 1.1.2011 when the USD/INR rate was Rs.43.50 per
USD, the firm approached the Bank for releasing pre-shipment loan (PCL), which is released.
On 31.3.2011, the firm submitted export documents, drawn on sight basis for USD 45,000 as full and final shipment.
The bank purchased the documents at Rs.43.85, adjusted the PCL outstanding and credited the balance amount to
the firm's account, after recovering interest for Normal Transit Period (NTP). The documents were realized on
30.4.2011 after deduction of foreign bank charges of USD 450. The bank adjusted the outstanding
post shipment advance. against the bill. Bank charged interest for pre-shipment loan @ 7% up to 90 days and,
@ 8% over 90 days up to 180 days. For Post shipment credit, the Bank charged interest @ 7% for demand bills and
@7.5% for usance (D/A) documents up to 90 days and @ 8.50% thereafter and on all over dues, interest @ 10%.
01 What is the amount that the Bank can allow as PCL to the exporter against the given export order,
considering the profit margin of 10% and insurance and freight cost of 12%?
a) Rs.2200000 b) Rs.1650000 c) R6.1485000 d) Rs.1291950
02 What is the amount of post shipment advance that can be allowed by the Bank under foreign bills
purchased, for the bill submitted by the exporter?
a) Rs.19,80,000 b) Rs.17,75,925 c) Rs.19,73,250 d) Rs.21,92,500
03 What will be the period for which the Bank charges concessional interest on DP bills, from date of
purchase of the bill?
a) 90 days b) 25 days c) 31 days d) Up to date of realization
04 in the above case, when should the bill be crystallized (latest date), if the bill remains unrealized
for over two months, from the date of purchase-(ignore holidays)?
a) On 30.4.2011 b) On 24.4.2011 c) On 24.5.2011 d) On 31.5.2011
05 What rate of interest will be applicable for charging interest on the export bill at the time of
realization, for the days beyond Normal Due Date (NDD)?
a) 8% b) 7% c) 7.5% d) 10%
Ans. 1-d 2-c 3-b 4-c 5-d Explanations:
1. FOB value =
CIF Value i.e. 50000x43.5 = 2175000
Deduct Insurance & freight 12% of 2175000 = 261000
Balance = 1914000
Deduct profit margin 10% of 1914000 = 191400
Balance = 1722600
Less Margin 25% = 430650
PCL = 1291950
2. 45000 x 43.85 = 1973250
3. Concessional• rate will be charged for normal transit period of 25 days and there after overdue
interest will be charged.
4. Crystallisation will be done when the bill becomes overdue after 25 days of normal transit period. Date of
overdue will be 25.4.2011. if bill remains overdue, it will be crystalised within 30 days i.e. up to 24.5.2011.
5. Rate of interest will be 10% as the overdue interest is stated as 10% in the question.
CASE STUDIES ON NPA PROVISIONING
Case-1
International Bank has provided the following information relating to its advance portfolio as on Mar 31, 2010: Total
advances P_s. 40000 cr. Gross NPA 9% and Net NPA 2%. Based on this information, answer the following questions:
01 Considering that all the standard loan accounts represent general advances, what is the
amount of provision for standard loan accounts:
a) Rs. 160 cr b) Rs. 151.90 cr
c) Rs. 145.60 cr d) Rs. 141.50 cr
02 What is the provision on NPA accounts:
a) Rs. 3600 cr b) Rs. 3200 cr
c) Rs. 2800 cr
d) Incomplete information. Cannot be calculated
03 What is the total amount of provisions on total advances, including the standard accounts:
a) Rs. 3612.30 cr b) Rs. 2945.60 cr
c) Rs. 2840.20 cr
d) Incomplete information. Cannot be calculated
04 What is the amount of gross NPA:
a) Rs. 4000 cr b) Rs. 3600 cr
c) Ps. 3200 cr d) Rs. 2800 cr
05 What is the amount of net NPA:
a) Rs. 800 cr b) Rs. 1000 cr
c) Rs. 1200 cr d) Incomplete information
06 What is the provision coverage ratio for NPA:
a) 70% — — b) 74.3%
c) 75.2% d) 77.85
07 What is the minimum amount of provisions to be maintained by the bank to meet the
provisioning coverage ratio of 70%;
a) Ps. 3600 cr b) Rs. 3200 cr
c) Rs. 2880 cr d) Rs. 2520 cr
Answers: 1-c 2-c 3-b 4-b 5-a 6-d 7-d
Explanations:
Que-1: Standard account Total = 40000 cr — 9% NPA = 3600 cr. = 40000 — 3600 = 36400 cr. Provision at
0.4% = 36400 x 0.4% = 145.60 cr
Que-2: Provision on NPA = Gross NPA 9% - net NPA 2% = 7% i.e. 40000 x 7% = 2800 cr
Que-3: Prevision on—NPA = Gross NPA 9% - net NPA 2% = 7% i.e. 40000 x 7% = 2800 cr. Provision on
standard account Rs. 145.60 cr. Hence total provision = 2945.60 cr
Que-4: 40000 x 9% = 3600 cr
Que-5: 40000 x 2% = 800 cr
Que-6: Total provision on NPA/Gross NPA = 2800/3600 = 77.8%
Que-7: Gross NPA x 70% = 3600 x 70% = 2520 cr
Case-2
International Banks provided following information about its-NPA account as on Mar 31, 2012.
Total loans — Rs. 40000 cr. Standard accounts Rs. 38000 cr induding direct agriculture and SME loans of Rs. 10000
cr. Sub-standard Rs. 800 a- out of which unsecured sub-standard Rs. 200 cr. Doubtful up to 1 year Rs. 800 a-,
