some relevant #credit schemes for #msmes


MSME - CLASSIFICATION


CUSTOMER SPECTRUM FOR BANKS / NBFCS

Small and Medium Enterprises Corporate Banking Retail

Consumers

26 million MSMEs as per 2006-07 census (projected to have

increased to 31 million in 2010-11) comprising of – micro

(94.54%), small (4.89%) and medium (0.17%) enterprises

92.7% MSMEs do not have access to institutional finance

IIP growth rate in MSMEs > organised sector growth rate

Partnership &

Family Owned

Businesses

(4%)

Small & Medium

Companies &

others (1%)

Top Tier

Local and Global

Corporates

Large Local

Corporates

Individuals in

Business (90%)

Individual

Consumers


MSME CLASSIFICATION AS PER MSMED ACT, 2006

Enterprise type

Manufacturing Service

Investment in Plant & Machinery Investment in Equipments

Micro Rs. 25 lakhs Rs. 10 lakhs

Small Rs. 5 crore Rs. 2 crore

Medium Rs. 10 crore Rs. 5 crore

Registration required for availing benefits of MSME schemes a) File EM-I / EM-II with DIC, or b) Online registration – Udyog Aadhar No. http://udyogaadhaar.gov.in/UA/UdyogAadhar-New.aspx (instant registration possible – free of cost)

http://udyogaadhaar.gov.in/UA/UdyogAadhar-New.aspx





SOME RELEVANT CREDIT SCHEMES


CREDIT LINKED CAPITAL SUBSIDY SCHEME

• Eligible banks – Canara Bank, NABARD, SIDBI, BOB, BOI, PNB, TIIC, SBBJ, NSIC & Andhra Bank. Other banks can avail through the eligible banks. Eligible micro and small enterprises (existing and new) as per MSME Development Act, 2006

• Approved Technology – listed at http://www.dcmsme.gov.in/schemes/sccredit.htm#appendixI

• Eligible amount – lower of: • 15% of the cost of eligible plant and machinery • Rs. 15 lakh Micro and Small enterprises having already availed of CLCSS can avail subject to a maximum of Rs. 15 lakh in its life

• Ineligible items – • Replacement of existing equipment / technology with same equipment / technology • upgrading with second hand machinery • tools, jigs, dies, moulds & maintenance spare parts & consumable stores; • cost of installation

http://www.dcmsme.gov.in/schemes/sccredit.htm

http://www.dcmsme.gov.in/schemes/sccredit.htm


CREDIT GUARANTEE FOR MICRO & SMALL INDUSTRIES

• Eligibility – micro and small enterprises (not medium) as per MSMED Act, 2006. Application for guarantee cover to be made by lender. Lender to agree for availing guarantee.

• For working capital, once availed by one Bank, the same amount cannot be availed by another Bank. Similarly, once availed for term loan, cannot be availed again after repayment

• Maximum guarantee available – • 85% for credit exposure of upto Rs. 5 lakh and for women entrepreneurs and for

enterprises in NER • 75% for credit exposure upto Rs. 50 lakh • 50% for credit exposure in excess of Rs. 50 lakh and upto Rs. 1 crore

• Guarantee Fee – 1.5% initially and 0.75% annually (1% & 0.5% for credit exposure less than Rs. 5 lakhs)


SIDBI MAKE IN INDIA SOFT LOAN FUND FOR MSMES (SMILE)


SMILE CONTINUES • Permitted sectors mentioned at http://www.makeinindia.com/sectors

• Objective - To provide soft loan (10% of the project cost), in the nature of quasi-equity, and term loan on relatively soft term.

• Eligibility – New as well as existing MSMEs in the manufacturing as well as services sector; undertaking expansion, modernization, technology upgradation or other projects for growing their Business.

