PPB Module BChapter Notes5–7 Marks Expected

Micro, Small and Medium Enterprises in India

Principles & Practices of Banking | Module B · Chapter 39

Chapter 38 covered bank lending to NBFCs and the Co-Lending Model. This chapter focuses on MSMEs — their statutory definition, revised classification criteria under the MSMED Act 2006, credit policy, delayed payment provisions, TReDS, CGTMSE guarantee schemes, and the cluster-based approach to financing.

By Bankopedia.co.inUpdated 2026JAIIB PPB · Module B

📌 Why This Chapter Matters in JAIIB

Expect 5–7 questions from this chapter. Key focus areas: MSME classification thresholds (Micro ≤₹1cr/₹5cr; Small ≤₹10cr/₹50cr; Medium ≤₹50cr/₹250cr — effective July 1, 2020); composite criteria rule (upgrade if either limit crossed; downgrade only if both limits fall below); PSL sub-target for Micro: 7.5% of ANBC/CEOBE; delayed payment: max 45 days, 3× Bank Rate compound interest; CGTMSE guarantee coverage (Micro ≤₹5L: 85%; Women/NE: 80%; Others: 75%; max ₹150L); collateral-free up to ₹10L (₹25L at discretion); TReDS factoring vs reverse factoring; and CLSS: 15% subsidy, ₹1 crore ceiling on purchase price.

Key Facts & References — Chapter 39 at a Glance

Micro enterprise:Investment ≤ ₹1 crore AND turnover ≤ ₹5 crore

Small enterprise:Investment ≤ ₹10 crore AND turnover ≤ ₹50 crore

Medium enterprise:Investment ≤ ₹50 crore AND turnover ≤ ₹250 crore

Classification effective from:July 1, 2020 (Gazette Notification S.O.2119(E) dated June 26, 2020)

Investment basis:Written Down Value (WDV) as per Income Tax Act; excludes land, building, furniture

Turnover calculation:Exports excluded; PAN and GSTIN mandatory after March 31, 2021

PSL sub-target for Micro:7.5% of ANBC or CEOBE, whichever is higher

Micro credit growth target:20% YoY credit growth; 10% annual growth in accounts; 60% of MSE lending to Micro

Delayed payment ceiling:Maximum 45 days from delivery (or agreed date, whichever is earlier)

Delayed payment interest:Compound interest at 3× Bank Rate (monthly rests)

MSME SAMADHAAN:Online portal for delayed payment complaints (Office of DC-MSME)

CGTMSE set up:August 2000 by Ministry of MSME and SIDBI

CGS-I coverage limit (SCBs):Up to ₹200 lakh without collateral

CGS-I coverage limit (RRBs/SFBs):Up to ₹50 lakh without collateral

Micro guarantee ≤₹5L:85% (subject to max ₹4.25 lakh)

Micro guarantee ₹5L–₹50L:85% (subject to max ₹37.50 lakh)

Women/NE guarantee:80% (subject to max ₹40 lakh)

All others guarantee:75% (subject to max ₹150 lakh)

Claim payout:75% within 30 days; balance 25% after recovery

Guarantee invocation window:Within 3 years from NPA date or lock-in period, whichever is later

Collateral-free lending:Mandatory up to ₹10 lakh; at bank discretion up to ₹25 lakh

Composite loan single window:Up to ₹1 crore (working capital + term loan combined)

CLSS subsidy:15% on purchase price of plant & machinery; loan ceiling ₹1 crore

UNIDO clusters:388 clusters across 21 states identified in India

Introduction & MSMED Act 2006 — Classification

Free

The policy framework for MSMEs traces back to August 1991, with the creation of SIDBI and the Technology Development & Modernisation Fund (TDMF). The Delayed Payment Act 1993 and the Ministry of MSME (1999) followed. In 2006, the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006replaced the word 'Industry' with 'Enterprise' and created a unified definition across manufacturing and services.

39.2 Aims of MSMEs

Strengths & Contributions

▸High contribution to domestic production
▸Low investment requirements
▸Significant export earnings
▸Operational flexibility
▸Capacity to develop indigenous technology
▸Low import intensity; import substitution
▸Contribution to defence production
▸Competitiveness in domestic and export markets

Limitations

▸Low capital base
▸Inadequate exposure to international environment
▸Concentration of functions in one or two persons

39.3.1 Classification of Enterprises (w.e.f. July 1, 2020)

Category	Investment in Plant & Machinery / Equipment	Annual Turnover
Micro Enterprise	Does not exceed ₹1 crore	Does not exceed ₹5 crore
Small Enterprise	Does not exceed ₹10 crore	Does not exceed ₹50 crore
Medium Enterprise	Does not exceed ₹50 crore	Does not exceed ₹250 crore

Enterprises must obtain an Udyam Registration Certificate. PAN and GSTIN are mandatory after March 31, 2021.

