Micro, Small & Medium Enterprises (MSME) is the pillar of economic growth of India. MSME has played a prominent role in the development of the country in terms of creating employment opportunities- MSMEs contribute 29 per cent to India's gross domestic product and comprise almost half of its exports. These units employ over 11 crore workers. MSME’s are the backbone of Indian industry. Though India is still facing infrastructural problems, lack of proper market linkages, and challenges in terms of flow of institutional credit, it has seen a tremendous growth in this sector.  

Micro, Small & Medium Enterprises Development (MSMED) Act, 2006

The Government of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 on June 16, 2006 which was notified on October 2, 2006. With the enactment of MSMED Act 2006, the paradigm shift that has taken place is the inclusion of the services sector in the definition of Micro, Small & Medium enterprises, apart from extending the scope to medium enterprises.

Public Procurement Policy for MSEs Order, 2018 has been notified under section 11 of MSMED Act, 2006. The Policy is effective from 1st April 2019 (Gazette notification on 9 November 2018).

New Definition of Micro, Small and Medium Enterprises 2020

On 1st June, 2020 the Union Cabinet headed by Prime Minister Narendra Modi officially revised the MSME definition. The recent changes in the definition of micro, small, and medium-sized enterprises made as a part of the Atmanirbhar Bharat Abhiyaan relief package were approved. 

Union Ministry of Micro, Small and Medium Enterprises has issued Gazette notification dated 01 June 2020 to pave way for implementation of the upward revision in the definition based on Investment and Annual Turnover of MSMEs in the country. The new definition and criterion will come into effect from 1st July, 2020. Gazette Notification is as under:

“In exercise of the powers conferred by sub-section (1) read with sub-section (9) of section 7 of the ‘Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006) and in supersession of the notification of the Government of India, Ministry of Small Scale Industries, dated the 29th September, 2006, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section(ii), vide S.O. 1642(E), dated the 30th September 2006 except as respects things done or omitted to be done before such supersession, the Central Government, hereby notifies the following criteria for classification of micro, small and medium enterprises, namely:—

(i) A micro enterprise, where the investment in Plant and Machinery or Equipment does not exceed one crore rupees and turnover does not exceed five crore rupees;

(ii) A small enterprise, where the investment in Plant and Machinery or Equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees;

(iii) A medium enterprise, where the investment in Plant and Machinery or Equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.”

Sector     Enterprises for Manufacturing/ processing Units Enterprises engaged in providing services
Micro Enterprise Investment in plant & machinery not exceeding Rs.25 lakh. Investment in equipment not to exceed Rs.10 lakh.
Small Enterprise More than Rs.25 lakh but not to exceed Rs.5 crore. More than Rs.10 lakh but not to exceed Rs.2 crore.
Medium Enterprise More than Rs.5 crore but not to exceed Rs.10 crore. More than Rs.2 crore but not to exceed Rs.5 crore.

Revised Classification applicable w.e.f 1st July 2020

Composite Criteria for Manufacturing Enterprises and Enterprises rendering Services: Investment and Annual Turnover
Classification Micro Small Medium
Investment in Plant and Machinery or Equipment and Not more than Rs.1 crore Not more than Rs.10 crore Not more than Rs.50 crore
Annual Turnover not more than Rs. 5 crore not more than Rs. 50 crore not more than Rs. 250 crore


Exercise of the powers conferred by sub-section (1) of MSME Act 2006 herein referred to as the said Act, the Central Government specifies the following items, the cost of which shall be excluded while calculating the investment in plant and machinery in the case of the enterprises mentioned in Section 7(1)(a) of the said Act, namely:

  1. Equipment such as tools, jigs, dyes, moulds and spare parts for maintenance and the cost of consumables stores;
  2. Installation of plant and machinery;
  3. Research and development equipment and pollution controlled equipment
  4. Power generation set and extra transformer installed by the enterprise as per regulations of the State Electricity Board;
  5. Bank charges and service charges paid to the National Small Industries Corporation or the State Small Industries Corporation;
  6. Procurement or installation of cables, wiring, bus bars, electrical control panels (not mounded on individual machines), oil circuit breakers or miniature circuit breakers which are necessarily to be used for providing electrical power to the plant and machinery or for safety measures;
  7. Gas producer’s plants;
  8. Transportation charges (excluding sales-tax or value added tax and excise duty) for indigenous machinery from the place of the manufacture to the site of the enterprise;
  9. Charges paid for technical know-how for erection of plant and machinery;
  10. Such storage tanks which store raw material and finished produces and are not linked with the manufacturing process; and
  11. Firefighting equipment.

While calculating the investment in plant and machinery, the original price thereof, irrespective of whether the plant and machinery are new or second handed, shall be taken into account provided that in the case of imported machinery, the following shall be included in calculating the value, namely;

  1. Import duty (excluding miscellaneous expenses such as transportation from the port to the site of the factory, demurrage paid at the port);
  2. Shipping charges;
  3. Customs clearance charges; and
  4. Sales tax or value added tax.