Doubtful above 1 year up to 3 years Rs. 200 cr and doubtful above 3 years Rs. 120 cr and loss accounts Rs. 80 cr. All
doubtful loans are fully secured.
01 What is the provision on standard accounts:
a) Rs. 25 cr b) Rs. 112 cr
c) Rs. 137 cr d) Rs. 151 cr
02 What is the amount of provision on sub-standard loan accounts:
a) Rs. 120 cr b) Rs. 140 cr
c) Rs. 160 cr d) Rs. 240 cr
03 What is the amount of provision on doubtful loan accounts:
a) Rs. 400 cr b) Rs. 340 cr
c) Rs. 320 cr d) Rs. 260 cr
04 What is the total provision on NPA loan:
a) Rs. 420 cr b) Rs. 560 cr
c) Rs. 580 cr d) Rs. 620 cr
05 What is the total provision on standard and NPA loans:
a) Rs. 813 cr b) Rs. 757 cr
c) Rs. 689 cr d) Rs. 716 cr
06 What is the provision coverage ratio of the bank:
a) 78.5% b) 30.8%
c) 31.0% d) 34.1%
07 If the security value in secured sub-standard accounts is Rs. 500 cr, what will be the
provision on sub-standard accounts:
a) Rs. 90 cr b) Rs. 85 cr
c) Rs. 80 cr d) Rs. 75 cr
08 If security value in DF-1 category accounts is Rs. 600 cr, what will be amount of provision
for OF-1 category accounts:
a) Rs. 800 cr b) Rs. 600 cr
c) Rs. 350 cr d) Rs. 190 cr
09 If security value is Rs. 150 cr in DF-2 accounts, the provision shall be:
a) Rs. 110 cr b) Rs. 95 cr
c) Rs. 80 cr d) Rs. 75 cr
10 What is the percentage of gross NPA:
a) 8% b) 6%
c) 5% d) 4%
11 what is the amount of net NPA:
a) Rs. 2000 cr b) Rs. 1380 cr
c) Rs. 1170 cr d) Rs. 1080 cr
12 What is the percentage of net NPA:
a) 3.29% b) 3.41%
-
c) 3.50% 1:1)-4.01%
Answers:1-c 2-b 3-a 4-d 5-b 6-c 7-a 8-c 9-a 10-c 11-b 12-c Explanations:
Que-1: Provision on general accounts = 28000 x 0.4% = 112 cr + Provision on direct agriculture and SME accounts =
10000 x 0.25% = 25 c. Total provision = 112 + 25 = 137 cr
Que-2: Secured sub-standard accounts = 600 x 15% = 90 cr + Unsecured sub-standard 200 x 25% =
50cr. Total provision = 140 cr •
Que-3: DF-1 = 800 x 25% = 200 a + DF-2 = 200 x 40% = 80 cr + 120 x 100 = 120 cr. Total
provision = 200 + 80 + 120 = 400 cr
Que-4: Sub-standard = 140 + DF = 400 + loss accounts = 80 cr Total = 140 + 400 + 80 = 620 cr
Que-5: Standard accounts = 137 cr + NPA loans Rs. 620 cr. Total provision-= 757 cr
Que-6: 620/2000X100 =-37.9%
Que-7: In secured sub-standard accounts, secured and unsecured balance is not to be differentiated for
provisioning purpose. Hence the provision shall be 600 x 15% = Rs. 90 cr
Que-8: Provision on secured portion 25% and on unsecured portion 100%. Hence provision shall be as under:
Secured accounts = 600 x 25% = 150 a- Unsecured 200 x 100 = 200 x 100 = 200 cr
Total provision = 150 + 200 = 350 cr
Que-9: Secured = 40% and unsecured = 100%
Secured account = 150 x 40 = 60 cr Unsecured = 50 x 100 = 50 a
Total = 60 + 50 = 110 cr
Que-10: 2000 a/40000 a = 5%
Que-11: Gross NPAs - provision = 2000 - 620 cr = 1380 cr
Que-12: Net advances =7;0000 - 60 = 39380. Net NPA = 1380. NPA %age = 1380/39380 = 3.5%
Case- 3
International Bank has following information relating to NPA loans portfolio on its records as on Mar 31, 2012.
Sub-standard secured loans - Rs. 1200 cr (security value Rs. 1000 cr),
Sub-standard unsecured loans - Rs. 200 a (security value Rs. 18 a),
Doubtful up to 1 year loans - Rs. 800 cr (security value Rs. 600 cr),
Doubtful above 1 year up to 3 years loans - Rs. 800 cr (security value Rs. 400 cr),
Doubtful,above 3 years loans - Rs. 800 a (security value Rs. 200 cr),
Loss loans - Rs. 200 cr (security value Rs. 18 cr),
Total advances - Rs. 40000 cr. Total NPA Rs. 4000 cr
On the basis of given information, answer the following questions:
01 What is the percentage of gross NPA:
a) 10% b) 11%
C) 12% d) 8%
02 What is the amount of provision for sub-standard account:
a) Rs. 320 cr b) Rs. 240 cr -
c) Rs. 230 cr d) Rs. 180 cr
03 What Is the amount of provision for doubtful loans:
a) Rs. 1710 cr b) Rs. 1660 cr
c) Rs. 1520 cr d) Rs. 1490 cr
04 What is the amount of total provisions:
a) Rs. 1640 cr b) Rs. 1760 cr
c) Rs. 1840 cr d) Rs. 2140 cr
05 What is the percentage of net NPA:
a) 5.18% b) 4.91%
c) 4.65%
d) Cannot be calculated on the basis of given information
06 What is the provision coverage ratio:
a) 51.5% b) 53.5%
c) 57.9% d) 64.5%
Answers: 1-a 2-c 3-a 4-d 5-b 6-b
Explanations:
Que-1: Gross NPATTotal advances = 4000/40000 x 100 = 10%
Que-2: 1200 x 15% + 200 x 25% = 180 + 50 = 230 cr
Que-3: DF-1 600 x 25% = 150 cr unsecured portion 200 x 100 = 200 cr Total = 350 cr
DF-2 400 x 40% = 160 cr i- unsecured portion = 400 x 100 = 400 cr Total = 560 cr
DF-3 = 800 crx100% = 800 cr Total provision = 350 + 560 + 800 = 1710 cr
Que-4:Total provision = Sub-standard = 230 cr, Doubtful 1710 cr, Loss = 200 cr. Total provision Rs. 2140 cr
Que-5: Net NPA = 4000 – 2140 = 1860 -
Net advance = 40000 – 2140 = 37860
Net NPA/Net Advances 1860/3.7860 = 4.91%
Que-6: 2140/4000 = 53.5%
14. ABCD OF MSME

