MSME Lending Guidelines 2020

Questions and Answers

What is the maximum turnover limit for a Micro Enterprise as defined in the MSMED Act?

Five crore rupees (correct)

One crore rupees

Ten crore rupees

Two crore rupees

Which enterprise falls under the Small Enterprise category based on investment and turnover limits?

Investment of 9 crore rupees and turnover of 55 crore rupees

Investment of 8 crore rupees and turnover of 45 crore rupees

Investment of 10 crore rupees and turnover of 50 crore rupees (correct)

Investment of 12 crore rupees and turnover of 60 crore rupees

What happens if an enterprise exceeds the classification limits for its current category?

It will remain in the same category

It will be placed in the next lower category

It will be placed in the next higher category (correct)

It will cease to exist

Who is required to obtain an 'Udyam Registration Certificate'?

All Micro, Small, and Medium Enterprises Signup and view all the answers

What is the allowable investment limit for a Medium Enterprise?

Fifty crore rupees Signup and view all the answers

Which of the following types of trade are included for the limited purpose of Priority Sector Lending?

Retail and Wholesale trade Signup and view all the answers

What is the significance of the Udyam Assist Certificate for Informal Micro Enterprises?

It is recognized as equivalent to Udyam Registration Certificate for PSL Signup and view all the answers

Which criterion must an enterprise meet to maintain its classification as micro, small, or medium?

Both investment and turnover limits Signup and view all the answers

What percentage of the guaranteed amount does the Trust pay upon preferring an eligible claim by the lending institution?

75% Signup and view all the answers

What happens to claims lodged that exceed two times the total fee including recovery remitted by the MLI?

They are suspended until remedied. Signup and view all the answers

What is the penalty interest rate that a lending institution must refund if the claim is recalled due to serious deficiencies?

4% above the Bank Rate Signup and view all the answers

When will the remaining 25% of the guaranteed amount be paid for loans sanctioned on or after 01/01/2013?

On conclusion of recovery proceedings or after three years, whichever is earlier. Signup and view all the answers

What must the lending institution do with the amount realized from the sale of assets in case of borrower default?

Credit it in full to the Trust before claiming remaining amounts. Signup and view all the answers

What is the reduced extent of guarantee for a single instalment claim settlement?

60% Signup and view all the answers

Which of the following conditions could lead to a recall of a claim released by the Trust?

Suppression of material information by the lending institution. Signup and view all the answers

In case of delay beyond 30 days for an eligible claim payment, what rate of interest will the Trust pay to the lending institution?

Prevailing Bank Rate Signup and view all the answers

What is the maximum discount an MSE can receive if it falls into all three categories?

30% Signup and view all the answers

Which social category does NOT qualify for fee relaxation?

Rich Entrepreneurs Signup and view all the answers

Which geographic area qualifies for the fee relaxation?

NER including Sikkim Signup and view all the answers

What is the fee rate concession for all eligible categories?

10% Signup and view all the answers

What is the MSE status qualification for fee relaxation?

ZED Certified Signup and view all the answers

What is the recommended year-on-year growth rate in credit to micro and small enterprises as per the Prime Minister's Task Force on MSME?

20 percent Signup and view all the answers

Which of the following lending options qualifies as achievement of the target for lending to Micro Enterprises?

Overdraft to PMJDY account holders Signup and view all the answers

What percentage of total lending to the MSE sector should be allocated to micro enterprises according to the guidelines?

60 percent Signup and view all the answers

What is one of the specific loan types included in the definition of 'Other Finance to MSMEs'?

Loans to microfinance institutions Signup and view all the answers

Which statement is true regarding loan applications from MSME borrowers?

Banks are required to acknowledge all loan applications. Signup and view all the answers

Which card type is included in the General Credit Cards for non-farm entrepreneurial credit needs?

Weaver's Credit Card Signup and view all the answers

The Task Force on MSME was established for what primary purpose?