39.3.2 Composite Criteria of Investment and Turnover

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Upward graduation rule

If an enterprise crosses the ceiling limits specified for its present category in either of the two criteria (investment OR turnover), it will cease to exist in that category and be placed in the next higher category.

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Downward graduation rule

No enterprise shall be placed in a lower category unless it goes below the ceiling limits specified for its present category in both criteria (investment AND turnover).

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Same PAN — multiple GSTINs

All units with GSTINs listed against the same PAN shall be collectively treated as one enterprise; aggregate values of all entities considered for category determination.

Investment & Turnover Calculation, Credit Policy

Free

39.3.3 Calculation of Investment

▸Linked to the Income Tax Return (ITR) of the previous year.
▸For new enterprises: based on self-declaration of the promoter (till after filing first ITR).
▸Includes all tangible assets other than land, building, furniture, and fittings.
▸Excludes items specified in the Act (certain pollution control, safety, R&D equipment).
▸Value = Written Down Value (WDV) at end of Financial Year as per Income Tax Act — NOT original cost of acquisition.
▸For new enterprise without ITR: purchase (invoice) value excluding GST, on self-disclosure basis.

39.3.4 Calculation of Turnover

▸Exports of goods or services shall be excluded while calculating turnover.
▸Turnover linked to Income Tax Act or CGST Act and GSTIN.
▸PAN and GSTIN mandatory after March 31, 2021.
▸Upward change: enterprise maintains current status till expiry of one year from close of the year of registration.
▸Reverse graduation: enterprise gets benefit of changed status only from April 1 of financial year following the year of change.

39.4 Policy Package for MSMEs — Credit/Finance

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PSL sub-target for Micro: 7.5% of ANBC or CEOBE (whichever is higher) for lending to Micro enterprises.

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PM Task Force targets: (a) 20% YoY growth in credit to micro and small enterprises; (b) 10% annual growth in number of micro enterprise accounts; (c) 60% of total MSE lending to Micro enterprises.

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SIDBI: Principal financial institution for promotion, financing, and development of the MSME sector. Coordinates functions of all institutions engaged in similar activities.

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SFCs and SIDCs: State Financial Corporations (SFCs) and State Industrial Development Corporations (SIDCs) are major sources of long-term funds for MSMEs.

▸

Other financing options: Primary/secondary securities market, venture capital, private equity, external commercial borrowings, and factoring services.

Delayed Payments, TReDS & Performance & Credit Rating

Members Only

39.6 Delayed Payments

Payment deadline:Payments for supplies by MSE units must be received on or before the agreed date, subject to a maximum of 45 days from delivery.

Bank sub-limits:Banks must fix sub-limits within working capital limits to large borrowers specifically for meeting payment obligations to MSMEs.

Penal interest:On failure to pay: compound interest with monthly rests at 3× the Bank Rate notified by RBI, calculated from the appointed day / agreed date.

MSME SAMADHAAN:Online portal (Office of DC-MSME, Ministry of MSME) where MSEs can file delayed payment applications. Problem persists because MSMEs depend on corporate buyers and are reluctant to use institutional mechanisms.

39.7 Trade Receivables Discounting System (TReDS)

What is TReDS?

An electronic platform for financing/discounting trade receivables of MSMEs through multiple financiers — banks and financial institutions permitted by RBI.

Factoring Unit (FU)

Standard nomenclature for invoice(s) or bill(s) of exchange. Each FU represents a confirmed obligation of the buyer.

Factoring

If the MSME seller creates the FU — it is called factoring.

Reverse Factoring

If the buyer creates the FU — it is called reverse factoring.

39.8 Performance and Credit Rating Scheme

Nodal Agency:NSIC (National Small Industries Corporation) — implementation through empanelled rating agencies

Coverage:Combination of credit and performance factors: operations, finance, business, and management risk

Rating Scale:Uniform Rating Scale for all empanelled rating agencies

Fee Structure:Turnover-based fee; partial reimbursement of rating fee through NSIC

Agency choice:MSEs have liberty to choose among the empanelled rating agencies

Benefits to MSEs

Independent, trusted third-party opinion on capabilities and creditworthiness; enables prompt credit at attractive interest rates; recognition in global trade; helps vendors assess the MSE.

Benefits to Banks

Independent evaluation of strength and weaknesses of the MSE seeking credit; enables better credit risk management by banks and financial institutions.

