LOAN POLICY FY 2018 CONTENTS 3 EQUITY & RISK CAPITAL ASSISTANCE INTRODUCTION PRODUCT PROFILE DUE DILIGENCE 11

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1 Appendix I LOAN POLICY FY 2018 PARA NO. CONTENTS PAGE NO. 1 OVERVIEW PREFACE FRAMEWORK OF THE LOAN POLICY OBJECTIVES OF THE LOAN POLICY OVERVIEW OF LOAN POLICY VALIDITY/ AUTHORITY OF LOAN POLICY 4 2 CREDIT MANAGEMENT POLICY THRUST/NICHE BUSINESS AREAS MICRO, SMALL & MEDIUM ENTERPRISES PRODUCT MANAGEMENT PROCESS MANAGEMENT 7 3 EQUITY & RISK CAPITAL ASSISTANCE INTRODUCTION PRODUCT PROFILE DUE DILIGENCE ASSISTANCE THROUGH FOCUSED EQUITY AND VENTURE DEBT FUNDS (VCFs / PE FUNDS) 11 4 ASSISTANCE FOR SERVICE SECTOR INTRODUCTION THRUST BUSINESS AREAS APPROACH TO FINANCING SERVICE SECTOR 12 5 ASSISTANCE TO SECTORS UNDER MAKE IN INDIA 13 6 ASSISTANCE FOR SUSTAINABLE DEVELOPMENT INTRODUCTION OBJECTIVES SCHEMES OF ASSISTANCE FOR SUSTAINABLE DEVELOPMENT 14 7 ASSISTANCE FOR RECEIVABLE FINANCE INTRODUCTION THRUST BUSINESS AREAS 16 Page 1 of 47

2 7.3 PRODUCT RATIONALISATION 17 8 INDIRECT LENDING INTRODUCTION ASSISTANCE TO STATE FINANCIAL CORPORATIONS (SFCs) MONITORING OF SFCs ASSISTANCE TO SCHEDULED COMMERCIAL BANKS ASSISTANCE TO SCHEDULED COOPERATIVE BANKS (SCBs) & REGIONAL RURAL BANKS (RRBs) ASSISTANCE TO SIDCs/SIICs ASSISTANCE TO NBFCs ASSISTANCE TO SMALL FINANCE BANKS 19 9 ASSISTANCE FOR INFRASTRUCTURE PROJECTS WORKING CAPITAL ASSISTANCE 20 Page 2 of 47

3 PARA NO. CONTENTS PAGE NO. 11 SIDBI FOUNDATION FOR MICRO CREDIT (SFMC) INTRODUCTION MICRO FINANCE SECTOR UPDATE FOCUS PRODUCT PROFILE CREDIT RISK MANAGEMENT CREDIT RISK STRATEGY RISK MEASUREMENT RISK MITIGATION EXTERNAL RATINGS PRICING RISK CATEGORISATION OF CUSTOMERS FROM AML PERSPECTIVE MANAGEMENT OF ASSET CONCENTRATION CONCLUSION 27 ANNEXURE I: BENCHMARKS FOR SANCTION 28 ANNEXURE - II: HIGHER INVESTMENT GRADE RATINGS SELECT SECTORS 31 ANNEXURE III: EXPOSURE CAPS 32 Page 3 of 47

4 LOAN POLICY FY OVERVIEW 1.1 PREFACE The significant role played by the Micro, Small and Medium Enterprises [MSMEs] in the Indian Economy is well known. MSMEs make significant contributions to India s gross domestic product [GDP], manufacturing output, exports and employment generation. The MSME sector is the second largest contributor to country s GDP. MSMEs also help address geographic disparities through dispersal of entrepreneurial activities. They are considered to be the nurseries for entrepreneurship, often driven by individual creativity and innovation. MSMEs are important for the national objectives of growth with equity and inclusion. In order to address the challenges of the MSMEs to scale up their performance and competitiveness, the Bank has adopted a multi-pronged approach to meet their requirement of capital, term credit, working capital, receivable finance, infrastructure (in the cluster), etc., through various instruments/products of assistance. 1.2 FRAMEWORK OF THE LOAN POLICY The Policy lays down broad approach, which the Bank adopts in respect of different credit processes, credit risk management, control and monitoring and is supplemented by specific circulars, manuals, guidelines issued from time to time. The policy will be amended from time to time in the light of changing business and economic environment and will be reviewed annually. The focus of the Loan Policy 2018 is on quality asset growth coupled with growth in net income in each segment of business while maintaining the focus on customer needs. Page 4 of 47

5 1.2.2 The Bank would also pursue the ways for generating non-interest / fee based income. As regards indirect finance business, cautious dispensation of credit with regard to state level institutions would continue The Loan Policy covers rupee as well as forex lending, risk capital and micro finance operations of the Bank. Operations under Bank s Treasury are excluded from the purview of this policy The Bank would provide financial assistance to MSMEs for the eligible activities, irrespective of the nature of constitution of the enterprise. Accordingly, assistance could be extended by the Bank to an individual, proprietorship, association of persons, partnership firm, limited liability partnership, company, society or trust. 1.3 OBJECTIVES OF THE LOAN POLICY The broad objectives of the Loan Policy of the Bank are outlined hereunder: (i) To build and sustain a high quality portfolio well diversified in terms of clients, markets and products with an acceptable risk adjusted yield. (ii) To establish a comprehensive credit strategy to fulfill the corporate mandate as per the SIDBI Act, 1989, amended from time to time, and undertake all such activities, directly or indirectly, that supports the MSME sector. (iii) (iv) (v) To pursue product innovation by the Bank based on market requirements. To promote inclusive growth through micro finance and risk capital. To strengthen the risk management systems for appropriate pricing of credit risks and ensure close monitoring of the credit portfolio. (vi) To build strong alliances with intermediaries for tapping new business areas. 1.4 OVERVIEW OF LOAN POLICY Page 5 of 47