To address various issues raised by MSMEs Signup and view all the answers

What is the minimum annual growth target for the number of micro enterprise accounts?

10 percent Signup and view all the answers

What happens to the claim settlement for accounts where waiver of legal action is granted?

A single instalment is reduced by 15% of the guarantee. Signup and view all the answers

What is the extent of guarantee coverage for Informal Micro Enterprises under the new provision?

85% Signup and view all the answers

Which category of enterprises does the 'Special Provision for Informal Micro Enterprises' apply to?

Enterprises exempted from GST regime. Signup and view all the answers

What is the standard guarantee fee rate for loans up to Rs. 10 lakh?

0.37% Signup and view all the answers

What is required for the invocation of guarantee under CGTMSE for Informal Micro Enterprises?

None of the above. Signup and view all the answers

What will happen if a legal waiver account's first claim settlement occurs?

The second instalment is settled after three years. Signup and view all the answers

What is the maximum loan amount eligible for guarantee coverage under the 'Special Provision for Informal Micro Enterprises'?

Rs. 20 lakh Signup and view all the answers

In terms of the extent of guarantee by choosing Option 1 for claim settlement, what reduction percentage is applied?

15% Signup and view all the answers

What is the maximum discount an MSE can receive if it qualifies under social, geographic, and MSE status categories?

30% Signup and view all the answers

Which social category does NOT qualify for the fee relaxation under the CGS II?

General Category Signup and view all the answers

What is the fee relaxation percentage for geographic categories eligible under CGS II?

10% Signup and view all the answers

Which of the following regions qualifies for fee relaxation under the geographic category?

Aspirational Districts Signup and view all the answers

Which borrower category is NOT included in the weaker section for fee relaxation?

Unemployed Youth Signup and view all the answers

How is the investment in plant and machinery or equipment calculated for an enterprise without prior Income Tax Returns?

Through a self-declaration by the promoter Signup and view all the answers

What is included in the calculation of investment in plant and machinery or equipment?

Tangible assets excluding certain items Signup and view all the answers

What happens to an enterprise's classification if there is an upward change in terms of investment or turnover?

It maintains its status for one year Signup and view all the answers

What should be excluded when calculating the turnover of any enterprise?

Exports of goods or services Signup and view all the answers

What is the status of a new enterprise regarding asset purchase value if it has no prior ITR?

Invoice value excluding GST will be considered Signup and view all the answers

What must a lending institution do after sanctioning a Sub-debt facility?

Apply for guarantee coverage from the trust Signup and view all the answers

What type of institutions qualify as eligible lenders under the Credit Guarantee Scheme for Startups?

Scheduled Commercial Banks and RBI registered NBFCs with certain ratings Signup and view all the answers

What characterizes an eligible borrower under the Credit Guarantee Scheme for Startups?

A startup with a stable revenue stream assessed over 12 months Signup and view all the answers

Which type of guarantee cover allows for a group of eligible borrowers?

Umbrella Based Guarantee Cover Signup and view all the answers

What is the annual guarantee fee for a transaction based guarantee cover?

2% per annum Signup and view all the answers

Which of the following statements about Member Institutions is true?

NBFCs must have a rating of BBB and above. Signup and view all the answers

What happens to recoveries made after the invocation of guarantee claims?

They first cover the legal costs incurred by MLIs Signup and view all the answers

What condition disqualifies a startup from being an eligible borrower?

Being classified as a Non-Performing Asset Signup and view all the answers

What is the maximum guarantee coverage limit per borrower under the Credit Guarantee Scheme for Co-Lending for secured loans?

₹500 lakh Signup and view all the answers

What is the key difference between Option/Model-1 and Option/Model-2 in the co-lending scheme?

Only Model-1 involves an escrow account Signup and view all the answers

Under the scheme, how much can a borrower obtain for unsecured credit facilities as per the new limits?

₹200 lakh Signup and view all the answers

What type of security is allowed under the 'Hybrid Security' product in the co-lending scheme?