1.Keynote address delivered by Shri S. S. Mundra, Deputy Governor, Reserve Bank of India at the 2nd CII
National Conference on MSME Funding held in New Delhi on August 23, 2016 ).
Thank you for inviting me to deliver the keynote address at this second edition of the Conference on
MSME Funding. I compliment the CII for having chosen a very relevant theme for the Conference
‘Propelling MSME Growth through Enhanced Financial Access and Support’. The theme lays emphasis on
two crucial pillars that are pertinent for the sector i.e. enhancing financial access and ensuring adequate
support to enable MSMEs to attain faster growth.
2.It is universally recognized that small businesses are the best vehicles for generate jobs. A IFC
/Mckinsey Study has estimated worldwide MSME population at 420 to 510 million, of which 360 to 440
million alone, are in emerging markets. The report also estimates that the formal SMEs contribute up to
45 percent of total employment and up to 33 percent of national income (GDP) in emerging economies
and these numbers could be significantly higher when informal SMEs are included. The Asia SME Finance
Monitor 2014 published by the Asian Development Bank has estimated that 96% of all enterprises in the
Asian region fall under the MSME category, absorb close to 2/3rd of the working force and contribute to
about 42 % of GDP.
3. According to MSME Ministry’s Annual Report for 2015-16, MSME sector in India today is a network of 51
million enterprises providing employment to 117.1 million persons and contributing 37.5 per cent of
India’s GDP2. The development of this sector is, therefore, crucial in generating significant levels of
employment across the country, more so since we have a large young and educated population which is
on lookout for employment.
MSME – Significance beyond job creation
4. While job creation is certainly critical, small businesses play a far greater role than just providing
employment. Let me state two key contributions of MSME sector here.
5.One, the MSME sector is a nursery for entrepreneurship and a school for innovation. Countless medium
and large corporates in India have evolved out of being micro and small sometime in not so distant past. I
am sure many in the audience here, who own fairly large businesses today, would have cut their teeth in
business through the route of micro and small enterprises.
6. Secondly, MSME sector is crucial for the success of the national agenda of Financial Inclusion. Let me
explain. Normally, when we talk about financial inclusion, we do so largely from the perspective of an
individual or at best a household. However, to my mind, universal financial inclusion cannot be considered
to have been achieved unless it is ensured that the micro and small businesses are financially included.
Credits to these small family run or individual run entities from the formal financial channels would make
these businesses sustainable and help them move out of poverty and propel them to a better quality of
life.
7. The surmise that I am trying to drive at is that if this is the sector that is the bulwark for such critical
developmental paradigms, there are compelling enough reasons for all stakeholders- be they the
Associations, the Financial Institutions, the regulators or the Government, to put all their might together
in a convergent fashion so that the right environment is created to propel growth of MSMEs in our
country.
8. For achieving this objective, there is a need to create an ecosystem which can facilitate handholding
and nurturing of MSME units particularly at the nascent stages. Also, there is a need to eliminate a host of
impediments – of permits, of inspections, of red tape and provide a set of enablers – skill development,
infrastructure, markets, technology etc. However, of all the enablers, probably none is more important
than Credit. The IFC/Mckinsey has estimated the credit gap for formal and informal MSMEs worldwide at
around $ 3.9 trillion globally, of which $2.1 to 2.6 trillion is in emerging markets.
The ABCD of Credit