6 The strategy for lending takes into account the Bank s approach for developing a healthy credit portfolio, its management and risk mitigation. Accordingly, the Loan Policy of the Bank broadly covers the following aspects: Credit Management Policy Business Policy of Verticals Credit Risk Management 1.5 VALIDITY/ AUTHORITY OF LOAN POLICY The Loan Policy is the principal document for the credit operations of the Bank, duly approved by the Board of Directors and is expected to serve as the guiding document for lending operations of the Bank This Loan Policy shall remain in force till the next revision is carried out and disseminated, which will be on annual basis The Regional Offices (ROs)/ Central Loan Processing Cells (CLPCs)/ Branch Offices (BOs) including XBOs are authorized to act upon this Policy on its issuance by Head Office (HO). Clarifications / further guidelines, if needed, would be issued by Risk Management Vertical (RiMV)/ concerned Business Vertical The Loan Policy guidelines will be applicable to all the facilities extended to various customers The Bank will abide by all the guidelines, directives and advices of Reserve Bank of India as may be in force from time to time. The product verticals would align their guidelines/ master circulars relating to the products, procedural aspects of credit appraisal, processing, sanction, documentation, etc. with the Loan Policy framework. 2. CREDIT MANAGEMENT POLICY Page 6 of 47

7 The business development strategy would be supported by a prudent Credit Management Policy. The market demand to improve products & processes would be balanced with exercise of sufficient control on the credit delivery processes so that exercise of prudence is not sacrificed. 2.1 THRUST/NICHE BUSINESS AREAS The Bank has identified the following to be the thrust/niche business areas: Sectors under important missions of the central government such as Make in India, Zero Defect Zero Effect and Digital India etc. Green finance to promote environmental sustainability through energy efficiency, cleaner technologies and adoption of renewable energy etc. Equity and mezzanine products like Risk Capital (including structured debt), Start-up schemes, Growth Capital, Fund-of-Funds, etc. Service sector Receivable finance Indirect lending viz. refinance to banks/ Financial Institutions (FIs), assistance to microfinance institutions (MFIs) and non-banking finance companies (NBFCs), resource support to public financial institutions (PFIs) and public sector undertakings (PSUs) benefiting MSME sector, etc. MSME linked infrastructure finance Cluster level interventions While the Bank will maintain its emphasis on financing niche areas, it shall continue to provide assistance to all eligible MSMEs to meet their various fund and non-fund requirements. Page 7 of 47

8 2.2 MICRO, SMALL and MEDIUM ENTERPRISES The definitions adopted for manufacturing and service sector activities under Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 are as under: Enterprise Category Manufacturing (Original Investment in P&M) Services (Original Investment in Equipment) Micro Up to `25 lakh Up to `10 lakh Small Upto `500 lakh Upto `200 lakh Medium Upto `1000 lakh Upto `500 lakh For manufacturing enterprises, a list of equipments to be excluded for ascertaining the eligible investment in plant and machinery is already notified under MSMED Act. The activities being financed/to be financed by the Bank, would include enterprises eligible under the definition of MSMED Act, both manufacturing and service enterprises and also, other service sector projects as approved by the Bank with focused approach on the MSME linkages of the assisted projects. The Bank also extends assistance to MSME units which would graduate out of the MSME category with the said assistance from the Bank, with appropriate checks. 2.3 PRODUCT MANAGEMENT Page 8 of 47

9 2.3.1 Benchmarks for Sanction: The benchmarks for sanction [BfS] as applicable to various products of the Bank are given in Annexure I. Relaxation cap has also been prescribed against BfS norms. However, in respect of renewals at current level or reduced level, delegated authority may relax the BfS norms, beyond relaxation caps specified for the respective Committees, provided suitable risk mitigants are put in place. Further, Central Credit and Investment Committee [CCIC] - CGM for proposals up to the delegation of Regional Credit, Settlement and Investment Committee [RCSIC], CCIC - DMD for proposals up to the delegation of CCIC-CGM and in other cases, Executive Committee [EC], can consider relaxations beyond the cap prescribed in the Policy on the merits of individual credit proposals. However, it should be ensured that rationale for seeking such relaxations/deviations together with risk mitigation measures are suitably brought out in the appraisal memorandum. Further, additional risk premium, if any to be charged for such relaxations beyond cap, would be decided by the delegated authority Facilitation for Product Development /Innovation The Bank has put in place a suitable mechanism to understand the business needs of the customer and address them swiftly. Accordingly, Product Innovation and Review Committee (PIRC) at the HO level consider and approve product innovations and their test marketing. A suitable exposure cap could also be fixed for such test marketing proposals to be monitored by the concerned product vertical Apart from approving products, PIRC also approves structuring of specific arrangements in a cluster or around a large corporate/ OEM where several MSMEs are expected to be benefited. Such arrangements could have different dispensations than those followed for regular credit products. Page 9 of 47

