Last updated: February 5th, 2020 4:04 PM

MSME Loan under Priority Sector

MSME or SSI units contribute 8% of India's GDP, 45% of manufactured output and 40% of total exports of India. Further, MSMEs are India's largest employers, providing employment to about 60 million people through 26 million businesses. Therefore, the continued growth of MSMEs or SSIs is vital for sustaining India's economic growth and achieving inclusive growth for all sections of the Indian population.  However, MSMEs and SSIs in India today struggle to obtain timely and adequate bank loans due to various factors such as collateral requirement, long processing time, high cost of credit, etc.. Hence, the Government of India has classified loans to MSME and/or SSIs under priority sector - to improve flow of funds to MSMEs and SSIs. In this article, we look at the implications of MSME and SSI loans being classified as Priority Sector Lending.

MSME or SSI Registration

MSME or SSI Registration is necessary for a business entity under the MSMED Act, 2006 for classifying the unit as an MSME or SSI. Manufacturing units with less than Rs.10 crore of investment in plant and machinery or service providing businesses with less than Rs.5 crores of investment in equipment can register as an MSME or SSI under the MSMED Act. To obtain MSME or SSI Registration, visit IndiaFilings.com. To know more about the benefits of MSME Registration, visit IndiaFilings Learning Center.

MSME Loan under Priority Sector Lending

The MSME or SSI business to which loan is to be extended, the quantum of loan and modalities of financing can be decided by the Bank. However, banks have to follow the following guidelines and achieve overall targets set for priority sector lending, as follows:

• As per the recommendations of the Prime Minister's Task Force on MSMEs, The banks must achieve a 20% year on year growth in loans to micro and small businesses. It also requires a 10% annual growth in the number of micro-enterprise loan accounts.
• Of the total loans to MSME and SSI units, 40% of the loans must be provided to micro (manufacturing) businesses having investment in plant & machinery of up to Rs.5 lakhs or micro (service) businesses having investment in plant & machinery of fewer than Rs.2 lakhs.
• Further, out of the total loans to MSMEs, 20% of the loans must be provided to small scale businesses (manufacturing) with an investment in plant & machinery of more than Rs.5 lakhs and up to Rs.25 lakhs or small scale businesses (service) with an investment in plant & machinery of more than Rs.2 lakhs and up to Rs.10 lakhs.
• The bank can provide a balance of 40% of the loans to MSME or SSI units not falling in any of the above categories.

MSME or SSI Unit Loan Processing Time

In addition to the above overall targets for MSME loan under priority lending, banks must process loan applications of MSMEs and SSIs quickly. The bank must process the loan application for Small Scale Units for a credit limit of up to Rs.25,000 within 2 weeks and those applications for a loan of up to Rs.5 lakhs must be processed within 4 weeks. The bank must process the loan application form MSME or SSI units for more than Rs.5 lakhs within a timeframe of 8 to 9 weeks. The processing time for the loan would only start on submission of all the documents and information requested by the bank are provided completely. To obtain a bank loan for an SSI or MSME business, visit IndiaFilings.com