9. As I said, credit is perhaps the most critical component for MSME entrepreneurs. Provision for Credit is
essentially dependent on four pivotal issues which I would call ‘ABCD’ of credit. Let me take you through
each of them and also explain what we are doing to iron out these issues.
a) The Á of Credit –Access/Availability

10. The 4th All India survey of MSMEs states that close to 90 per cent of MSMEs are dependent on
informal sources, which by any standards is a worrisome figure. Since that survey, some headway must
have been made in improving MSMEs’ access to formal financial channels; however, it still remains a
challenge. The public sector banks today have close to 3000 specialized branches which specialize in
lending to MSME units. Private sector banks have built up products and processes, which enable quick
disbursal of loans. Most banks have switched over to centralized credit sanctioning, which enables better
turnaround time. Many others have increased the credit limits to the field level functionaries. While these
steps have improved access, there is still a huge unmet demand for credit for MSMEs. (There is a total
finance requirement of INR 32.5 trillion ($650 billion) in the MSME sector, which comprises of INR 26
trillion ($ 520 Billion) of debt demand and INR 6.5 trillion ($130 Billion) of equity demand).As per
provisional data for period ended March 2016, total outstanding loan of the banking system to MSME
sector stood at around 11.1 trillion rupees in 20.6 million loan accounts. Contrast this to the estimated
need of INR 26 trillion and number of MSMEs at 51 million.
11. An important piece of the problem is adequacy of banking outlets. Small entrepreneurs are spread
across remote locations in the country where physical bank branches are not available. Also, the banking
correspondent mechanism is yet to mature to a level where they can play a key role in credit disbursal.
Second and perhaps a more import dimension is availability of credit at a time when it is required by the
entrepreneur. Ability of small entrepreneurs to withstand life cycle shocks is extremely limited and hence
availability of timely credit becomes critical for their survival. The formal financial system, due to a variety
of reasons, which may include cumbersome procedures, lack of understanding of the business model,
inability of the entrepreneur to meet the requirements of the banks etc., is unable to meet this immediate
need of the entrepreneur.
b) ‘B’- Banks and Business