10 The areas generally expected to be amenable to product innovation are service sector segments like organized retailing, IT & IT enabled services, entertainment, cash flow/ rent discounting, cash flow management products for MSME segment, cluster specific products, etc The new credit products proposed to be introduced or major changes in existing products / credit processes would be duly signed off by Risk Management Vertical Coverage under Guarantee schemes The credit facilities to the eligible MSE customers may be generally covered under guarantee schemes operated by Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), National Credit Guarantee Trustee Company (NCGTC) etc., as applicable Cross-selling with Government Schemes The products of the Bank would also be dovetailed with the schemes of Government of India [GoI] and state governments, wherever feasible, to improve the viability of the assisted projects and growth in overall asset base of the Bank. 2.4 PROCESS MANAGEMENT Delegation of Powers The key tool for managing the internal processes of the Bank is the Delegation of Powers (DoP) to various committees and the individual functionaries of the Bank. It also puts in place suitable system of checks and balances in the credit or investment related decision processes Appraisal process Page 10 of 47

11 The credit proposals for term loan and working capital assistance to MSMEs would be appraised in Credit Appraisal and Rating Tool (CART). However, credit proposals falling under commercial real estate (CRE), secured business loan (SBL), asset light 1 and other cash flow based financing categories. Infrastructure and any other new products may be appraised outside CART in detailed appraisal note (DAN) In view of relatively high delinquency levels in certain sectors, the Bank would adopt a cautious/selective approach for financing under these sectors with better risk mitigation. Currently these sectors are textiles, drugs & pharmaceuticals, hotels, infrastructure, food & food products, hospitals and iron & steel. The list may be modified during the year based on review of NPA performance and other factors There exists significant opportunities for assistance to Commercial Real Estate (CRE) projects, particularly keeping in view the significant MSME linkages of such proposals. In view of risks inherent in such projects, risk mitigants at project/ proposal specific level would be incorporated with due care while structuring the assistance The Bank s current guidelines on due diligence with regard to obtaining satisfactory credit reports, undertaking visits, due diligence of suppliers /contractors etc., checking of CIBIL/Credit Information Companies (CICs) database for consumer/commercial credit information reports, KYC and AML norms, checking of RBI defaulters list, and CRILC database, caution advices etc., guidelines on connected lending, multiple banking arrangements, NOC from existing lenders, etc., wherever applicable, shall be followed. 1 Projects in the service sector which do not create substantial tangible fixed assets and invest in light assets but generate comfortable cash flows. Page 11 of 47

12 No additional facilities would be granted by the Bank to the wilful defaulters as identified by it and those appearing in the list as published/disseminated by RBI/CICs. In addition, such companies/ entities (including their entrepreneurs / promoters) where the Bank has identified siphoning / diversion of funds, misrepresentation, falsification of accounts and fraudulent transactions would be debarred from the Bank s exposure, for floating new ventures for a period of 5 years from the date of removal of their name from the list of wilful defaulters Fair Practices Code for lenders/ Code of commitment to Micro and Small Enterprises [MSEs]: Fair Practices Code for Lenders, as per RBI guidelines, has been adopted by the Bank and hosted on Bank s website. The Code sets out the guidelines for processing of loan applications, appraisal, disbursement, post-disbursement supervision, etc. A Grievance Redressal Mechanism has also been put in place to resolve the disputes arising out of the Fair Practices Code. The Bank has adopted the Code of commitment to Micro and Small Enterprises (MSEs) of Banking Codes and Standards Board of India (BCSBI). BUSINESS POLICY OF VERTICALS [3-11] 3. EQUITY & RISK CAPITAL ASSISTANCE 3.1 INTRODUCTION MSMEs are largely dependent on the promoters resources, borrowings from friends and relatives and secured loans from banks/financial institutions for meeting their financial requirements. However, while promoters resources are limited, bank finance is also restricted due to various norms such as asset Page 12 of 47

13 coverage ratio, DER, etc., which adversely impact the flow of financial assistance to MSMEs and in turn constrain their credit absorption capacity and consequent growth Focus SIDBI Foundation for Risk Capital for MSMEs was set up in FY with a view to addressing the issues related to existing gaps in the funding of MSMEs. Over the last 8 years, SIDBI has introduced risk capital products for MSMEs with potential for high growth for various needs like meeting financing gaps while implementing capex, expenditure on intangibles like R&D, marketing, product development expenses, etc. and other bonafide financial requirements for growth. The simple structure of mezzanine instruments has resulted in acceptance of the product by MSMEs in various geographies across the country. During the year, the Bank will continue its efforts for creating awareness of quasi-equity schemes among MSMEs as well as the banking sector. SIDBI would also carry out policy advocacy for wider acceptance of the products by the institutional players in the country. In view of the above, the focus of the Policy for FY 2018 is aimed at improving the off-take taking into consideration the felt needs of the sector and building up of quality portfolio Direct assistance The Bank provides risk capital to MSMEs using appropriate quasi-equity products based on best practices being followed in other parts of the world. The Bank uses a mix of standardized products and structured products (where assistance is customized for each customer on a case to case basis) for faster dispensation of mezzanine debt instruments to eligible MSMEs. 3.2 Product profile (i) Start-up Assistance Scheme (SAS) Page 13 of 47

