The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 is a foundational legislation in India that aims to promote, develop, and enhance the competitiveness of micro, small and medium enterprises (MSMEs). For banking professionals, understanding its regulatory framework is crucial to effectively support MSMEs and comply with mandated standards.
Objectives and Scope
The MSMED Act was enacted to provide a comprehensive mechanism for fostering the growth and protection of MSMEs across manufacturing and service sectors. It gives legal recognition to “enterprise” (including both manufacturers and service providers), defines MSME categories, and integrates support measures across all tiers of MSMEs.
Key Provisions
- National Board for MSMEs: The Act led to the establishment of a National Board to review policies, address challenges, and facilitate MSME-friendly regulations. Classification:
Updated MSME Classification Criteria (Effective April 1, 2025)
The MSME (Micro, Small, and Medium Enterprises) classification in India, effective from April 1, 2025, uses a composite criterion based on both investment in plant & machinery/equipment and annual turnover as under.
Micro Enterprises:
- Investment: Not more than ₹2.5 crore.
- Turnover: Not more than ₹10 crore.
Small Enterprises:
- Investment: Not more than ₹25 crore.
- Turnover: Not more than ₹100 crore.
Medium Enterprises:
- Investment: Not more than ₹125 crore.
- Turnover: Not more than ₹500 crore.
Key Aspects
Composite Criteria:
- The classification is based on both investment and turnover, providing a uniform system for manufacturing and service sectors.
- Increased Thresholds:
- The updated limits are significantly higher than the previous definition, allowing more businesses to qualify as MSMEs and access various benefits, government schemes, and financial support as they grow.
Purpose:
- The revision aims to empower MSMEs to expand, invest in technology, and remain competitive without losing their essential benefits.
Authority:
- These changes were formalized by the Ministry of Micro, Small & Medium Enterprises, Government of India, taking effect on April 1, 2025.
Registration Process: Micro and small enterprises have an option for memorandum filing, streamlining the process to claim benefits directly, while medium manufacturing units must register mandatorily.
Procurement Policies: Central and State governments notify preferences for MSMEs in public procurement, improving market opportunities.
Payment & Financial Support
- Timely Payments: Buyers must pay MSMEs within 45 days of accepting goods or services. Delays attract a penalty interest at twice the prescribed rate.
- Dispute Resolution: MSME Facilitation Councils resolve payment-related disputes within a 90-day framework, ensuring quicker access to working capital.
- Credit Access & Restructuring: Banks are required to offer credit facilities, standby loans, and mid-term reviews to meet MSMEs’ demands, especially during financial distress. Debt restructuring mechanisms are in place for viable MSMEs exhibiting early signs of stress.
Implications for Banks
- Mandatory Credit Guidelines: Banks must align their lending policies to MSME sector needs, proactively extend credit and restructure accounts as needed, and publicize one-time settlement schemes for NPAs.
- Reporting & Disclosures: Strict disclosures are mandated during audits, and deductions for delayed MSME payments are disallowed under the Income Tax Act, emphasizing the need for timely settlements.
- Shared Responsibility: Recent judicial interpretations underscore a shared obligation—banks are expected to follow restructuring protocols but MSMEs must proactively engage and communicate their status.
Contemporary Reforms & Future Directions
Amendments proposed up to 2024 aim to digitize grievance redressal (via Samadhan portal), bolster MSME representation at the national level, and modernize the regulatory architecture to address changing business conditions like delinquent payments and evolving needs of MSMEs.
The MSMED Act, 2006 stands as a pillar of MSME empowerment in India, mandating fair payment cycles, facilitating credit, and fostering a responsive regulatory environment that banking institutions must actively support for the sector’s sustained growth.
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