12. ‘B’ in the ‘ABCD’ paradigm of credit fundamentally refers to the information asymmetry between the
two Bs – Banks and Business.
The United States Agency for International Development (2009) defines a financially literate SME
owner/manager as “someone who knows what are the most suitable financing and financial management
options for his/her business at the various growth stages of his/her business; knows where to obtain the
most suitable products and services; and interacts with confidence with the suppliers of these products
and services. He/she is familiar with the legal and regulatory framework and his/her rights and recourse
options.”
13.I don’t think that majority of the MSME entrepreneurs in the country today meet the criterion.
Financial literacy in the context of a MSME focuses on an individual’s ability to translate financial literacy
concepts to business needs. Financial literacy is essential for effective money management and low levels
of financial literacy hinder the understanding of available financial products and services. MSE
entrepreneurs are also constrained by lack of operational skills, accounting and finance acumen, business
planning etc. which underscores a need for facilitation by banks/other agencies.
14. However, it is not a one way street. Large-scale retirements in banks in recent years have also
adversely impacted the collective skill-sets available at the field level in understanding, appraising and
monitoring the MSME loan portfolio. The poor underwriting skills leads to avoidable under or over
financing, which can have a telling effect on the health of the MSME units, particularly in adverse life cycle
situations.
c) ‘C’- Collateral Requirements

15. The formal financial institutions particularly banks consider lending to MSMEs as highly risky since the
entrepreneurs often do not possess adequate collateral to support the credit. Very often, the loans are
rejected, despite the project prima facie, being feasible. While there are several dispensations to tide over
the problem, the credit culture has not matured enough to a level existing in developed economies where
lending is done against the assets of the firm including its movable assets. This also necessitates that we
build up strong financial infrastructure, which would support the banks in lending to these sectors without
worries and using all types of assets available to secure the loan. It is also pertinent for banks to realise
that though the loan to the individual entities in the sector may be riskier on a solo basis, overall on a
portfolio level, these are less vulnerable than loans to corporate.
d) ‘D’- Documentation
16. Many of the MSMEs, particularly the Micro units, do not have adequate documentation to match the
rigours of a formal financial system. Absence of documentation drives the small entrepreneurs to informal
sources that are willing to provide credit with minimum documentation. Further, a vast majority of the
MSMEs are informal, which brings down the credit score of the entrepreneur and hinders the ability of the
formal financial system to lend to them. Banks, on their part will need to leverage on modern technology
algorithms and Big data so that they can differentiate between a good borrower and a not so good one
even in the absence of conventional documentation.
17. Having analysed various impediments in finance to the sector let me dwell on some of the steps
taken by RBI, Government of India and other Apex institutions in bridging these gaps.
(i) Access/ Availability