14 Under the Start-up Assistance Scheme, the Bank considers assistance to early stage enterprises, preferably in technology and innovation space and where revenues have commenced with product acceptability by customers. The product could be structured flexibly to support the early stage operations of these Start-ups. Since the assistance is in the form of debt and its timely servicing assumes significance, under the scheme, those enterprises which have received equity funding from Venture Capital Funds (VCFs), Angel Network, investors, etc will be given thrust. Such investors may add value to the start-up enterprises by helping them to get customers, build teams; provide strategic/operational guidance besides providing equity support that an early stage enterprise needs. Considering that start-up enterprises stand high on the fatality scale, in order to enhance its returns from successful enterprises, the Bank may negotiate for higher equity kicker while extending assistance under the scheme. (ii) Growth Capital and Equity Assistance Scheme for MSMEs (GEMS) The objective of the Scheme is to provide growth capital to deserving MSMEs for: a Bridging the gap in the means of finance for expansion/ modernization/ scaling up. New businesses/ diversification by entrepreneurs with established track record can be considered, selectively (along-with direct finance assistance). b Intangibles or non-asset creating investments viz. product development, marketing related expenditure, R&D, etc., besides investments in quality control/energy efficiency equipment etc. Page 14 of 47

15 c Margin money for working capital. While normal working capital [WC] requirements should generally be met under normal WC arrangement, need based gap in WC requirements (where the borrower has arrangements for major part of its WC requirements tied up) could be considered, selectively, based on merits of the case and with justification. However, the Bank would not consider funding of working capital as well as margin for the same under the scheme. d Any other bona-fide expenditure required for growth of the business which may not qualify for assistance through normal banking channels. The scheme provides for faster dispensation of risk capital through various instruments viz. debt based instruments like Subordinated debt and convertible instruments viz. Optionally Convertible Subordinated Debt (OCSD), Optionally Convertible Debt (OCD), Optionally Convertible Debentures (OCDR) and Optionally Convertible Cumulative Preference Shares (OCCPS) etc., to the existing customers of the Bank and also to new customers with good past track record. 3.3 Due diligence In order to build a quality Risk Capital portfolio, the Bank would generally carry out an independent due diligence of MSMEs by an external agency viz. audit firm, law firm etc. to support the investment process under GEMS, for exposure of `1 crore and above or such other threshold as may be decided from time to time. 3.4 Assistance through focused equity and venture debt funds (VCFs / PE Funds) The Bank provides corpus support to MSME and Startup focused Alternative Investment Funds (AIFs) managed by Investment Managers with relevant Page 15 of 47

16 expertise in equity transactions, monitoring and hand holding of investee companies. The Bank invests in such funds as per the policy framework approved by the Board and within the overall guidelines stipulated by RBI from time to time. With an objective of making available equity capital to the MSMEs, the Bank has launched the India Aspiration Fund (IAF), a Fund of Funds in August 2015, that invests in AIFs predominantly investing in MSMEs. As part of Startup India Action Plan announced by Hon ble Prime Minister in January 2016, the Bank is mandated by Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce & Industry, Government of India to manage Fund of Funds for Startups (FFS) with a corpus of `10,000 crore. Contribution out of FFS would be extended to AIFs which are predominantly focusing on Startups as per the operational guidelines issued by DIPP from time to time. The Bank is also mandated by Ministry of Micro, Small & Medium Enterprises, Government of India to manage ASPIRE Fund having corpus of `60 Crore. Contribution under ASPIRE Fund would be extended to AIFs which have focus on agro-based industries as per the operational guidelines issued by Ministry of MSMEs from time to time. To augment the sources of patient capital for the growth of MSMEs of the country, the Bank has entered into Memorandum of Understanding (MOU) with Life Insurance Corporation of India (LIC) for contributing to the Corpus of AIFs which are supported by the Bank under IAF. Such arrangements will not only facilitate early financial closure of Funds being raised by AIFs but also bring more institutional investors in the eco system. 4. ASSISTANCE FOR SERVICE SECTOR 4.1 INTRODUCTION Page 16 of 47

17 The Policy is aimed at identification of thrust areas for lending under service sector, charting out a focused business development strategy, encouraging product innovation suited to the needs of the industry, improving credit delivery and having in place a pricing policy which supports business growth and links it to risk. 4.2 THRUST BUSINESS AREAS While the Bank would consider support to all eligible service sector activities, the following areas would be accorded due emphasis for faster asset growth during the year: (i) (ii) (iii) (iv) (v) (vi) Logistics & supply chain management Organized retail outlets/ Retail Chains/dealerships Restaurants/food chains/quick Service Restaurants etc. Healthcare/Diagnostic Chains/Specialty Clinics etc. Lifestyle, media & entertainment Tourism related services (vii) IT / IT enabled services (viii) Franchisee chains of well known brands, (ix) Warehouse 4.4 APPROACHES TO FINANCING SERVICE SECTOR For the purpose of this policy, the assistance to service sector has been broadly divided into three categories viz. (a) asset backed term loan assistance, (b) term loan assistance to asset light service sector enterprises, (c) assistance for facilitating payments to MSMEs in Construction Sector (i.e., for CRE exposure). (a) Asset backed assistance to service sector enterprises Asset backed term loan assistance would include assistance towards projects involving substantial primary and /or collateral security in the form Page 17 of 47

18 of fixed assets like immovable properties and equipment, etc. Hotels, hospitals, warehouses etc., would generally fall under this category. (b) Term loan assistance to asset light service sector enterprises Some of the projects in the service sector do not create tangible fixed assets and invest in light assets and, therefore, may not meet security related norms of asset backed assistance, but these are found to generate comfortable cash flows. These segments include IT and other knowledge based industries, organized retail chains, restaurant chains, diagnostic/ specialty clinics, IT/ BPO services etc. As there is good potential for considering assistance to these sectors, proposals of deserving customers could be considered for Bank s financial support based on merits. (c) Assistance to CRE/construction entities for facilitating payments to MSME suppliers/ vendors. The Bank shall selectively consider assistance to construction sector/ CRE projects with linkage/support services to MSMEs. The assistance provided shall be under the purview of CRE guidelines issued by RBI from time to time. 5. ASSISTANCE TO SECTORS UNDER MAKE-IN INDIA The Central Government launched an ambitious Make in India campaign in FY 2016 to make India a manufacturing hub and has identified 25 sectors under the Make in India initiative. In order to facilitate MSMEs take part in the Government s Make in India initiative, the Bank has launched a Scheme SIDBI Make in India Loan for Micro, Small & Medium Enterprises (SMILE) with a fund corpus of ` 10,000 crore to be met out of the Budget allocation. The objective of SMILE is to provide soft loan in the Page 18 of 47

