appendix i lp fy2015

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Appendix – I

LOAN POLICY – FY 2016

PARA NO.

CONTENTS PAGE NO.

1 OVERVIEW 3

1.1 PREFACE 3

1.2 FRAMEWORK OF THE LOAN POLICY 4

1.3 OBJECTIVES OF THE LOAN POLICY 5

1.4 OVERVIEW OF LOAN POLICY 6

1.5 VALIDITY/ AUTHORITY OF LOAN POLICY 6

2 CREDIT MANAGEMENT POLICY 7

2.1 PRODUCT MANAGEMENT 7

2.2 PROCESS MANAGEMENT 8

3 EQUITY & RISK CAPITAL ASSISTANCE 10 3.1 INTRODUCTION 10 3.2 PRODUCT PROFILE 11 3.3 DUE DILIGENCE 12 3.4 INDIRECT ASSISTANCE 12 3.5 PARTNERSHIP FOR START-UP ASSISTANCE 13 3.6 “smallB” BRANCHES FOR INNOVATION FINANCE 13 4 ASSISTANCE FOR SERVICE SECTOR 13

4.1 INTRODUCTION 13 4.2 ELIGIBLE BORROWERS 14 4.3 THRUST BUSINESS AREAS 14 4.4 APPROACH TO FINANCING SERVICE SECTOR 14 5 ASSISTANCE FOR SUSTAINABLE DEVELOPMENT 15

5.1 INTRODUCTION 15 5.2 OBJECTIVES 16 5.3 THRUST BUSINESS AREAS : DIRECT FINANCE FOR SUSTAINABLE

DEVELOPMENT 16

5.4 SCHEMES OF ASSISTANCE FOR SUSTAINABLE DEVELOPMENT 18 6 ASSISTANCE FOR RECEIVABLE FINANCE 19

6.1 INTRODUCTION 19 6.2 THRUST BUSINESS AREAS 20 6.3 PRODUCT RATIONALISATION 21 7 INDIRECT LENDING 21

7.1 INTRODUCTION 21

7.2 ASSISTANCE TO STATE FINANCIAL CORPORATIONS (SFCs) 21

7.3 MONITORING OF SFCs 22

7.4 ASSISTANCE TO SCHEDULED COMMERCIAL BANKS 22

7.5 ASSISTANCE TO SCHEDULED COOPERATIVE BANKS (SCBs) & REGIONAL RURAL BANKS (RRBs)

22

7.6 ASSISTANCE TO SIDCs/SIICs 23 7.7 ASSISTANCE TO NBFCs 23 8 ASSISTANCE FOR INFRASTRUCTURE PROJECTS 23 9 WORKING CAPITAL ASSISTANCE 24

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10 SIDBI FOUNDATION FOR MICRO CREDIT (SFMC) 24 10.1 INTRODUCTION 24

10.2 MICRO FINANCE SECTOR UPDATE 24

10.3 FOCUS 25

10.4 PRODUCT PROFILE 25 11 CREDIT RISK MANAGEMENT 26

11.1 CREDIT RISK STRATEGY 26 11.2 RISK MEASUREMENT 27 11.3 RISK MITIGATION 28 11.4 EXTERNAL RATINGS 28 11.5 PRICING 28 11.6 RISK CATEGORISATION OF CUSTOMERS FROM AML PERSPECTIVE 29 11.7 MANAGEMENT OF ASSET CONCENTRATION 29 12 CONCLUSION 31

ANNEXURE – I: BENCHMARKS FOR SANCTION AS APPLICABLE FOR GENERAL PURPOSE TERM LOANS

32

ANNEXURE – II : TERM LOAN TO MFIs & LOAN TO NBFCs FOR ONLENDING TO MICRO ENTERPRISES/MISSING MIDDLE

34

ANNEXURE - III: HIGHER INVESTMENT GRADE RATINGS – SELECT SECTORS 38 ANNEXURE – IV: RATING GRADE-WISE EXPOSURE CAP 39 ANNEXURE – IV: EXPOSURE CAPS 40

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LOAN POLICY – FY 2016

1. OVERVIEW

1.1 PREFACE

The significant role played by the Micro, Small and Medium Enterprises [MSMEs] in the Indian Economy is well known. MSMEs are considered to be the nurseries for entrepreneurship, often driven by individual creativity and innovation, and make significant contributions to India’s gross domestic product [GDP], manufacturing output, exports and employment generation. The MSME sector is the second largest contributor to country’s GDP. The geographic distribution of the MSMEs is also more even. MSMEs are important for the national objectives of growth with equity and inclusion.

In order to address the challenges of the MSMEs to scale up their

performance and competitiveness, the Bank has adopted a multi-pronged approach to meet their requirement of capital, receivable finance, reduced energy consumption, infrastructure (in the cluster), etc., through various instruments/products of assistance.

The Bank has identified the following activities to be the thrust/niche business areas:

• Energy efficiency, clean technologies and sustainable financing

• Equity products like Risk Capital (including structured debt), contribution to funds, etc.

• Service sector

• Receivable finance and factoring services

• Indirect lending viz. refinance to banks/ Financial Institutions (FIs), resource support to public financial institutions (PFIs) and public sector undertakings (PSUs) benefiting MSME sector, etc.

• MSME linked infrastructure finance

• Loan facilitation and syndication

The business of the Bank has been divided into broad products/ business streams on the above lines. While the Bank will maintain its emphasis on financing niche areas, it shall continue to provide financial assistance to all eligible MSMEs to meet their various other

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needs including term lending, working capital financing [both fund based and non-fund based] and meeting other fund requirements.

1.1.1 The Bank has put in place risk assessment tools for credit rating which have enabled it to directly reach out to smaller customers in the MSME segment by cutting down the appraisal and processing time.

1.1.2 Micro, Small and Medium Enterprises Development [MSMED] Act,

2006 The definitions adopted for manufacturing and service sector activities under MSMED Act are as under:

Furthe

The activities being financed/to be financed by the Bank, would include enterprises eligible under the definition of MSMED Act, both manufacturing and service enterprises and also, other service sector projects as approved by the Bank with focused approach on the MSME linkages of the assisted projects. For manufacturing enterprises, a list of equipments to be excluded for ascertaining the eligible investment in plant and machinery is already notified under MSMED Act.

1.2 FRAMEWORK OF THE LOAN POLICY

1.2.1 The Policy lays down broad approach, which the Bank adopts in respect of different credit processes, credit risk management, control and monitoring and is supplemented by specific circulars, manuals, guidelines issued from time to time. The policy will be amended from time to time in the light of changing business and economic environment and will be reviewed annually. The focus of the Loan Policy 2016 is on quality asset growth, coupled with growth in income in each segment of business, maintaining the focus on customer needs.

Enterprise Category

Manufacturing (Original Investment in

P&M)

Services (Original Investment in

Equipment)

Micro Up to `25 lakh Up to `10 lakh

Small Upto `500 lakh Upto `200 lakh

Medium Upto `1000 lakh Upto `500 lakh

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1.2.2 Looking into the increasing competition and the resultant margin pressures, the Bank would also put in place a suitable strategy to rapidly develop and increase the size and scope of its portfolio for generating non-interest / fee based income. As regards indirect finance business, cautious dispensation of credit with regard to state level institutions would continue.

1.2.3 The Loan Policy covers rupee as well as forex lending, risk capital and micro finance operations of the Bank. Operations under Bank’s Treasury are excluded from the purview of this policy, as separate dispensation is required for Treasury operations.

1.2.4 The Bank would provide financial assistance to MSMEs for the eligible activities, irrespective of the nature of constitution of the enterprise. Accordingly, assistance could be extended by the Bank to an individual, proprietorship, association of persons, partnership firm, limited liability partnership, company, society or trust.

1.3 OBJECTIVES OF THE LOAN POLICY

The broad objectives of the Loan Policy of the Bank are outlined hereunder:

(i) To build and sustain a high quality credit portfolio well diversified in terms of clients, markets and products with an acceptable risk adjusted yield.

(ii) To establish a comprehensive credit strategy to fulfill the corporate mandate as per the SIDBI Act, 1989, amended from time to time, and undertake all such activities, directly or indirectly, that supports the MSME sector.

(iii) To encourage various functionaries to innovate and evolve competitive and need based products based on market requirements.

(iv) To promote inclusive growth through micro finance and risk capital.

(v) To strengthen the risk management systems for appropriate pricing of credit risks and ensure close monitoring of the credit portfolio so as to prevent fresh slippages into non-performing assets [NPAs].

(vi) To build strong alliances with intermediaries for tapping new business.