RBI has initiated several measures to improve the availability of banking services, especially in the rural
and far-flung areas where access to formal finance is arduous.
18. New institutions: As you are aware, two new universal banks have started operations while in-
principle approval has been granted to 10 entities to set up Small Finance Banks that would primarily
focus on lending to unserved and underserved sections including small business units, small and marginal
farmers, micro and small industries and unorganized
sector entities. These small finance banks have been mandated to extend 75 per cent of its Adjusted Net
Bank Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL) by the Reserve
Bank. At least 50 per cent of its loan portfolio should constitute loans and advances of up to Rs. 25 lakh.
Many of the SFBs have prior experience of working with small businesses as MFIs/NBFCs and we believe
that they will be able to bring in technology backed innovative last mile practices to serve their
customers.
19. Increased branch penetration/ Specialized branches: RBI has advised banks to set up ‘brick and
mortar’ branches in villages with population of more than 5000 in a phased manner. Coupled with a more
mature Banking Correspondent mechanism, this would give considerable fillip in meeting the banking
needs of the MSMEs particularly in rural areas. Besides, creating presence of physical branch, there is
also a need to have large number of bank officials with appropriate skill sets and knowledge to handle
the life cycle needs of the small businesses. Already, Public Sector banks have established specialized
MSME branches in every district to cater to the needs of the small businesses. We are already working
towards improving the skill sets and entrepreneurial sensitivity of the field level functionaries.
20. P2P lending: New players have entered the MSME lending landscape in form of P2P companies. These
entities use an online platform to match lenders with borrowers to provide unsecured loans and mostly for
receivables financing. P2P lending has great potential as an alternative form of low-cost finance as it can
reach to the needy where formal sources are unable to reach or unwilling to lend. RBI has been mindful of
a need to regulate these entities without stifling their ability to innovate and is currently in the process of
issuing final guidelines on P2P lending.
21. Policy intervention for Life Cycle Issues: We have advised the banks to keep a provision for
additional credit limits (Standby Credit Facility for term loans and an additional provision within the overall
working capital limits) in order to provide timely financial support to Micro and Small enterprises facing
financial difficulties during their lifecycle. Banks have also been advised to carry out mid-term review of
regular working capital limits and fix up timelines for credit decisions. I am happy to say that most banks
have put in place similar provisions in the last one year or so.
22. Co-origination of loans: While several steps have been taken to address the problems related to
accessibility, there are certain structural problems which would take their own sweet time in getting
sorted out. One of this is the issue of reaching the last mile. Much as we have encouraged the banks to
establish brick and mortar branches across remote villages, we must be conscious that they would always
be driven by viability assessments/
cost considerations. One possible solution for this problem could be convergence of efforts between banks
on one hand and the NBFCs, MFIs on the other, who have ‘feet on the ground’ in such locations, better
understanding of the local conditions and business viability, better knowledge about the credit worthiness
of individuals, their repayment capabilities etc. Could we envisage a framework for co-origination of
loans by banks and the NBFCs/MFIs with risk participation? While it would ensure skin in the game
for both parties, it would benefit the entrepreneurs in terms of cost of credit, which on account of blending
could be substantially lower. This could probably be the most ideal structure to serve the micro
enterprises who are the most deprived in terms of availability of credit.
(ii) Banks and Business
23. Let me now turn my focus to steps for bridging the information asymmetry between the banks
and the businesses. As I mentioned earlier, this is not a one-way street. Not only are the small
entrepreneurs often ignorant about banking products and practices, several bankers have little
understanding of the lifecycle credit needs of small businesses. Towards covering this base, RBI has
started a capacity building initiative called the National Mission for Capacity Building of Bankers for
financing MSME Sector (NAMCABS) in a mission mode. The field level functionaries must appreciate the
importance of two critical pillars of financing MSME sector viz., timeliness and adequacy of credit. I am
happy to state that close to 3300 officials of the banks have undergone this programme in the last one
year.
24. Credit Counsellors : For bridging the information asymmetry on the MSME borrowers side, RBI is
initiating a process for putting in place a framework for accreditation of credit counsellors who are
expected to serve as facilitators and enablers for micro and small entrepreneurs. Since MSMEs are
typically enterprises with little credit histories and with inadequate expertise in preparing financial
statements, credit counsellors will assist the borrowers in preparing their project reports and also help
banks make better informed credit decisions.
25. Revival and Rehabilitation of MSMEs: Another key step in the direction of supporting the firms in
distress is the issuance of guidelines on the Framework on Revival and Rehabilitation of MSMEs, which
provides an institutionalized framework for rehabilitation of enterprises which are potentially viable, but
are under temporary duress. The Framework provides for a structured mechanism, which could be
triggered either by the banker or by the entrepreneur at the first signs of stress. The problem resolution is
scaled up to a committee with a time bound schedule. I see this as a very powerful tool and urge upon
the bankers to get this process rolling at the earliest.
(iii) The difficult ‘C’s -Credit and Collateral