19 nature of quasi-equity and term loan on relatively soft terms to eligible new and existing MSMEs in India. Within the corpus of `10,000 crore, a suitable sub-limit would be fixed on assistance by way of soft loan. The Bank will focus on making the scheme customer friendly and endeavour maximizing utilisation of the fund. The Bank is also operating "Make in India fund" of ` 1000 cr. out of its own resources to provide concession in the interest rate working capital scheme to encourage MSMEs take part in the above initiative of the Government. 6. ASSISTANCE FOR SUSTAINABLE DEVELOPMENT 6.1 INTRODUCTION The Bank has recognized sustainable developmental of the MSME sector as one of the high potential areas for strengthening the competitiveness of MSMEs in India. The Bank has been operating Lines of Credit from various multilateral/ bilateral agencies viz. Kreditanstalt fur Wiederaufbau (KfW), Germany, Japan International Cooperation Agency (JICA), Japan, Agence Francaise de Developpement (AfD), France, for financing energy efficient and cleaner environment investments in MSMEs. 6.2 OBJECTIVES (i) To promote the use of energy efficient and cleaner technologies by MSMEs. (ii) To reduce energy consumption, enhance energy efficiency, reduce CO 2 emissions and improve the profitability of the Indian MSMEs in the long run. (iii) To support promotion of renewable energy, energy efficiency and sustainable development in MSME sector under existing products / by Page 19 of 47

20 introducing new products with an element of some concessionality in interest rates. (iv) To encourage innovation in technology, products and delivery, particularly aimed at supporting the supply side. (v) To support MSMEs towards development, up-scaling, demonstration and commercialization of innovative technology based project. (vi) To strengthen MSMEs active on the supply side of clean technologies and which are engaged in development and adaptation, demonstration, deployment and commercialization of innovative clean technologies, products, processes and services including those MSMEs which provide services like energy service companies (ESCOs) / renewable energy service companies (RESCOs). 6.3 SCHEMES OF ASSISTANCE FOR SUSTAINABLE DEVELOPMENT International / Multilateral Lines of Credit for Sustainable Finance: Recognizing the importance of Energy Efficiency (EE) & Cleaner Production (CP) in tackling the challenge of climate change and curtailing the demand for energy from fossil fuels, SIDBI has been operating Lines of Credit from various multilateral/ bilateral agencies. These EE/CP investments will result in energy savings and reduction in global Green House Gas (GHG) emissions. Besides, it also strengthens the competitiveness of MSMEs in India and in global markets The 4E (End-to-End Energy Efficiency) - Solutions and Financing schemes: The End to End Energy Efficiency Solutions (4E Solutions) launched by SIDBI provides technical support to its MSMEs to improve their energy savings by availing the services of Technical Consultant / ESCOs at a reasonable cost with Page 20 of 47

21 assurance on the quality of services. This 4E Solution will be implemented by SIDBI branches in association with India SME Technology Services Limited (ISTSL), an associate institution of SIDBI utilizing the services of specialized energy professionals. To facilitate implementation of energy efficiency measures by the MSMEs after their detailed energy audit under the 4E Solutions Scheme, a revolving fund has been created with the support of World Bank (WB)-Global Environment Facility (GEF) to provide loans to MSMEs at concessional interest rates and soft terms (4E Financing Scheme) Partial Risk Sharing Facility (PRSF) for Energy Efficiency Project: The Bank is the Project Executing Agency (PEA) for the World Bank Project, viz. Partial Risk Sharing Facility for Energy Efficiency (PRSF). The objective of the project is to support the GoI efforts to transform the energy efficiency (EE) market in India by promoting increased level of EE investments, particularly through energy service performance contracting (ESPC) delivered through ESCOs. Under the project, SIDBI (PEA) provides partial risk coverage to the extent of 75% of the loans given by Banks / FIs / NBFCs (including SIDBI loans) to ESCOs and ESCO-implemented projects. Minimum loan size eligible for coverage under PRSF is `10 lakh and the maximum loan eligible for coverage is `15 crore per project Assistance for Technology Innovation Projects Need for developing national capabilities to innovate and create business opportunities in emerging technology areas has been acutely felt as there continues to be a dearth of early stage funding for commercialization of innovations by MSMEs due to higher risks of investment in unproven technologies. Thus, major proportion of the available funding gets invested in Page 21 of 47