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1.4 OVERVIEW OF LOAN POLICY

The strategy for lending takes into account the Bank’s approach for developing a healthy credit portfolio, its management and risk mitigation. Accordingly, the Loan Policy of the Bank broadly covers the following broad aspects:

Credit Management Policy Business Policy of Verticals Credit Risk Management

There continues to be demand for indirect credit from the banking sector, albeit for short term. The strategy would be to raise resources competitively given the Bank’s unique position as the principal financial institution for the MSME sector and meet the credit demand from the banking sector, to the extent possible.

1.5 VALIDITY/ AUTHORITY OF LOAN POLICY

1.5.1 The Loan Policy is the principal document for the credit operations of the Bank, duly approved by the Board of Directors and is expected to serve as the guiding document for lending operations of the Bank.

1.5.2 This Loan Policy shall remain in force till the next revision is carried out and disseminated, which will be on annual basis.

1.5.3 The Regional Offices (ROs)/ Central Loan Processing Cells (CLPCs)/ Branch Offices (BOs) including XBOs are authorised to act upon this Policy on its issuance by Head Office (HO). Clarifications / further guidelines, if needed, would be issued by Risk Management Vertical (RiMV)/ concerned Business Vertical.

1.5.4 The Loan Policy guidelines will be applicable to all the credit facilities extended to various customers by different verticals.

1.5.5 The Bank will abide by all the guidelines, directives and advices of Reserve Bank of India as may be in force from time to time. The guidelines in this document should be read in conjunction with the operational guidelines on the various products/business lines and the circulars / master circulars / credit manual compiling the procedural aspects of credit appraisal, processing, sanction, documentation, etc.

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2. CREDIT MANAGEMENT POLICY The business development strategy would be supported by a prudent Credit Management Policy. The market demand to improve products & processes would be balanced with exercise of sufficient control on the credit delivery processes so that exercise of prudence is not sacrificed.

2.1 PRODUCT MANAGEMENT

2.1.1 Benchmarks for Sanction:

The benchmarks for sanction [BfS] as applicable to various products of the Bank are given in Annexure I. Relaxation cap has also been prescribed against BfS norms. Further, additional risk premium would also be charged with a cap on relaxation parameters. However, in respect of existing renewal at current level or reduced level as a part of exit strategy, delegated authority may relax the BfS norms suitably provided proper risk mitigants are put in place..

Apart from relaxation of BfS norms, the Bank would generally, not consider relaxation of eligibility criteria of the products.

2.1.2 Facilitation for Product Development /Innovation

The Bank has put in place a suitable mechanism to understand the business needs of the customer and address them swiftly. Accordingly, Product Innovation and Review Committee (PIRC) at the HO level consider and approve product innovations and their test marketing. A suitable exposure cap could also be fixed for such test marketing proposals to be monitored by the concerned product vertical.

Apart from approving products, PIRC also approves structuring of specific arrangements in a cluster or around a large corporate/ OEM where several MSMEs are expected to be benefited. Such arrangements could have different dispensations than those followed for regular credit products.

The new credit products proposed to be introduced or major changes in existing products / credit processes would be duly signed off by Risk Management Vertical.

The areas generally expected to be amenable to product innovation are service sector segments like organized retailing, IT & IT enabled services, entertainment, cash flow/ rent discounting, cash flow management products for MSME segment, cluster specific products, etc.

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2.1.3. Coverage under CGTMSE

The credit facilities up to `100 lakh to the eligible MSE customers would be generally covered under CGTMSE Scheme. In case, an eligible proposal is not getting covered under the CGTMSE Scheme, justification may be given in the appraisal note while putting up the proposal to the sanctioning authority (including a comparison of proposed security vis-a-vis the cover available under CGTMSE Scheme or other reasons, if any).

2.1.4. Cross-selling with Government Schemes

The products of the Bank would also be dovetailed with the schemes of Government of India [GoI] and state governments, wherever feasible, to improve the viability of the assisted projects and growth in overall asset base of the Bank.

2.2 PROCESS MANAGEMENT

2.2.1 Delegation of Powers

The key tool for managing the internal processes of the Bank is the Delegation of Powers (DoP) to the Credit Committees and the individual functionaries of the Bank. It also puts in place suitable system of checks and balances in the credit related decision processes. However, DoP would be within the broad framework of BfS norms as laid down in the Loan Policy.

2.2.2 Appraisal process

The existing appraisal process of the Bank would be followed to appraise projects and other assistance. The Credit Appraisal and Rating Tool (CART) is in use in the Bank for rating and appraisal of term loan proposals from existing profit making units for assistance up to `200 lakh and appraisal of other credit proposals including working capital. It has brought standardization to the credit decision making process and has considerably reduced the turnaround time. Accordingly, all credit proposals, irrespective of quantum of assistance, would be appraised under CART. Rating of exposures above `200 lakh and those not eligible for rating in CART is undertaken in Risk Assessment Models (RAMs). Appraisal of cash flow based term loan assistance would be carried out in Detailed Appraisal Memorandum with RAM rating.

In view of the recent downturn in the economy and relatively high NPA levels in the sectors like Textiles, Drugs & Pharmaceuticals, Packaging & Packaging materials, Infrastructure, Solar Power & Biomass projects and Iron & Steel, the Bank would adopt a

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cautious/selective approach for financing under these sectors with better risk mitigation.

There exist significant opportunities for assistance to Commercial Real Estate (CRE) projects, particularly keeping in view the significant MSME linkages of such proposals. In view of slowdown in the economy and risks inherent in such projects, risk mitigants at project/ proposal specific level would be incorporated with due care while structuring the assistance.

The Bank’s current guidelines on due diligence with regard to obtaining satisfactory credit reports, undertaking visits, due diligence of suppliers /contractors etc., checking of CIBIL database for consumer/commercial credit information reports, KYC and AML norms, checking of RBI / CIBIL defaulters list, caution advices etc., guidelines on connected lending, multiple banking arrangements, NOC from existing lenders, etc., wherever applicable, shall be followed.

2.2.3 Fair Practices Code for lenders/ Code of commitment to Micro and Small Enterprises [MSEs]:

Fair Practices Code for Lenders, as per RBI guidelines, has been adopted by the Bank and hosted on Bank’s website. The Code sets out the guidelines for processing of loan applications, appraisal, disbursement, post-disbursement supervision, etc. All information relating to charges/ fees for processing would be disclosed in the loan application forms. Further, the customer would be informed of all costs to be borne in sourcing finance from SIDBI. The facility of prepayment of loans would be available and no pre-payment interest would be levied for loans upto `50 lakh under fixed interest rates and no pre-payment interest would be levied for loans, irrespective of amount under floating interest rates. A Grievance Redressal Mechanism has also been put in place to resolve the disputes arising out of the Fair Practices Code. The Bank has adopted the Code of commitment to Micro, Small and Medium Enterprises of Banking Codes and Standards Board of India (BCSBI).

2.2.4 The Companies Act, 2013

The new Companies Act, 2013 (the Act) has come into existence

and necessary notifications issued in the Official Gazette. With

more emphasis on corporate governance and corporate social

responsibility, the Act has ushered in number of changes in the

law governing corporate sector. The Act prescribes more than 30

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new definitions which were earlier not defined in any other enactments. The Act has defined the terms such as “Associate Company”, “Small Company” (which incidentally is a new concept), Employee Stock Option” “Promoter”, “Related Party”, “Turnover”, Chief Executive Officer, Chief Financial Officer, “Global Depository Receipt” etc. The Act provides for class action suit, by minority shareholders to take collective action against errant companies, better disclosure requirements in financial statements and disclosure of interests of directors etc. It has also streamlined procedures relating to disclosure of transactions with parties related to directors, promoters, restriction on guarantee/security to secure third party liabilities, etc. The provisions of new Companies Act, 2013 would be kept in view in the course of business.

BUSINESS POLICY OF VERTICALS [3-10]

3 EQUITY & RISK CAPITAL ASSISTANCE 3.1 INTRODUCTION 3.1.1 MSMEs are largely dependent on the promoters’ resources,

borrowings from friends and relatives and secured loans from banks/financial institutions for meeting their financial requirements. However, while promoters’ resources are limited, bank finance is also restricted due to various norms such as asset coverage ratio, DER, etc., which adversely impact the flow of financial assistance to MSMEs and in turn constrain their credit absorption capacity and consequent growth. To facilitate enhanced flow of credit to this sector, SIDBI, Government of India and the Reserve Bank of India have been taking several measures from time to time.

