RBI's Committee on MSMEs Recommended Major Reform Oriented Changes

Reserve Bank of India had set up a committee to come up with a set of recommendations for the upcoming MSME policy after a comprehensive observation. The RBI committee has made recommendations that have broadly covered several aspects of MSME business, this includes policy framework, banking and finance.

Although the much needed and discussed economic reforms are expected to be on the way, and the role of MSMEs are going to be very crucial in this. Considering such a scenario, these recommendations from RBI matters most and are expected to drive the next wave of Indian MSMEs.

Here are some key recommendations from the RBI Committee:

MSME Policy Focused Recommendations 

Turnover based MSME definition, proposed by the Government in place of existing investment based definition, endorsed. Also recommends delegation of powers to amend definition to be given to Ministry of MSME.

Larger states asked to establish more than one Facilitation Councils. Medium enterprises to be covered under the gambit of FCs.

A National Council for MSMEs to be set-up under the Chairmanship of the Prime Minister with the Ministers for MSME, Commerce & Industry, Textiles, Food Processing, Agriculture, Rural Development, Railways and Surface Transport being members. Similar State Councils for MSMEs in States for better coordination of developmental initiatives.

Instead of multiple registrations, PAN to be a Unique Enterprise Identifier (UEI)

All MSMEs to mandatorily upload all their invoices above an amount to be specified by Government on Information Utilities (IU) set up under IBC.

GeM and TReDS platforms to be integrated for enabling discounting of bills for orders accepted through GeM. PSEs required to settle invoices for goods supplied within 10 days of issue of certificate of acceptance.

District Industries Centres (DICs) in new avatar proposed to establish Enterprise Development Centres (EDCs) to assist rural enterprises in respect of GST, IT, UAM registration, PAN application, loan document preparation, etc.

A comprehensive new MSME Code (set of legislation) to put an end to ‘territorial jurisdiction based and arbitrary inspection system’ to address the major challenges, relating to physical infrastructural bottlenecks, absence of formalisation, technology adoption, capacity building, backward and forward linkages, lack of access to credit, risk capital, perennial problem of delayed payments, etc.

Recommends Rules under Insolvency and Bankruptcy Code for a differentiated regime for insolvency/bankruptcy of firms.  Considering their vulnerability and size, Insolvency Code / delegated legislation to provide for out-of-court assistance to MSMEs, who are predominantly proprietorships, such as mediation, debt counselling, financial education, etc.

Recommendations for Better Access to Finance & Banking

A Government-sponsored Fund of Funds (FoF) of Rs 10,000 crore to support VC/PE firms investing in the MSME sector that will support crowdfunding from venture capital and private equity firms.

Distressed Asset Fund, with a corpus of Rs 5000 crore, to assist units hit by change in the external environment to be run on lines of Textile Upgradation Fund Scheme (TUFS)

Limit of collateral security free loans raised from Rs 10 lakh to  Rs 20 lakh (including loans sanctioned under PMMY and to SHG based enterprises.)

A scheme to be announced within a year to facilitate portability of MSME loans

The PSB Loans In 59 Minutes portal to also cater to new entrepreneurs with an enhanced limit up to Rs. 5 crores.

A new concept of adjusted Priority Sector Lending to enable banks to specialize in lending to a specific sector.

CGTMSE suggested introducing ex-ante Credit Guarantees for loans above Rs 2 crore. After having secured a guarantee, borrowers can approach different banks for a better deal.

Proposed a second TReDS window for reverse factoring so that supplier financing can be provided easily.

A working group SIDBI and IBA to bring in uniformity and simplification of various loan application formats and assessment process and also suggest ways to reduce Turn Around Time (TAT) especially in the pre-LOS (Loan Origination System) or centralised sanction stage.

Basel II rating requirement (SEM exposure) raised to Rs 7.5 Crore.