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CHAPTER – I

INTRODUCTION

The purpose of this chapter is to describe the problem of the study,

to define its objectives, and to discuss the methodology employed.

Further, the present chapter enlightens the significance of the study

and explains the limitations as well.

Small and Medium Enterprises play an important role in the

development of the country. However, these industries face difficulty in

accessing adequate finance for their businesses. Apart from the traditional

modes of financing like banks and money lenders, newer sources of financing

such as venture capital investment, can take care of their financing

requirements. In the case of India, the government has taken several

initiatives both at the national and the international levels to improve the

availability of finance. But there are still certain impediments that the SMEs

face that are required to be addressed by the government.

SMEs encourage entrepreneurial development and dispersal of the

industries throughout the length and breadth of the country. It also generates

a lot of employment opportunities and the capital cost per employee is very

minimum. With the service sector contributing a major share to the GDP and

as this sector relies on the SMEs, the scope for SME finance by the

commercial banks has increased tremendously. The government is also

committed to give a fillip to the sector through infrastructural development,

skill developmental effort, technological up gradation and by expanding the

role of Small Industries Development Bank of India in SME development.

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SMEs contribute nearly 9% of India’s GDP and the Reserve Bank of India has

advised all commercial banks to achieve 20% annual growth in SME lending

till 2010, so that the SME sector exposure to commercial banks is doubled.

Public sector banks’ overall credit to SME sector grew by 26% in 2006-2007,

which amounted to Rs.1,85,000 cores. Among the large PSBs, state bank of

India’s SMEs exposure grew by 24% and all banks are targeting SMEs credit

growth of 25%.

As the small and medium enterprises (SME) sector is one of the fastest

growing industrial sectors all over the world, initiatives are being taken by both

the national and develop small and medium enterprises. Prominent among

them are the small industries development organization (SIDO), national small

industries corporation (NSIC), export promotion authorities, SIDBI, NABARD,

State infrastructure corporation by the National and state level agencies in

fostering the overall growth of SME sector is phenomenal. Apart from

providing extension and advisory services, these agencies play a significant

role to channelize financing by various institutions and intermediaries through

different schemes and acting as a bridge between financial intermediates and

entrepreneurs in the contest of SMEs heading towards epitome in the Market

economy. In order to see that Indian economy develops fast, planners and

Economists advocated development of small and medium industry.

Accordingly several institutional and non institutional strategies also

have been developed to initiate and sustain the growth of small and medium

industries in India. A program of instructional financing is one of the several

strategies that government of India introduced to give a maximum fillip to

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small scale industries through the credit facilities offered by national banks,

institutions and government subsidies.

A Small scale Industry / Ancillary industry is defined as a unit whose

investment in fixed assets in Plant and Machinery does not exceed

Rs.3 crores. (Subject to the condition that the unit is not owned, controlled or

subsidiary of any other industrial undertaking) .The Small Scale Sector has

emerged as dynamic and vibrant sector of Indian economy and it has been

making significant contribution to industrial production, export and

employment generation.

In most developing countries, as also in India, Small Enterprises have

been viewed as an engine of employment generation. SME Sector in India

creates largest employment opportunities for the Indian populace, next only to

Agriculture. It has been estimated that a lakh rupees of investment in fixed

assets in the small scale sector generates employment for four persons.

Employment contribution by SMEs in Andhra Pradesh is 7.5%

SME industries form a significant part of Andhra Pradesh economy.

The sector contributes around 6 per cent of GSDP and employs close to 2.5

lakh people. Many of the growth engines selected for focused development,

e.g., construction and pharmaceuticals, will give rise to many opportunities for

small-scale industries. The sector will thus be a major focus in the strategy to

create rapid growth in the State. By 2020, Punjab will have many dynamic and

profitable small-scale industries. Propelled by technological development and

capability building, small scale units will flourish all over the State. The

proliferation of these industries will provide many opportunities for

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entrepreneurship and employment, leading to a significant rise in income for

the State’s people.

The SMEs industries sector plays a vital role for the growth of the

country. It contributes 40% of the gross manufacture to the Indian economy.

The Small Scale Industry today constitutes a very important segment of the

Indian economy. The development of this sector came about primarily due to

the vision of our late Prime Minister Jawaharlal Nehru who sought to develop

core industry and have a supporting sector in the form of small scale

enterprises.

It has been estimated that a lakh rupees of investment in fixed assets

in the small scale sector produces 4.62 lakhs worth of goods or services with

an approximate value addition of ten percentage points.

Export contribution:

SME Sector plays a major role in India's present export performance.

45%-50% of the Indian Exports is being contributed by SSI Sector. Direct

exports from the SSI Sector account for nearly 35% of total exports. The

number of small scale units that undertake direct exports would be more than

5000.

Economic Indicators:

The SME Industry today constitutes a very important segment of the

Indian economy. The development of this sector came about primarily due to

the vision of our late Prime Minister Jawaharlal Nehru who sought to develop

core industry and have a supporting sector in the form of small scale

enterprises.

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The process of economic liberalization and market reforms has opened

up the Indian small scale sector to the global competition. SMEs are now

facing stiff competition from Multinational companies after the liberalization

and globalization of Indian trade. SMEs have to revitalize their marketing

strategies, promotional strategies and they require lot of support from

government.

But SME in India and abroad suggests that there must be a paradigm

shift in Philosophy and seeks to resolve some constraints like future of SMEs

in India, fresh and further capabilities needed to equip and enable this sector

to perform better, and the kind of transformation required in its structure,

strategy, policy and perspectives.

ABID HUSSAIN committee on small enterprises has recommended

abolition of policy of reservation for SS units and advocated Cluster Approach

to small industry development. The policy of protection, subsidization, and

reservation should be replaced by one of promotion, incentives and existence.

He said this was necessary to prepare them for surviving in a Global

Economy with competition.

With the liberalization of the Indian economy, greater emphasis was

placed on meeting the credit needs of MSEs. This was manifest through the

following initiatives:-

1. Earmarking of credit for tiny sector within overall lending to small

industries.

2. Opening of specialized SSI bank branches.

3. Establishment of National Equity Fund for venture capital support.

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4. Technology Development & Modernization Fund through SIDBI.

5. Enhancement of turnover limit for assessing aggregate working capital

requirement.

6. Enhancement of limit of composite loan to Rs. 10 lakhs. (Rs 1 million)

7. No collateral security for loans up to Rs. 5 lakhs. (Rs 0.5 million)

The Comprehensive Policy Package announced on 30th August 2000

took this process further. This included:-

1. Launch of Credit Guarantee Scheme to cover loans up to Rs. 50 lakhs.

(Rs 5.0 million)

2. Launch of Credit Linked Capital Subsidy Scheme to provide for subsidy

against loans taken for technology up gradation.

3. Further enhancement of ceiling composite loan limit to Rs. 25 lakhs.(Rs

2.5 million)

4. Enhancement of project cost limit under National Equity Fund to Rs. 50

lakhs.(Rs 5 million)

Many of these initiatives were based on the recommendations made by

the Nayak Committee, the Kapur Committee and the Dr. S.P. Gupta Study

Group.

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(I) NEED FOR THE STUDY:

The SME sector has become very important for many economic

activities in developing countries because of its special features of capital

sparing and labor intensiveness. In fact, the small and tiny sectors have a

major role to play in developing nations which suffer due to low capital

formation and over population Govt. of India took several measures for the

promotion and smooth functioning of this sector. Besides these, Government

of India carefully planned the development of small and tiny industrial sectors

in the country. It was spent millions of rupees for their development during

the plan periods. But to the dissatisfaction of many, including Government

agencies, the sector has not been working well owing to different problems

faced by them both at the promotional and operating stages.

(II) OBJECTIVES OF THE STUDY:

The purpose of the study is to identify the problems encountered by

SME Industrial units and thereby to suggest such measures that would

resolve the problems. The objectives of the study are:

1. To examine the growth and functioning of SME industries at Ludhiana

district and in the State of Punjab.

2. To discuss the credit facilitates offered to the SMEs

3. To analyze government’s support in obtaining credit facilities

4. To outline the financial problems faced by sample units and the role

played by financial agencies with reference to commercial Banks.

5. To examine the role played by SME promoting agencies including both

the central and state governments in providing credit facilities.

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6. To examine the awareness of various credit schemes offered by the

commercial banks in the wake or the MSMED act, 2006.

7. Finally, to suggest suitable measures based on the identified gaps in the

problem areas to resolve the major financial problems of the small and

medium industrial units.

(III) REVIEW OF THE LITERATURE:

1. BRAHMANADAM, G, N., RAI, H.L., DAKSHINA MURTHY, D, “Financing

Small Scale Sector”. The Role of Banks”, INDIAN BANKING TODAY AND

TOMORROW, MAY, 1981- the above article was prepared on the role of

banks in financing the SMEs in the year 1981. at those times the Indian

banking was not all interested in financing the SMEs , because of their

credit worthiness. Later due to changes in the industrial policy of India, the

commercial banks came forward and made immense help to the growth of

SMEs. This article was written before the economic reforms taken place.

Here is a gap for more analysis about the role of the banks in the post

economic reforms. My study on this topic totally focused on the credit

facilities available to the SMEs in the wake of MSME act 2006. Due the

presence of the gap about the present day activities are different to those

of 1980’s. I made in-depth study of the banker’s role in providing the credit

to promote the SMEs.

2. CHOPRA, K.C., “Financing for The Decentralized Sector- Small and

Medium Industries” THE BANKER, AUGUST, 2006 – The above article

prepared on the thesis, reveals the financing for the SMEs in the

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decentralized sector. This article helped me in selecting the path for my

study on credit facilities for SMEs. The article vividly discussed about the

possible ways to finance the SMEs in the decentralized sector like

Agricultural based and Artisan based SMEs. Really there is a gap between

the centralized and decentralized sectors in getting the finance from the

banks. The banks are very much lenient in providing loan facilities to the

centralized sector. Through my study I made an attempt to study the

intricacies faced by the decentralized sector SMEs in Guntur District, well

known for its agricultural based industries.

3. JAILAL SAAW, “Growth of Small Scale Industries in India” JOURNAL OF

INDUSTRY AND TRADE, April – 2005- The growth of small and medium

industries in India was discussed in the above article. The expected

growth was not there because of lot of root causes to sickness and

underdevelopment in the SME sector. This article discussed about the

slow growth rate of SMEs, dues to several problems. Through my study I

focused on the one problem that is financial problems faced by the SME

segment. I concentrated on the credit facilities offered by the governmental

agencies as well as the commercial banks.

4. JAYA PRAKASH REDDY, R., BRAHMANADAM, G.N., “Small Scale

Sector: Problems And Prospects” YOJANA 1-15, JAN, 1987 - the above

article deals with the various problems like ,marketing, raw material, labor,

technical and financial problems. The focus on the finance related issue is

very limited. They have given more importance to the procurement of raw

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material and marketing and labor problems in SME segment. But not

discussed about the credit facilities for the SMEs.

From my study I focused more on the credit facilities available to the SMEs

from the Central Government and State Governments and Commercial

Banks.

5. KAURA, M.V., SHARMA, G.L., “Financing Small Industries – Institution

Should Change Their Attitudes, Procedures” ” JOURNAL OF INDUSTRY

AND TRADE, MARCH, 1999, - the above article discussed very vividly the

attitudes of the financial institutions whether belong to Central Government

or state Government or the Governmental Agencies promoted for this

purpose. In the wake of the MSME Act, 2006 passed in the interest of the

small scale sector by the Government of India, the attitude of the financial

institutions towards SME sector was totally changing. The Employees of

above said financial institutions are very much helpful and friendly with the

promoters of the SMEs.

6. NAMBIAR, P.C.D., “FINANCING for PRIORITY SECTORS” S.B.I

MONTHLY REVIEW DEC16, 2007 – The article on the above topic paved

the way for the thinking strategy for the financing the small scale and

medium scale industries by the bank officers. The government of India

through its industrial policy clearly stated that the commercial banks

should give priority treatment to the SMEs. The nature of the banking

officials also discussed in the argicle. But that is not sufficient to promote

the SME sector because the sector was totally neglected for the last

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several decades due to invention of the MNCs. By enacting the MSME act,

2006, the government of India clearly indicated the signal to the banking

people to provide the credit facilities to the SMEs. This article is very much

helpful in preparing the script for my thesis

7. PATNAIK,S.M., “ COMPREHENSIVE LEGISTATION NEEDED “

ECONOMIC TIMES DEC 2004 – in the year 2004 the author of this article

expressed his grief for an enactment to safe guard the SME sector. The

Government of India in the year 2006 came with the special law for the

protection of SME sector. Really it is a welcome gesture for the

safekeeping the SMEs. In my thesis I discussed the intricacies and the

implementation of the act by the nodal agencies for the promotion of the

SMEs.

8. RAMACHANDRA, K.S., REVIVING SICK UNITS, “FINANCIAL EXPRESS”

OCT 9, 2001 – the above article discussed the reviving the sick SMEs in

various aspects, like providing technology, management training, skilled

labor, export promotion and giving finance. the root cause for all the above

problems is the financial problem. The financial institution should provide

sufficient amount at an easy disbursal system to promote the SMEs. The

topic which I am preparing focused more on the credit facility awareness

and availability of several schemes for SMEs.

9. SAHNEY, M., “BANKS ASKED TO STEM INDUSTRIAL SICKNESS”

INDUSTRIAL INDIA VOL 36, 12 DEC 2005. Through this article the author

tries to express the need for banks intervention in the promotion of the

SMEs. the officials of the banks in India are belong to middle class families

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and unaware of the industrial promotion and its need. Mere advice to the

bankers is not helpful. So for that reason Srimathi Indira Gandhi

Nationalized all private banks for the development of agricultural sector in

1971.The MSMEact 2006, instigates the banks to provide the credit

facilities without any hesitation to the SMEs.