Certified Credit Counsellors (CCC) Scheme

Launched by SIDBI in July 2017 (based on RBI framework from April 2016). CCCs are institutions or individuals registered with SIDBI to assist MSMEs in preparing professional project reports — helping banks make more informed credit decisions. CCC aspirants must complete the MSME Certification programme offered by IIBF.

CGTMSE — Credit Guarantee Schemes

Members Only

39.9.1 Background

CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises) was set up by the Ministry of MSME and SIDBI in August 2000 to address the common hurdle of collateral/third-party guarantee requirements. The Trust reimburses the lender if the MSE unit defaults — enabling collateral-free lending. Current schemes: CGS-I (Banks), CGS-II (NBFCs), CGS-III (Mudra), PM SVANidhi, and CGSCL (Co-Lending).

39.9.2 CGS-I — Credit Guarantee Fund Scheme for Banks

Eligible MLIs:Commercial banks, RRBs, SFIs, SFBs, NBFCs, Fin-Tech NBFCs, SIDBI, NSIC, and NEDFC.

Coverage limit:Up to ₹50 lakh for RRBs/FIs/SFBs; up to ₹200 lakh for SCBs, select FIs, and NBFCs — without any collateral security or third-party guarantee.

Hybrid Security Product:MLIs can obtain collateral for part of the credit facility; the other part (up to ₹200 lakh) can be covered under CGS-I. CGTMSE gets notional second charge on collateral — no separate documentation needed.

Guarantee Period:From date of payment of guarantee fee: for tenure of loan (term/composite loans); or 5 years if only working capital facilities.

Interest rate cap:Maximum 14% per annum (including cost of guarantee cover). For RRBs: Average Base Rate decided by CGTMSE.

Facilities above ₹200 lakh:Can be covered; maximum guarantee cover ₹150 lakh; CGTMSE gets pari-passu charge on both primary and collateral security.

Rating requirement:Credit facilities above ₹50 lakh up to ₹200 lakh must be rated internally and be of investment grade.

Guarantee Coverage Table (CGS-I, w.e.f. April 01, 2018)

Category	Up to ₹5 lakh	₹5L – ₹50L	₹50L – ₹200L
Micro Enterprises	85% (max ₹4.25L)	85% (max ₹37.5L)	75% (max ₹150L)
Women Entrepreneurs / NE Region	80% (max ₹40L)	80% (max ₹40L)	75% (max ₹150L)
MSE Retail Trade (₹10L–₹100L)	50% (max ₹50L)	50% (max ₹50L)	50% (max ₹50L)
All Other Eligible Borrowers	75% (max ₹150L)	75% (max ₹150L)	75% (max ₹150L)

39.9.3 CGS-II — for NBFCs

▸Open to NBFCs registered with RBI meeting CGTMSE criteria.
▸Covers credit facilities up to ₹100 lakh per borrower.
▸Portfolio crystallises at end of each quarter; fresh portfolio from next quarter.
▸Guarantee fee payable within 30 days of submission / CGDAN, whichever is earlier.
▸Above ₹50L up to ₹200L: must be investment grade rated.

39.9.6 CGSCL — for Co-Lending

▸Two options: Option 1 (joint lending by Banks & NBFCs); Option 2 (Direct Assignment).
▸Only MLIs registered under CGS-I & CGS-II eligible as a pair for CLM under CGSCL.
▸Secured facility: up to ₹200 lakh; Unsecured: up to ₹100 lakh.
▸Coverage: 50% for unsecured; 75% for secured (primary security).
▸Hybrid Security: unsecured part up to ₹200 lakh covered; CGTMSE gets notional second charge.

39.9.5 PM SVANidhi 2.0 — Street Vendors

Implementing Ministry:Ministry of Housing and Urban Affairs (since June 1, 2020)

3rd Loan:Up to ₹50,000; tenor up to 36 months (on repayment of 2nd loan of up to ₹20,000)

2nd Loan min repayment:6 months before eligible for next loan cycle with enhanced limit

Interest subsidy:7% for 2nd and 3rd loans (for Standard accounts only)

Guarantee coverage period:Claims payable till March 2028

39.9.7 & 39.9.8 Exclusions & Claims

Not Covered Under CGTMSE

✗Covered by DICGC or RBI (to extent of cover)
✗Micro enterprises up to ₹10L covered by MUDRA Guarantee Scheme
✗Covered by any other insurance/guarantee/indemnity
✗Not conforming to Govt. law or RBI directives
✗Sanctioned against collateral/third party guarantee (except Hybrid Security model)
✗Borrower for whom guarantee of Trust was already invoked and remains unpaid

Claim Procedure

✓MLI must inform NPA date by end of subsequent quarter.
✓Guarantee can be invoked within 3 years from NPA date or lock-in period, whichever is later.
✓Trust pays 75% of guaranteed amount within 30 days if claim is in order.
✓Balance 25% paid on conclusion of recovery proceedings or till decree gets time-barred.
✓Action for recovery must be initiated after issuing loan recall notice.
✓MLI must continue diligent recovery efforts even after guarantee claim payment.