22 relatively lower risk/proven technologies, thereby limiting innovations to reach the market. In order to address these constraints, the Bank has joined hands with Technology Information Forecasting and Assessment Council (TIFAC), Dept. of Science & Technology, Govt. of India for implementing Technology Innovation Programme (SRIJAN Scheme) and with Kreditanstalt fur Wiederaufbau (KfW), Germany for implementing KfW Innovation Finance Programme. Financial products on soft terms and mechanism has been developed and being implemented. 7. ASSISTANCE FOR RECEIVABLE FINANCE 7.1 INTRODUCTION: MSME Receivable Finance Scheme (MSME-RFS) is being operated by the Bank for more than two decades to mitigate the receivables problem of MSME sellers and improving their cash flow / liquidity. RFS covers discounting/purchasing of bills/invoices arising out of sale of indigenous components/ parts/ sub-assemblies/ accessories/ intermediates manufactured/ job work done/ services provided by MSMEs and eligible service providers to Large Purchaser Corporates. The scheme also allows coverage of bills relating to Small Road Transport Operators (SRTOs), being service providers. The Bank has been making need based modifications/ simplifications/ rationalization in the scheme considering inter-alia the changing business environment, demand of the customers, feedback from the operating offices and for increasing the reach of the Scheme for the benefit of a large number of MSMEs. End-use of funds is verified by undertaking visits to select MSME beneficiary units and random verification of the purchased/discounted Page 22 of 47

23 invoices / bills to ensure utilization of funds as per objectives of the Scheme. In order to improve the quality of overall portfolio and to address inadequacies of existing internal rating system, external rating has been made mandatory under MSME RFS, where the limits are not backed by collateral security. Further, residual charge / second charge, would be explored in respect of such limits not backed by collateral security for customers with external rating lower than AA. Wherever possible, personal guarantees of directors would also be obtained for such facilities. More thrust is given for creating a portfolio of secured/partially secured limits and limits not backed by collateral security with external rating of AA and above. For existing customers, the thrust would be on retaining customers with a good track record. 7.2 THRUST BUSINESS AREAS: i) The scheme basically covers bills raised by MSME units engaged in manufacturing / job works / service sector. Keeping in view the increasing share of service sector, business opportunities in these sectors will be identified. However, In view of the perceived higher risks in financing the service sector under the scheme, the Bank would adopt a cautious approach, with improved focus on customer selection and account monitoring. ii) Keeping in view the focus on serving MSMEs and improving the quality of the portfolio, greater thrust is accorded to extend seller-wise receivable finance [SRFS] limits directly to MSMEs to improve under the cash flow & liquidity position of MSMEs / Service providers by providing them with financial assistance against the goods sold and / or services rendered to purchaser companies with satisfactory market standing. The focus would also be on extending assistance through purchaser-wise limits or purchaser Page 23 of 47

24 wise exposure with seller wise limits/ arrangements to top rated corporates thereby increasing MSME outreach. iii) In line with the national agenda for moving to electronic mode across all financial products, the bank would focus on bringing more business under direct E-discounting module developed in-house by the Bank. iv) To help existing customers, the entire credit purchases both from MSMEs and non-msmes, can be covered under Trade Finance Scheme/ Raw Material Assistance Scheme, after ensuring that there is no double financing. The scheme is also being extended to new customers with certain additional criteria. 7.3 PRODUCT RATIONALISATION: Over a period of time, MSME RFS has been improvised to meet the growing business requirements like MSME RFS without Bills of Exchange, MSME RFS backed by L/C, Seller wise Receivable Finance Scheme [SRFS], Modified Invoice Discounting Scheme, E-discounting and Trade Finance Scheme/Raw Material Assistance Scheme. The process of rationalization would continue during the year as per requirement. 8. INDIRECT LENDING 8.1 INTRODUCTION The indirect lending portfolio of the Bank consists predominantly of refinance to Primary Lending Institutions (PLIs), comprising State Financial Corporations (SFCs), State Industrial Development/ Investment Corporations (SIDCs / SIICs) [collectively referred to as State Level Financial Institutions (SLFIs)], Scheduled Commercial Banks, Scheduled Cooperative Banks, Regional Rural Banks, Small Finance Banks and select financial institutions. In addition, the portfolio also Page 24 of 47

25 includes resource support/ term loan to Public Sector Undertakings benefiting the MSMEs. 8.2 ASSISTANCE TO STATE FINANCIAL CORPORATIONS [SFCs] Broadly, the support to SFCs would continue to be based on the overall exposure norms, financial health, compliance of performance parameters as approved by the Board. 8.3 MONITORING OF SFCs Given the sizeable exposure of the Bank to the SFCs, the performance of all the SFCs would continue to be closely monitored both by way of on-site and off-site mechanisms. Further, with a view to bringing about convergence in the regulatory framework, vis-a-vis the industry practices, the Bank has been advising the SFCs to comply with prudential norms prescribed by RBI. SFCs shall also comply with other regulatory directives such as adoption of accrual system of accounting, income recognition and asset classification [IRAC] norms, KYC / AML norms, industry wise exposure norms, valuation of assets, etc. 8.4 ASSISTANCE TO SCHEDULED COMMERCIAL BANKS The strategy adopted in FY 2017 to create long term assets under the scheme would continue to be the thrust area for FY 2018 also. Banks would be encouraged to avail longer term refinance. Exposure to the scheduled commercial banks by way of refinance during FY 2018 would be encouraged but within the individual counterparty exposure limits fixed by the Bank. The individual bank wise caps are fixed on the basis of category of the bank, its net worth and risk rating. 8.5 ASSISTANCE TO SCHEDULED COOPERATIVE BANKS [SCBs] & REGIONAL RURAL BANKS [RRBs] Page 25 of 47