10.SOUNDARRAJ, FINACING SMALL SCALE INDUSTRIES, A PROFIT,

“RESERVE BANK OF INDIA BULLETIN 1980” APR - the reserve bank as

a central bank and banker’s bank and the prime lending bank to the

government should take initiatives to promote the SME sector. The author

is very much interested in financing the small and medium scale industries

in India, because it is providing more employment than any other sector. It

arrests the migration to the cities from the villages in search of better jobs

and better facilities. This topic has given me the encouragement to think in

this way for the betterment of village and cottage industry development.

(IV) HYPOTHESIS:

In the light of this backdrop the present study has been taken up to

identify the credit facilities and the problems faced by the small and medium

entrepreneurs in obtaining credit from the government. It is hypothesized that

the small and medium sectors are suffering from financial problem.

To test the validity of the hypothesis, small and medium industries of

Ludhiana district area are selected for study. To avoid any ambiguity in

dealing with the hypothesis and to organize the survey on sound lines, the

objectives of the study are clearly defined as above.

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(V) LIMITATIONS OF THE STUDY:

The following are the main limitations of the study. They are

1. This study is confined only to 100 units in Ludhiana District.

2. Though small and medium industrial units were inter related, the study is

focused on more than 25 lakhs investment in P & M only.

3. There were lots of difficulties in getting the data from the Small and

medium scale industries. But utmost care was taken to maintain the

quality aspect in the data.

4. The study is limited to time, cost and effort of the investigator.

5. Though there has been chance for bias, the investigator has taken all the

steps for the reduction of bias

(VI) SAMPLE, SOURCE AND METHODOLOGY:

Selection of the sample:

A systematic record of small and medium industrial units of Ludhiana

District does not exist. As registration of units is only optional many units are

found to be operating without registration. No information could be obtained

about the total number of such units and their locations. The study has been

confined to those small units which are registered. The record maintained by

District Industries Centre is used for preparing a list of small tiny units

operating in Guntur District.

There were approx 9500 small and medium industrial units in DIC

Registrar at the end of December, 2008 out of which 6880 units presently

working and remaining units were not working. 80% of units come under the

tiny unit’s category only. Among the Units having investment in P & M more

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than Rs. 25, 00,000 are selected by using random sampling technique. .

The sample is confined to 100 units in total. A structured schedule of

questions was prepared for this purpose.

Methodology & Sources of data:

The study is empirical in nature as it is based on data collected with the

help of a schedule which can be seen in Appendix-II. A few industrial units

were approached for the purpose of presenting and finalization was done

by alteration of some items and addition of some other provisions in the

schedule.

The researcher visited some of the sample units and some of the units

approached through telephone of small scale sector and collected the data

from the respondents.

Both primary and secondary data are used in the study. Secondary

data is collected mainly from District Industries Centre, Statistics of Ludhiana

District and Industrial Profile. Primary data is collected from the owners and

Managers of Small Scale Industries in Ludhiana District.

Period of study:

The study covers a period of 3 weeks from 10 March 2010 to 1 April

2010. This period seems to be the short period for the small scale industrial

units owing to the absence of any serious economic fluctuations during

the period. The period is considered to be a reasonable period to

analyze the various problems of small and medium scale Industrial units.

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Presentation of the study (‘Chapterization’)

The first chapter deals with the objective of the study, research

methodology taken by the investigator, limitations of the study, period of study

and the significance of the study and the test of Hypotheses.

In the second chapter of this study deals with the introduction to

SMES, the growth of SMES, Indian and global importance, and the chapter

discuss about the Industrial policy of government of India before the economic

reforms and after. This chapter discuss about the contributions to Indian

economy from the SMEs sector and finally the problems faced by the SMEs.

The second portion of the second chapter deals with the various credit

facilities available to SMEs. The promotional activities of Central government

and state government in the contextual background of MSME act 2006. the

active participation of the public and private commercial banks in the creation

of the credit facilities to SMEs sector. Finally it deals with the promotional

activates of SIDBI, SIDO and NSIC.

The third chapter deals with the analysis of the study of the sample

units carefully selected from the eligible list of SMEs, situated in and around

Ludhiana district, at different industrial estates. Finally this chapter deals with

the test of hypothesis.

The fourth and final chapter deals with the findings of the study and

suggestions. For the findings of the study the investigator conducted a survey

with a well structured schedule covering all sorts of questions relevant to the

topic “credit facilities for SMEs”

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CHAPTER – 2

Credit – the lifeline of SMEs

The purpose of this chapter is to discuss the profile and development of

SMEs in India. Further the chapter enlightens the problems and common

characteristics of the SMEs and also deals with the emerging trends in SMEs.

The main objective of this chapter is to present the availability of credit facilities

to SME units in India.

INDIAN PERSPECTIVE:

The Small and Medium Industries occupy a very important position in

any economy. Traditionally they produce certain specialized items for which

they enjoy virtual monopoly of skill and expertise developed over the years.

Many items produced in the small scale sector are also used as raw materials

in the large scale industry and thus small scale industries contribute to large

scale production in no small measure.

However, in a free economy, the small and medium scale industries

will have to face stiff and challenging competition from the large scale

industrial sector. In a controlled economy, the small scale industries are

protected from competition from the large scale sector by means of subsidies,

grants, monetary incentives from the Government, reservation of certain items

of production in the small scale etc.

In a free economy, the small and medium scale industrial sector is not

insulated from competition from the large scale sector and for their survival

and growth; they will have to face competition from the large scale sector out

of their own ingenuity and resources.

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Governments across the globe are increasingly leveraging variants of

credit guarantee mechanisms to promote entrepreneurial growth in the Micro,

Small and Medium Enterprises (MSMEs) sector. The experience has been

rewarding both for the financial system as well as the recipient sectors of the

economy...

ASIAN PERSPECTIVE:

In the Asian context, credit guarantee institutions have been in

existence for several decades and are an integral part of the financial

framework of the respective economies. Japan, for instance, has 52 credit

guarantee corporations with an apex body for re-guaranteeing the portfolio of

these institutions.

Korea has one of the largest Credit Guarantee Company in the world in

terms of guarantees issued. It also has 9 other provincial guarantee

corporations with a central re-guarantee organization. Malaysia has a unique

institution which combines the roles of a credit institution, venture capital

company, credit rating agency and guarantee company.

Nepal, Sri Lanka, Indonesia, Thailand and other countries in the Asian

region have fairly well developed and mature credit guarantee organizations

operating with Governmental support. The criticality and importance of Micro,

Small and Medium Enterprises (MSMEs) in driving India’s growth story needs

no elaboration.

There is enough evidence to suggest that a strong and vibrant Small

and Medium Enterprises sector in the country is one of the key elements

responsible for attaining ‘financial inclusive growth’. Creation of higher levels

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of employment per capital invested, addressing the issue of employment to a

large number of the under-privileged and disadvantaged sections of society,

overcoming the obstacles for rural and semi-urban prosperity, optimizing

utilization of locally available resources, providing an enabling environment for

the millions of young Indians to participate in the nation building task are

areas of foremost concern in the Government of India’s agenda for

development.

The causes of sickness of SME industries are mainly as under:

Diversion of funds.

Dissension among partners.

Shortage of power.

Technological obsolescence. 

Overdependence on purchases by Government.

Lack of awareness of credit facilities available

Lack of knowledge about various credit schemes

Problems in Recovery of Receivables

The funds of many SME industrial units are blocked in receivables. As

a result, recycling of funds is affected and production suffers. In a competitive

environment, it must be ensured that receivable dues are realized with utmost

expedition. The SME units will have to make special efforts for collection of

their dues for their growth. They may have to utilize the services of factoring

companies for the purpose.

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The small and medium scale units must properly look after these areas

to guard against sickness. India is now largely a free-enterprise economy. In

India, despite a liberalized economy, the SME sector is performing well. In the

year 1996-97, the production of Village and Small industries sector increased

to about Rs. 4, 81,466 crores recorded in 1995-96, of which the share of SME

was nearly 80 per cent. The overall growth of the sector was 9.1 per cent

during 1996-97. Employment in the SME Industries Sector increased to 574

lakh persons as at March 1997 as against 5534 lakh persons as at March

1996. The sector has generated an incremental employment of nearly 20 lakh

persons thereby registering growth of 3.6 per cent in employment in 1996-97.

The policies of the Government are also directed towards the growth of

small and medium scale industries. The Government has since enhanced the

investment limit in plant and machinery from Rs. 60 lakh (Rs. 75 lakh for

ancillaries and exporting SMEs) to a common limit of Rs. 3 crores. This would

encourage modernization of existing small sale industries with adoption of

appropriate new technologies in the sector and stimulate the growth of new

small scale units.

The Government is also keen to provide adequate institutional credit to

the SME sector by ensuring that working capital limits of small scale units are

fixed by the financial institutions at a minimum of 20 per cent of their projected

turnover, as prescribed by Nayak Committee. The Government has plans to

educate the small and medium entrepreneurs about economies of scale,

arrange for up gradation of skills and technologies and strengthen export

capabilities for promotion of small scale industries. In India, the small and

medium industries are, therefore, poised for growth and development

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provided they adopt strategies as mentioned above to overcome competition

from the large scale sector.

Thus, the prospects of SME industries in a free economy are quite

encouraging provided the Government plays a supportive role and adequate

measures are taken to meet the challenges thrown up by the large scale

sector.

The National Small Industries Corporation (NSIC). Small and medium

Industries Development Corporation (SSIDC) through their export

development program are playing a vital role to promote the SME sector in

exporting their products/projects in international, markets by providing

following assistance to the small and medium enterprises. It provides

Marketing and promotion, financial and technical assistance,

There are 28 Small Industries Service Institutes (SISI) in India. These

institutes help the small scale industries’ entrepreneurs in providing all the

guidance.

DEVELOPMENT OF SMALL AND MEDIUM ENTERPRISES IN INDIA:

Making the best use of the material resources by employing higher

order of skill and artistic talents through traditional handicrafts, India has

occupied a permanent place of pride in the world before industrial

resolution. However, the advent of modern large scale mechanized

industry, the imposition of restrictions on Indian trade by the British rulers

and deteriorating socio-economic conditions lead to the decline of Small

Scale Industry. But with the provisions of permanent place in the nation's

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policy of economic development after the attainment of the Independence, it

has staged a grand recovery and is now well entrenched on the path of

progress towards great expansion.

SME has emerged into prominent sector in Indian economy in general

and industry in particular. SSI sector in India has posted impressive growth in

1990's from 15% in 1991-92 to 55% in 2001-02.The growth in employment

generation has been equally impressive from 3% to 45% during the same

period. Employment in SME touched 19 million, just behind agriculture. Share

of SSI exports crosses 40% of total exports.

Growth by itself in SME sector is impressive enough indicating a

positive response to the Economic Reform process initiated in the country

since 1991.

--- Development of infrastructure

--- Assured supply of Raw Materials

--- Availability of Cheap Credit

--- Concessionary Taxes and Tariffs.

--- Financial subsidies

--- Equity contributions are all the protective measures for the sector

However, there still remain a number of issues confronting SSI

sector that require to be addressed through a set of policy interventions

that effect the competitiveness of these enterprises.

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Small and Medium Enterprises - Industrial policy:

The small and Medium industries have a specific role to play by the

Industrial policy 1948 which stated that cottage and small scale industries

are particularly suited for better utilization of local resources and for the

achievement of local self-sufficiency in respect of certain type of essential

goods.

A Small and Medium Industries Board was constituted in 1954 and a

number of helping schemes such as supply of machinery on hire purchase,

liberal and wider grants under the state aid to Industries Act, and price

preference in government purchase were also initiated to provide support

to the small sector.

The Government announced its second Industrial policy in 1956 which

replaced the Industrial policy resolution of 1948. The state had followed a

policy of supporting Small Scale Industries by restricting the volume of

producing in the large scale sector, by differential taxation, or by direct

subsidies. While such measures continue to be taken wherever necessary,

the aim of the state policy is to ensure that the decentralized sector acquires

sufficient vitality to be self supporting and its development is integrated

with that of large scale industry. The state concentrated on measures

designed to improve the competitive strength of the small scale producer.

Besides, the Government intended to strengthen the existing arrangements to

finance small scale units and make changes if necessary to ease the credit

problems of the sector. The system of reservation of items for exclusive

production by small scale units would continue in future.

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The Industrial policy statement of 1985 was also accorded importance

to small scale sector and made some suitable policy changes. The definition

of small scale unit was revised to include all manufacturing units having

investment in Plant and Machinery unto Rs.35 Lakhs. In case of ancillary

units, the investment ceiling was Rs.45 Lakhs. More recently the definition

was relaxed to include service oriented industries and the list of industries

reserved for exclusive development was increased as also the items reserved

for purchase by government.

In the policy statements of 1991, the state followed a policy of

supporting small enterprises in the country. Small and Medium enterprises

account for 55% of industrial production, 40% of exports and above 88% of

manufacturing employment. Hence, this sector is considered as dynamic and

vibrant sector of the country. The relative importance tends to vary

inversely with the level of development and their contribution. Small and

Medium enterprises have played a significant role in creating sufficient load

and balancing economic and social developments within the country. Small

and Medium enterprises have emerged as the leaders in the industrial sector.

In recognition of their significance and stature, the then government

announced policy measures on August 6, 1991 for the first time in the post

independence period. This was to promote and strengthen small, tiny and

village enterprises. This is almost a U-turn in policy stimulants and structure

of micro and small enterprises in the country.