26. The issue of finding the right balance in securing a loan without pushing the borrower to informal
sector has been a bugbear for the banking system. This is sought to be addressed through creation and
development of right institutional structures. Let me delve upon some of these efforts:
27. Movable Asset Registry: Movable assets, as opposed to fixed assets such as land or buildings, often
account for most of the capital stock of private firms and comprise an especially large share for micro,
small and medium-size enterprises. Hence, movable assets are the main type of securities that firms can
pledge to obtain bank financing. I am happy to state that CERSAI, in active coordination with Government
of India and Reserve Bank has established the movable asset registry, which when mature would have a
multiplier effect in lending to the sector.
28. TReDS: In order to solve the problem of delayed payment to MSMEs, RBI has licensed three entities
for operating the Trade Receivables Discounting System (TReDS). The system would facilitate the
financing of trade receivables of MSME enterprises from corporate and other buyers, including
government departments and public sector undertakings (PSUs) through multiple financiers. The
objective is to create Electronic Bill Factoring Exchanges which could electronically accept and settle
bills so that MSMEs could encash their receivables without delay. It is expected that the TReDS will
commence operations within this current fiscal. It would be important that the use of TReDS is
made mandatory for, to begin with corporate and PSUs and later for the Government
departments. I would urge the Chambers and the MSME Ministry to proactively examine this
aspect as success of TReDS initiative can be a game changer for the sector.
29. Utility of the Credit Guarantee Scheme: Realizing the problems of small borrowers in posting
collaterals, RBI has asked the banks not to insist on collateral in case of loans up to Rs 10 lakh extended
to units in the MSE sector. Also, Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)
has been set up to encourage the Member Lending Institutions to extend credit based on the viability of
the proposal rather than insisting on security or surety. Based on practical experience however, I tend to
believe that these provisions have not led to desired outcomes. Let me elaborate.
On one hand, the guideline on collateral-free loans has led banks to at times devise ways of denying
credit to the MSMEs borrowers, while on the other extreme, the provision for credit guarantee has
potential to cause deterioration in quality of credit appraisal and due diligence, consequently straining
the resources of the CGTMSE. Clearly, both outcomes are undesirable. I would rather advocate that
borrower is compensated by way of a better pricing in loan for the availability of collateral. Further, I
would also like to see the CGTMSE to evolve a framework for making the pricing risk-based rather than
having a uniform risk premium related to the past performance and quality of individual portfolios.
Eventually, this activity should also move to an open market system.
(iv)The Cumbersome ‘D’- Documentation
31. The absence of credit history and the need for documentation often pushes the micro
entrepreneur away from conventional banking channels to the more informal sectors. This has to be
addressed through a constant process of simplification of procedures and more importantly by leveraging
technology.
32. Udyami Mitra portal set up by SIDBI leverages IT architecture of Stand-Up Mitra portal and
aims at instilling ease of access to MSMEs’ financial and non-financial service needs. The Portal, as a
virtual market place endeavours to provide 'End to End' solutions not only for credit delivery but also for
the host of credit-plus services by way of hand holding support, application tracking, multiple interface
with stakeholders (i.e. banks, service providers, applicants).We could see development of more such
technological interfaces in the coming days making it easier for MSME entrepreneurs to borrow from the
banking system. RBI is committed to support such initiatives with appropriate safeguards and consumer
protection measures.
33. Role of Associations: The entrepreneur and Industry bodies have a significant role to play in
linking, maintaining and sustaining the borrower-banker relationship. This could be in handholding,
enabling and capacity building of the new entrepreneurs. As you are aware, the BCSBI has formulated a
Code of Bank's Commitment to Micro and Small Enterprises for voluntary adherence by the banks. The
industry associations must also spread awareness about various facilities available/guidelines issued by
the regulators to bridge the information asymmetry.
Conclusion
34. Let me conclude by going back to the theme of propelling growth of MSMEs. In using the term
‘propel’ you have underlined the sense of urgency that is required in this area. Our demographics compel
us to push forward this agenda and make quantum jumps so that entrepreneur can start and drive
businesses without worrying about finance. We are committed to this paradigm shift and the slew of
measures that are being taken by the RBI,
*BEST OF LUCK *