Collateral security for part and unsecured for the rest Signup and view all the answers

What condition must be met for a borrower to be eligible under the Credit Guarantee Scheme for Co-Lending?

The credit facilities must not be in default Signup and view all the answers

What is required for the guarantee cover under Option/Model-1 of the co-lending scheme?

Joint appraisal by both institutions Signup and view all the answers

Which of the following is NOT a requirement for loan eligibility under the Credit Guarantee Scheme for Co-Lending?

Loans must be solely for equipment purchase Signup and view all the answers

Which factor determines the guarantee coverage for the unsecured part of a credit facility under the CGSCL?

Maximum limit of ₹500 lakh for the unsecured part Signup and view all the answers

What is the additional risk premium applied if the outstanding NPAs of a Member Institution exceed 15% per annum?

0.50% Signup and view all the answers

What is the deadline for a Member Institution to pay the Annual Commitment Charge for umbrella-based guarantee cover?

On or before April 30 each year Signup and view all the answers

What is the one-time guarantee fee amount a Member Institution must pay upon invoking a guarantee claim for pooled investments in startups?

1% of the Pooled Investment Signup and view all the answers

What is the maximum guarantee cover that can be provided per borrower?

Rs. 10 crore Signup and view all the answers

What happens if a Member Institution delays payment beyond the stipulated deadline?

They face a penalty of 4% above the prevalent Repo Rate Signup and view all the answers

What is the Annual Commitment Charge (ACC) rate for umbrella-based guarantee cover?

0.15% p.a. Signup and view all the answers

What charge must a Member Institution pay if no claims are preferred after closure of the VDF?

0.25% of the Pooled Investment Signup and view all the answers

What is the additional risk premium charged if NPAs exceed 10%?

0.25% Signup and view all the answers

Study Notes

Definition of MSMEs

MSMEs are defined under the MSMED Act, 2006, and include Micro, Small, and Medium Enterprises based on investment and turnover limits.
Loans to MSMEs qualify for Priority Sector Lending from July 1, 2020.

Classification of Enterprises

Micro Enterprise: Investment limit of ₹1 crore and turnover cap of ₹5 crore.
Small Enterprise: Investment limit of ₹10 crore and turnover cap of ₹50 crore.
Medium Enterprise: Investment limit of ₹50 crore and turnover cap of ₹250 crore.
Registration on the Udyam portal is mandatory for all MSMEs to receive a Udyam Registration Certificate.
Retail and Wholesale trade included as MSMEs for priority sector lending purposes.

Informal Micro Enterprises (IMEs)

IMEs can also register and will be treated as micro enterprises for Priority Sector Lending benefits if they have an Udyam Assist Certificate.

Composite Criteria for Classification

An enterprise must adhere to both investment and turnover caps for its category.
Crossing limits in either criterion mandates reclassification to the next higher category. Lower classification is only possible if both criteria fall below the specified limits.

Financing Guidelines for MSMEs

Loans extend to entities assisting decentralized sectors in supply and marketing related to artisans and cottage industries.
Bank loans to Micro Finance Institutions (MFIs) for MSME lending are promoted under specified conditions.
Overdrafts for PM Jan-Dhan Yojana accounts contribute towards achieving micro enterprise lending targets.

Recommendations from Prime Minister's Task Force

Task Force aims for a 20% yearly growth in credit to micro and small enterprises.
Aim for 10% annual growth in micro enterprise accounts.
Target that 60% of lending to the MSE sector should be directed towards micro enterprises.

Lending Application Protocol

Banks must acknowledge all loan applications clearly recording serial numbers.
Claims lodged above double the total fee will be reviewed and possibly suspended until corrected.

Claim Settlement by CGTMSE Trust

75% of the guaranteed amount is payable within 30 days upon eligible claim lodging.
Interest is payable on delayed claims at the prevailing Bank Rate.
25% balance payable upon recovery proceedings or after a specified time frame based on loan date.

