Bank Audit 2021- Loans to MSME and Priority Sector

Ashish M. Shaji

27 Apr, 2021

Directions have been issued by the RBI in the name of lending to MSME Sector Directions 2017. The provisions of the directions shall apply to every scheduled commercial banks licensed to operate in India by the RBI. In this article, we shall discuss loans to MSME and priority sector.

Loans to MSME

The MSMED Act was enacted on June 16, 2006. Subsequently, the RBI issued a circular and notified the changes. It has been adopted for the purposes of bank credit there was a paradigm shift that took place, i.e., the inclusion of the services sector in MSME definition apart from extending the scope to medium enterprises.

Now, manufacturing as well as services is eligible for bank finance.

Manufacturing enterprises-

Manufacturing enterprises means enterprises engaged in the manufacture/production of goods as provided below:

• A micro enterprise is an enterprise wherein investment in plant and machinery doesn’t go beyond 25 lakh rupees;
• A small enterprise is an enterprise wherein investment in plant and machinery exceeds 25 lakh rupees but not exceeds 5 crore rupees;
• A medium enterprise is an enterprise wherein investment in plant and machinery exceeds 5 crore rupees and doesn’t exceed 10 crore rupees.

Service enterprises-

Enterprises that are engaged in providing/rendering services and whose investment in equipment are as specified below (original cost excluding land and building, fittings, and other items not related directly to the service rendered):

• A micro enterprise is an enterprise wherein the investment equipment is not more than 10 lakh rupees;
• A small enterprise is an enterprise wherein the investment in equipment exceeds 10 lakh rupees but not exceed 2 crore rupees;
• A medium enterprise is an enterprise wherein the investment in equipment exceeds 2 crore rupees and not exceed 5 crore rupees.

What an auditor must check?

Auditor must check-

• That there is an acknowledgment of the loan application with a running serial number recorded on the application form and on the acknowledgment to MSME borrowers;
• That there is no collateral that is accepted for loans up to 10 lakh to units in the MSE sector;
• That the loan is covered under the CGTSME^[1] and that the premium has been paid.

Further, the MSME ministry clarified that to ascertain the investment in plant and machinery for classifying an enterprise as Micro, Medium or Small, one can rely on the following documents:

• Copy of the invoice of the purchase of plant and machinery;
• Gross block for investment in the plant and machinery as provided in the audited accounts;
• A certificate issued by a CA about the purchase price of plant and machinery.

Loans to priority sector

This covers the agriculture and the MSME sector. Therefore export credit under agriculture and MSME sector also fall under PSL in the respective categories. The export credit includes pre-shipment and post-shipment export credit as provided in Master Circular on Rupee/Foreign Currency Export Credit and Customer Service to Exporters issued by the Department of Regulation.

What an auditor must check?

Auditor must check-

• That a register or electronic record is maintained by the bank where the receipt date, sanction/rejection, or the disbursement date with reasons have been recorded;
• An acknowledgement for loan application providing a time limit within which the bank put forth its decision in writing  to the applicant is issued;
• Such register/record is produced to inspecting agencies;
• No loan related and ad hoc service charge/inspection charge is levied on priority sector loans up to 25000.

Loans for education

Loans to individuals for education, including vocational courses, not more than 20 lakh rupees are eligible for priority sector classification.

What an auditor must check?

Auditor must check-

• That the loans up to 10 lakh rupees to individuals for educational purposes including vocational courses regardless of the sanctioned amount is considered for the priority sector;
• That loans has been disbursed to educational institutions, and prospectus and copies of reports are held;
• That the central sector interest subsidy has been claimed timely in eligible cases;
• That the subsidy obtained from the government department under the central sector interest subsidy in the account is accounted for appropriately.

Conclusion

During the bank audit, the auditor may be required to perform a number of examinations to ascertain certain facts. The above mentioned points are some of the essential to-dos for an auditor. This article intended to decode the loans to MSME and priority sector.

Read our article:All about the AEO Package for MSME