The directions have been issued by the Reserve Bank Of India in the name of Lending to Micro, Small & Medium Enterprises (MSME) Sector] Directions, 2017. The provisions of such Directions are applicable to every Scheduled Commercial Bank licensed to operate in India by the Reserve Bank of India.
Loans to MSME Sector
The MSMED Act 2006 was enacted and notified the same vide Gazette Notification dated June 16, 2006. Subsequently, RBI issued a circular ref. RPCD.PLNFS. BC.No.63/06.02.31 /2006-07 dated April 4, 2007, and notified the changes. Thereupon the same has been adopted for purposes of bank credit there was 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. So now, the manufacturing as well as rendering the services is eligible for bank finance. Further, The Reserve Bank Of India has issued a Master Direction FIDD.MSME & NFS.12/06.02.31/2017-18 July 24, 2017 (Updated as of April 25, 2018) covering the credit line of the MSME sector.
(a) Manufacturing Enterprises :Subject to the definition in MSMED Act, 2006, 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 crores; 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 the 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– 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 crores; and
(iii) A medium enterprise is an enterprise where the investment in equipment is more than Rs. 2 crores but does not exceed Rs. 5 crores.
An Auditor should check whether:
(a) That there is an acknowledgment of loan application along with a running serial number is recorded on the application form as well as on the acknowledgment to MSME borrowers have been given mandatorily;
(b) That there is no collateral has been accepted for loans up to` 10 lakh to units in the MSE sector, and under the Prime Minister Employment Generation Programme (PMEGP) administered by KVIC. and
(c) That the loan has been covered under CGTSME and premium has been paid
(d) A small enterprise is an enterprise where the investment in equipment is more than Rs.10 lakh but does not exceed Rs. 2 crores; and
(e) A medium enterprise is an enterprise where the investment in equipment is more than Rs. 2 crores but does not exceed Rs. 5 crores.
(f) Further, Ministry of MSME, Government Of India, Office Memorandum (OM) F. No. 12(4)/2017-SME dated March 8, 2017, clarified that for ascertaining the investment in plant and machinery for classification of an enterprise as Micro, Small, and Medium, the following documents could be relied upon:
(i) A copy of the invoice of the purchase of plant and machinery; or
(ii) Gross block for investment in plant and machinery as shown in the audited accounts; or
(iii) A certificate issued by a Chartered Accountant regarding the purchase price of plant and machinery.
Loans to Priority Sector
The priority sector advances cover the Agriculture sector and MSME sector. Thus, Export credit under agriculture and MSME sectors also falls under PSL in the respective categories viz. agriculture and MSME. The Export credit includes pre-shipment and post-shipment export credit (excluding off-balance sheet items) as defined in Master Circular on Rupee / Foreign Currency Export Credit and Customer Service to Exporters issued by Department of Regulation, RBI vide DBR No.DIR.BC.14/04.02.002/2015-16 dated July 1, 2015, and updated from time to time.
An Auditor should check whether:
(a) a register/electronic record has been maintained by the bank, wherein the date of receipt, sanction/rejection/disbursement with reasons thereof, etc. have been recorded,
(b) an acknowledgment for loan application mentioning a time limit within which the bank communicates its decision in writing to the applicant has been issued;
(c) such register/record is produced to all inspecting agencies, comment if no such records made available; and
(d) no loan-related and ad hoc service charges/inspection charges have been levied on priority sector loans up to ` 25,000. (In the case of eligible priority sector loans to SHGs/JLGs, this limit will be applicable per member and not to the group as a whole)
(e). Master Direction FIDD.CO.Plan.5/04.09.01/2020-21 dated September 4, 2020)
Loans for Education
Loans to individuals for educational purposes, including vocational courses, not exceeding ₹ 20 lakh are eligible for priority sector classification.
An Auditor should check whether:
(a) loans up to ` 10 lakh to individuals for educational purposes including vocational courses irrespective of the sanctioned amount, has been considered as eligible for priority sector;
(b) Has been disbursed to educational institutions directly and prospectus and copies of reports are held.