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CONTRIBUTION OF SMEs TO INDIAN ECONOMY:

The Small and Medium sector which plays a important role in the

Indian economy in terms of employment and growth has recorded a high rate

of growth after independence. It is now one of the fastest growing sectors in

the country. It has made steady progress during recent years. The good

performance of the small scale units is evident from their number, production,

employment and foreign exchange earnings.

The root cause for unemployment in India is the over growing

population which has outpaced the development of industry and agriculture.

For a country like ours, with limited financial resources and huge reservoir of

human resources, Small and Medium industry is the only means for solving

the unemployment problem.

SME Contribution to GDP:

Small and Medium Industries has been contributing significantly to

Gross National Product of the Country. The total production of small industry

was 61,228 crores in 1985-1986 which rose to 6, 25,000 in 2000-01. It is

important to note that the output of the small and Medium sector rose faster

than that of large scale sector. The total value of production by village and

small scale industries during the 12th Five year plan period is projected to rise

to Rs.8, 00,000.

SMEs Contribution to exports:

Small and Medium scale industries has registered a high growth in the

export field by contributing substantially to the national earnings from

25

exports. The contribution of small scale industries to exports has

gradually increased from 2,580 crores in 1984-85 to nearly 75,000 crores

during 2008-2009. However, from year to year changes are significant.

A view of the progress made by the small scale sector in terms of

investment, employment, production exports does bear out that it has made

significant contribution to the economy.

26

PROBLEMS OF SMEs:

Some of the major problems are briefly as follows:

Financial problems of SMEs:

. The financial problem of SMEs is the Root Cause for all the other

problems faced by the SME sector. The small and medium industrialists are

generally poor and there are no facilities for cheap credit. They fall into the

clutches of money lender who charges very high rates of interest, or else they

borrow from the dealers of their goods, who exploit them by completing them

to sell their products at very low price. After the nationalization of 14 major

Indian Banks in July, 1969, the Commercial banks were providing only a small

proportion of SMEs financial requirements. Credit to the SME sector

continues to be non-commensurate with its contribution to the total industrial

output. As against the share of the village and SME at 40% in the industrial

out, its share in total credit to the industrial sector is only about 30%.

Raw Material problem of SMEs:

This difficulty is experienced in a very pronounced form. The quantity,

quality and regularity of the supply of raw materials are not satisfactory.

There are no quantity discounts, since they are purchased in small

quantities and hence charged, higher prices by suppliers. Difficulty is also

experienced in procuring semi-manufactured materials. Financial weakness

stands in the way of securing raw materials in bulk in a competitive market.

Production problem of SMEs:

SME units suffer from inadequate work space, power, lighting and

ventilation, and safety measures etc. These short comings have tended to

27

endanger the health of workmen and have adversely affected the rate of

production. Many units are following primitive methods of production.

Adoption of modern techniques is either disliked by the entrepreneurs is not

feasible. Wage rates and service conditions of small industries are not

attractive to skilled labor.

Marketing problem of SMEs:

As marketing is not properly organized, the helpless artisans are

completely at the mercy of middle man. The potential demand for their goods

remains under developed. The SMEs have to face the competitions from large

scale units in marketing their products. It causes damage to the growth and

stability of SMEs. SMEs cannot afford to spend lavishly for advertisement to

promote their sales. Further, SMEs produce such products which can not

satisfy modern tastes. They cannot afford to have services of specialists to

prepare marketing plans for penetration into domestic and foreign markets.

Managerial problem of SMEs:

Small scale industries in our country have suffered from the lack of

entrepreneurial ability to develop initiative and undertake risks in the

unexplored industrial fields. The in efficiency in management comes first

among managerial problems. The entrepreneurial ability of promoters of

cottage industries and SMEs are handicapped by technical know how in the

areas of production, finance, accounting and marketing management.

Sickness of SMEs:

A serious problem which is hampering small and medium sector has

been sickness. Many small units have fallen sick due to one problem or the

28

other. Sickness is caused by two sets of factors, Internal and external factors.

From among the various internal and external causes of sickness the

important ones are bud management, high rate of capital gearing,

inadequacy of finance, short of raw materials, outdated plant and machinery,

low labor productivity etc., Besides these factors, some aggregate economic

behavior of the country such as availability of credit, volume of money

supply, capital market activity or level of investment and price level

fluctuations, may have important bearing on industrial sickness in the country.

EMERGING TRENDS IN SMEs IN INDIA:In the increasingly knowledge-driven economy, emerging trends are

key consideration in day-to-day business decisions. New products,

technologies and creative designs appear almost daily on the market and are

the result of continuous human innovation and creativity. Small and medium-

sized enterprises (SMEs) are often the driving force behind such innovations.

Their innovative and creative capacity, however, is not always fully exploited

as many SMEs are not aware of how these emerging trends can help and

safeguard them. To help SMEs more fully utilize the emerging trends in their

business activities, they need to know more about them.

NATIONAL PROGRAMSSIDO in collaboration with UNIDO has undertaken National programs

for development of selected sectors namely Toy, Stone, Machine Tools, and

Hand Tools & Lock in India. The estimated cost of these National programs is

USD 6.6 Million.

29

COMMON CHARACTERISTICS OF SMEs:

(a) Born out of individual initiatives & skills

            SME startups tend to evolve along a single entrepreneur or a small

group of entrepreneurs; in many cases; leveraging on a skill set. There are

other SMEs being set up purely as a means of earning livelihood. These

includes many trading and retail establishments while most countries continue

SMEs to manufacturing services, others adopt a broader definition and

include retailing as well.

(b) Greater operational flexibility

The direct involvement of owner(s), coupled with flat hierarchical

structures and less number of people ensure that there is greater operational

flexibility. Decision making such as changes in price mix or product mix in

response to market conditions is faster.

(c) Low cost of production

SMEs have lower overheads. This translates to lower cost of

production, at least upto limited volumes.

(d) High propensity to adopt technology

Traditionally SMEs have shown a propensity of being able to adopt and

internalize the technology being used by them.

(e) High capacity to innovate export:

SMEs skill in innovation, improvisation and reverse engineering are

legendary. By being able to meet niche requirements, they are also able to

capture export markets where volumes are not huge.

30

(f)  High employment orientation:

SMEs are usually the prime drives of jobs, in some cases creating upto

80%. Jobs SMEs tend to be labor intensive per se and are able to generate

more jobs for every unit of investment, compared to their bigger counterparts.

(g) Utilization of locally available human & material resources

SMEs provide jobs locally and hence utilise manpower available

locally. Since it is available for them to transport materials over long

distances, they often improvise with materials which are available locally.

(h) Reduction of regional imbalances

Unlike large industries where divisibility of operations is more difficult,

SMEs enjoy the flexibility of location. Thus, any country, SMEs can be found

spread virtually right across, even through some specific location s emerge as

‘clusters’ for units of a similar kind. Nevertheless, the spread of SMEs is a fact

which enhances their attraction from a national or regional policy.

CREDIT FACILITIES FOR SMEs:

SME industries form a significant part of Punjab’s economy. The sector

contributes around 6 per cent of GSDP and employs over 2.5 lakh people.

Many of the growth engines selected for focused development, e.g.,

construction and pharmaceuticals, will give rise to many opportunities for SME

industries. The sector will thus be a major focus in the strategy to create rapid

growth in the State. By 2020, Punjab will have many dynamic and profitable

SME industries. Propelled by technological development and capability

building, SMEs will flourish all over the State. The proliferation of these

31

industries will provide many opportunities for entrepreneurship and

employment, leading to a significant rise in income for the State’s people.

Infrastructural facilities:

The available literature on the industrial front of Punjab denotes that

the state has sound infrastructural facilities. The facilities are not only

adequate for the existing industrial units but also sufficient to the units to be

set up in the near future. By having the full-pledged infrastructure base, the

state could attain significant industrial growth in the recent past. The state

took many steps to industrialize the state with a good number of units

engaged in different trades spread throughout the state. The important

measures that were taken by the state are as follows:

1. Provision of outlays for the development of roads and Transportation

facilities.

2. Establishment of Industrial Estates.

3. Establishment of several Industrial Promotion Corporations and Agencies.

4. Promotion of subsidies and incentives for the promotion of industries in the

specified backward areas of the states.

5. Development of Primary sector and there by to improve the resource Base

to the agro based units.

6. Provision of consultancy in the production, marketing, financial and

Managerial areas through different state agencies.

32

The approach to develop SME industries by govt. will depend on,

Building skills and promoting technological development.

Providing infrastructure and credit.

Reforming policy and simplifying procedure.

Providing assistance with marketing.

Encouraging the development of special categories of entrepreneurs

(women, scheduled castes and tribes, backward classes, etc).

THE VARIOUS CREDIT SCHEMES AVAILABLE TO SMEs

Credit Guarantee Fund Scheme for Small and Medium Industries:-

There are an estimated 128.44 lakh registered and unregistered micro and

small enterprises (MSEs) in the country at the end of March 2007, providing

employment to an estimated 309.11 lakh persons. The MSE sector

contributes about 39% of the manufacturing sector output and 33% of the

nation’s exports. Of all the problems faced by the MSEs, non-availability of

timely and adequate credit at reasonable interest rate is one of the most

important. One of the major causes for low availability of bank finance to this

sector is the high risk perception of the banks in lending to MSEs and

consequent insistence on collaterals which are not easily available with these

enterprises. The problem is more serious for micro enterprises requiring small

loans and the first generation entrepreneurs.

The Credit Guarantee Fund Scheme for Micro and Small Enterprises

(CGMSE) was launched by the Government of India to make available

collateral-free credit to the micro and small enterprise sector. Both the existing

and the new enterprises are eligible to be covered under the scheme. The

33

Ministry of Micro, Small and Medium Enterprises and Small Industries

Development Bank of India (SIDBI), established a Trust named Credit

Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) to

implement the Credit Guarantee Fund Scheme for Micro and Small

Enterprises. The scheme was formally launched on August 30, 2000 and is

operational with effect from 1st January 2000. The corpus of CGTMSE is

being contributed by the Government and SIDBI in the ratio of 4:1 respectively

and has contributed Rs.2500 crore.

Small Scale Service & Business Enterprises (SSSBE’s):

SSSBE’s industry related service/ business enterprises with investment

upto Rs 500,000 in fixed assets, excluding land and building, are called Small

Scale Service/ Business Enterprises (SSSBE’s). This limit has been raised to

Rs.1 million w.e.f. September 2000

CREDIT - THE LIFELINE OF SMEs of all the elements that go into a

business, credit is perhaps the most crucial. The best of plans can come to

naught if adequate finance is not available at the right time. MSEs need credit

support not only for running the enterprise & operational requirements but

also for diversification, modernization/ up gradation of facilities, capacity,

expansion etc. In respect of MSEs, the problem of credit becomes all the

more critical when ever any episodic event occurs such as a large order,

rejection of consignment, inordinate delay in payment etc. In general, MSEs

operate on tight budgets, often financed through owner's own contribution,

loans from friends and relatives and some bank credit.

34

Government of India recognized the need for a focused credit policy for

MSEs in the early days of promotion of MSEs. This in turn led to a credit

policy with the following components:-

Priority Sector Lending:

Credit to the small scale sector is ensured as part of the priority sector

lending by banks. Banks are required to compulsory ensure that defined

percentage (currently 40%) of their overall lending is made to priority sectors

as classified by Government. These sectors include agriculture, small

industries, export etc. The inclusion of small industries in this list makes them

eligible for this earmarked credit.

35

Improving the Credit Flow

Nayak Committee (1991-92)

Nayak Committee set up by the Reserve Bank of India in December

1991 (Report came in September 1992) dealt with aspects of adequacy and

timeliness of credit to SMEs. Nayak Committee found that SMEs was getting

working capital to the extent of 8.1% of its annual output which was less than

the normative requirement of 20%. Accordingly, Nayak Committee

recommended that the SSI sector should obtain 20% of its annual projected

turnover by way of working capital. Based on these, as well as other

recommendations of the Nayak Committee, RBI issued a number of

guidelines advising the banks to grant working capital to the extent of 20% of

the projected annual turnover, timely disposal of loan applications and setting

up of specialized bank branches for SME loaning in areas of higher SME

concentration. This norm is applicable to units with annual turnover up to Rs.

5 crores.

Seven Point Action Plan (1995-96)

As a follow up of Nayak Committee recommendations, the Union

Finance Minister in the Budget Speech of 1995-96, announced a Seven Point

Action Plan for improving the flow of credit to SME sector. This included:-

Setting up of specialized SSI bank branches;

Adequate delegation of powers at branch and regional levels;

Conducting sample surveys of their performing SME accounts by banks;

Sanction of composite loans as far as possible;

Regular meeting with SSI entrepreneurs;

Sensitization of bank managers towards working of SME Sector; and

36

Simplification of procedural formalities by banks.

Action has been taken by banks on the above action plan.

Kapur Committee (1997-98)

Reserve Bank of India (RBI) had in December 1997 appointed a One

Man Committee headed by Shri S.L. Kapur, the then Member, Board for

Industrial & Financial Reconstruction (BIFR), to review inter-alia: the working

of credit delivery system of SME industries with a view to making the system

more effective, simple and efficient to administer; and to make suggestions for

simplification and improvement in system and procedures. The Committee

submitted its Report to RBI on 30th June 1998, which contains 126

recommendations. Out of 126 recommendations, 103 have been examined by

RBI and decision taken thereon. Banks/ Financial Institutions and other

agencies have already implemented 86 recommendations. Some of the

important measures taken pursuant to the Recommendations of the

Committee include:-

Delinking of SIDBI from IDBI.