3.1.2 Focus

SIDBI Foundation for Risk Capital for MSMEs was set up in FY 2008-09 with a view to addressing the issues related to existing gaps in the funding of MSMEs. Over the last 6 years, SIDBI has introduced mezzanine Risk Capital products for MSMEs for various needs like meeting financing gaps while implementing capex, expenditure on intangibles like R&D, marketing, product development expenses, etc. and other bonafide financial requirements for growth. The simple structure of Risk Capital instruments has resulted in acceptance of the product by MSMEs in various geographies across the country. During the year, SIDBI

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will continue its efforts for creating awareness of risk capital schemes among MSMEs as well as the banking sector. SIDBI would also carry out policy advocacy for wider acceptance of the products by the institutional players in the country.

In view of the above, the focus of the Policy for FY 2016 is aimed at improving the off-take taking into consideration the felt needs of the sector and building up of quality portfolio.

3.1.3 Direct assistance

The Bank provides risk capital to MSMEs using appropriate risk capital products based on best practices being followed in other parts of the world. The Bank uses a mix of standardized products and structured products (where assistance is customized for each customer on a case to case basis) for faster dispensation of risk capital to eligible MSMEs.

3.2 Product profile

(i) Start-up Assistance Scheme (SAS) Under the Start-up Assistance Scheme, SIDBI considers assistance to early stage enterprises, preferably in technology and innovation space and where revenues have commenced with product acceptability by customers. Maximum assistance under the scheme has now been increased to `200 lakh. The product could be structured flexibly to support the early stage operations of these Start-ups. (ii) Growth Capital and Equity Assistance Scheme for MSMEs (GEMS)

The objective of the Scheme is to provide growth capital to deserving MSMEs for: a Bridging the gap in the means of finance for expansion/

modernization/ scaling up. New businesses/ diversification by entrepreneurs with established track record can be considered, selectively (along-with direct finance assistance).

b Intangibles or non-asset creating investments viz. product development, marketing related expenditure, R&D, etc., besides investments in quality control/energy efficiency equipment etc.

c Margin money for working capital. While normal working capital [WC] requirements should generally be met under normal WC arrangement, need based gap in WC requirements (where the borrower has arrangements for

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major part of its WC requirements tied up) could be considered, selectively, based on merits of the case and with justification. However, the Bank would not consider funding of working capital as well as margin for the same under the scheme.

d Any other bona-fide expenditure required for growth of the business which may not qualify for assistance through normal banking channels.

The scheme provides for faster dispensation of risk capital

through various instruments viz. debt based instruments like Subordinated debt, Optionally Convertible Subordinated Debt (OCSD), Optionally Convertible Debt (OCD), Optionally Convertible Debentures (OCDR) and also equity based instruments like Optionally Convertible Cumulative Preference Shares (OCCPS) etc., to the existing customers of the Bank and also to new customers with good past track record.

3.3 Due diligence

In order to build a quality Risk Capital portfolio, the Bank would generally carry out an independent due diligence of MSMEs by an external agency viz. audit firm, law firm etc. to support the investment process under Risk Capital schemes, for exposure of `1 crore and above.

3.4 Indirect Assistance

The Bank will continue to provide risk capital to MSMEs through several state level and national level venture capital funds and also through banks and other channel partners.

a. Assistance through focused equity funds (VCFs / PE Funds)

The Bank provides corpus support to MSME focused Equity Funds / Venture Capital Funds / Private Equity (PE) Funds having relevant expertise and networking in equity transactions, monitoring and hand holding of investee companies. The Bank invests in such funds as per the policy framework approved by the Board of the Bank under the overall guidelines stipulated by RBI from time to time. Going forward, a new financing structure could be explored under which the Bank would get a preferred, albeit lower return on its investment, so as to allow higher returns to other investors willing to take higher risks, as this would incentivize more investors to come into the industry.

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b. Assistance through Banks/ NBFCs To reach wider segment of MSMEs, efforts are being made to extend resource support to banks under Risk Capital Fund so that they can extend risk capital assistance to their customers. In respect of NBFCs, proposals could be examined on case to case basis based on merits.

3.5 Partnerships for startup assistance

The major challenge in assisting small startups is proper mechanism for project validation and the effort/skill required in mentoring these Start-ups. Therefore, there is a need to develop a network of mentor agencies which would help banking sector to provide credit to start up and early stage enterprises. Towards this end, the Bank shall partner with various agencies like Angel Networks, incubators and industry bodies like NASSCOM, TiE (The Indus Entrepreneurs) etc. for developing a framework for supporting start-up units and would work with other organizations having relevant mandates in line with the Bank’s Risk Capital strategy.

3.6 “smallB” branches for Innovation Finance

Under the guidance of Government of India, SIDBI has introduced a financing programme in collaboration with 10 public sector banks for financing innovative and technology Start-ups. Under the aegis of the programme, 10 banks have opened 10 ‘smallB’ Innovation Finance branches at different locations spread across the country. The Bank has provided these branches the know-how and operating guidelines / processes to handle such proposals. During the year, the Bank would endeavor to further strengthen and scale up the programme.

4. ASSISTANCE FOR SERVICE SECTOR 4.1 INTRODUCTION

The service sector contributes more than 60% of the national GDP. The sector contributes significantly in employment generation and export earnings. There is a substantial gap in funding of service sector enterprises offering immense business potential.

The Policy is aimed at identification of thrust areas for lending under service sector, charting out a focused business development strategy, encouraging product innovation suited to

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the needs of the industry, improving credit delivery and having in place a pricing policy which supports business growth and links it to risk.

4.2. ELIGIBLE BORROWERS

SIDBI would finance service sector enterprises which fall within the investment definition under MSMED Act, 2006 and also based on SIDBI Act 1989 and various approvals of the Board from time to time.

4.3 THRUST BUSINESS AREAS

While the Bank would consider support to all eligible service sector activities, the following areas would be accorded due emphasis for faster asset growth during the year:

(i) Logistics & supply chain management (ii) Organized retail outlets/ Retail Chains/dealerships (iii) Restaurants/food chains/Quick Service Restaurants etc. (iv) Healthcare/Diagnostic Chains/Specialty Clinics etc. (v) Lifestyle, media & entertainment (vi) Tourism related services (vii) IT / IT enabled services (viii) Franchisee chains of well known brands, (ix) E-Commerce

4.4 APPROACHES TO FINANCING SERVICE SECTOR

For the purpose of this policy, the assistance to service sector has been broadly divided into five categories viz. (a) asset backed term loan assistance, (b) term loan assistance to asset light service sector enterprises, (c) assistance for facilitating payments to MSMEs in Construction Sector (i.e., for CRE exposure) (d) structured financial assistance to franchisees and (e) assistance under product innovation/ new products/ schemes.

(a) Asset backed assistance to service sector enterprises (i) Asset backed term loan assistance would include

assistance towards projects involving substantial primary and /or collateral security in the form of fixed assets like immovable properties and equipment, etc. Hotels, hospitals, warehouses etc., would generally fall under this category.

(ii) Secured Business loan assistance backed by immovable property as collateral security would also be provided to

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MSMEs for any bona-fide business expenditure on fast-track basis using simplified processes.

(b) Term loan assistance to asset light service sector enterprises

Some of the projects in the service sector do not create tangible fixed assets and invest in light assets and, therefore, may not meet security related norms of asset backed assistance, but these are found to generate comfortable cash flows. These segments include IT and other knowledge based industries, organized retail chains, restaurant chains, diagnostic/ specialty clinics, IT/ BPO services etc. As there is good potential for considering assistance to these sectors, proposals of deserving customers could be considered for Bank’s financial support based on merits.

(c) Assistance to CRE/construction entities for facilitating payments

to MSME suppliers/ vendors.

The Bank shall selectively consider assistance to construction sector/ CRE projects for facilitating payments to MSME suppliers/ vendors. The assistance provided shall be under the purview of CRE guidelines issued by RBI from time to time.

(d) Structured Financial Assistance to Franchisees

Keeping in view the growth of franchisee model of business in service sector, assistance to new and existing franchisees would be another thrust area for lending. Bank will actively engage the Franchisor in assessing the Franchisees and mitigating credit risk. The Bank would actively involve associations/ domain experts in franchising industry in identifying bankable proposals under Franchising Model.

(e) Assistance under Product Innovation/ New Products/ Schemes. The Bank shall endeavour to introduce new products/ schemes suited to the specific requirements of service sector industries and also explore assistance under the existing pilot products approved by Product Innovation and Review Committee (PIRC) with need based modifications, wherever felt necessary. This could include assistance based on contractual cash-flows/ future receivables, etc.