26 Over the years, Scheduled Co-operative Banks (SCBs) have registered significant growth in the number, size and volume of business handled. Some of the RRBs are also now profit driven and, in addition to commercial lending such as agriculture and MSME's, these banks also compete with scheduled commercial banks for fee and commission, incomes from remittances, sale of insurance products and mutual fund schemes. Counterparty exposure limits to these banks shall be decided on a case to case basis, depending on risk rating and other factors such as net worth of the bank, eligible MSE portfolio, overall financial health, compliance with regulatory directives, etc. 8.6 ASSISTANCE TO SIDCs/SIICs The Bank would continue to make a conscious attempt, as hitherto, to reduce / exit from the existing exposures to weaker SIDCs / SIICs (including TFIDCs). 8.7 ASSISTANCE TO SFBs: Refinance from SIDBI, which is exempt from CRR / SLR requirements, is expected to be one of the major forms of support to SFBs in their initial years, particularly until they are able to build up a resource base from public deposits. As per the Scheme for Refinance to SFBs approved by the Board, counter party exposure to each individual SFB shall be capped based on its internal rating. As regards pricing, it is expected that interest rate shall be fixed broadly at a level which is between the prevailing rates offered for refinance to Private Sector Banks and that applicable for term loan assistance to NBFCs/NBFC-MFIs. The rates are proposed to be finalized on a case to case basis based on relevant factors / prevailing market conditions at the time of sanction. Page 26 of 47

27 In addition to the above Scheme for Refinance to SFBs, subject to their meeting prescribed eligibility criteria, SFBs would also be considered for refinance under MSME Refinance Fund [as already permitted by RBI] / SIDBI s Refinance Scheme for Micro & Small Enterprises on terms and conditions as applicable for such refinance. 8.8 ASSISTANCE TO NBFCs The NBFCs (both in the category of Deposit taking and Non Deposit taking) registered with RBI which are engaged in financing MSMEs and in business for the last 5 years, are, prima facie, eligible for resource support from the Bank subject to meeting the prescribed BfS norms relating to net owned funds, capital adequacy ratio, gross NPA, recovery percentage, minimum investment grade external rating and compliance with all the prudential guidelines prescribed by RBI from time to time. The Bank provides term loan / resource support to Asset Finance Companies. The assistance is also extended to Loan Companies, if the loan is given for income generating activities. The assistance could also be extended to Infrastructure Finance Company (IFC) with the other lenders in financing the infrastructure projects provided such projects benefit the MSMEs The assistance to NBFCs would be secured by, first exclusive charge on the assets financed / first pari-passu charge with other lenders by way of hypothecation of book debts of the NBFC with suitable margin, collateral security etc Direct Assignment: Purchase of pool of MSME asset from NBFC will be considered on a case to case basis in accordance with Bank s internal norms and the extant RBI guidelines in this regard. Page 27 of 47

28 9. ASSISTANCE FOR INFRASTRUCTURE PROJECTS Availability of adequate and quality infrastructure facilities is a key component for speedy growth of the MSME sector. It has positive impact in terms of creation of employment, efficiency in operations and waterfall effect on the entire economy. The Bank has been providing assistance for infrastructure projects in the areas of industrial parks, transportation, etc. after satisfying the MSME linkages of the assisted projects. The infrastructure sector provides adequate scope for up-scaling of lending by the Bank. While assistance for infrastructure projects in other areas would be extended through consortium/ multiple banking arrangements, assistance to industrial infrastructure projects could be considered on a standalone basis. Within infrastructure sector, the projects from tourism, warehousing infrastructure, cold chain sub-sectors, etc., having linkage with MSMEs, could be explored. Further, projects of common waste management facilities and effluent treatment plants at industrial clusters, renewable energy projects, may be considered for coverage under the scheme after satisfying itself on MSME linkages and benefits. 10. WORKING CAPITAL ASSISTANCE Working Capital Assistance would be considered selectively to: (i) existing customers who are solely banking with the Bank ; (ii) (iii) (iv) existing customers of the Bank (who are also banking with other banks) and have placed major share of immovable security with the Bank; existing well performing entities who are new to the Bank and do not enjoy working capital facility with any other bank; New entities where term loan is considered by the Bank. Page 28 of 47

29 Takeover of working capital accounts, as a part of term loan take over, may be considered subject to compliance of take over guidelines. 11. SIDBI FOUNDATION FOR MICRO CREDIT [SFMC] 11.1 INTRODUCTION The Micro Finance sector is on a growth path after its revival post AP crisis with regulator viz., RBI and the newly created Self Regulatory Organizations (SROs), viz., MFIN / Sa-Dhan, ensuring a strong and clear regulatory framework for MFIs to operate efficiently. The guidelines also entailed the MFI lenders to assess the MFIs performance in terms of sustainability as well as regulatory compliance. Flow of funds from banks to MFIs has risen substantially enabling the sector to register impressive growth. SIDBI, being a pioneer financial institution in the micro finance space, continued to provide financial assistance, in the form of equity, quasi-equity and term loans, etc., while advocating and implementing various responsible finance practices, viz., Code of Conduct Assessment (COCA), etc MICRO FINANCE SECTOR UPDATE The microfinance industry in India has been a strong enabler in including the financially underserved and unserved in the formal financial ecosystem. The positive role played by this sector is evident from the awarding of universal banking and small finance bank licenses to the top MFIs in India. The RBI constituted Mohanty Committee in its report (December 2015) on Medium Page 29 of 47