• Promoter’s Contribution - Minimum 15% of project cost for project up to Rs. 1 crore and 20% projects having project cost in excess of ₨. 2 crore

• Term Loan – upto 75% of the project cost (maximum DER of 3:1) including soft loan of 10% of project cost (15% for SC/ST/Women/ Persons with disability) subject to maximum of ₨. 20 lakhs

• Minimum Term Loan – ₨. 25 lakhs

• Repayment period – 7 years

• Interest rate – 9.35% p.a. for soft loan and regular loan 9.45% - 9.95% for the first 3 years. After 1st 3 years, entire loan would be charged normal rate of interest @ 11.70% to 14.20% p.a. Upfront fee of 0.5% + taxes

http://www.makeinindia.com/sectors

http://www.makeinindia.com/sectors


TECHNOLOGY INNOVATION FUND - SRIJAN SCHEME

• Technology Information, Forecasting & Assessment Council, (TIFAC) GOI fund, implemented by SIDBI

• Eligibility - New/ existing MSME units

• Promoters contribution – Minimum 20% of the project cost

• Loan Amount – 80% of the project cost subject to maximum of Rs. 100 lakh

• Interest Rate – not more than 5% p.a. and upfront fee - 0.5% of sanctioned amount plus applicable service tax

• Repayment Period – 6 year including moratorium period from the date of completion of the project


4E SCHEME – END-TO-END ENERGY EFFICIENCY INVESTMENT

• Objective – for meeting capital expenditure including equipment cost, commissioning of project and other expenditure related to achieving energy efficiency measures. Other expenditure limited to 50% of equipment costs. Land and Civil works costs excluded

• Eligibility – only for existing MSME units of more than 3 yrs

• Promoters contribution – 10% of the project cost

• Loan Amount – 90% of the project cost subject to minimax of Rs. 10 lakh and ₨. 150 lakh; subject to 20% of turnover

• Interest Rate – below 2.5% of normal rate

• Repayment Period – moratorium period of 6 months; total repayment period – 3 years for loans upto ₨. 100 lakhs and 5 yrs for loans exceeding ₨. 100 lakhs


SIDBI - GENERAL PURPOSE TERM LOAN • Objective

• Setting up of new MSME unit, • Expansion/Diversification / Modernization/ technology upgradation/ quality

certification of existing units by MSMEs, • acquisition of additional machinery / equipments, • marketing related activities by MSMEs.

• Promotor Contribution - 33 % of Project Cost in new project and 25% in existing well performing units

• Loan amount – Minimum Rs. 10 Lakh with security margin of 1.3 to 1.4

• Loan Period - 8-10 years including moratorium period up to 18 months

• Interest Rate – normal interest rate charged by SIDBI and upfront fee of 1% of the term loan sanctioned


SIDBI – GEMS / GROWTH CAPITAL & EQUITY ASSISTANCE FOR MSMES • Objective – to bridge finance gap for expansion, modernisation and scaling up,

margin money for working capital, financing for business growth including for intangibles like R&D, marketing, energy efficiency etc.

• Eligibility – existing MSMEs in existence for more than 3 years

• Type of assistance – • Optionally Convertible Cumulative Preference Share • Subordinated debt • Loans with royalty or equity participation

• Promotor Contribution - 33 % of Project Cost in new project and 25% in existing well performing units

• Loan amount – 50% of the tangible networth

• Loan Period - 7 years for loans; equity components – suitable exit options are anticipated

• Interest Rate – normal interest rate, generally 2%-3% above SIDBI’s PLR

• Security – generally with assets created out of the assistance


SIDBI – PRIVILEGED CUSTOMER SCHEME (PCS) • Objective - for general (non-specific investment plan)

• Loan Amount - Maximum of ₨. 1 cr subject to a maximum of • 20% of Annual Sales, for manufacturing and service sector enterprises • 40% of Annual Sales, for entities operating purely on job work basis

• Eligibility • Existing SIDBI customer with good track record of repayment • Should not be in negative industry list • Should not be in default to other banks • SIDBI’s internal rating - SB6 or better

• Promotor Contribution - not asked (DER should preferably be low on overall business basis to enjoy better rating and qualify under this scheme)

• Period of loan - flexible based on need

• Interest Rate – normal interest rate based on internal credit rating


SOME INPUTS START-UPS


FACILITIES FOR STARTUPS

Objective Qualification Criteria

• Incorporated or registered in India (proprietorship, unregistered partnerships, etc. are excluded). Public Ltd companies not eligible

• Not older than 5 years

• Turnover not exceeding Rs. 25 cr in any of the financial year

Subjective Qualification Criterion

• Innovation, Development, Deployment of New Products, Processes or Services.