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5. ASSISTANCE FOR SUSTAINABLE DEVELOPMENT

5.1 INTRODUCTION The Bank has recognized sustainable developmental of the MSME sector as one of the high potential areas for strengthening the competitiveness of MSMEs in India. The Bank has been operating Lines of Credit from various multilateral/ bilateral agencies viz. Kreditanstalt fur Wiederaufbau (KfW), Germany, Japan International Cooperation Agency (JICA), Japan, Agence Francaise de Developpement (AfD), France, for financing energy efficient and cleaner environment investments in MSMEs.

5.2 OBJECTIVES

(i) To promote the use of energy efficient and cleaner technologies by MSMEs.

(ii) To reduce energy consumption, enhance energy efficiency, reduce CO2 emissions and improve the profitability of the Indian MSMEs in the long run.

(iii) To support promotion of energy efficiency and sustainable development in MSME sector under existing products / by introducing new products with an element of some concessionality in interest rates.

(iv) To encourage innovation in technology, products and delivery, particularly aimed at supporting the supply side.

(v) To support MSMEs towards development, up-scaling, demonstration and commercialization of innovative technology based project.

(vi) To strengthen MSMEs active on the supply side of clean technologies and which are engaged in development and adaptation, demonstration, deployment and commercialization of innovative clean technologies, products, processes and services.

5.3 THRUST BUSINESS AREAS: DIRECT FINANCE FOR SUSTAINABLE DEVELOPMENT

An indicative list of segments in the MSME sector which have high potential for energy saving/ cleaner production, to be targeted for business thrust, is given below:

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(i) Engineering & machine tools

(ii) Auto components

(iii) Electronics and electrical products

(iv) Sponge iron plants*

(v) Foundry & forgings

(vi) Pulp & paper

(vii) Ceramics including digital printing

(viii) Rice mills

(ix) Textiles, in particular, readymade garments and hosiery*

(x) Drugs and pharmaceuticals*

(xi) Food processing & agro based industries

(xii) Hazardous waste treatment and all waste management projects

(xiii) Waste to energy projects* and recycling of waste material

(xiv) Industrial pollution control technologies

(xv) Sustainable transport solutions (e.g., transport operators using cleaner energy such as LPG/CNG, etc.)

(xvi) Commercial green building

(xvii) Co-generation of energy and use of renewable energy sources*

(xviii) Renewable energy projects such as solar, wind etc.

(xix) Units engaged in supply / manufacture and service of EE/CP products/services/equipments

(xx) Energy service companies (ESCOs) with Partial Risk Sharing Facility (PRSF) for energy efficiency projects arrangement

(xxi) Sustainable agri business including organic farming with linkages to industry such as food processing (eg., Green Houses & Floriculture)

(xxii) Expenditure on energy audit / environment compliance audit / pollution control & management consultancy services.

(xxiii) Expenditure on green rating, BEE star rating of its product, eco-friendly labeling, etc.

(xxiv) ISO 50001 / 14000 or other accredited environmental certification.

(xxv) CDM registration related expenditure and any Climate Change Mitigation projects.

(xxvi) Green micro finance (micro loans upto `5 lakh to micro enterprises for green / energy efficient equipment measures) through various micro finance intermediaries or NBFCs.

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(xxvii) Any sector- phasing out of ozone depleting substances

*While encouraging adoption of energy saving/cleaner production/ modernization, cautious/higher selectivity approach with better risk mitigation to be maintained in terms of para 2.2.2.

5.4 SCHEMES OF ASSISTANCE FOR SUSTAINABLE DEVELOPMENT

5.4.1 International / Multilateral Lines of Credit for Sustainable Finance: Recognizing the importance of Energy Efficiency (EE) & Cleaner Production (CP) in tackling the challenge of climate change and curtailing the demand for energy from fossil fuels, SIDBI has been operating Lines of Credit from various multilateral/ bilateral agencies viz. Kreditanstalt fur Wiederaufbau (KfW), Germany, Japan International Cooperation Agency (JICA), Japan, Agence Francaise de Developpement (AfD), France, for financing energy efficient and cleaner production investments in MSMEs. These EE/CP investments will result in energy savings and reduction in global Green House Gas (GHG) emissions. Besides, it also strengthens the competitiveness of MSMEs in India and in global markets.

5.4.2 The 4E (End-to-End Energy Efficiency Solution): SIDBI had launched the End to End Energy Efficiency Solutions (4E solutions) Product on June 05, 2014, “World Environment Day”. The 4E solution launched by SIDBI would provide technical support to its MSME clients to improve their energy savings by availing the services of Technical Consultant / Energy Services Companies (ESCOs) at a reasonable cost with assurance on the quality of services. For this purpose, a revolving fund has been created from World Bank (WB)-Global Environment Facility (GEF) project to provide loans for such energy efficiency projects to MSMEs at concessional interest rates and soft terms. This 4E Solution will be implemented by SIDBI branches in association with India SME Technology Services Limited (ISTSL), an associate institution of SIDBI utilizing the services of specialized energy professionals.

5.4.3 Partial Risk Sharing Facility (PRSF) for Energy Efficiency Project:

SIDBI has signed agreement with World Bank for “Partial Risk Sharing Facility for Energy Efficiency (PRSF) Projects”. The objective of the project is to support the GoI efforts to transform the energy efficiency (EE) market in India by promoting

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increased level of EE investments, particularly through energy service performance contracting (ESPC) delivered through Energy Service Companies (ESCOs). Under the project, SIDBI will guarantee the loans given by Banks / FIs / NBFCs (including SIDBI loans) to ESCOs and ESCO-implemented projects to minimize their risk perception and also to kick-start the ESPC based ESCO market for Energy Efficiency Projects in India.

5.4.4 Sustainable Finance Scheme [SFS] There are certain projects which may not meet the eligibility norms set by the international lending agencies. But, considering the fact that these projects also result in energy efficiency improvements in the MSMEs and result in abatement of Green House Gas (GHG) emissions that harms the environment, a separate scheme, viz. “Sustainable Finance Scheme” (SFS) has been formulated for direct assistance to such projects.

5.4.5 Assistance for Technology Innovation Projects Need for developing national capabilities to innovate and create business opportunities in emerging technology areas has been acutely felt as there continues to be a dearth of early stage funding for commercialization of innovations by MSMEs due to higher risks of investment in unproven technologies. Thus, major proportion of the available funding gets invested in relatively lower risk/proven technologies, thereby limiting innovations to reach the market. In order to address these constraints, the Bank has joined hands with Technology Information Forecasting and Assessment Council (TIFAC), Dept. of Science & Technology, Govt. of India for implementing Technology Innovation Programme (SRIJAN Scheme) and with Kreditanstalt fur Wiederaufbau (KfW), Germany for implementing KfW Innovation Finance Programme. Financial products on soft terms and mechanism has been developed and being implemented.

6. ASSISTANCE FOR RECEIVABLE FINANCE

6.1 INTRODUCTION:

Receivable Finance Scheme (RFS) is being operated by the Bank for nearly two decades to mitigate the receivables problem of MSME sellers and improving their cash flow / liquidity.

RFS covers discounting/purchasing of bills/invoices arising out of sale of indigenous components/ parts/ sub-assemblies/

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accessories/ intermediates manufactured/ job work done/ services provided by MSMEs and eligible service providers to Large Purchaser Corporates. The scheme also allows coverage of bills relating to Small Road Transport Operators (SRTOs), being service providers.

The Bank has been making need based modifications/ simplifications/ rationalization in the scheme considering inter-alia the changing business environment, demand of the customers, feedback from the operating offices and for increasing the reach of the Scheme for the benefit of a large number of MSMEs.

End-use of funds is verified by undertaking visits to select MSME beneficiary units and random verification of the purchased/discounted invoices / bills.

In order to improve the quality of overall portfolio and to address inadequacies of existing internal rating system, external rating has now been made mandatory, in respect of new customers under MSME RFS, where the limits are not backed by collateral security. Further, residual charge / second charge, wherever available, would be explored in respect of such limits not backed by collateral security. Wherever possible, personal guarantees of directors would also be obtained for such facilities. More thrust is given for creating a portfolio of secured/partially secured limits and gradually bring down the portion of limits not backed by collateral security out of total portfolio.