Opening of more specialized branches.

Enhancement in the limits of Composite Loan from Rs. 2 lakhs to Rs. 5

lakhs.

Setting of DRTs.

Introduction of Credit Guarantee Scheme.

The Credit Facilities from NABARD

NABARD is set up as an apex Development Bank with a mandate for

facilitating credit flow for promotion and development of agriculture, small-

37

scale industries, cottage and village industries, handicrafts and other rural

crafts. It also has the mandate to support all other allied economic activities in

rural areas, promote integrated and sustainable rural development and secure

prosperity of rural areas. In discharging its role as a facilitator for rural

prosperity NABARD is entrusted with

Providing refinance to lending institutions in rural areas

Bringing about or promoting institutional development and

Evaluating, monitoring and inspecting the client banks

 Besides this pivotal role, NABARD also:

Acts as a coordinator in the operations of rural credit institutions

Extends assistance to the government, the Reserve Bank of India and

other organizations in matters relating to rural development

Offers training and research facilities for banks, cooperatives and

organizations working in the field of rural development

Helps the state governments in reaching their targets of providing

assistance to eligible institutions in agriculture and rural development Acts

as regulator for cooperative banks and RRBs

 Some of the milestones in NABARD's activities are:

District Rural Industries Project (DRIP) has generated employment for

23.34 lakh persons with 10.95 lakh units in 105 districts.

Credit functions, involving preparation of potential-linked credit plans

annually for all districts of the country for identification of credit potential,

monitoring the flow of ground level rural credit, issuing policy and

operational guidelines to rural financing institutions and providing credit

facilities to eligible institutions under various programmes

38

Development functions, concerning reinforcement of the credit functions

and making credit more productive

Supervisory functions, ensuring the proper functioning of cooperative

banks and regional rural banks

Financial InclusionIndian economy in general and banking services in particular have

made rapid strides in the recent past. However, a sizeable section of the

population, particularly the vulnerable groups, such as weaker sections and

low income groups, continue to remain excluded from even the most basic

opportunities and services provided by the financial sector. To address the

issue of such financial exclusion in a holistic manner, it is essential to ensure

that a range of financial services is available to every individual. These

services are:

(I) A no-frills banking account for making and receiving payments,

(ii) A savings product suited to the pattern of cash flows of a poor household,

(iii) Money transfer facilities,

(iv) Small loans and overdrafts for productive, personal and other purposes, &

(v) micro-insurance (life and non-life)

In order to address the issues of financial inclusion, the Government of

India constituted a “Committee on Financial Inclusion” under the

Chairmanship of Dr. C. Rangarajan. The Committee submitted its final report

to Hon'ble Union Finance Minister on 04 January 2008.

39

National Equity Fund Scheme (NEF)

Purpose

To meet gap in prescribed minimum promoters' contribution and/or in equity

Eligible Borrowers

Small and Medium entrepreneurs for setting up new projects in tiny /

small scale sector and rehabilitation of potentially viable sick SME units

irrespective of the location. Existing tiny and SME industrial units and service

enterprises [tiny enterprises would include all industrial units and service

industries (except Road Transport Operators) satisfying the investment ceiling

prescribed for tiny enterprises] undertaking expansion, modernization,

technology up gradation and diversification can also be considered

irrespective of the location.

Norms

Scheme operated through SFCs / twin function SIDCs / Scheduled

Commercial Banks / Select Urban Co-operative Banks

Cost of project - Not to exceed Rs.5 million

Soft Loan limit - 25% of cost of project subject to a maximum of Rs.10, 00,000

per project.

Service Charges - 5% p.a. on soft loan

Direct Credit Schemes

1. SSIs

2. Service sector units with project cost upto Rs.25 crore

Medium Sector Enterprises (MSE) and

40

Service sector units with project cost above Rs.25 crore and upto Rs.250

crore.

Eligible Borrowers

I]New or existing SSI units.

ii]SSI unit graduating to medium scale, and

iii] Service sector units with an overall project cost not exceeding Rs.25 crore.

i] New or existing medium sector enterprises, and

ii] Service sector units with an overall project cost above Rs.25 crore and upto

Rs.250 crore with Bank's assistance not exceeding Rs. 50 crore.

Constitution

The unit should generally be a private limited / public limited company.

However, partnership firms, sole proprietorship concerns and Societies and

Trusts would also be considered on a case to case basis. The unit should

generally be a private limited / public limited company

Nature of assistance

Term loan and other forms of assistance such as Working Capital Term

Loan and bills discounting (on selective basis).

Term loan and other forms of assistance such as Working Capital Term Loan,

suppliers' & purchasers' bills discounting. Investment products such as

debentures, optionally convertible cumulative preference shares, zero coupon

bonds, etc.

Currency of loan

In Rupee or foreign currency

41

Technology Up gradation Fund Scheme for Textile Industries (TUFS)

Purpose

TUFS has been launched with a view to sustaining as well as

improving the competitiveness and overall long term viability of the textile

sector. The scheme intends to provide timely and adequate capital at

internationally comparable rates of interest in order to upgrade the textile

industry's technology level.

Special Features

For SSIs: The borrowers can avail of any one of the following benefits: 5%

interest reimbursement on the interest actually charged in respect of rupee

loan or coverage of exchange rate fluctuation not exceeding 5% p.a. from the

base rate or cost of forward cover premium upto 5% p.a. on the base rate of

exchange in respect of foreign currency OR 12% Credit Linked Capital

Subsidy on eligible investment made for modernization, for SME Textile and

Jute Industries in respect of Rupee Loans; The units are permitted to make

new investment eligible under TUGS upto Rs. One crore or till the unit

reaches SSI limit, whichever is higher. OR 20% Credit linked Capital subsidy

(CLCS @20%) on machinery cost exclusively for power loom units in SSI

sector. The cost of modern weaving machinery admissible is upto Rs. 60 lakh

(i.e. Subsidy ceiling is Rs. 12 lakh).

For units’ graduating out of SSI and Medium Sector Enterprises (MSEs):

The borrowers can avail 5% interest reimbursement on the interest

actually charged in respect of rupee loan or coverage of exchange rate

fluctuation not exceeding 5% p.a. from the base rate or cost of forward cover

42

premium upto 5% p.a. on the base rate of exchange in respect of foreign

currency loan.

Eligible Borrowers

SME units, SME units graduating out of the sector after implementation

of the scheme and MSEs in the Textile sector and Cotton Ginning and

Pressing sector can be covered.

Debt Equity Ratio

Not to exceed 2:1 for the company/firm/concern as a whole

Direct Discounting Scheme - Equipment (DDS-E)

Purpose

To enable manufacturers - sellers in SME sector / service sector

including construction / selling agents to offer deferred payment terms for

credit sales and realize sale proceeds by discounting bills of exchange /

promissory notes arise out of such sales.

Eligible Borrowers

Limits are sanctioned by SIDBI to well established concerns / corporate

bodies buying machinery / capital equipment from SME units. Limits are also

sanctioned to well established SME manufacturers - sellers

Norms

Usance of Bills - Normally 3-5 years

Minimum transaction value - Rs.1, 00,000

Composite Loan Scheme (CLS)

Purpose: Assistance for equipment and/or working capital as also for work

sheds

43

Eligible Borrowers: Artisans, village and cottage industries and small and

medium industries

Norms: Loan Limit - Not to exceed Rs.2.5 million

Single Window Scheme (SWS)

Purpose

To provide both term loan for fixed assets and loan for working capital

through the same agency. The total working capital requirement of such units

inclusive of all fund based facilities may be taken into account for determining

the working capital facility eligible for refinance

Eligible Borrowers

Entrepreneurs setting up new projects in SSI / tiny sector, new

promoters acquiring unencumbered fixed assets of existing SSI concerns

from PLIs, as also existing well run units undertaking modernization /

technology up gradation and potentially viable sick units undertaking

rehabilitation scheme

Norms

Scheme operated through SFCs / twin function IDCs / scheduled

commercial banks / eligible state co-operative banks / scheduled urban co-

operative banks

Term Loan - Not to exceed Rs.20 million

44

CREDIT GUARANTEE FUND SCHEME FOR SMEs:

Introduction

There are an estimated 128.44 lakh registered and unregistered micro,

small and medium enterprises (MSMEs) in the country at the end of March

2007, providing employment to an estimated 309.11 lakh persons. The MSME

sector contributes about 39% of the manufacturing sector output and 33% of

the nation’s exports. Of all the problems faced by the MSMEs, non-availability

of timely and adequate credit at reasonable interest rate is one of the most

important. One of the major causes for low availability of bank finance to this

sector is the high risk perception of the banks in lending to MSMEs and

consequent insistence on collaterals which are not easily available with these

enterprises. The problem is more serious for micro enterprises requiring small

loans and the first generation entrepreneurs.

The Credit Guarantee Fund Scheme for Micro and Small Enterprises

(CGMSE) was launched by the Government of India to make available

collateral-free credit to the micro and small enterprise sector. Both the existing

and the new enterprises are eligible to be covered under the scheme. The

Ministry of Micro, Small and Medium Enterprises and Small Industries

Development Bank of India (SIDBI), established a Trust named Credit

Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) to

implement the Credit Guarantee Fund Scheme for Micro and Small

Enterprises.

45

Eligible Lending Institutions

The institutions, which are eligible under the scheme, are scheduled

commercial banks (Public Sector Banks/Private Sector Banks/Foreign Banks)

and select Regional Rural Banks (which have been classified under

‘Sustainable Viable’ category by NABARD). National Small Industries

Corporation Ltd. (NSIC), and SIDBI have also been made eligible institutions.

As on September 30, 2009, there are 62 Member Lending Institutions (MLIs)

of the Trust, comprising 28 Public Sector Banks, 13 Private Sector Banks, 18

Regional Rural Banks and 3 other Institutions viz NSIC and SIDBI.

Eligible Credit Facility

The credit facilities which are eligible to be covered under the scheme

are both term loans and working capital facility up to Rs.50 lakh per borrowing

unit, extended without any collateral security or third party guarantee, to a

new or existing micro and small enterprise. For those units covered under the

guarantee scheme, which may become sick owing to factors beyond the

control of management, rehabilitation assistance extended by the lender could

also be covered under the guarantee scheme. It is noteworthy that if the credit

facility exceeds Rs.50 lakh, it may still be covered under the scheme but the

guarantee cover will be extended for credit assistance of Rs.50 lakh only.

Another important requirement under the scheme is that the credit facility

should be availed by the borrowing unit from a single lending institution.

46

  NSIC SCHEMES

Bill Financing

Bills drawn by small scale units for the supplies made to the reputed

and well established enterprises and duly accepted by them will be financed /

discounted by NSIC for a maximum period of 90 days.

Working Capital Finance

Finance for augmenting working capital of viable and well managed

units, on selective basis in case of emergent requirements, to enable them to

payoff their purchases of consumable stores and spares and production

related overheads particularly electricity bills, statutory dues, etc.

Export Development Finance

Finance for export development to export oriented units for meeting

their emergent requirements. Pre and post shipment finance shall also be

provided to such units at usual terms & conditions.

The Equipment Leasing Scheme

The object of the Leasing Scheme is to assist SSI Units to procure

industrial equipment for modernization, expansion and diversification of their

industries.

Eligibility

Exclusively for existing && financially viable SSI units including

ancillary units, duly registered as SSI units with the Directorate of Industries.

47

Benefits

100% financing at very liberal terms with easy repayment schedule.

Simple formalities and speedy sanction. Single window system for imported

equipment. The Corporation undertakes to complete formalities like procuring

import license, opening of Letter of Credit etc. Tax rebate on full 5 year lease

rental.

Basic Terms

Lease period of 5 years extendable by another 3 years. Repayment as

lease rental at the rate of Rs.24 per Rs.100 per month of the cost of machine.

There is no separate interest. Minimum assistance provided is Rs.100,000

and maximum subject to SSI ceiling of Rs.6,000,000 or Rs.7,500,000 in case

of an ancillary unit. The value of installed machinery at original cost including

value of the machine proposed to be obtained under leasing should not

exceed Rs.6,000,000 or Rs.7,500,000 in case of an ancillary unit.

The unit will have to pay the following before the order for equipment

can be placed on the supplier. Amount equal to three months rental (six

months rental for special equipment) and Approximately 7% cost of the

equipment (8% for Imported equipment) to cover the insurance charges of the

machinery for the period of lease i.e. 5 years and administrative charges of

the Corporation.

The unit/party must carefully read the terms and conditions and also

the list of the documents to be furnished along with the application as printed

on the application form. The party will have to execute an Agreement Bond

48

before delivery of machine. Payment of lease rental will start after three

months of delivery of machine. The cost of the application form is Rs.25/-.

The application can be submitted to NSIC Branch Office/Regional

Office of the area in which the unit is located.

MAIN SCHEMES OF SIDBI

National Equity Fund Scheme which provides equity support to small

entrepreneurs setting up projects in Tiny Sector.

Technology Development & Modernization Fund Scheme for providing

finances to existing SSI units for technology up gradation / modernization.

Single Window Scheme to provide both term loan for fixed assets and loan

for working capital through the same agency.

Composite Loan Scheme for equipment and/or working capital and also for

work sheds to artisans, village and cottage industries in Tiny Sector.

Mahila Udyami Nidhi (MUN) Scheme provides equity support to women

entrepreneurs for setting up projects in Tiny Sector.

Equipment Finance Scheme for acquisition of machinery/equipment

including Diesel Generator Sets which are not related to any specific project.

