1|Page

Question 1:
Briefly explain the steps involved in setting up an MSME unit?

Answer-
The Micro, Smal, and Medium Enterprise (MSME) sector play a prominent role in the
economic growth of a developing country like India. This sector has been established
with an underlying aim of nurturing the micro, small, and medium enterprises in
India. MSME sector in India also provides a significant contribution towards
manufacturing, exports, employment, and industrial units in India. In short, the
economic growth of India also relies on MSME sector development. MSME sector is
also popularly known as the Small-Scale Industry (SSI) in India.

The important documents that are mandatory for MSME registration are given below:

Address Proof (of Business)

Rented Property: NOC from the landlord, Rent receipt, and a utility bill or its
equivalent are mandatory as a proof of landlord’s ownership
Self-owned Office: For self-owned offices, one must have an allotment letter,
possession letter, property tax receipt, or lease deed. If a municipal license exists
against the business name or its proprietor, director or partner, then no need of a
possession document
Receipts/copies of every sale and purchase bills
Bills of machinery purchased and the copy of important licences
Articles of Association (AOA) and Memorandum of Association (MOA)/Partnership
Deed along with the copy of board resolution and incorporation certificate
2|Page

Question 2:
Write a note on Sharma Committee

Answer-The Sharma Committee, officially known as the Committee on

Comprehensive Financial Services for Small Businesses and Low-Income
Households, was a committee formed in 2013 in India to examine issues relating to
financial inclusion and suggest measures to enhance the accessibility and
affordability of financial services for small businesses and low-income households.
The committee was chaired by Nachiket Mor, who was then a member of the
Reserve Bank of India’s Central Board of Directors. The formation of the Sharma
Committee was in
response to the need of addressing financial exclusion faced by a significant portion
of the Indian population, particularly those belonging to economically weaker
sections.
The committee was tasked with assessing the existing financial services framework,
identifying gaps, and proposing recommendations to improve financial inclusion for
small
businesses and low-income households. It focused on areas such as credit,
deposits, payments, remittances, and insurance.
The Sharma Committee submitted its report to the Reserve Bank of India in January
2014. The report highlighted the importance of a comprehensive approach to
financial inclusion,
emphasizing the need for accessible and affordable financial products and services.
It also proposed measures such as the establishment of a specialized category of
banks called
“payment banks” and “small finance banks” to cater to the financial needs of
underserved sections of society.
The recommendations of the Sharma Committee report played a significant role in
shaping financial inclusion policies in India.
As a result, the Reserve Bank of India released guidelines for the establishment of
payment banks and small finance banks, allowing entities such as telecom
companies, non-banking
financial institutions, and microfinance institutions to provide basic banking services.
The committee's work and recommendations contributed to advancing financial
inclusion efforts in India, aiming to bring previously excluded segments of the
population into the formal financial system. The Sharma Committee report led to
subsequent policy changes and initiatives that continue to have an impact on the
financial landscape of the country.

Question 3:
3|Page

Explain three methods of the lending framework proposed by

the Tandon committee?

Answer-

1)First method of lending:

The contribution by the borrowing unit is fixed at a minimum of 25% working capital
gap from long-term funds. In order to reduce the reliance of the borrowers on bank
borrowings by bringing in more internal cash generation for the purpose, it would be
necessary to raise the share of the contribution from 25% of the working capital gap
to a higher level. The remaining 75% of the working capital gap would be financed by
the bank. This method of lending gives a current ratio of only 1:1. This is obviously
on the low side.

2)Second method of lending:

In order to ensure that the borrowers do enhance their contributions to working
capital and to improve their current ratio, it is necessary to place them under the
second method of lending recommended by the Tandon committee which would give
a minimum current ratio of 1.33:1. The borrower will have to provide a minimum of
25% of total current assets from long-term funds. However, total liabilities inclusive of
bank finance would never exceed 75% of gross current assets. As many of the
borrowers may not be immediately in a position to work under the second method of
lending, the excess borrowing should be segregated and treated as a working capital
term loan which should be made repayable in instalments. To induce the borrowers
to repay this loan, it should be charged a higher rate of interest. For the present, the
group recommends that the additional interest may be fixed at 2% per annum over
the rate applicable on the relative cash credit limits. This procedure should be made
compulsory for all borrowers (except sick units) having aggregate working capital
limits of rs.10 lakhs and over.
3)Third method of lending:
Under the third method, permissible bank finance would be calculated in the same
manner as the second method but only after deducting four current assets from the
gross current assets. The borrower’s contribution from long-term funds will be to the
extent of the entire core current assets, as defined, and a minimum of 25% of the
balance current assets, thus strengthening the current ratio further. This method will
provide the largest multiplier of bank finance. Core portion current assets were
presumed to be that permanent level which would generally vary with the level of the
operation of the business. For example, in case of stocks of materials the core line
goes horizontally below the ordering level so that when stocks are ordered materials
are consumed down the ordering level during the lead time and touch the core level,
but are not allowed to go down further.