• Recommendation letter from recognised incubators

• A minimum of 20% funding from any of the AIFs registered with SEBI or

• Funding received for innovation from GOI / State Govt.

• Patent filed and published in the Journal of the Indian Patent Office


FACILITIES FOR STARTUPS

Benefits

• Can self-certify compliances

• start-ups registered between April 1, 2016 and April 1, 2019 are eligible for tax exemption for 3 years (s.80IA of the IT Act, 1961)

• Exemption on tax u/s.56(2)(viib) is available for valuation of shares issued above fair market value

• Can employ apprentices between 2.5% and 10% of the total employee strength (including contract employees)


SELF CERTIFICATION OF COMPLIANCE FOR START-UPS Labour Laws:

• The Building and Other Constructions Workers’ (Regulation of Employment & Conditions of Service) Act, 1996

• The Inter-State Migrant Workmen (Regulation of Employment & Conditions of Service) Act, 1979

• The Payment of Gratuity Act, 1972

• The Contract Labour (Regulation & Abolition) Act, 1970

• The Employees’ Provident Funds & Miscellaneous Provisions Act, 1952

• The Employees’ State Insurance Act, 1948

Environment Laws:

• The Water (Prevention & Control of Pollution) Act, 1974

• The Water (Prevention & Control of Pollution) Cess (Amendment) Act, 2003

• The Air (Prevention & Control of Pollution) Act, 1981

In case of the labour laws, no inspections will be conducted for a period of 3 years. Startups may be inspected on receipt of credible and verifiable complaint of violation, filed in writing and approved by at least one level senior to the inspecting officer. Startups which fall under the ‘white category’ (as defined by the Central Pollution Control Board (CPCB)) would be able to self-certify compliance and only random checks would be carried out in such cases.


PREFERENTIAL MARKET ACCESS TO MSMES W.e.f. April 1, 2015 at least 20% of the total procurement by

• Central Government,

• State Government and

• PSUs

• have to be mandatorily least 20% from MSMEs, without any relaxation in quality standards or technical parameters..

Start-ups (in the manufacturing sector) registered with Government under the Startup India are exempt from the criteria of “prior experience/ turnover” provided they have their own manufacturing facility in India.


HOW TO RAISE FINANCE


AVENUES OF FINANCE TRADITIONAL

• Debt – long term + working capital

• Discounting of hundies, channel finance, invoice discounting, etc.

• Quasi Equity – unsecured from friends and relatives

• Equipment finance & lease

EMERGING

• Quasi Equity – long term convertible instruments

• Alternative Investment Funds – VCFs, PEs, Angel Investors, etc.

• Factoring of receivables (?)

• SME Exchange / ITP (?)

• Informal exchanges – crowd funding (???)


UNDERSTANDING THE 4 INTERDEPENDENCIES

Finance

Risk – return relationship

Purpose & Tenure

Lenders’/Investors’ expectation

Credibility & Governance


LENDERS’ OUTLOOK

CREDIT WORTHINESS ASSESSMENT

Business Plan

Promoters

Team

LENDING STAGE

Matured and Stable

Sustainable Growth

LENDING PURPOSE

Acquisition of Long Term Assets

Expansion through Working

capital finance

EXIT

Timely repayment of Principal

Timely payment of interest

Keeping Account regular


INVESTORS’ OUTLOOK

INVESTMENT CASE

Business Plan

Promoters

Team

INVESTMENT STAGE

Seed / Early

Growth

INVESTMENT PURPOSE

Strategic

Non-strategic

EXIT OPTIONS

Buyout

Buyback

IPO

INVESTMENT HORIZON

Purpose

Timing and Life of Investible

Funds

Exit options


5CS IN CREDIT-WORTHINESS Character : to be reflected in conduct and which

leaves an impression on investors, lenders,

customers & other trade parties.