Venture Capital Scheme to encourage SSI ventures/sub- contracting units to

acquire capital equipment, as also requisite technology for building up of

export capabilities/import substitution including cost of total quality

management and acquisition of ISO-9000 certification and for expansion of

capacity.

49

ISO 9000 Scheme to meet the expenses on consultancy, documentation,

audit, certification fee, equipment and calibrating instruments required for

obtaining ISO 9000 certification.

Micro Credit Scheme to meet the requirement of well managed Voluntary

Agencies that are in existence for at least 5 years; have a good track record

and have established network and experience in small savings-cum-credit

programmes with Self Help Groups (SHGs) individuals.

New Schemes

(i) To enhance the export capabilities of SSI units.

(ii) Scheme for Marketing Assistance.

(iii) Infrastructure Development Scheme.

(iv) Scheme for acquisition of ISO 9000 certification.

(v) Factoring Services and

(vi) Bills Re-discounting Scheme against inland supply bills of SSIs.

Major Schemes

Technology Development & Modernization Fund

SIDBI has set up Technology Development & Modernization Fund

(TDMF) scheme for direct assistance of small sale industries to encourage

existing industrial units in the sector, to modernize their production facilities

and adopt improved and updated technology so as to strengthen their export

capabilities. Assistance under the scheme is available for meeting the

expenditure on purchase of capital equipment acquisition of technical know-

how, up gradation of process technology and  products with thrust on quality

50

improvement, improvement in packaging and cost of TQM and acquisition of

ISO-9000 series certification.

SIDBI in July 1996 had permitted SFCs and promotional banks to grant

loans for modernization projects costing upto Rs. 50 lakhs. The Coverage of

the TDMF scheme has been enlarged w.e.f. 1.9.1997. Non-exporting units

and units which are graduating out of SSI sector are now eligible to avail

assistance under this scheme.

National Equity Fund

National Equity Fund (NEF) under Small Industries Development Bank

of India (SIDBI) provides equity type assistance to SSI units, tiny units at five

per cent service charges. The scope of this scheme was widened in 2000-01

raising the limit of loan from Rs. 6.25 lakhs to Rs. 10 lakhs and project cost

limit from Rs. 25 lakhs to Rs. 50 lakhs.

(a) The following are eligible for assistance under the scheme:-

i. New projects in tiny and small scale sectors for manufacture,

preservation or processing of goods irrespective of the location

(except for the units in Metropolitan areas).

ii. Existing tiny and small scale industrial units and service enterprises

as mentioned above (including those which have availed of NEF

assistance earlier), undertaking expansion, modernization,

technology up gradation and diversification irrespective of location

(except in Metropolitan areas).

iii. Sick units in the tiny and small scale sectors including service

enterprises as mentioned above, which are considered potentially

51

viable, irrespective of the location of the units (except for the units in

Metropolitan areas).

iv. All industrial activities and service activities (except Road Transport

Operators).

(b) Project cost (including margin money for working capital) should not

exceed Rs. 50 lakhs in the case of new projects in the case of existing units

and service enterprises, the outlay on expansion/modernization/technology up

gradation or diversification or rehabilitation should not exceed Rs. 50 lakhs

per project.

(c) There is no change in the existing level of promoters' contribution at 10%

of the project cost. However, the ceiling on soft loan assistance under the

Scheme has been enhanced from the present level of 15% lakh per project to

25% of the project cost subject to a maximum of Rs. 10 lakhs per project.

(d) 30% of the investment is earmarked for tiny units.

Factoring Services

Factoring services make available the much needed working capital to

Small Scale Enterprises and is likely to induce customers to make timely

payments for fear of adverse "customer-image" in the market. Factoring

services are being increasingly set up, which is a good sign. Some private

factoring companies have also come up. Government of India intends to bring

forward legislation to promote factoring without recourse for the SSI Sector.

52

Composite Loan Scheme

The Scheme envisages sanction and disbursement of working capital

and term loan together from a single agency. The limit for composite loans

has been enhanced to Rs. 25 lakhs in the Comprehensive Policy Package.

The Scheme is operated both by banks and financial institutions. State

Financial Corporations under Single Window Scheme provide working capital

loan along with term loan to new tiny and small scale sector units so as to

overcome the  initial difficulties and delays faced by them to start production

expeditiously.

Indicative Parameters - Debt-equity Ratio

3:1 in the total venture of outlay (i.e., cost of the project plus working

capital requirement) after taking into account the amount of

investment/subsidy/incentive available for the project.

Promoter's Contribution

As may be required to arrive at the Debt Equity ratio of 3:1

Margin for Term Loan

- All backward areas in the State 25%

- Other areas and Municipal limits of all cities of the state 30%

Rate of Interest: (Effective)

LOAN DESCRIPTION

I TIER During

construction

period

II TIER Remaining

period implementation/ 

of term loan1.TERM LOAN    

a) For new units in backward area 12.5% 13.5%

b)For units in non-backward area 13.5% 14.5%

53

2. WORKING CAPITAL LOANS

a) All loans upto  Rs 2 lakhs 15.0%

b) All loans exceeding Rs 2 lakhs 16.5%

  Repayment

Working Capital Component

- Not exceeding 10 years (including moratorium upto 13 years)

Term Loan Component

- Not exceeding 8 1/2 years (including moratorium of 18 months)

Security

Corporation will have first charge on fixed assets and hypothecations of

the current asset. Corporation may also ask for Collateral Security against

Working Capital Loan.

Terms and Conditions

Working Capital loan should be availed within one year from the date of

commencement of production.

The unit should open a current account with a designated bank and the

amount of working capital of the loan will be credited as and when

disbursed by the Corporation.

The unit should  route its entire transaction of the  business including all

the receipts and payments through this account only.

The unit should repay the entire working capital loan sanctioned by the

Corporation at once in case the unit approached the bank for more

working capital.

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The unit should provide monthly stock statement showing the position of

inventory level of the Corporation. If they fail to provide the same, the

Corporation may recall the loan.

All other terms and conditions would be applicable as per details given in

the General Folder of the Corporation.

The above information regarding Composite Loan Scheme is by way of

indicative guidance for entrepreneurs and it is not a binding obligation on a

Bank/Corporation while considering the loan and is subject to change from

time to time.

Innovative Strategies to Finance SMEs

The small and medium enterprises (SME) in India are the second

largest employment provider, after agriculture. In fact, it creates a on-third-of

our exports and provides 40% of value addition to our manufacturing sector.

In developed countries like the US and Japan this sector plays equally

important role. It provides 67% and 80% employment opportunities

respectively and contributes 61% and 72% manufacturing out put in those

countries respectively. It would be interesting therefore, to study in what way

this sector could be boosted up to provide more employment opportunities in

India.

SMEs all over the world lean upon external finance for their survival

and growth. This depends upon availability of fund to these units at a

sustainable rate, at opportune time and adequate sum. Traditionally, SMEs

have suffered due to high cost of funding, inadequacy and delayed

disbursements.

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These have happened due to:

High risk on account of poor financial and marketing management.

Vulnerability to high market risk and high rate of mortality

Non availability of information regarding their performance on regular

basis to assess and rate their strength and weaknesses.

High transaction costs involved in financing SMEs leading to ultimately

non remunerative to borrower ass well as lender

Poor margin in transactions due to involvement of middlemen

SMEs poor financial condition makes them unfit to assume market and

technological risks.

RECENT INNOVATIONS

In recent years some initiatives have been taken by both governments

and banks of developed and developing countries to make SMEs more

acceptable for funding by banks. These initiatives aim to reduce cost and risk

in financing SMEs. These may be summed up as follows:

Venture capital funds have been floated to share risk, cost of funding

and to provide support on market and management know how.

Credit guarantee and rating institutions have been floated to support

banks to assume risk unhesitatingly in financing SMEs

More appropriate credit instruments have been developed to help SME

to have facile credit with less cost and collaterals

Better information systems and training modules have been developed

to make SME viable and acceptable.

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Despite these recent changes, SMEs need some more hand holding to

become attracitive and viable

Existing gaps:

Delivery of finance not linked with delivery of business development.

Financing institutions do not assume the role of partners to SMEs both

in assuming risks and assisting in management and marketing.

Non- existence of reliable information systems to study the risk pattern

and to provide market intelligence to SMEs.

Non availability of suitable debt and equity instruments to help SMEs to

raise fund from the capital market.

Innovative strategy to finance SMEs

Creating partnership relationship of micro financing institutions with

SMEs for risk sharing.

Developing equity market and venture capital for SMEs

Evolving credit cards to maintain required liquidity in operation of

SMEs.

Providing facilities for securitization of debts for improving liquidity of

financing

Developing derivative market for price risk

Recent developments

Some initiatives have been taken by commercial banks in India to

make SME financing less risky. In this special mention is providing

rating facility. Besides this, venture capital has been floated to assume

higher risk.

57

Lending on the merit of the project rather than on the basis of collateral

is gradually evolving particularly with the help of venture capital

Change in lending strategies, ex 1. Transaction lending technology. 2.

Relationship lending technology, and 3. Mixed technology, i.e. taking

risk cove and sharing the risk through marketable products.

Gradual adoption innovative strategies as enumerated above by

commercial hanks in India help building suitable financial environment for

sustainable development of financing model for SMEs. How ever, still these

banks have miles to go to reach the desire point. To comprehend this, it would

be interesting to study how developed countries like Japan have responded to

the needs of SMEs by diversifying financial options. Financial institutions in

Japan have adopted lending based on partnership model with securitization to

mitigate risk and blocking of funds. They have also made efforts to alleviate

problems faced by them due to information asymmetry in SMEs financing by

using recently developed micro data on SMEs with low return on assets

(ROA) and poor equity ratios are paying high interest rates and eventually

defaulting. These studies also have revealed that effect of adaptation strategy

works as this enable SMEs to get finance at reduced interest rate than those

SMEs chosen on selection basis. The age of the firm is another factor helping

improve in terms of financing. In fact it has been established to a great extent

that lending based on collaterals and personal guarantee has proved to be

inefficient and this need to be supplemented if not substituted by relationship

banking. Hence in Japan relation banking is surging ahead and collateral and

personal guarantee is complimentary substitute to relationship banking.

58

Similarly in Japan, credit guarantee schemes has helped improving not only

financing environment by also the business performance of SMEs

NEED of the hour

Most of the research studies on financing of SMEs have highlighted the

need to link availability of finance to SMEs to the delivery of business

development to improve its viability. It is therefore necessary to evolve a

model that shall provide for a partnership in between SMEs and banks. The

partnership concept takes care of sharing of risk in business proportionate to

their respective financial involvement. Moreover, if we extend the partnership

concept further, it would also help borrower to get more acceptable rate of

interest. In fact, such partnership concept may lead to sharing of earnings

instead of charging interest on loan as is prevalent in Islamic sharing of

earnings instead of charging interest on loan as is prevalent in Islamic

banking which of late is growing in importance due to present rise in oil prices.

Moreover, it is necessary to build reliable information on SMEs to help

assess market opportunities and risk management

There is also an urgent need to develop equity market for SMEs. This

may be done by spreading success stories of SMEs in India. It has been the

findings of many research studies that SMEs mostly depend upon external

capital and this should not be only loans from banks but should be partly

equity raised from the market besides the nominal equity held by the

promoter. In this the supportive role of mutual funds and venture capitals

could be of great help in developing capital market for SMEs. Further,

securitization is another area to be developed to take care of non-performing

59

assets (NPAs) that are blocking regular flow of funds to credit institutions

catering to SMEs.

It is obvious that in India gradually banks should adopt relationship

lending technology and treat transaction lending technology as a

complimentary and not a substitute strategy. Along with this risk cover and

sharing of risk may help further improving SMEs financing by banks in India/

Credit Schemes

1. General Loans

All Proprietary, Partnership, Private/Public Limited Companies,

Industrial Co-operative Societies for establishing tiny, small scale and medium

scale industrial units and service oriented industries For acquiring assets for

setting up new units and for expansion, diversification and modernisation in

case of existing units. Project cost should not exceed Rs 12.00 crores.

2. Equipment Refinance Scheme

Existing well performing small and medium scale units: Assisted by the

Corporation, or by any other State/Central financial institution. Bank /self-

Financed. Units should be in operation for at least 4 years from the date of

commercial production earned profits/declared dividends, during immediate

preceding 2 years, not defaulted in repayments to institutions / bank. For

acquiring identifiable items of plant and machinery/other equipments including

energy saving systems, for modernization/ expansion balancing/ replacement

or any other purpose except new projects Project cost including proposed

eqpt. Should not exceed Rs. 12.00 crores.

60

3. Modernization Schemes

Existing tiny, village, small and medium scale units, which are in

operation atleast for 5 years. In case of replacement/renovation, the

machinery should have been in use in the unit for a period atleast 5 years.

Mere replacement of machinery or solely for expansion of capacity are not

covered. Assistance for modernization. Upgradation of process/Technology &

product. Export oriented. Import-substitution, Energy Saving, Anti-pollution

measures

-Conservation/ Substitution of scarce raw materials.

-Improvement in capacity utilization through increase in productivity and de-

bottle necking. Improvement in material handling etc., Total Project cost: Not

to exceed Rs.12 crores.

4. Scheme for Tourism Related Facilities

Entrepreneurs setting up Tourism Related activities

For setting up of

- Development of Amusement Parks

- Cultural Centres/ Conventional Centres, Restaurants.

- Travel, Transport and

- Tourist Service Agencies

 Cost of project: Need-based

-Approvals from Tourism Dev. Agencies.

5. Assistance to hospitals / Nursing Homes

Entrepreneurs setting up Allopathic Nursing Homes/Hospitals having

qualified PG Doctors(MD/MS) on full-time basis having a minimum bed

61

strength of 10. Ayurvedic/Homeopathic/ Unani/Naturopathy Nursing Homes

are not eligible.