(c) Central sector interest subsidy (CSIS) has been claimed timely in eligible cases; and
(d) Subsidy received from Government department under CSIS in the account is accounted for appropriately.
(e) RBI Master Direction FIDD.CO.Plan.1/04.09.01/2016-17 July 7, 2016.
Non-Performing Assets (NPA)
An asset, including a leased asset, becomes a non-performing asset when it ceases to generate income for the bank. A non-performing asset (NPA) is a loan or an advance where;
i. interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan,
ii. the account remains ‘out of order’ as indicated in paragraph 2.2 below, in respect of an Overdraft/Cash Credit (OD/CC),
iii. In case of interest payments, banks should classify an account as NPA only if the interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter.
COVID-19 – 2020 Regulatory Package
The Reserve Bank Of India has come up with a notification RBI/2019-20/244 DOR.No.BP. BC. 71/ 21.04.048/ 2019-20 Dated May 23, 2020, referring the circulars DOR.No. BP.BC.47/ 21.04.048 /2019-20 dated March 27, 2020 and DOR. No. BP. BC.63/ 21.04.048/ 2019-20 dated April 17, 2020, announcing certain regulatory measures in the wake of the disruptions on account of the COVID-19 pandemic and the consequent asset classification and provisioning norms and Rescheduling of Payments for term loans and Working Capital. RBI directed the bankers to extend the moratorium up to August 31, 2020, on payment of all instalments in respect of term loans. Accordingly, the repayment schedule for such loans as also the residual tenor will be shifted across the board. Interest shall continue to accrue on the outstanding portion of the term loans during the moratorium period. and in respect of accounts classified as standard as of February 29, 2020, even if overdue, the moratorium period, wherever granted in respect of term loans, shall be excluded by the lending institutions from the number of days past due for the purpose of asset classification under the IRAC norms. The asset classification for such accounts shall be determined on the basis of revised due dates and the revised repayment schedule.
RBI – Expiry of COVID-19 Regulatory Package
The Reserve Bank of India has come up with a notification RBI/2021-22/17DOR. STR. REC. 4/21.04.048/2021-22 dated April 7, 2021 as follows.
The Hon’ble Supreme Court of India has pronounced its judgment in the matter of Small Scale Industrial Manufacturers Association vs UOI & Ors. and other connected matters on March 23, 2021. In this connection, it is advised to Refund/adjustment of ‘interest on interest all borrowers, including those who had availed of working capital facilities during the moratorium period, irrespective of whether moratorium had been fully or partially availed, or not availed, in terms of the circulars DOR. No. BP.BC.47 /21.04.048/ 2019-20 dated March 27, 2020, and DOR.No.BP.BC.71/21.04.048/2019-20 dated May 23, 2020 (“Covid-19 Regulatory Package and the Lending institutions shall disclose the aggregate amount to be refunded /adjusted in respect of their borrowers based on the above reliefs in their financial statements for the year ending March 31, 2021
Asset classification of borrower accounts by all lending institutions following the above judgment shall continue to be governed by the extant instructions as clarified below.
i. In respect of accounts that were not granted any moratorium in terms of the Covid19 Regulatory Package, asset classification shall be as per the criteria laid out in the Master Circular – Prudential norms on Income Recognition, Asset Classification, and Provisioning pertaining to Advances dated July 1, 2015, or other relevant instructions as applicable to the specific category of lending institutions (IRAC Norms).
ii. In respect of accounts that were granted moratorium in terms of the Covid19 Regulatory Package, the asset classification for the period from March 1, 2020, to August 31, 2020, shall be governed in terms of the circular .No.BP.BC. 63/21.04.048 /2019-20 dated April 17, 2020, read with circular DOR.No.BP.BC.71/21.04.048/2019-20 dated May 23, 2020. For the period commencing September 1, 2020, asset classification for all such accounts shall be as per the applicable IRAC Norms.