The Reserve Bank of India (RBI) has asked banks to ensure enough credit to the micro and small industries and also to apply the RBI's guidelines on optimally restructuring debt to get MSEs out of incipient sickness and put them on the recovery path.

These guidelines, the RBI said in release, ''in fact, subsume the incipient sickness stage and, if implemented as intended, could significantly prevent or arrest sickness at the initial stages.''

''Such MSE units/enterprises, which turn sick in spite of debt re-structuring are expected to be few and would fall within the ambit of the extant guidelines on rehabilitation of potentially viable sick units/enterprises,'' it said, adding that it would be to the advantage of the creditor banks as well as their MSE clients.

The group has recommended the setting up of a credit guarantee fund trust for micro and small enterprises (CGTMSE) and has also made several suggestions aimed at increasing the flow of institutional credit to MSEs.

Besides addressing the issue of adequate and timely credit, the group has made recommendations for timely detection and remedial action with respect to incipient sickness as also rehabilitation of sick units which can be revived.

The group has also recommended that Reserve Bank of India may announce a One Time Settlement Scheme (OTS) for the MSME sector. However, RBI has left the issue of settlement of non-performing loans to the judgement of individual banks.

''It is necessary that the banks have their own non discretionary OTS policy which enables their officials to make quick and judicious decisions on OTS.  As such, banks are advised to put in place a suitable OTS for this sector,'' the RBI said.

''Accordingly, in the light of the recommendations of the group and the Banking Codes Standards Board of India's Code of Commitment for the MSE borrowers, your bank may undertake a review and put in place the following policies for the MSE sector, duly approved by the board of directors,'' the RBI said.

The RBI directive follow recommendations made by a working group on MSE finances under the chairmanship of K C Chakrabarty, chairman and managing director of Punjab National Bank. 

The working group was set up in recognition of the problems being faced by the the MSE sector, particularly with respect to rehabilitation of potentially viable sick units.

The report, submitted in April 2008, covered the entire gamut of issues and problems (credit and non-credit related) confronting the sector. The RBI had placed the report on its website and invited comments from all stake holders.

The recommendations relating to Government of India have been forwarded to them for consideration and necessary action. The   recommendations relating to the state governments have been forwarded to the SLBC convener banks for taking up the issue in the SLBC meetings, RBI said. Other recommendations pertaining to SIDBI have been sent to them.