-For setting up Nursing Homes/ Hospitals.

For expansion/ modernization of existing nursing homes.

-Assistance for land, building, medical equipment including diagnostic and

therapeutic eqpt., air-conditioners, ambulance etc.

Cost of project: Need based

Not exceeding Rs.12.00crores per project

6. Assistance acquiring Electro-medical eqpt.

Qualified medical practitioners use/Entrepreneurs employing qualified

Doctors.

-For acquiring Electro-medical/other related equipment

Cost of project: Need based

Cost of equipment up to Rs. 60.00lakhs- Refinance from SIDBI. Above

Rs.60.00 lakhs-Refinance from IDBI.

8. Assistance for DG sets

Any existing unit

-For acquiring DG sets Standard Make.

9. Scheme for acquiring Bore well Drilling Rigs

All entrepreneurs who propose to acquire Bore well Drilling Rigs.

-For acquiring Bore well Drilling Rigs with Transport vehicle chassis.

Project cost: Need based.

10. Civil Contractors Scheme

62

Proprietary/Partnership Firms, Private/Public Limited companies of

Class I &II Civil Contractors.

-For working capital to meet short term working capital (maintenance

expenses) requirements.

Proprietary & Partnership Firms: upto Rs.120 lakhs

Private & Public Ltd Companies: upto Rs.240 lakhs.

11. Assistance for setting up Industrial Estates.

Any entrepreneur interested for development of contiguous land into

industrial estate/area. Minimum land required 10 acres. Proposals should

include construction of industrial sheds. For purchase of land, cost of land

development, cost of stamp duty etc, for development of infrastructural facility

such as approach roads, drainage, water supply system, and power

distribution lines, central effluent treatment plant, construction of industrial

shed/multi-storied industrial buildings, etc., Cost of project not exceeding

Rs.12.00crores.

12. Scheme for Qualified Professionals

Qualified professionals in the fields of Management, Accountancy,

Medicine, Engineering etc. for setting up own professional practice/

consultancy ventures and for acquiring additional equipment for existing/

established professional firms. Assistance for acquiring land, building,

furniture & fixtures and related equipment. Cost of land, building should not

exceed 50% of total project cost. Cost of project below Rs.20.00 lakhs.

13. Single Window Scheme

New tiny and SSI units

63

To provide term loan and Working Capital Term Loan.

Venture outlay shall not exceed Rs.100.00 lakhs including working capital

14. Scheme for Technology Development and Modernization.

Sole proprietary, partnership firms, Co-operative Societies, Private &

Public Limited Companies of small scale industrial units including ancillary

units which are going in for modernization/ technology up gradation which

should be in operation for 3 years and not defaulted to institutions and banks.

For purchase of capital equipment, need-based civil works, acquisition of

land, acquisition of technical know-how, designs, drawing, up gradation of

process technology and products, improvement in packaging, cost of TQM

and acquisition of ISO 9000 series Certificate and additional/ incremental

margin money for working capital.

Project outlay not to exceed Rs.100 lakhs. Outlay on land and building

should not exceed 25% of the project cost. Minimum promoters contribution

25% of the project cost.

15. Poultry Farm Scheme

New and experienced promoters are eligible to set up poultry farms of

layers/Broilers/Parental broilers with minimum of 15,000 birds capacity.

Assistance for acquiring land, construction of civil works, machinery and initial

stock of chicks, feed, medicines and vaccines. Project cost: Need based.

16. National Equity Fund Scheme

New projects in tiny and SSI sectors irrespective of location. Existing

tiny & SSI and service enterprises except transport operators undertaking

expansion/modernization, technology upgradation and diversification

64

irrespective of location. Sick units in tiny & SSI sector including service

enterprises. Units in Metropolitan area, projects which avail of any margin

money or seed/special capital assistance under Schemes of Central/State

Governments, SFCs and other State level institutions or banks (except State

investment subsidy) are not eligible for assistance. For acquiring assets to

establish tiny and small scale units.

Project cost: Not exceeding Rs.10.00 lakhs for new units and for existing

projects including outlay on modernization /expansion etc.

Promoters contribution: Minimum of 10% of project cost.

Soft loan: 25% of project cost with 1% service charge.

DER-1.857:1

Other Schemes:

17. Composite Loan Scheme

For setting up units in cottage, village and tiny sector and in places

where the population is less than five lacs. However, the population restriction

does not apply to artisans. For equipment and/or working capital as also for

work sheds. Project cost not exceeding Rs.50, 000/- Promoters contribution-

Nil

18. Scheme for SC/ST Entrepreneurs

Entrepreneurs belonging to SC/ST community

For setting up industrial and service units

For projects less than Rs.50,000/-

Promoters contribution-Nil

19. Scheme for Physically handicapped persons.

65

Physically handicapped entrepreneurs.

For setting up industrial and service units

For projects less than Rs. 50.000/- promoters contribution-Nil

20. Merchant Banking

a) Working Capital Term loan

Existing units assisted by the Corporation/units availed term loan not less than

Rs.5.00 lakhs earlier and have closed the loan account/units financed by the

Corporation and in operation for more than 3 completed years and have

earned net profits for the last 3 years, regular in repayment to the financial

institutions, should not have availed reschedulement facility more than once

from the corporation.

Assistance below Rs 150 lakhs to meet short term working capital

requirements of existing units and other purposes, except for speculative

purposes, except for speculative purpose. Loans above Rs.50.00 lakhs are

considered for short term working capital requirements only. Total assistance

to all the associated units of a group of companies shall not exceed Rs.300.00

lakhs.

Loan shall be a minimum of Rs.150 lakhs

Loan shall be secured by collateral security of 150%

Loan repayment period:

For loans upto Rs.10.00 lakhs – 12 months

From Rs.10.00 lakhs to Rs.25.00 lakhs 18 months

From Rs.25.00 lakhs to Rs. 50.00 lakhs-24months

From Rs.50.00 lakhs to Rs.150.00 lakhs-36 months

66

above Rs.150.00 lakhs to Rs.240 lakhs repayment shall be fixed on case to

case basis.

b) Bill Discounting (Purchase Bills)

Only well-established and reputed companies having proven track record with

a minimum 3 years of operation, earned net profits for the last 3 years, with

satisfactory bankers opinion, should not have defaulted to financial

institutions/banks and should not be in arrears or statutory dues.

-Facility shall be extended for industrial products / components / raw materials

etc., for the borrower concerns towards working capital requirement other

than consumables.

Maximum limit for sanction Rs.90.00 lakhs. The sanction limits shall be

secured by collateral security of urban immovable property to the extent of

150%

c) Public Issue Appraisal

Pre-issue appraisals

Public issue management such as working as lead managers, Co managers,

participation in equity, underwriters to the issue, Capital Structure, Loans

Syndication etc.

 d) Equipment Lease

Industrial concerns eligible for availing term loans from the Corporation falling

under categories of A++ and A+ category of Good Entrepreneurs.

For acquiring new equipment form standard and reputed suppliers.

67

The cost of the equipment shall be Rs.10.00 lakhs and above. Maximum

assistance shall not exceed the value of productive equipment /machinery

owned by the industrial concern.

Maximum assistance is Rs.150.00 lakhs in case of Corporation /Companies,

Rs.90.00 lakhs in case of partnership concerns and Rs. 60.00 lakhs in case of

sole proprietary concerns.

The lease period shall not be for more than 3 years.

e) Hire Purchase assistance

Industrial concerns assisted by our Corporation falling under A++ and A+

categories good entrepreneurs having proven track record with a minimum 3

years of operation, earned net profits for the last 3 years, with satisfactory

banker’ opinion, should not have defaulted to financial institutions/banks and

should not be in arrears or statutory dues.

For acquiring machinery/equipment of general purpose nature and special

purpose nature having high saleability and shall be procured from standard

and reputed suppliers.

The cost of the equipment shall be Rs.10.00 lakhs and above. Maximum

assistance shall not exceed the value of productive equipment /machinery

owned by the industrial concern.

Maximum assistance is Rs.150.00 lakhs in case of Corporation /companies,

Rs. 90.00 lakhs in case of partnership concerns and Rs, 60.00 lakhs in case

of sole proprietary concerns.

The repayment period shall not be for more than 3 years.

LIST OF KEY FINANCIAL INSTITUTIONS

68

INDUSTRIAL FINANCE CORPORATION OF INDIA (IFCI)

INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA (ICICI)

INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)

EXPORT-IMPORT BANK OF INDIA (EXIM BANK)

INDUSTRIAL RECONSTRUCTION BANK OF INDIA (IRBI)

SHIPPING CREDIT AND INVESTMENT CORPORATION OF INDIA (SCICI)

INFRASTRUCTURE LEASING AND FINANCIAL SERVICES LTD. (IL&FS)

TECHNOLOGY DEVELOPMENT AND INFORMATION CORPORATION OF

INDIA LTD. (TDICI)

RISK CAPITAL AND TECHNOLOGY FINANCE CORPORATION LTD. (RCTFC)

TOURISM FINANCE CORPORATION OF INDIA (TFCI)

NATIONAL BANK FOR AGRICULTURAL AND RURAL DEVELOPMENT

(NABARD)

NATIONAL SMALL INDUSTRIES CORPRATION (NSIC)

STATE FINANCIAL CORPORATIONS (SFCs)

STATE INDUSTRIAL DEVELOPMENT CORPORATIONS

STATE INDUSTRIAL INVESTMENT CORPORATIONS (SIICs)

STATE SMALL INDUSTRIES DEVELOPMENT CORPORATIONS (SSIDCs)

SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI)

NATIONAL CO-OPERATIVE DEVELOPMENT CORPORATION (NCDC)

A Guide to Banking and Finance

How to approach financial institutions?

Just like any other businesses when you get referrals from the others, it

is generally easier and less stressful to have your friends and business

associates introduce familiar financial institutions to you. If you do not know

anyone who can refer a financial institution to you, you can consult bank

69

branches where you maintain personal bank account. The branch manager

will generally be glad to refer you to their commercial departments when their

marketing professional will approach you to identify your financing needs.

Whether to choose banks or finance companies depend upon your

needs. With the current development in the commercial finance sectors in

Hong Kong, there are increasingly more finance companies that are providing

professional financial services that can compare with banks. Many

commercial finance companies have started to provide many new and more

innovative financing that is not available in banks. The difference between

obtaining financing from banks or finance companies is becoming smaller and

smaller. The most important factor for you is to decide who is providing the

most suitable financing solutions for your company.

Since financial institutions are risk averse, they would only finance

companies that they deem are of low risks. Of course, each financial

institution has a different way to evaluate risks and has different degrees of

tolerance of risks. Generally speaking, financial institutions would evaluate the

following areas before deciding whether to grant credit facilities to a

commercial enterprise:

i) Management

ii) Acceptable financial conditions

iii) Collateral Value

iv) Sound and feasible business and plans

v) Positive outlook of industry

vi) Clean litigation records

70

Management Management is the key to the success of any organization, regardless

of its size. Therefore, a financial institution will evaluate management to

ensure they have the ability to operate the company in ways that the company

that repays loans. Some of the key questions that you, as managers, will be

judged by financial institutions.

i. Is the management competent and knowledgeable about their business?

ii. Is the management experienced in the business?

iii. Is the management committed to the business?

iv. Does the management/shareholder(s) have the resources to support the

business in the event of business difficulties?

Acceptable financial conditions

Financial statements are basically one of the most important piece of

information used by financial institutions in evaluating a company's credit

standing. It is because decision-makers in a financial institution "Do not

generally" know SME personally. Financial statement is an "Objective" report

card of your business and it separates between "Dream" and "Reality " of a

SME.

Having financial statements prepared and audited by an external

auditor on a timely basis will help financial institutions know your financial

conditions more clearly and objectively.

71

Government Funding and Schemes

An entrepreneur requires a continuous flow of funds not only for setting

up of his/ her business, but also for successful operation as well as regular up

gradation/ modernization of the industrial unit. To meet this requirement, the

Government (both at the Central and State level) has been undertaking

several steps like setting up of banks and financial institutions; formulating

various policies and schemes, etc. All such measures are specifically focused

towards the promotion and development of small and medium enterprises.

The public sector banks are the major source of financial assistance to the

industrial sector. They extend credit support to the firms in the form of loans,

advances, discounting bills, project financing, term loans, export finance, etc.

Some of the major examples of such banks are:-

STATE BANK OF INDIA (SBI) provides a wide range of financial products

and services that can cater to any business or market requirement. It deploys

multiple channels to deliver integrated solutions for all financial challenges

faced by the corporate universe. Its various funding schemes are:-

Working capital finance, extended to all segments of industries and

services sector.

Corporate term loans to support capital expenditures for setting up new

ventures as also for expansion, renovation, etc.

Deferred payment guarantees to support purchase of capital equipments.

Project finance

Structured Finance

72

The bank also provides financial assistance to agriculturists through a

network of rural and semi-urban branches. These specialized branches have

been set up in different parts of the country exclusively for the development of

agriculture through credit deployment. Their schemes cover a wide range of

agricultural activities like crop loan, finance to horticulture, farm mechanization

schemes, land development schemes, minor irrigation projects, agricultural

term loans, etc.

BANK OF BARODA offers various products and services that meet the

specific requirements of business enterprises, particularly the small scale

units. Various schemes relating to the provision of loans and advances by the

bank include:-

Working Capital Finance

Term Finance

Small and Medium Enterprise (SME) Loan Pack

Small Business Borrowers

Traders Loan

GOVERNMENT FUNDING SCHEMES

Small scale industries need credit support on a continuous basis for

running the enterprise as well as for its diversification and modernization.