6.2 THRUST BUSINESS AREAS:

i) The scheme basically covers bills raised by MSME units engaged in manufacturing / job works / service sector. Keeping in view the increasing share of service sector, business opportunities in these sectors will be identified. However, In view of the perceived higher risks in financing the service sector under the scheme, the Bank would adopt a cautious approach, with improved focus on customer selection and account monitoring.

ii) Keeping in view the focus on serving MSMEs, greater thrust is being laid, this year, to extend seller-wise receivable finance [SRFS] limits directly to MSMEs to improve the cash flow & liquidity position of MSMEs / Service providers by providing them with financial assistance against the goods sold and / or

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services rendered to purchaser companies with satisfactory market standing.

iii) In line with the national agenda for moving to electronic mode across all financial products, the bank would focus on bringing more business under direct E-discounting module developed in-house by the Bank.

iv) The Bank will facilitate promotion of factoring services including extending debt support to factoring companies registered with RBI as per provisions of The Factoring Regulation Act, 2012 or Banks providing factoring services. Existing SRFS would be suitably modified, wherever necessary, to extend factoring services, to avail of the benefits available to Factors under The Factoring Regulation Act, 2012.

v) To help existing customers, the entire credit purchases both from MSMEs and non-MSMEs, can be covered under Trade Finance Scheme/ Raw Material Assistance Scheme, after ensuring that there is no double financing.

6.3 PRODUCT RATIONALISATION:

Over a period of time, MSME RFS has been improvised to meet the growing business requirements like MSME RFS without Bills of Exchange, MSME RFS backed by L/C, Seller wise Receivable Finance Scheme [SRFS], Modified Invoice Discounting Scheme, E-discounting under NTREES platform and Trade Finance Scheme/Raw Material Assistance Scheme. The process of rationalization would continue during the year as per requirement.

7. INDIRECT LENDING

7.1 INTRODUCTION

The indirect lending portfolio of the Bank consists predominantly of refinance to Primary Lending Institutions (PLIs), comprising State Financial Corporations (SFCs), State Industrial Development/ Investment Corporations (SIDCs / SIICs) [collectively referred to as State Level Financial Institutions (SLFIs)], Scheduled Commercial Banks, Scheduled Cooperative Banks, Regional Rural Banks and select financial institutions. In addition, the portfolio also includes resource support/ term loan to Public Sector Undertakings benefiting the MSMEs.

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7.2 ASSISTANCE TO STATE FINANCIAL CORPORATIONS [SFCs]

Broadly, the support to SFCs would continue to be based on the overall exposure norms, financial health and coverage under Memorandum of Understanding [MoU], as also the exposure limits already approved by the Board.

7.3 MONITORING OF SFCs

Given the sizeable exposure of the Bank to the SFCs, the performance of all the SFCs would continue to be closely monitored both by way of on-site and off-site mechanisms. Further, with a view to bringing about convergence in the regulatory framework, vis-a-vis the industry practices, the Bank has been advising the SFCs to comply with prudential norms prescribed by RBI. SFCs shall also comply with other regulatory directives such as adoption of accrual system of accounting, income recognition and asset classification [IRAC] norms, KYC / AML norms, industry wise exposure norms, valuation of assets, etc.

7.4 ASSISTANCE TO SCHEDULED COMMERCIAL BANKS

7.4.1 The risk profile of scheduled commercial banks as a whole is low. The scheduled commercial banks generally prefer to avail short term refinance assistance. However, looking to the need to create long term assets under the Scheme, creation of such assets through refinance to scheduled commercial banks would continue to be the thrust area for FY 2016. Banks would be encouraged to avail longer term refinance having repayment periods of 5 years and above. Exposure to the scheduled commercial banks by way of refinance during FY 2016 would be encouraged but within the individual counterparty exposure limits fixed by the Bank as given in Annexure –V. The individual bank wise caps are fixed on the basis of category of the bank, its net worth and risk rating.

7.5 ASSISTANCE TO SCHEDULED COOPERATIVE BANKS [SCBs] & REGIONAL RURAL BANKS [RRBs]

Over the years, SCBs have registered significant growth in the number, size and volume of business handled. Some of the RRBs are also now profit driven and, in addition to commercial lending such as agriculture and project funding, compete with scheduled commercial banks for fee and commission incomes such as issue

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of drafts, sale of insurance products and mutual fund schemes. Counterparty exposure limits to these banks shall be decided on a case to case basis, depending on risk rating and other factors such as net worth of the bank, eligible micro and small enterprise [MSE] portfolio, overall financial health, compliance with regulatory directives, etc.

7.6 ASSISTANCE TO SIDCs/SIICs

The Bank would continue to make a conscious attempt, as hitherto, to reduce / exit from the existing exposures to weaker SIDCs / SIICs (including TFIDCs).

7.7 ASSISTANCE TO NBFCs

7.7.1 The NBFCs (both in the category of Deposit taking and Non Deposit taking) registered with RBI which are engaged in financing MSMEs and in business for the last 5 years, are, prima facie, eligible for resource support from the Bank subject to meeting the prescribed BfS norms relating to net owned funds, capital adequacy ratio, gross NPA, recovery percentage, minimum investment grade external rating and compliance with all the prudential guidelines prescribed by RBI from time to time. The Bank provides term loan / resource support mainly to Asset Finance Companies. However, the assistance could also be extended to Loan Companies, if the loan is given for income generating activities and 60% of the income comes from productive assets.

7.7.2 The assistance to NBFCs would be secured by, first exclusive charge on the assets financed / first pari-passu charge with other lenders by way of hypothecation of book debts of the NBFC with suitable margin, collateral security etc.

8. ASSISTANCE FOR INFRASTRUCTURE PROJECTS

Availability of adequate and quality infrastructure facilities is a key component for speedy growth of the MSME sector. It has positive impact in terms of creation of employment, efficiency in operations and waterfall effect on the entire economy. The Bank has been providing assistance for infrastructure projects in the areas of industrial parks, transportation, etc. after satisfying the MSME linkages of the assisted projects.

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The infrastructure sector provides adequate scope for up-scaling of lending by the Bank. While assistance for infrastructure projects in other areas would be extended through consortium/ multiple banking arrangements, assistance to industrial infrastructure projects could be considered on a standalone basis. Within infrastructure sector, the projects from tourism, warehousing infrastructure, cold chain sub-sectors, etc., having linkage with MSMEs, could be explored. Further, projects of common waste management facilities and effluent treatment plants at industrial clusters, renewable energy projects, may be considered for coverage under the scheme after satisfying itself on MSME linkages and benefits.

9. WORKING CAPITAL ASSISTANCE

Working Capital Assistance would be considered selectively to:

(i) existing customers who are solely banking with the Bank ;

(ii) existing customers of the Bank (who are also banking with other banks) and have placed major share of immovable security with the Bank;

(iii) existing well performing entities who are new to the Bank and do not enjoy working capital facility with any other bank;

(iv) new entities where term loan is considered by the Bank.

Takeover of working capital accounts, as a part of term loan take over, may be considered subject to compliance of take over guidelines.

10. SIDBI FOUNDATION FOR MICRO CREDIT [SFMC]

10.1 INTRODUCTION

Micro finance remains an instrument for the poor to improve livelihoods and reduce financial vulnerabilities by increasing their income and savings. With emphasis on supporting income generation activities under microfinance, the Bank continues financial assistance to Micro Finance Institutions (MFIs). In addition to this, the Bank has entered into the area of providing financial assistance to Participating Financial Institutions (PFIs), which offer loans with financing volumes ranging from ` 50,000 to ` 10,00,000 (Missing Middle) to eligible micro and small enterprises.

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10.2 MICRO FINANCE SECTOR UPDATE

The Micro Finance sector has rebounded and has registered significant growth. Government of India [GoI] and Reserve of India [RBI], both, have been perusing the agenda of universal financial inclusion (UFI) with full vigour. FY 2015 saw the launch of Pradhan Mantri Jan Dhan Yojana which has been implemented in mission mode by GOI and has provided great impetus to UFI. RBI is also taking suitable proactive steps. It has granted fresh banking license to 2 entities and has also sought application for Small Finance Banks and Payment Banks which will help in deepening the financial inclusion efforts further. RBI has also put in place the Self regulatory Organization (SRO) mechanism and also permitted the Business Correspondent (BC) model. All these proactive measures will help strengthen the micro finance sector and will make MFIs more relevant and contextual in the financial inclusion space.

With the sector regaining confidence and momentum, the Bank has also adopted a ‘growth strategy’ approach for the micro credit business. It is proposed to continue the same during FY 2016.

10.3 FOCUS On asset quality, focus is on risk management through the assessment, monitoring and exposure management. The focus of the Bank is on MFIs and NBFCs with track record of resource mobilization, capital, and strong systems, compliances with new regulatory guidelines and responsible lending practices and long term sustainability in terms of financial and operational efficiencies.