Options for Claim Settlement

Two options for claim settlements for accounts with waiver of legal action:
- A single instalment with reduced guarantee coverage.
- Existing two-instalment claim process.

Special Provisions for IMEs

Special provisions for IMEs not subject to GST and registered on Udyam Assist Platform.
Guarantee coverage up to ₹20 lakh with 85% coverage.
No requirement for primary security for guarantee applications.

Fee Relaxations

Fee concessions available for social categories (e.g., women, SC/ST), geographic regions (including northeast regions), and MSME status.
Maximum cumulative discount for borrowers falling into all three categories can reach 30%.

Goods and Services Tax Identification Number (GSTIN) and PAN

All entities with the same Permanent Account Number (PAN) are treated as one enterprise under GSTIN.
Aggregate turnover and investment figures will determine the micro, small, or medium enterprise category.

Investment Calculation in Plant and Machinery

Investment calculations are based on Income Tax Returns (ITR) under the Income Tax Act, 1961.
New enterprises may use self-declaration for investment calculations until they file their first ITR, after which ITR is required.
Definition of "plant and machinery or equipment" includes only tangible assets, excluding land, buildings, furniture, or fittings.

Turnover Calculation

Exports are excluded from the turnover calculations for enterprises.
Enterprises maintain their classification status for one year even if there is an upward change in investment or turnover.

Charging of Annual Guarantee Fee

Lower rates and higher guarantee coverage for borrowers in specific categories: Social, Geographic, and MSE Status.
Target groups for social category include Women, SC, ST, PwD, and Agniveers.
Geographic relaxations apply to regions like the North Eastern States and Aspiration Districts.
Maximum discount of 30% on the standard fee rate for MSEs in all three categories.

Credit Guarantee Scheme for Co-Lending (CGSCL)

Scheme initiated on February 25, 2022, by CGTMSE for guarantees on credit facilities for Micro and Small Enterprises (MSEs).
Co-lending has two arrangements:
- Option 1: Joint Lending by Banks and NBFCs through an escrow account, requiring mutual appraisal and due diligence.
- Option 2: Direct Assignment, allowing banks to discretionarily book loans originated by NBFCs.

Eligible Credit Facilities under CGSCL

Maximum limits for loans: ₹500 lakh for secured and ₹200 lakh for unsecured credit facilities.
Credit facilities must be standard and not classified as non-performing assets (NPAs).
Hybrid Security option allows partial collateral security for unsecured credit loans up to ₹500 lakh.

Application Process for Guarantee Cover

Lending institutions need to apply to the trust for guarantee coverage post-sanctioning a Sub-debt facility.
Trust approval is mandatory before the scheme becomes valid.

Credit Guarantee Scheme for Startups (CGSS)

Introduced on October 6, 2022, to provide loan guarantee coverage for startups with stable revenue streams.
Fund managed by the National Credit Guarantee Trustee Company Limited (NCGTC).

Eligible Borrowers and Institutions

Eligible borrowers include startups with stable revenue and not in default.
Eligible lending institutions include scheduled banks, financial institutions, and RBI-registered NBFCs with a rating of BBB or above.

Types of Guarantee Cover under CGSS

Transaction-Based Guarantee Cover for individual borrowers.
Umbrella-Based Guarantee Cover for groups of eligible borrowers.

Guarantee Fees

Transaction-based fee: 2% per annum, reduced to 1.5% for units from the North East and women entrepreneurs.
Umbrella fees involve an Annual Commitment Charge (ACC) of 0.15% and a one-time fee of 1% upon claim invocation.
Delayed payments incur penal charges above the prevailing Repo Rate.

Maximum Guarantee Cover

The maximum guarantee coverage per borrower is capped at ₹10 crores.

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Description

Test your knowledge on the updated guidelines for lending to Micro, Small, and Medium Enterprises (MSMEs) as per the MSMED Act, 2006. This quiz focuses on the new definitions and changes that came into effect on July 1, 2020. Understand the impact of these guidelines on financial institutions and enterprises.