Recognizing the need for a focused financial assistance to such industries,

the Government of India, together with the State Governments, has

formulated several policy packages including schemes and funds for their

73

growth and development. Most of these programmes of the Central

Government are implemented through two principal organizations:-

1. Small Industries Development Organization (SIDO) is an apex body for

promotion and development of small scale industries in the country. Its

major activities include:-

Advising the Government on formulation of policies and

programmes for the small-scale industries.

Conducting periodical census/survey of the small scale industry and

generating data/reports on various important parameters/indicators

of growth and development of the sector.

Maintaining close liaison with other Central Ministries, Planning

Commission, State Governments, Financial Institutions and other

organizations concerned with the development of small-scale

industries.

Facilitating linkage of small-scale industries as ancillaries to large

and medium scale industries.

Developing human resource base through training and skill up

gradation.

For achieving its objectives, SIDO has devised a comprehensive range

of schemes for providing credit facilities, technology support services

and marketing assistance, etc. Some of the major schemes are:-

Credit Linked Capital Subsidy Scheme for Technology Up gradation

Credit Guarantee Scheme

ISO 9000/ISO 14001 Certification Reimbursement Scheme

Integrated Infrastructure Development (IID Scheme)

74

SSI MDA Scheme

Assistance to Entrepreneurship Development Institutes

Micro Finance Programme

2. National Small Industries Corporation Ltd (NSIC), has been

established with the objective of promoting, aiding and fostering the growth

of small scale industries in the country. It has been assisting small

enterprises through a set of specially tailored schemes which facilitate

marketing support, credit support, technology support and other support

services.

Marketing support schemes: - sound marketing is critical for the growth

and survival of small enterprises. NSIC acts as a facilitator to promote

small industries products and has devised a number of schemes to

support small enterprises in their marketing.

Credit support schemes:- NSIC facilitates credit requirements of small

enterprises in several areas. These include:-

Equipment financing:- through schemes like 'Hire Purchase'

and 'Term Loan' for the procurement of equipments.

Financing for procurement of raw material:- by facilitating

bulk purchase of basic raw materials at competitive rates, import

of scares raw materials, etc. NSIC also takes care of all the

procedures, documentation and issue of letter of credit in case

of imports.

Financing for marketing activities:- such as internal

marketing, exports and bill discounting, etc.

Financing through syndication with banks:- by entering into

strategic alliances with commercial banks so as to facilitate fund

75

requirement of the small enterprises. It involves an arrangement

of forwarding the loan applications of the interested small

enterprises to the banks.

Performance and credit rating scheme for small industries:-

so as to enable the small enterprises to ascertain the strengths

and weaknesses of their existing operations and take corrective

measures accordingly. NSIC is operating the scheme through

agencies like ICRA, ONICRA, Duns & Bradstreet(D&B), CRISIL,

FITCH, CARE and SMERA.

Technology support schemes:- NSIC offers small units various support

services through its 'Technical Services Centres' and 'Extension

Centres'. The services provided include advise on application of new

techniques; material testing facilities through accredited laboratories;

energy and environment services at selected centres; classroom and

practical training for skill up gradation, etc.

At the State level, various State Financial Corporations (SFCs) have been set

up by the respective State Governments for providing financial assistance to

the industrial units. For this purpose, these institutions have brought out

several funds and schemes, from time to time.

76

Small and Medium Enterprises in India: Facts and Figures

CURRENT SCENARIO ( 2005-06 )

Total Number of SSI Units 12341665

Number of Registered Units 18070807

Number of Unregistered Units 10470858

Number of Women Enterprises 1063721

Women managed enterprises 995141

Growth Rate of SSI sector (%) 12.32

Total Industrial Sector Growth Rate (%) 8.1

Employment (Lakh persons) 294.91Total Employment in the Industrial sector (Lakh persons) 1944.44

Production (at current prices) (Rs. Cr.) 497842

Fixed Investment (Cr.) 181423

Total Exports of India (Rs. Cr.) 456417.86

Number of Sick Units (March 2005) 138041

77

Growth in Small and Medium Scale Industries during Census Periods in India (1972, 1987-1988 and 2001-2002)

Parameter 1st Census 2nd Census 3rd Census *CARG1(%)

*CARG2(%)

*CARG3(%)

Units (Nos.) 139577 582368 1374974 9.99 6.33 8.21

Employment(Nos.) 1653478 3665810 6163479 5.45 3.78 4.64

Fixed Investment(Rs. in lakh) 79674 929603 9179207 17.80 17.77 17.78

Investment in P & M (Rs. in lakh) 53696 554258 3032868 16.84 12.91 14.92

Production(Rs. in lakh) 26074 4297205 20325462 20.55 11.74 16.22

78

CHAPTER – 3

ANALYSIS AND DISCUSSION

The objective of this chapter is to analyze various credit facilities available to SMEs.

Attempts have been made to highlight the awareness of different schemes offered by

the public, private banks and the governmental agencies like SIDBI, SFC and MSME

based on the empirical evidence obtained by the researcher. Moreover, efforts are

also made to analyze the reasons for the problems that are identified so as to

suggest appropriate measures to resolve the problems.

It is observed during the survey that the SMEs are suffering from

several problems which hamper their growth. The industries concerned are

small but their problem seen to be many. It is observed that every unit is

facing by one problem or other depending on its size and structure. The Root

cause for all the above problems are lack of availability of credit. The

entrepreneurs are lack of knowledge regarding the credit facilities available to

them. Though the government and its agencies are providing all sorts of credit

facilities in various forms, the small and medium enterprises are unaware of

the credit facilitates offered by the industrial promotion banks and agencies

Financial Problems:

As pointed out earlier, this second part of the chapter brings out the

financial problems of small units. Efforts have been made to analyze the

various financial problems of small sectors. The analysis is done based on

the data obtained from the sample units and care is taken to draw out

meaningful conclusions.

79

Sources of Finance:

For most of the owners in small scale sector, shortages of finance or

capital is considered to be the most important factor responsible for a host of

problems faced by them. Small units generally depend on two kinds of

capital, viz., 1. Own capital and 2. Borrowed capital consisting of (i) Long

term capital for its investment in equipment and other capital assets and (ii)

short term capital to meet current needs of the industry.

Own capital or equity capital is usually provided by the industrialists

themselves. It is sometimes supplemented by the resources raised from

friends and relatives either as partners or shareholders. Small entrepreneurs

generally do not encourage equity capital from outside agencies as it involves

sharing of management and control. Much of this initial capital is required for

the purchase of fixed assets like land, building, plant equipment and the

balance for working capital.

Owned capital may not be sufficient to meet the long term needs. In

such a case, besides the own capital, long term capital is needed for

expansion and renovation of plant and modernization of machinery. Short

term credit is needed for working capital to buy raw materials and stores, to

pay wages, to hold stocks of finished goods etc.

Financing Small and Medium Units:

The facilities available for financing small and tiny units in Ludhiana

District are reflected in the analysis of the actual amount of loans granted to

them by various organized and un organized agencies, besides their own

funds invested by the industrialists in their respective units.

80

Table- 3.1: About Line of Activity

S.No

ParticularsNo. of

Respondents

Percentage

(%)

1 Manufacturing 59 59.00

2 Service 31 31.00

3 Any other 10 10.00

Total 100 100.00

Manufacturing Service Any other0

10

20

30

40

50

60

70

59

31

10

Line of Activity

Line of Activity

No.

of R

espo

nden

ts

Out of the hundred respondents 59% are in manufacturing activity,

31% are offering services to the customers and remaining 10% are in other

areas of business. The manufacturing activities consists of producing

automobile spare parts, agricultural pump sets, computer forms, textile yarn,

cotton ginning mills and tobacco related products. In the service sector the

SMEs are in automobile service, hospitals, and hotels etc.

81

Table- 3.2: About Form of organization

S.No

ParticularsNo. of

Respondents

Percentage

(%)

1 Sole Trader 25 25.00

2 Partnership Firm 45 45.00

3 Co-operative Society 6 6.00

4 Private Limited 24 24.00

Total 100 100.00

Sole Trader Partnership Firm Co-operative Society Private Limited0

5

10

15

20

25

30

35

40

45

50

25

45

6

24

Form of Organization

Form of Organization

No.

of R

espo

nden

ts

From the above table and graph it shows that majority of the SMEs

belongs to partnership type of organizations comes to 45%. 25% of the

respondents belong to sole trader ship of business. 24% of the SMEs

registered under companies act and next 6% of the firm’s registered under the

co-operatives act. This shows clearly that the industrial organizations are very

much interested in form their business under the partnership act, because the

formation and dissolving the partnership is very simple. That’s why the

management consultants like the chartered auditor support formation of

partnership at initial stages, for its low cost operations and less obligated to

government enactments and they are free from mandatory obligation put forth

by the companies act.

82

Table- 3.3 : Sources of Borrowed Capital

S.No

ParticularsNo. of

Respondents

Percentage

(%)

1 Commercial Banks 46 46.00

2 State Financial Corporation 15 15.00

3 Commercial banks and SFC

13 13.00

4 Friends and Relatives 16 16.00

5 Money Lenders 06 06.00

6 APSSIDC 04 04.00

Total 100 100.00

46%

15%

13%

16%

6% 4%

Sources of Borrowed Capital

Commercial BanksState Financial CorporationCommercial banks and SFCFriends and RelativesMoney lenders APSSIDC

From the above table and graph it is quite clear that the credit facilities

are offer by the commercial banks about 46% , next comes the friends and

relatives. The state financial corporation is funding around 15% of the

respondents. The state financial corporation with collaboration with the

commercial banks are offering credit to 13% of the respondents. Still the

SMEs are depending upon the money lenders 4%. These money lenders

charge more rate of interest, this is also one of the major financial problems

83

faces by the SMEs. The state governments APSSIDC also providing minimum

credit support to the 4% of the respondents.

Table- 3.4 : Investment Outlay

S.No

ParticularsNo. of

Respondents

Percentage

(%)

1 10 Lakhs to 25 Lakhs 59 59.00

2 25 Lakhs to 2 Crores 24 24.00

3 2 Crores to 5 Crores 15 15.00

4 5 Crores to 10 Crores 2 2.00

Total 100 100.00

10 Lakhs to 25 Lakhs 25 Lakhs to 2 Crores 2 Crores to 5 Crores 5 Crores to 10 Crores0

10

20

30

40

50

60

70

59

24

15

2

Investment Outlay

Investment Outlay

No.

of R

espo

nden

ts

From the study it was observed that 59% of the respondents are

investing in between Rs10 – 25 lakhs in their business, 24 % respondents are

investing in between Rs25 lakhs– 2 crores. 15% of the respondents are

investing in between Rs 2 crores to 5 crores and 2% of the respondents

investment is in between Rs5 – 10 crores in their business. so from the

84

above table it is clear that most of the respondents investment in their

business is in between Rs10 – 25 lakhs

Table- 3.5 : Working Capital Vs Fixed Assets

S.No

Particulars

No. of Respondents

Percentage

(%)

1 50 – 50% 10 10.00

2 40 – 60% 20 20.00

3 30 – 70% 15 15.00

4 20 – 80% 55 55.00

Total 100 100.00

50 - 50% 40 - 60% 30 - 70% 20 - 80%0

10

20

30

40

50

60

10

20

15

55

Working Capital - Fixed Assets

No.

of R

espo

nden

ts

From the above table it is clear that the no of respondents with

50- 50% composition of fixed assets to working capital are 10. The no of

respondents with 40 – 60% composition of fixed assets to working capital are

20. The no of respondents with 30 – 70% composition of fixed assets to

85

working capital are 15. The no of respondents with 20 – 80% composition of

fixed assets to working capital are 55.

86

Table- 3.6 : Sources of Borrowed Capital

S.No

ParticularsNo. of

Respondents

Percentage

(%)

1 Commercial Banks 46 46.00

2 State Financial Corporation 15 15.00

3 Commercial banks and SFC 13 13.00

4 Friends and Relatives 16 16.00

5 Money Lenders 06 06.00

6 APSSIDC and other Govt agencies

04 04.00

Total 100 100.00

46%

15%

13%

16%

6% 4%

Sources of Borrowed Capital

Commercial BanksState Financial CorporationCommercial banks and SFCFriends and RelativesMoney lenders APSSIDC

From the above it is clear that 46% of the respondents are obtaining

the loan from commercial banks. 15% of the respondents are obtaining the

loan from state financial corporation. 13% of the respondents are obtaining

the loan from both commercial banks and state financial corporation. 16% of

the respondents are obtaining loan from friends and relatives. 6% of the

respondents are obtaining the loan from money lenders. Remaining 4% of the

respondents are obtaining loan from other Governmental agencies

87

88

Table- 3.7 : Problems faced by the SMEs in obtaining the credit

S.No

ParticularsNo. of

Respondents

Percentage

(%)

1 Non Eligibility of Credit 39 39.00

2 Rise in Interest Rate 15 15.00

3 Delay in process 21 21.00

4 Heavy Documentation 25 25.00

Total 100 100.00

25%

21%39%

15%

Type of problem

Heavy documentaion Delay in process Non Eligibility to credit Charging more intrest

From above table and graph it is revealed that 32% of the respondents

don’t have the eligibility to obtain credit facility from the banks. 15% of the

respondents had a problem because of raise in the interest rates. 21% of the

respondents feel that there is much delay in offering them to the

entrepreneurs from the government side. 25% of the respondents feel that the

government is going for heavy documentations. however the entrepreneurs

who are involved in producing products are still unaware of the credit facilities

provide by the governmental agencies

89

90

Table- 3.8 : Agencies help in solving Financial Problems

S.No

Particulars

No. of Respondents

Percentage

(%)

1 SIDBI 5 5.00

2 MSME 5 5.00

3 SFC 25 25.00

4 SBI 40 40.00

5 PNB 25 25.00

Total 100 100.00

0

5

10

15

20

25

30

35

40

45

5 5

25

40

25

About Scheme of Unit

Scheme

No.

of R

espo

nden

ts

From the above table it is clear that 5% of the respondents are helped

by the SIDBI. 5% of the respondents approached MSME to solve their

financial problems. 25% of the respondents took the help of SFC to solve their

financial problems. SBI helped maximum 40% of the respondents’ followed by

PNB which helped 25% of the respondents in their financial problems,

especially In Ludhiana district.