Banks are advised to mandatorily acknowledge all loan applications, submitted manually or online, by their MSME borrowers and ensure that a running serial number is recorded on the application form as well as on the acknowledgement receipt. Banks are further advised to put in place a system of Central Registration of loan applications, online submission of loan applications and a system of e-tracking of MSME loan applications.

Collateral: Banks are mandated not to accept collateral security in the case of loans up to Rs.10 lakh extended to units in the MSE sector. Banks are also advised to extend collateral-free loans up to Rs. 10 lakh to all units financed under the Prime Minister Employment Generation Programme (PMEGP) administered by KVIC.

Banks may, on the basis of good track record and financial position of the MSE units, increase the limit to dispense with the collateral requirement for loans up to Rs.25 lakh (with the approval of the appropriate authority). Banks are advised to strongly encourage their branch level functionaries to avail of the Credit Guarantee Scheme cover, including making performance in this regard a criterion in the evaluation of their field staff.

Composite loan: A composite loan limit of Rs.1 crore can be sanctioned by banks to enable the MSE entrepreneurs to avail of their working capital and term loan requirement through Single Window.


The Ministry of MSME, Government of India and SIDBI set up the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) with a view to facilitate flow of credit to the MSE sector without the need for collaterals / third party guarantees. The Credit Guarantee scheme (CGS) seeks to reassure the lender that, in the event of a MSE unit, which availed collateral - free credit facilities, failing to discharge its liabilities to the lender, the Guarantee Trust would make good the loss incurred by the lender up to 85 per cent of the outstanding amount in default.

The CGTMSE would provide cover for credit facility up to Rs. 200 lakh which have been extended by lending institutions without any collateral security and /or third party guarantees. A guarantee and annual service fee is charged by the CGTMSE to avail of the guarantee cover.


As per extant policy, certain targets have been prescribed for banks for lending to the Micro and Small enterprise (MSE) sector. Banks have been advised to achieve a 20 per cent year-on-year growth in credit to micro and small enterprises, a 10 per cent annual growth in the number of micro enterprise accounts and 60 percent of total lending to MSE sector as on corresponding quarter of the previous year to Micro enterprises.


Public sector banks have been advised to open at least one specialised branch in each district. Further, banks have been permitted to categorise their general banking branches having 60% or more of their advances to MSME sector as specialized MSME branches in order to encourage them to open more specialised MSME branches for providing better service to this sector as a whole.


Cluster based approach to lending is intended to provide a full-service approach to cater to the diverse needs of the MSE sector which may be achieved through extending banking services to recognized MSE clusters. A cluster based approach may be more beneficial: -

(a) in dealing with well-defined and recognized groups;

(b) availability of appropriate information for risk assessment;

(c) monitoring by the lending institutions; and

(d) reduction in costs.


With a view to facilitating credit flow to the MSME sector and enhancing the comfort-level of the lending institutions, the credit rating of MSME units done by reputed credit rating agencies should be encouraged. Banks are advised to consider these ratings as per availability and wherever appropriate structure their rates of interest depending on the ratings assigned to the borrowing MSME units.


In order to provide timely financial support to Micro and Small enterprises facing financial difficulties during their ‘Life Cycle’, Banks are advised to review and tune their existing lending policies to the MSE sector by incorporating therein the following provisions so as to facilitate timely and adequate availability of credit to viable MSE borrowers especially during the need of funds in unforeseen circumstances:

  1. To extend standby credit facility in case of term loans;
  2. Additional working capital to meet with emergent needs of MSE units; 
  3. Mid-term review of the regular working capital limits, where banks are convinced that changes in the demand pattern of MSE borrowers require increasing the existing credit limits of the MSMEs, every year based on the actual sales of the previous year; 
  4. Timelines for Credit Decisions.


A viable/potentially viable unit may apply for a debt restructuring if it shows early stage of sickness. In such cases the banks may consider to reschedule the debt for repayment, consider additional funds etc. A debt restructuring mechanism for units in MSME sector has been formulated and advised to all commercial banks.


The salient features of the Framework are as under:

  1. Before a loan account of an MSME turns into a Non-Performing Asset (NPA), banks or creditors should identify incipient stress in the account by creating three sub-categories under the Special Mention Account (SMA) category as given in the Framework.
  2. Any MSME borrower may also voluntarily initiate proceedings under this Framework.
  3. Committee approach to be adopted for deciding corrective action plan.
  4. Time lines have been fixed for taking various decisions under the Framework.


The Banking Codes and Standards Board of India (BCSBI) has formulated a Code of Bank's Commitment to Micro and Small Enterprises. The Code sets minimum standards of banking practices for banks to follow when they are dealing with Micro and Small Enterprises (MSEs) unit. It provides protection to MSEs and explains how banks are expected to deal with MSEs for their day to-day operations and in times of financial difficulty.