Capacity : ability to repay through

cash generated from the

business. Usually, spelt out in

advance

Capital : money personally invested in the

business by the borrower. A tool to

assess extent of shareholder

commitment in the business. Also acts as

a cushion in uncertain business

environment.

Collateral : an additional assurance provided by

borrower to the credit grantor, to fall- back upon

in the event of capacity to repay falls short. It

could be in the form of guarantees, mortgage of

additional assets, etc..

Conditions : the intended purpose

for which credit is sought. Credit giver

assesses the business scenarios under

which risks are estimated & credit

granted.


6TH C – COMMUNICATION

6th

C

Communication For SMEs 5Cs not enough ‘BECAUSE’

Perception with regards credit risk is high

SMEs required to make extra efforts in improving the perception either through higher collateralization or better communication

Communication and demonstration with actual performance


COMMUNICATE WHAT?

Performance Sustainability

Society

Transparency

Compliance to

investment

/lending terms

Articulating problems -

opportunities


SOME DOS’ AND DON’TS

Transparency

Clarity in communication

Managing within sanctioned

limits

Compliances to conditions

Diversion of funds

Hiding facts of previous defaults

and business failures

Excess utilisation / overdrawal of

credit limits

High frequency of cheque bounces



COMMUNICATION ESSENTIAL FOR

• Delay in commencement of service offering / commercial production, time-cost overrun etc.

• Inordinate delay in submission of anticipated periodic information like quarterly results, performance and compliance related information, etc.

• Reasons for high incidence of customer complaints, delays in customer commitments, sales returns, cheque returns, etc.

• Large increase or decrease in business turnover – basis / concerns. Large part of business is acquired / sold

• Stoppage / suspension of work for an unreasonably long time

• Losses – reasons and likely timeframe for improvement

• Loss of a business partner or co–promoter or a key customer or key employee.

• Possibility of not servicing interest at prescribed intervals; failing to adhere to agreed loan repayment schedule or investment terms

• When winding-up petition or other legal action is filed against the business


LENDER TOOLS

2. Debt service / interest coverage ratio : EBIT / Interest Expenses

4. Return on capital employed ratio : Operating profit / Capital employed * 100% (to be > Capital Cost)

5. Stock position : Slow or fast moving. (Also, stock carried as a % of Sales)

6. Debtor realisation : Amount, time and certainty in realisation. (Also, realisable debtors as a % of Sales)

1. Cash Flows : ‘Cash is fact, profit an opinion!’

3. Working capital turnover ratio : Cost of goods sold / Net working capital (or gross working capital)


UNDERSTANDING CREDIT SCORE

Credit information

companies (CICs)

Below 540

Poor Credit

300

710+

Excellent Credit

650-709

Above Average Credit

600-649

Good Credit

540-599

Fair Credit

900

Sensitive information of past defaults / suits filed available in public domain, and cannot be hidden from lenders


INFORMATION RELATING TO DEFAULTS

http://suit.cibil.com/

Choose

Search or summary any one

Date

Click ‘>’ button

If you have chosen summary then you again choose

Credit grantor wise list or state/union territory

If you have chosen search then type ‘name’ about who you want to search.

Click on search.

http://suit.cibil.com/


BANKS INTERNAL RATING

• Banks undertake assessment of credit exposures using their internal rating models

• Normally 16 to 20 point scale (some have 8 point scale)

• Factors considered • Financial performance and cash flows generated

• Limit utilization, repayment track record and conduct with Bank

• Security margin available

• Future outlook of the entity and the industry to which it belongs

• Internal Rating assigned can be ascertained from the Bank


DISCUSSIONS / Q&A


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some relevant #credit schemes for #msmes

Small Business & Entrepreneurship