Common Guidelines for MSME Lending & Cluster Financing

Members Only

39.11 Common Guidelines / Instructions for Lending to MSME Sector

(a) Acknowledgement of Loan Applications

All loan applications must be acknowledged (manual or online) and allotted a running serial number.

(b) Collateral Security

No collateral security for loans up to ₹10 lakh extended to MSE sector and all units under PMEGP (administered by KVIC). Banks may dispense with collateral up to ₹25 lakh at their discretion. Banks should encourage CGTMSE cover.

A composite loan limit of ₹1 crore can be sanctioned to enable MSE entrepreneurs to meet both working capital and term loan requirements through a Single Window.

(d) Revised General Credit Card (GCC) Scheme

Provides greater credit linkage for all productive activities within Priority Sector guidelines.

(e) Credit Linked Capital Subsidy Scheme (CLSS)

Technology Upgradation for MSEs: (i) Subsidy: 15% for all micro and small enterprises; (ii) Loan ceiling: ₹1 crore; (iii) Subsidy basis: purchase price of plant & machinery (not loan amount). Implementing agencies: SIDBI and NABARD.

(f) Streamlining Credit Flow to MSEs

Banks must incorporate: standby credit facility for term loans; additional working capital for emergent needs; mid-term review of working capital limits; defined timelines for credit decisions.

(g) Debt Restructuring Mechanism

SME Debt Restructuring guidelines (issued August 2020, updated periodically) to be adopted by all SCBs.

(h) Revival and Rehabilitation Framework

Framework notified by Ministry of MSME in May 2015 (RBI guidelines issued 2016) for MSME units with loan limits up to ₹25 crore — to provide simpler, faster stress resolution.

(j) Specialised MSME Branches

Public sector banks advised to open at least one specialised branch in each district. Banks should also have a system of e-tracking of MSE loan applications.

39.10 Cluster Based Approach to Financing MSMEs

A cluster is a concentration of economic enterprises producing a typical product/service within a geographical area (spanning villages, a town or city). India has more than 6,500 industrial, artisan and micro enterprise clusters estimated to contribute 60% of manufactured exports.

Types of Clusters

▸Artisanal: textiles, handlooms, handicrafts, woodcrafts, metal/stone crafts, jewellery, leather, pottery.
▸Industrial: processed food, rice milling, garments, engineering, machine tools, foundry, rubber, pharmaceuticals.
▸UNIDO identified 388 clusters across 21 states.

Benefits of Cluster Financing

▸Dealing with well-defined and recognised groups.
▸Better information availability for risk assessment.
▸Easier monitoring by lending institutions.
▸Reduction in costs.
▸Separate packages/services can be developed per cluster.
▸Each lead bank of the district to adopt at least one cluster.

Govt. Schemes for Clusters

Ministry of MSME has approved clusters under: SFURTI (Scheme of Fund for Regeneration of Traditional Industries) and MSE-CDP (Micro and Small Enterprises Cluster Development Programme) — located in 121 minority concentration districts. All SLBC Convenor banks must incorporate cluster credit requirements in their Annual Credit Plans.

Chapter Summary & Flashcards

Members Only

Chapter 39 in 6 Lines

MSMED Act 2006 redefined MSMEs (w.e.f. July 1, 2020): Micro ≤₹1cr/₹5cr; Small ≤₹10cr/₹50cr; Medium ≤₹50cr/₹250cr — composite criterion of investment (WDV, excl. land/building) and turnover (excl. exports); all same-PAN GSTINs treated as one enterprise.
Upgrade if either limit crossed; downgrade only if both limits fall below; upward change: current status retained for 1 year; reverse graduation effective from April 1 of following FY.
PSL sub-target for Micro: 7.5% of ANBC/CEOBE; PM Task Force: 20% YoY credit growth, 10% account growth, 60% of MSE lending to Micro; SIDBI is principal institution; SFCs/SIDCs for long-term funding.
Delayed payment: max 45 days; 3× Bank Rate compound interest; MSME SAMADHAAN for online complaints. TReDS: electronic platform for trade receivables; FU = invoice; factoring (MSME creates FU) vs reverse factoring (buyer creates).
CGTMSE (set up Aug 2000): CGS-I up to ₹200L (SCBs)/₹50L (RRBs) without collateral; guarantee coverage 85% (Micro ≤₹50L), 80% (Women/NE), 75% (others), max ₹150L; claim: 75% within 30 days, invoke within 3 years of NPA date; collateral-free mandatory up to ₹10L.
CLSS: 15% subsidy on plant & machinery purchase price, ceiling ₹1 crore, implementing agencies SIDBI/NABARD; composite loan ₹1 crore (single window); specialised MSME branch per district; UNIDO: 388 clusters in 21 states contributing 60% of manufactured exports.