10.4 PRODUCT PROFILE

SFMC shall continue with subordinate debt, long term debt, term loan to MFIs for on-lending under microfinance, to intermediaries for on-lending to micro enterprises and to service providers. With the micro finance sector showing buoyancy, Bank has reintroduced the scheme for extending support to MFIs by way of long tenor loans. Details of eligibility criteria, etc., for various products are at Annexure II. The Missing Middle Financing activities of the Bank through PFIs are being funded by ADB, KfW as well as out of SIDBI funds. Under the product segment, assistance will be extended to PFIs to enable them to extend loans in the Missing Middle segment. With RBI revising the loan limit

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under micro finance to `1 lakh , SIDBI would cover micro finance loans up-to `1lakh under its MCS dispensation. With regard to missing middle dispensation, the loan limit would continue to be between `0.50 lakh to `10 lakh since some of the borrowers having loans between `0.50 lakh to `1lakh may be under individual dispensation and hence would be eligible for coverage under missing middle dispensation.

Bank’s equity and related investments in MFIs will be guided by statutory guidelines.

Bank’s Fair Practices Code, Grievance Redressal Mechanism and RBI’s guidelines to all India FIs on connected lending are applicable for assistance under SFMC.

11. CREDIT RISK MANAGEMENT

RBI had issued guidelines that the banks should have a robust Credit Risk Management (CRM) system which is sensitive and responsive to the credit risks emanating from its dealings with individuals, corporates, banks, FIs or sovereign. According to the RBI guidelines, banks have to devise a risk management framework oriented towards their requirements, dictated by size, complexity of business, risk philosophy, marketing perception, etc. The dimensions of credit risk to which the Bank is exposed to fundamentally emanate from exposure to MSME enterprises/ sector which are characterized by weaknesses in corporate structure, systems, accounting standards, lack of availability/ reliability of information and vulnerability to external developments, risk concentration in exposure to the MSME sector.

11.1 CREDIT RISK STRATEGY

In line with the strategy for managing risks in the credit portfolio, following tenets have been incorporated in the Loan Policy :

(a) Monitoring exposure to SFCs/ SIDCs as a percentage of total portfolios.

(b) Use of internal rating models to measure credit risk for majority of the customer categories. Use of internal/external ratings in the decision making process for lending would eventually lead to improvement in the overall credit quality and better risk management of the Bank’s portfolio.

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(c) Risk control, inter alia, through implementation of exposure limit framework for different segments of customers.

(d) Implementation of processes to ensure that initiative to increase lending by innovation in products, target clients, etc., does not lead to deterioration of the asset quality of the Bank’s portfolio.

(e) Installation of an enabling framework capable of grading the risk and eventually linking pricing to internal ratings as suited to the Bank’s requirements.

11.2 RISK MEASUREMENT

11.2.1 Internal Credit Rating Systems

The Bank uses Credit Appraisal and Rating Tool [CART] to process loan proposals (Greenfield and existing units) and rating of loan proposals covering exposures up to ` 200 lakh received from existing units fulfilling certain criteria.

For loans outside the purview of rating in CART, Risk Assessment Models (RAMs) are being used for customer segments indicated below:

(a) Small and Medium Enterprises (SMEs); Larger SMEs;

(b) Service sector enterprises;

(c) Infrastructure Special Purpose Vehicles (SPVs) – Road, Power, Telecom and Port;

(d) Banks (public/ private sector/ foreign banks, etc.) and financial institutions;

(e) State Financial Corporations, State Industrial Development Corporations;

(f) Large companies / corporate entities having financial linkages with the MSME sector, State Electricity Boards, other State/Central level specialized Corporations, etc. and for RFS limits.

11.2.2 Investment Grades

Proposals with internal obligor risk rating at the time of appraisal between S1 to S8 in RAM (equivalent grade in CART) are considered as ‘investment grade’ i.e. suitable for extending credit facility. However, in respect of certain sectors, higher investment grade ratings have been stipulated for greater

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selectivity and credit quality as indicated in Annexure – III with minimum internal rating grade specified. Such higher investment grades shall not be applicable for assistance to infrastructure projects/ joint financing proposals [consortium/ multiple banking arrangements], other than power sector projects which will be considered with a minimum rating of S7 only.

11.3 RISK MITIGATION

The present credit risk mitigation strategies in vogue would be continued which are primarily being applied at two levels. At the project specific level [transaction level], efforts are made to identify critical risk factors and suitable mitigation measures are explored and stipulated, wherever possible. Risk rating would be used for objective grading of risk. At the portfolio level, the Bank has been following a strategy of exposure management and prudential caps on credit exposures under various activity/ industry /type of customer. The Bank has also been working out the portfolio rating of the operating offices on an annual basis for internal purposes. In order to build a strong portfolio, the Bank would adopt a rating grade wise exposure cap as indicated at Annexure - IV.

11.4 EXTERNAL RATINGS

In respect of MSME-RFS limits without collateral security and resource support to NBFCs, external rating (Long term rating) by RBI accredited rating agencies is considered for the purpose of eligibility and pricing with minimum specified external rating grade.

11.5 PRICING

11.5.1 In the existing scenario of dynamic interest rates, competition and the need for the Bank to expand the direct finance portfolio with addition of quality assets, a dynamic pricing strategy has become sine qua non. The pricing of loans is carried out as per the gradation of risk determined by the internal ratings for various customer segments. With a view to remaining competitive in the market, the existing practice of fixing the interest/ discount rate depending upon competitiveness/ demand, asset cover and such other factors, may continue. As regards assistance sanctioned to infrastructure projects and such other projects under joint finance / consortium arrangement, the interest rate stipulated by the lead institution / other banks would normally be followed.

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11.5.2 In case of projects involving multiple/joint/consortium financing, interest rate reset clauses would be in line with the practice obtaining with other banks / institutions.

11.6 RISK CATEGORISATION OF CUSTOMERS FROM AML PERSPECTIVE

In compliance with the Policy Guidelines on KYC Norms and Anti Money Laundering (AML) Standards, the process of risk categorization of customers has been put in place depending upon their activity, location, constitution, etc.

11.7 MANAGEMENT OF ASSET CONCENTRATION 11.7.1 Exposure1 Caps

Asset concentration is being managed by the Bank by way of various exposure caps/ norms for credit deployment which have been fixed, as under, taking into account the norms prescribed by RBI.

11.7.1.1 Individual / Group Exposure

(a) In respect of schemes of direct assistance to MSMEs and specialized organizations marketing MSME products, the individual / group exposures shall be as follows:

Particulars Cap

For Single Borrower 3% of capital funds of SIDBI For Proprietorship entities ` 10 crore For Group Exposure 6% of capital funds of SIDBI

b) The exposure cap applicable in respect of assistance to NBFCs/ private sector corporations shall be as under:

Particulars Cap RBI Guidelines For Single Borrower

15% of capital funds of SIDBI – AFCs 10% of capital funds of SIDBI– Others

15% of capital funds

For Group Exposure

40 % of capital funds of SIDBI 40% of capital funds

1Exposure has been defined as under:

Product Exposure computation Fund based & Non-fund based facilities

Limit sanctioned or outstanding whichever is higher.

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b) The exposure cap applicable in respect of MSME Receivable Finance Scheme (MSME-RFS), direct resource support and such other forms of bulk lending (except refinance and Bills Rediscounting Scheme) to public financial institutions, public sector undertakings and corporates shall be as under:

Particulars Cap RBI Guidelines

For Single Borrowers

15% of capital funds of the Bank 15% of capital funds

For Group Exposure 25% of capital funds of the Bank 40% of capital funds

Though the Bank is a refinancing institution, from the prudential perspective and in accordance with RBI’s suggestions, suitable internal caps have been put in place for the refinance portfolio. The Bank has in place overall exposure caps for SFCs and SIDCs, which are perceived to be relatively higher risk segment of this portfolio. Keeping in view the RBI’s policy on Exposure Norms for Financial Institutions, the exposure, inter alia, has been related to capital funds of the Bank.

11.7.1.2 Counterparty / Activity / Industry exposure

Internal caps have been laid down in respect of different schemes of direct assistance and for various industrial sectors as summarized in the table at Annexure – V.

11.7.3 Restricted industries

The extant instructions for a cautious approach in respect of industries such as chemical dyes & dye intermediates, industrial oxygen, distilleries, etc., would continue. Assistance to deserving units in the list could be considered if they have an internal obligor risk rating of S7 or above. Industries consuming / producing ozone depleting substances viz. Chlorofluorocarbons (CFCs), Halon, Carbon tetrachloride, Methyl chloroform, Hydro bromo-fluorocarbons (HBFCs), hydrochloro-fluorocarbons (HCFCs), Methyl bromide, Bromochloromethane (BCM), etc., would not be assisted at all.