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Banking Made Easy

Sanjay Kumar Trivedy (Divisional Manager )

1. About Certificate. Examination in SME Finance for Bankers 02-03

5. Setting up SME 37-48

6. SMEs: Policy, Regulatory and Legal Framework 48-55

9. SME Development 104-105

10. Clusters and Cluster Development 106-114

11. SME: Recovry & Rehabilitation 114-131

12. Future of SMEs 132-133

13. Memory Based Recalled Question 134-146

14. Test Your Self : Practice Test 147-180

15. Case Studies 181-188

16. ABCD of MSME Credit 188-192

IIBF Certificate Examination

MEDIUM OF EXAMINATION: Examination will be conducted in English only.

Cut-off Date of Guidelines / Important Developments for Examinations

QUESTIONS MODELS : TYPES OF QUESTIONS

Type – C: MULTIPLE CHOICE – APPLIED THEORY – QUES. & ANS

PERIODICITY AND EXAMINATION CENTRES

PROCEDURE FOR APPLYING FOR EXAMINATION

Examination Fees Exclusive SERVICE TAX @15.50%

2. SMEs: Policy, Regulatory and Legal Framework

3. Institutional Framework & SME Financing

4. Financing Options & Modes

6. Clusters and Cluster Development

HIGHLIGHTS OF THE SIXTH MSME ECONOMIC CENSUS

Measures Taken For MSMEs Growth

MSMEs and the Future of India’s Economy

PRIORITY SECTOR LENDING

Eligible advances extended in India against the incremental FCNR (B)/NRE

Terms and Conditions for Priority Sector Advances

Other priority sector Up to Rs.25000 : nil

Agro clinics & business centres

SISRY Not to be obtained

PROCESSING/INSPECTION FEE, SERVICE CHARGE, PENAL INIT IN PRIORITY SECTOR ADVANCES

Self Help Groups

Targets for finance to Micro Enterprise & T K A Nair Committee Recommendations

Loan above Rs.50 lac to Rs.100 lac: 50%* 25.00

Composite Fee as % of Women, NE Others

For loan up to Rs.5 lac 0.75% p.a. 1% p.a.

Prime Minister's Employment Generation Programme (PMEGP)

OPERATIONAL GUIDELINES on MSEs Collateral security

Banks' Code for MSEs

CREDIT CARD FOR MSEs

GENERAL CREDIT CARD SCHEME 2013

LAGHU UDHAMI CREDIT CARD (LUCC) SCHEME

SWAROzGAR CREDIT CARD SCHEME Scheme prepared by NABARD is implemented by

Start Up India Scheme

Stand Up India Scheme

COMMITTEES ON ADVANCES & PRIORITY SECTOR

1.1 Short Title and Commencement

1.3 Definitions/ Clarifications

2 Micro, Small & Medium Enterprises Development (MSMED) Act, 2006

2.2 Priority Sector Guidelines for MSME sector

2.2.1 Manufacturing Enterprises

2.2.2 Service Enterprises

2.3 Khadi and Village Industries Sector (KVI)

4 Common guidelines / instructions for lending to MSME sector

4.1 Issue of Acknowledgement of Loan Applications to MSME borrowers Banks to

4.3 Composite loan

4.4 Revised General Credit Card (GCC) Scheme

4.8 Framework for Revival and Rehabilitation of MSMEs

5.1 Specialised MSME branches