Flashcards — Chapter 39

1. What are the investment and turnover limits for a Micro Enterprise under the revised MSMED Act criteria?▼

Investment in plant & machinery or equipment does not exceed ₹1 crore AND annual turnover does not exceed ₹5 crore.

2. What are the limits for a Small Enterprise?▼

Investment does not exceed ₹10 crore AND annual turnover does not exceed ₹50 crore.

3. What are the limits for a Medium Enterprise?▼

Investment does not exceed ₹50 crore AND annual turnover does not exceed ₹250 crore.

4. When did the revised MSME classification come into effect?▼

July 1, 2020 (vide Gazette Notification S.O.2119(E) dated June 26, 2020).

5. What is the composite criteria upward graduation rule?▼

If an enterprise crosses the ceiling limits in either investment OR turnover, it is placed in the next higher category.

6. What is the composite criteria downward graduation rule?▼

An enterprise is placed in a lower category only if it goes below ceiling limits in BOTH investment AND turnover.

7. How is investment in plant & machinery calculated for MSME classification?▼

Written Down Value (WDV) as per the Income Tax Act at end of Financial Year — not the original cost of acquisition. Excludes land, building, furniture, and fittings.

8. Are exports included in turnover for MSME classification?▼

No — exports of goods or services are excluded while calculating turnover for classification purposes.

9. What is the PSL sub-target for lending to Micro enterprises?▼

7.5% of ANBC or CEOBE, whichever is higher.

10. What are the PM Task Force credit targets for banks regarding MSMEs?▼

(a) 20% YoY growth in credit to micro & small enterprises; (b) 10% annual growth in number of micro enterprise accounts; (c) 60% of total MSE lending to go to Micro enterprises.

11. What is the maximum time for payment to MSE suppliers under the MSMED Act?▼

On or before the agreed date, subject to a maximum of 45 days from the date of delivery.

12. What is the penal interest for delayed payments to MSEs?▼

Compound interest with monthly rests at 3 times the Bank Rate notified by RBI.

13. What is TReDS and what is a Factoring Unit (FU)?▼

TReDS is an electronic platform for financing/discounting MSME trade receivables through multiple financiers. A Factoring Unit (FU) is a standard nomenclature for invoice(s) or bill(s) of exchange representing a confirmed buyer obligation.

14. What is the difference between factoring and reverse factoring in TReDS?▼

Factoring: the MSME seller creates the FU. Reverse factoring: the buyer creates the FU.

15. When was CGTMSE set up and by whom?▼

August 2000, set up jointly by the Ministry of MSME and SIDBI.

16. What is the maximum credit facility covered under CGS-I for Scheduled Commercial Banks?▼

Up to ₹200 lakh without any collateral security or third-party guarantee.

17. What is the guarantee coverage for Micro Enterprises for credit facilities up to ₹5 lakh under CGS-I?▼

85% of the amount in default, subject to a maximum of ₹4.25 lakh.

18. What is the guarantee coverage for Women Entrepreneurs / NE Region borrowers (above ₹5L to ₹50L)?▼

80% of the amount in default, subject to a maximum of ₹40 lakh.

19. Within how many days does CGTMSE pay 75% of the guarantee claim?▼

Within 30 days of the claim being found in order and complete.

20. Within what period must a bank invoke the CGTMSE guarantee after an account becomes NPA?▼

Within 3 years from the NPA date or the lock-in period, whichever is later.

21. Up to what loan amount is collateral-free lending mandatory for MSE borrowers?▼

Up to ₹10 lakh. Banks may also dispense with collateral up to ₹25 lakh at their discretion.

22. What is the CLSS subsidy rate and on what basis is it calculated?▼

15% subsidy, calculated on the purchase price of plant & machinery (not the loan amount). Loan ceiling: ₹1 crore. Implementing agencies: SIDBI and NABARD.

23. How many industrial/artisan clusters exist in India and what share of manufactured exports do they contribute?▼

More than 6,500 clusters, contributing approximately 60% of India's manufactured exports. UNIDO identified 388 clusters across 21 states.

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