11.7.4 Policy on Group Lending

The Bank considers assistance to large groups only under select schemes such as MSME-RFS, NBFC and Infrastructure Scheme. Decisions on sanction/ continuation of exposure on a concern

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whose group/ associate concern(s) has defaulted to the Bank and / or to other banks/ FIs are being taken on case specific merits. The practice would be continued and a final view on such cases would be taken by the delegated sanctioning authorities.

12. CONCLUSION

Efficient credit delivery is the key to quality portfolio build up and customer retention. The Loan Policy gives adequate flexibility to develop viable business proposals. The Policy has also put in place a suitable structure for approval / clearance of new products. Hence, any business proposition considered to be viable and bankable should not be lost on account of non-availability of a suitable scheme/product. It will also be the endeavour of the Bank to further simplify and streamline procedures/processes to expedite the credit delivery besides making efficient use of IT for internal credit monitoring. Strategic alliances entered into with commercial banks would also be utilized for giving better facilities and services to the MSME customers. While the Bank has been making efforts in introducing risk management practices on an on-going basis, it would also accord due emphasis in initiating a paradigm transition towards an integrated risk management framework.

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Annexure I Benchmarks for Sanction [BfS]

Sl. No

Parameters BfS Norms/Relaxation Cap Products- Term Loan Working Capital Commercial Real

Estate Receivable Finance Equity & Risk Capital/

SMILE Resource support to

NBFC Micro Credit

Secured Clean BfS

Norm Relaxation

Cap BfS

Norm Relaxation Cap

BfS Norm

Relaxation Cap

BfS Norm

Relaxation Cap

BfS Norm

Relaxation Cap

BfS Norm

Relaxation Cap

BfS Norm

Relaxation Cap

BfS Norm

Relaxation Cap

1 Prudential Rating New Entity/

Proposal S8 No S8 No S8 No S8 No AA A+ S8 No S7/

BBB+ No MfR5 No

2 DER2 2:1 3:1 - - 3:1 No - - - - 3:1 No - - 10:1 No 3 Promoters’ Contribution

New Entity 33% 25% - - 25% No - - - - - - - - - - Existing Entity 25% 20% - - - - - - - - - - - -

4 Projected DSCR 1.50 1.25 - - 1.50 1.25 - - - - 1.50 1.25 - - - - 5 Interest Coverage Ratio3

New Entity4 - - 1.50 No - - - - - - - - - - - - Existing Entity5 - - 1.506 1.25 - - - - - - - - - - - -

6 Fixed Asset Coverage Ratio [FACR] New Entity 1.00 No 0.75 No 1.50 No 1.25 No - - - - - - - - Existing Entity 1.00 0.90 0.70 1.35 1.10 - - - - - - - - Asset Light/Cash Flow based

0.50 0.40 - -

7 Asset Coverage Ratio [ACR]7 New Entity 1.40 1.30 1.40 1.30 2.00 1.80 1.25 No 1.25 1.10 - - - - - - Existing Entity 1.30 1.20 1.30 1.20 1.75 1.60 1.10 - - - - - - Asset Light/Cash Flow based

1.30 1.00 - - - - - - - -

8 Current Ratio New Entity - - 1.25 1.10 - - 1.25 1.10 1.25 1.10 - - - - - - Existing Entity [Enhancement]

- - 1.25 0.90 - - 1.25 0.90 1.25 0.90 - - - - - -

2 For the company/entity as a whole after considering sub-debt [SD] and interest-free unsecured loans [IFUSL] as quasi equity 3 Interest coverage ratio = EBIT / Interest expenses 4 A “New entity” is an entity newly set up/proposed to be set up. This would also include entities established in the past but with nil or insignificant

commercial production. 5 An “Existing entity” is one which has already been established and is engaged in commercial production (with or without SIDBI's financial assistance). 6 Based on last audited accounts 7 To be worked out on the basis of residual charge in case of RFS clean limit/not backed by collateral security

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Sl. No

Parameters

BfS Norms/Relaxation Cap

Products- Term Loan Working Capital Commercial Real Estate

Receivable Finance Equity & Risk Capital/ SMILE

Resource support to NBFC

Micro Credit Secured Clean

BfS Norm

Relaxation Cap

BfS Norm

Relaxation Cap

BfS Norm

Relaxation Cap

BfS Norm

Relaxation Cap

BfS Norm

Relaxation Cap

BfS Norm

Relaxation Cap

BfS Norm

Relaxation Cap

BfS Norm

Relaxation Cap

9 Quick Ratio New Entity - - - - - - 0.50 0.40 0.50 0.40 - - - - - - Existing Entity [Enhancement]

- - - - - - - - - - - -

10 Total Outside Liabilities [TOL] to Tangible Net-worth [TNW] ratio New Entity - - 4:1 5:1 - - 4:1 5:1 4:1 5:1 - - - - - - Existing Entity [Enhancement]

- - 6:1 - - 6:1 6:1 - - - - - -

11 Margin on stocks of raw materials, receivables/book debts, WIP, finished goods etc. New Entity - - 30% 25% - - - - - - - - - - - - Existing Entity [Enhancement]

- - 20% - - - - - - - - - - - -

12 Recovery Performance

- - - - - - - - - - - - 95% 90% - -

13 Gross NPA - - - - - - - - - - - - Less than 5%

No - -

14 Capital to Risk [weighted] Assets Ratio [CRAR]

- - - - - - - - - - - - Min. 15%

No Min. 15%

No

15 Portfolio at Risk >90 days

- - - - - - - - - - - - - - Less than 10%

No

16 Operational Self Sufficiency [OSS]

- - - - - - - - - - - - - - 100% 90%

Note: a. Apart from relaxation of BfS norms, the Bank would generally, not consider relaxation of eligibility criteria of the products.

However, the product verticals may revisit their operational guidelines with respect to eligibility criteria and if required, suitable modifications may be provided based on product feedback from the market/ operating offices.

b. Relaxation of BfS norms within the cap may be considered for maximum 3 [three] parameters. Additional risk premium is proposed to be charged for such relaxations as follows: 10 bps for one relaxation, 20 bps for two relaxations and 30 bps for three relaxations

c. In respect of existing renewal at current level or reduced level as a part of exit strategy, the delegated authority may relax the BfS norms suitably, without levy of additional risk premium, provided proper risk mitigants are put in place.

********

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Annexure II

A. TERM LOAN TO MICRO FINANCE INSTITUTIONS (MFIs)

1. Objective

SIDBI extends term loans to

MFIs for on lending to the poor – individuals or groups of individuals formed as JLGs, SHGs, etc.

2. Eligibility criteria

To be eligible for term loan assistance from SIDBI the MFI:

a. should be registered as Society, Trust, Company/Section-25 Company, NBFC-MFI, Co-operative Society and MACS.

b. should be registered as any other legal entity may be considered only after BO obtains Legal Vertical’s clearance on its suitability.

c. should have been lending under MF for at least 36 months or should have promoters/senior management having at least 10 years of experience in micro credit/banking/NBFC lending operations.

d. has a minimum outreach of 5,000 loan accounts or 3,000 customers

e. targets the poor, especially women and is secular .

f. has audited financial statements (in case of NGO with microfinance as a programme, the NGO should preferably have separate audited financial statements for the MF programme) and

g. has systems, processes and procedures in place required of a financial intermediary like internal accounting, internal audit, risk management, cash management, timely MIS, etc.

h. shall be in compliance with RBI and other statutory guidelines including Fair Practices Code and RBI circulars dated May 03, 2011 and December 02, 2011, April 08, 2015 as amended and updated from time to time.

3. Others

a. MFI may follow any generally practiced MF models like Grameen model, SHG model, JLG model, cooperatives, etc., and any other appropriate model permissible under the law

b. The Bank’s loan to be on lent by MFIs for use by borrowers in:

i. setting up/running non-farm income generating activities and micro enterprises under MSMED Act and

ii. construction of new / renovation/ expansion of dwelling units / dwelling unit-cum-work sheds, etc.

iii. Loan to an MFI will be on annual/need basis with minimum loan of generally `0.50 crore to an MFI.

iv. NBFC-MFI to submit a certificate from a C.A regarding compliance with RBI norms for NBFC-MFIs and all other MFIs to submit a C.A certificate regarding compliance with RBI’s norms on eligibility of bank loans to MFIs under priority sector.

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v. Availability of a valid external capacity assessment rating of acceptable grade is a prerequisite. However, in case of existing good customers of the Bank, need based relaxations may be permitted by the sanctioning authority till the submission of fresh rating.

vi. Primary security shall comprise hypothecation of book debts/receivables.

vii. Suitable collateral security like deposit of FDs, personal guarantee, pledge of shares, guarantee by multilateral donors and other forms of collateral security may be considered on a case to case basis.

