Micro, Small and Medium Enterprises in India | PAPER II – PRINCIPLES & PRACTICES OF BANKING | MODULE B: FUNCTIONS OF BANKS
Micro, Small and Medium Enterprises (MSMEs) in India
Aim of MSMEs
The key aims of MSMEs are to:
- Generate employment opportunities
- Promote balanced regional development
- Enhance exports and contribute to GDP
- Encourage entrepreneurship and innovation
Micro, Small and Medium Enterprises Development (MSMED) Act, 2006
The MSMED Act classifies enterprises into Micro, Small, and Medium based on investment in plant & machinery or equipment and annual turnover.
| Type | Investment (in ₹ crore) | Turnover (in ₹ crore) |
|---|---|---|
| Micro | Up to 1 | Up to 5 |
| Small | Up to 10 | Up to 50 |
| Medium | Up to 50 | Up to 250 |
Policy Package for MSMEs – Credit/Finance
- Priority Sector Lending target for MSMEs
- Interest Subvention Scheme
- Credit Linked Capital Subsidy Scheme (CLCSS)
- Working Capital and Term Loans through SIDBI and banks
Measures for Promotion and Development
- Technology Upgradation Support
- Skill Development and Training Programs
- Market Development Assistance
- Export Promotion Measures
Enhancement of Competitiveness
Includes cluster development, lean manufacturing, zero defect-zero effect certification, and quality assurance schemes.
Delayed Payments to MSMEs
Buyers must make payment within 45 days. Delays attract compound interest with monthly rests at 3 times the bank rate under Section 16 of the MSMED Act.
Example: If the payment of ₹1,00,000 is delayed by 3 months and the bank rate is 6%, the interest is calculated as:
Interest = ₹1,00,000 × (6% × 3) × 3 = ₹4,500 approx.
Trade Receivables Discounting System (TReDS)
An electronic platform to facilitate financing of trade receivables of MSMEs from corporate buyers through multiple financiers.
Performance and Credit Rating Scheme
Implemented by NSIC with support from MoMSME. Provides ratings to MSMEs to enhance their creditworthiness and access to finance.
Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGTMSE)
Provides collateral-free credit up to ₹2 crore to new and existing MSEs.
Illustration: A loan of ₹50 lakh is sanctioned under CGTMSE. The bank gets 75% guarantee cover = ₹37.5 lakh in case of default.
Cluster Based Approach in Financing MSMEs
MSMEs are financed as part of industry clusters (e.g., textile cluster, auto components). This allows better risk management and focused development.
Common Guidelines / Instructions for Lending to MSME Sector
- Collateral-free loans up to ₹10 lakh for MSEs
- Composite loan limit up to ₹1 crore
- Rehabilitation of sick MSMEs
- Mandatory registration on Udyam Portal for classification
Multiple Choice Questions (MCQs)
- What is the investment limit for a Micro enterprise as per MSMED Act?
A. Up to ₹10 lakh
B. Up to ₹1 crore
C. Up to ₹5 crore
D. Up to ₹2 crore
Answer: B - Which Act governs the classification and development of MSMEs in India?
A. MSME Act, 1999
B. Industrial Development Act, 2001
C. MSMED Act, 2006
D. SIDBI Act, 1990
Answer: C - What is the maximum payment period allowed to buyers for payments to MSMEs?
A. 30 days
B. 45 days
C. 60 days
D. 90 days
Answer: B - TReDS is primarily used for:
A. Credit rating
B. Receivables discounting
C. Tax filing
D. Asset securitization
Answer: B - What is the guarantee coverage under CGTMSE for MSE loans up to ₹2 crore?
A. 50%
B. 60%
C. 75% or more
D. 40%
Answer: C - Which agency implements the Performance and Credit Rating Scheme?
A. RBI
B. SIDBI
C. NSIC
D. NABARD
Answer: C - Which platform enables electronic discounting of invoices for MSMEs?
A. RTGS
B. NEFT
C. TReDS
D. E-NACH
Answer: C - Composite loan to MSMEs includes:
A. Working capital only
B. Term loan only
C. Term loan and working capital
D. Loan against shares
Answer: C - Which portal is mandatory for MSME classification?
A. e-Shram
B. GeM
C. Udyam
D. NSDL
Answer: C - Which organization is primarily responsible for financing MSMEs?
A. RBI
B. SEBI
C. SIDBI
D. NABARD
Answer: C
Comments