30 term Path on Financial Inclusion, inter-alia states that Microfinance institutions (MFIs) fill the niche that is mostly under-served by main stream financial institutions and to that extent play a critical role in furthering financial inclusion. The Committee recommends that bank credit to MFI s should be encouraged. MFIs have consistently added value to customers livelihood through partnerships with various stakeholders like investors, banks, other financial institutions, credit bureaus and other emerging agencies. However, the growth has also been accompanied by challenges such as increase in risks due to geographical concentration, increase in cash carrying costs, rise in cases of fraud and high churn in human capital employed by these institutions. To maintain growth and reduce costs while overcoming the challenges, MFIs will have to develop a holistic strategy based on several external and internal factors. Externally, MFIs need to address customer requirements, navigate lenders and investors, build effective partnerships with financial and nonfinancial institutes for sales, and cross-sell and adhere to guidelines issued by regulators and self-regulatory organisations. On the internal front, operations, technology, risk management and human capital together play an integral role in all activities undertaken by MFIs. Institutions need to innovate their operations and develop products to add value to their customers economic and social conditions while concentrating on under penetrated markets in India. Technology needs to be leveraged not just to reduce costs but also to increase geographical reach and, thus, the top line. MFIs also need to adopt HRM best practices, thereby providing tools to help individuals remain highly motivated and contribute to their success. The MFI sector, in a short time of just over 15 years has effectively contributed towards providing financial services to the unbanked population of the country through its deep penetration in the difficult geographical parts with Page 30 of 47

31 approximately 150 big and small microfinance institutions. The gross outstanding loan portfolio of NBFC-MFIs which represents major portion of the MFI outstanding stood at `54,129 crore as on December 31, 2016, with a client base of over 3.38 crore across 30 states/union territories of the country with equitable distribution across all regions having an outreach of 33% in the south, 27% in North, 24% in West and 16% in the East (as per the MFIN Micrometer for quarter ended December 2016). There has also been an increase in new entrants with various banks especially private sector banks, directly lending to the microfinance segment as well as lending through Business Correspondents. Further, inspired by the profitability of the MF market and putting in practice the belief that the poor are an interesting market, the presence of banks as providers of microfinance is scaling up. They are integrating microfinance into their mainstream commercial retail lending, which is evident from the acquisition of certain NBFC-MFIs by large scheduled commercial banks in India. The move of giving licenses to small finance banks has been the major step towards pushing financial inclusion in the country. This put the spotlight on the microfinance sector as 8 out of the 10 newly licensed small finance banks are MFIs. The entry of MFIs in SFB segment who are familiar with the nuances of banking with poor borrowers, by getting access to banking these entities can tap public deposits which will significantly lower their cost of borrowing and enable them to bring down rate of interest on loans. The Reserve Bank of India (RBI) and the Government of India (GoI) have announced a number of regulations and developments supporting financial inclusion and thereby created conducive policy and regulatory environment. The demonetization in November 2016 has impacted the industry severely, Page 31 of 47

32 however, the situation seems to be improving and stabilizing. Overall, the impact of demonetization on the sector is expected to be positive with MFIs emerging stronger, adopting better risk management practices and bringing greater focus on cashless operations through digital channels. With the sector regaining confidence and momentum, the Bank has also adopted a growth strategy approach for the Micro Credit business. It is proposed to continue the same strategy during FY FOCUS On asset quality, focus would continue to be on risk management through the assessment, monitoring and exposure management. Recently, Bank introduced internal rating module for MFI to bring more objectivity in assessing the risk in the loan proposals. Bank focuses on MFIs and NBFCs with good track record of resource mobilization, capital infusion, strong systems, compliances with regulatory guidelines, adherence to responsible lending practices and long term sustainability in terms of financial and operational efficiencies. Bank s Fair Practices Code, Grievance Redressal Mechanism and RBI s guidelines to all India FIs on connected lending are applicable for assistance under SFMC. From SIDBI s perspective, the differentiated banking architecture in the form of SFBs offers opportunities for a greater role for SIDBI as an apex institution for promotion, financing and development of MSMEs. 9 out of the 10 entities selected by RBI for SFB Licence at in-principle stage were SIDBI partners. SIDBI therefore would continue to actively engage with the prospective SFBs as a natural extension of the existing relationships when they were NBFC / NBFC- MFIs PRODUCT PROFILE Page 32 of 47

33 (a) Support to MFIs and NBFC- MFIs: SFMC shall continue with term loan, subordinate debt, long tenor loans, to MFIs for on-lending to micro enterprises and to service providers. Bank s equity and related investments in MFIs will be guided by statutory guidelines. In order to support well performing MFI customers, the Bank had introduced modified Privileged Customer Scheme for MFIs to provide loan funds on the basis of simplified application/appraisal process. The Missing Middle Financing activities of the Bank through PFIs are being funded by KfW as well as out of the Bank s funds. Under the product segment, assistance will continue to be extended to PFIs to enable them to extend loans in the Missing Middle segment. (b) India Microfinance Equity Fund (IMEF) To provide equity and quasi equity support to smaller MFIs to help them maintain growth and achieve scale and efficiency in their operations, India Microfinance Equity Fund (IMEF) was launched with funds from GoI. Initially, the corpus was of `100 crore (subsequently enhanced to `300 crore). Under the Scheme, assistance in the form of sub-debt, Equity and quasi-equity is provided to Smaller Socially Oriented Micro Finance Institutions, operating mostly in underserved / unserved areas of the Country. In order to increase the outreach / impact, modifications in the scheme guidelines, viz., increase in the quantum of assistance, norms for eligible borrower, greater flexibility in equity investment pricing, etc., have been sought from Government of India. The focus on increasing the overall investments under the scheme to benefit large number of smaller MFIs would continue. (c) Support to Small Finance Banks during FY 2017 Page 33 of 47