B. Micro Credit Scheme- Support to Micro Finance Institutions by longer

tenor Loans and Instruments 1. Type of MFI

a. Generally NBFCs having a valid registration as NBFC-MFI and having

asset size above `100 crore. Should meet all RBI prescribed criteria for NBFC-MFIs.

b. Portfolio [on and off balance sheet] as per last audited annual accounts should be more than ` 100 crore.

c. Already assisted by SIDBI with a satisfactory repayment track record. d. Other formats generally ineligible with the exception of large sized well

run MFIs having a minimum of Portfolio [on and off balance sheet] as per last audited annual accounts more than ` 250 crore.

2. Product Exposure

a. Minimum - `5 crore b. Maximum - `50 crore (maximum assistance under this product to a MFI

to be capped at 25% of the last audited networth of the MFI). c. In exceptional cases the maximum assistance up to `75 crore may be

considered in case of deserving MFIs, subject to assistance not exceeding 25% of the last audited networth of the MFI

d. Not to be extended on standalone basis, i.e. the assistance should be coupled with existing or proposed assistance under MCS

3. Instruments

Secured Debt, Sub Debt or Non Convertible Debentures for Tier II Capital Support

4. Repayment Period

Minimum 4 years and maximum upto 7 years

5. Capacity Assessment Rating

Minimum rating grade of mfR3 or equivalent

6. Operating Self Sufficiency (OSS), PAR (>30 days), Capital Adequacy

OSS- Minimum 100% for the last 2 years

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PAR (>30 days)- Below 3% Capital Adequacy Ratio- Minimum 15% for NBFC-MFIs or as prescribed

by RBI from time to time.

C. LOANS TO PARTICIPATING FINANCIAL INSTITUTIONS (PFIs) FOR ONLENDING TO MICRO ENTERPRISES / MISSING MIDDLE

1. Approach The Bank shall extend term loan to PFIs, i.e., NBFCs, NBFC-MFIs, Trusts, Societies, Section 25 Companies etc., for on lending to micro enterprises loans in the range of `0.50 lakh to `10 lakh per enterprise/borrower.

2. Eligibility Criteria

NBFCs and MFIs (including NBFC- MFIs) have to fulfill the following criteria: Track record of experience and performance in the field of

microfinance and MSE financing Demonstrate adequate organizational capacities and governance

structures Meet minimum requirements regarding credit management and risk

appraisal systems Compliance with all applicable prudential regulations and guidelines

of RBI Should have a minimum prescribed external rating (for Asset Finance

Company and Loan Company) and minimum prescribed Capacity Assessment Rating (CAR) (for MFIs including NBFC-MFIs). However, given the pioneering nature of CAR, partial disbursements may be allowed in deserving cases in case of existing good customers, pending submission of fresh CAR.

Adequate anti-money laundering procedures are in place Have arrangements or will shortly enter into arrangements with a

credit bureau Meet benchmark norms with respect to capital adequacy, net worth,

non-performing assets, risk rating etc. as laid out in SIDBI’s Loan Policy, reviewed and revised from year to year. However, sanctioning authority may allow need based relaxations in deserving case in respect of existing good customers of the Bank.

Meet minimum SIDBI requirements with respect to adoption of an Environmental and Social Safeguards framework governing MSE lending.

Specific exemptions from some of these criteria can be made for start-up NBFCs, depending on SIDBI’s assessment and Loan Policy in consultation with international lending Agencies.

3. Others

a. Lending will be based on in-house appraisal along with credit rating by an independent rating agency as in vogue in SFMC.

b. NBFCs registered as Asset Finance Company or Loan Companies should have minimum Investment grade rating of BBB+ group rating by CRISIL or its equivalent grade rating by other rating Agencies whose ratings are accepted by SIDBI.

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c. As regards MFIs (including NBFC-MFI), they should have a minimum capacity assessment rating of MfR5 of CRISIL or equivalent from a grading Agency acceptable to SIDBI.

d. Security shall comprise Hypothecation of assets, wherever available, created out of the loan and collateral security on case to case basis.

e. Exposure norms and rate of interest shall be as per guidelines from time to time.

D. Securitization/Acquisition by way of Direct assignment of cash flows Purchase of Micro Enterprise / Missing Middle loans by way of securitization and direct assignment of cash flows will be considered on a case to case basis in accordance with the extant RBI guidelines in this regard.

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Annexure – III

Higher investment grade ratings – Select Sectors

Sr. No. Particulars of industry Minimum obligor rating

1 Iron & steel industry S7 2 Power sector projects S7 3 Wind mill projects (stand alone8) S7 4 Deserving units in the restricted

list of Industries such as Chemical dyes & dye intermediates, industrial oxygen, distilleries etc.

S7

8 Minimum obligor rating of windmill projects taken up by existing companies primarily for depreciation benefit/captive use/sale to SEB would be S8

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Annexure – IV

Rating grade-wise Exposure Caps

Sr. No. Obligor Rating Exposure Cap [% of Aggregate Portfolio]

1 S 12 1%

2 S 11 1.5% 3 S 9 &10 2.5% 4 Upto S 8 95%

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Annexure – V Exposure Caps

9Includes exposure to activities in various sub-sectors under infrastructure 10 Subject to compliance with capital market exposure limit 11 Excluding NBFCs

S. No. Activity / Industry Exposure cap

1 Bills Finance

(a) MSME-RFS without collateral 15% of o/s portfolio of SIDBI

2 Infrastructure activities/projects

(a) Total portfolio9 10% of o/s portfolio of SIDBI

(b) Power sector including generation, transmission and distribution.

7.5 % of o/s portfolio of SIDBI

3 NBFCs (overall exposure of the Bank) 20 % of o/s portfolio of SIDBI

4 Contribution to Venture Capital Funds10 5 % of o/s portfolio of SIDBI

5 Resource Support11 12.5 % of o/s portfolio of SIDBI

6 Services Sector

(a) Exposure in service sector projects 15 % of o/s portfolio of SIDBI

7 Industry Exposure

(a) Cap on exposure to a particular industry other than those at (b) below

5 % of o/s portfolio of SIDBI

(b)

(i) Transport Equipment (including Auto and auto components)


(ii) Textiles / readymade garments and hosiery


(iii) Food processing industry 10 % of o/s portfolio of SIDBI

(iv) Engineering industry 10 % of o/s portfolio of SIDBI

(v) Drugs and pharmaceuticals 10 % of o/s portfolio of SIDBI

(vi) Electronics and electrical products 10 % of o/s portfolio of SIDBI

(vii) Agro based industries 10 % of o/s portfolio of SIDBI

(viii) Commercial Real Estate 8.5 % of o/s portfolio of SIDBI

(xi) Iron & Steel 5 % of o/s portfolio of SIDBI

(xii) Petroleum & Petroleum Products 10 % of o/s portfolio of SIDBI

8 Direct Assignment business 5 % of o/s portfolio of SIDBI

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**********

12 Excluding SFCs and SIDCs

S. No. Activity / Industry Exposure cap

9 Ceiling on Exposure in unsecured advances [including MSME-RFS without collateral at 1(a) above]

30% of o/s portfolio of SIDBI

10 Individual bank/institution wise limit

Refinance/Co-accepted Bills/ BRS/LOCFC/Resource Support [per institution]

(a) State Bank / its Associate Banks/ Nationalised Banks/ Financial Institutions (FIs]

Individual bank/FI-wise limit as approved by the Board.

(b) Private sector banks/ foreign banks

(c) SFCs [per institution] 15% of capital funds of SIDBI

(d) SIDCs including TFIDCs [per institution] 1% of capital funds of SIDBI

(e) SSIDCs [per institution] 0.5% of capital funds of SIDBI

(f) Scheduled Co-operative banks/ Regional Rural Banks [per institution]

7.5 % of capital funds of SIDBI

11 Aggregate exposure to

(a) All SFCs (Aggregate) `3000 crore

(b) All SIDCs including TFIDCs (Aggregate) 5 % of capital funds of SIDBI

(c) All Nationalised Banks (aggregate) 300% of capital funds of SIDBI

(d) All State Bank and its Associate Banks (aggregate)

200% of capital funds of SIDBI

(e) All FIs (aggregate)12 100 % of capital funds of SIDBI

(f) Private Sector Banks (aggregate) 200 % of capital funds of SIDBI

(g) Foreign Banks (aggregate) 100 % of capital funds of SIDBI

appendix i lp fy2015

Documents

indirect assistance

startup assistance

schemes of assistance

equity risk capital

working capital assistance

overview of loan policy

loan policy fy

credit management policy