91

Table- 3.9: Problems experience in securing loans

S.No

ParticularsNo. of

Respondents

Percentage

(%)

1 Delay in sanction 40 40.00

2 Security problem 20 20.00

3 No. of visits paid up & followed up

20 20.00

4 Incidental expenses 15 15.00

5 Any other problem 5 5.00

Total 100 100.00

Delay in

sancti

on

Secu

rity problem

No. of v

isits p

aid up & fo

llowed up

Incidental ex

penses

Any other

problem

05

1015202530354045 40

20 2015

5

No.

of R

espo

nden

ts

Majority of the entrepreneurs are experiencing the problem of delay in

approval and sanction of their loans from the banks and credit agencies. Next

comes the security problem, the SMEs who is approaching the banks are not

in a position to supply the required collateral guarantee to the banks. Another

problem is the no of visits paid and followed up with the banks for the sanction

of the loan. There are some peculiar problems like the political leaders are

putting their legs to stop the sectioning of the loan to the eligible owners of the

SMEs.

92

Table- 3.10: utilization of the credit

S.No

ParticularsNo. of

Respondents

Percentage

(%)

1 Increase the production 55 55.00

2 Increase the working capital

10 10.00

3 Purchase raw material 25 25.00

4 Modernization 10 10.00

Total 100 100.00

Increase the produc-tion

Increase the working capital

Purchase raw material Moderniztion0

10

20

30

40

50

60 55

10

25

10

About Invest the Credit

No.

of R

espo

nden

ts

From the above table and graph 55% of the respondents are taking the

credit to increase their production capacities. 10% of the respondents are

taking the credit to increase their working capital. 25% of the respondents are

taking the credit to purchased raw material. Another 10% of the respondents

taking loan for the modernization of their existing units. The utilization of the

credit almost related to improving functioning of the unit, with modernization,

stocking the raw material to avoid unforeseen demand.

93

Table- 3.11: Types of Subsidy enjoyed by the SMEs

S.No

Particulars

No. of Respondents

Percentage

(%)

1 Full 18 18.00

2 Partial 12 12.00

3 Nominal 24 24.00

4 40/60 6 6.00

5 Nil Subsidy 40 40.00

Total 60 100.00

Full Partial Nominal 40/60 Nil Subsidy0

5

10

15

20

25

30

35

40

45

18

12

24

6

40

No.

of R

espo

nden

ts

From the above table it is clear that 18% of the respondents got full

subsidy from the government. 12 % of the respondents felt that they got

partial subsidy. 24% respondents are of the opinion that they got nominal

subsidy. 6% of the respondent s felt that they enjoyed 40:60 subsidy from the

government. 40% of the respondents felt that they did not got any subsidy

from the government.

94

95

Table- 3.12: Quick Disbursal of Credit from various commercial banks

S.No

Particulars

No. of Respondents

Percentage

(%)

1 HDFC 30 30.00

2 ICICI 50 50.00

3 Fullerton 5 5.00

4 SBI 15 15.00

Total 100 100.00

HDFC ICICI Fullerton SBI0

10

20

30

40

50

60

30

50

5

15No.

of R

espo

nden

ts

From the above table and graph it depicts that 50% of the respondents

feel that ICICI Bank is quick at granting the credit. 30% of the respondents

feel that HDFC Bank is at second position in offering credit. 15% of the

respondent feels that SBI at third position in offering loan. 5% of the

Respondent fees that Fullerton is taking more tin\me than any other

commercial bank in dispersing the credit facility.

96

97

Table- 3.13 : Behavior of Financial Agencies in granting loan

S.No

ParticularsNo. of

Respondents

Percentage

(%)

1 Friendly 20 20.00

2 Helpful 30 30.00

3 Neglecting 10 10.00

4 Non-cooperative

40 40.00

Total 100 100.00

Friendly Helpful Neglecting Non-Cooperative0

5

10

15

20

25

30

35

40

45

20

30

10

40

No. o

f Res

pond

ents

From the above table and graph, 20% of the respondents feel that

employees working in financial agencies are friendly in nature. 30%

respondents fees that employees are heopful.10% of the respondents’ fees

that employees are neglecting them. 40% of the respondents feel that

employees of financial agencies are non co-operative.the governmental

agencies are giving importance to political influence and background.

98

Table- 3.14 : Amount Sanctioned

S.No

Percentage of Loan amount sanctioned

No. of Respondent

s

Percentage

(%)

1 100% 10 10.00

2 75% 30 30.00

3 50% 40 40.00

4 25% 20 20.00

Total 100 100.00

100% 75% 50% 25%0

5

10

15

20

25

30

35

40

45

10

30

40

20

No.

of R

espo

nden

ts

From above table it is clear that 10 out of the sample of the

respondents feel that their entire loan amount was sanctioned. 30 out of the

sample of the respondents are at the opinion that 75% of the loan is

sanctioned. 40 out the sample of the respondents are at the opinion that 50%

of the loan is sanctioned and 20 out of the sample of respondents feels that

only 25% of the loan is sanctioned

99

Table- 3.15: Time taken for sanction

S.No

ParticularsNo. of

Respondents

Percentage

(%)

1 1 Week to 1 Month 10 10.00

2 1 Month to 2 Months 25 25.00

3 2 Months to 4 Months

25 25.00

4 4 Months to 6 Months

40 40.00

Total 100 100.00

1 Week to 1 Month 1 Month to 2 Months

2 Months to 4 Months

4 Months to 6 Months

0

5

10

15

20

25

30

35

40

45

10

25 25

40

No.

of R

espo

nden

ts

From the above table it is clear that 10 respondent feels that their loan

has been sanctioned in less than one month. 25 respondents feel that their

loan amount has been sanctioned within 2 months. Another 25 respondent

feels that their loan amount has been sanctioned within 4 months. 40

respondents feel that their loan amount has been sanctioned within 6 months,

due to so many parameters and heavy documentations.

100

Table- 3.16: Facilities provided by them to repay the loan

S.No

ParticularsNo. of

Respondents

Percentage

(%)

1 Interest Holiday 1 1.00

2 Deferred payments 15 15.00

3 E.M.I 65 65.00

4 Interest charged on yearly basis 19 19.00

Total 100 100.00

Interest Holiday Deferred payments E.M.I Interest charged on yearly basis

0

10

20

30

40

50

60

70

1

15

65

19

No.

of R

espo

nden

ts

The SME entrepreneurs feel that the banks and the governmental

agencies are giving some sort of help in repayment of their loans. 65% of the

respondents feel that the institutions are giving chance to convert their loan

amount into monthly equated installments for easy and regular payments.

19% of the respondents feel that instead of charging compound interest they

charging simple annual interest. 15% felt that they enjoying the mode of

deferred payment from the financial institutions. In some cases the banks are

deferring the credit amount for 1 to 3 years. Least among all the facilities is

the interest holiday announced by the government to some SME sector

industries. These units are enjoying the interest holiday for 1 to 3 years , this

can be treated as one of the subsidies provided by the government of India in

the promotion of small and medium sector industries

101

Table- 3.17: Awareness of credit facilities given by government

S.No

Particulars

No. of Respondents

Percentage

(%)

1 Yes 60 60

2 No 40 40

Total 100 100.00

60%

40%

YesNo

From above table it is clear that 60 respondents are of the opinion that

they are aware of various credit facilities available.40 respondents are of the

opinion that they don’t have any information about the availability of the credit

facilities. The SME sector is suffering from lack of knowledge about credit

facilities given by the government through the nodal agencies. All the SME

unit owners are requesting to provide the awareness programs of the different

schemes through regular counseling sessions.

102

Table- 3.18: Amount that you looking from the Government

S.No

ParticularsNo. of

Respondents

Percentage

(%)

1 1 – 5 Lakhs 10 10.00

2 5 – 10 Lakhs 30 30.00

3 10 – 20 Lakhs 40 40.00

4 Above 20 Lakhs

20 20.00

Total 100 100.00

1 – 5 Lakhs 5 – 10 Lakhs 10 – 20 Lakhs Above 20 Lakhs0

5

10

15

20

25

30

35

40

45

10

30

40

20

No.

of R

espo

nden

ts

The SMEs are very much interested to take the loan from the banks

the amount ranging from Rs10-20laks, the reason behind this is almost 90%

of the SMEs in Guntur district are seasonal and they operate hardly for 4 to 6

months in a year. To run the business in the season they need Rs10- 20 lakh.

But some of the bigger units like cold storages are interested in taking the

loan for more than Rs20 lakh to 1crore. The tobacco companies need more

capital investment in the form of purchase of raw material in the season for

export. The raw material is purchased from the auction centers on cash and

carry basis.30% of the respondents insisted on borrowings from Rs5-10lakhs

103

and 10% of them are interested in borrowing Rs1-5lakhs, because of their

size of operations.

Table- 3.19: Payback period opted by you

S.No

ParticularsNo. of

Respondents

Percentage

(%)

1 1 – 5 Years 10 10.00

2 5 – 10 Years 25 25.00

3 10 – 15 Years 20 20.00

4 15 – 20 Years 45 45.00

Total 100 100.00

1 – 5 Years 5 – 10 Years 10 – 15 Years 15 – 20 Years0

5

10

15

20

25

30

35

40

45

50

10

25

20

45

No.

of R

espo

nden

ts

From above table it is clear that 10 respondents opted less than 5

years as the payback period. 25 respondents opted less than 1d0 years as

the payback period. 20 respondents opted less than 15 years as the payback

period. And 45 respondents opted less than 20years. Generally the operators

in SME segment likes longer payback period for their loan amounts because

104

turnaround in these units are limited and the within the short span of time it is

not possible for them to pay the credit amount

105

Table- 3.20 : Capacity Utilization

S.No

ParticularsNo. of

Respondents

Percentage

(%)

1 Under utilization of the capacity 85 85.00

2 Over utilization of the capacity 5 5.00

3 Installed capacity utilization 8 8.00

4 Not utilizing the installed capacity 2 2.00

Total 100 100.00

Under utilization of the capacity

Over utilization of the capacity

Installed capacity utilization

Not utilizing the installed capacity

0

10

20

30

40

50

60

70

80

90 85

58

2

No.

of R

espo

nden

ts

From the above table and graph 85% of the units are under utilizing their

installed capacity. 5% of the respondents are not utilizing the installed capacity.2% of

the respondents are over utilizing the unit capacity and 8% of the respondents are

utilizing installed capacity of production from their units. The under utilization and not

utilization of the units, they have reasons to explain. Those causes for the under

utilization are discussed in the below table. the machinery what they are using in

producing the products are very old in nature , some units have second hand and

used machinery , due to this mechanical and maintenance also they are suffering .

106

Table- 3.21 : Causes for under Utilization

S.No

ParticularsNo. of

Respondents

Percentage

(%)

1 Due to financial problem 85 85.00

2 Due to labour problem 5 5.00

3 Due to marketing problem 8 8.00

4 Due to raw material problem 2 2.00

Total 100 100.00

Due to finan

cial p

roblem

Due to lab

our problem

Due to m

arketi

ng problem

Due to ra

w mate

rial p

roblem

0102030405060708090 85

5 82

No.

of R

espo

nden

ts

From the above table and graph it is quiet evident that 85% of the SMEs are

suffering from the financial problem. Because of unawareness of proper channels of

credit schemes offered by the commercial banks and the governmental agencies and

the neglecting attitude of the government and bank officials the SMEs are facing

funds crunch and this leads them to all sorts of production problems. In the opinion of

the industrialists, if they got sufficient money, all other problems like labor, marketing

and raw material and maintenance of machinery are trivial in nature

107

Table- 3.22 : Awareness of SIDBI; SIDO; NSIC; SFC; NABARD

S.No

Particulars No. of

Respondents

Percentage

(%)

1 Any One Organisation 70 70.00

2 Any Two Organisations 12 12.00

3 Any Three Organisations 8 8.00

4 Any Four Organisations 6 6.00

5 All organizations 4 4.00

Total 100 100.00

Any One O

rganisa

tion

Any Two Orga

nisations

Any Three

Organisa

tions

Any Four O

rganisa

tions

All orga

nizations

0

10

20

30

40

50

60

70

8070

128 6 4

No.

of R

espo

nden

ts

From the above table and graph it is quiet clear and assumable that the

majority of the SME segment operators are unaware of the credit agencies,

which are promoted by the central Government. According to our survey the

Promoters of the SMEs have little knowledge about the various institutions

offering credit facilities to the SMEs. Only 8%of the respondents know all the

five important governmental institutions. 70% of the respondents are aware of

the any one of the organization. 12%of the respondents are aware of the only

any two organizations. The remaining knows the any three or four of the

108

above credit granting organizations. It is clear evidence that the SMEs sector

needs more awareness from the nodal agencies about the credit institutions.

Table- 3.23 : Awareness of below Schemes

a) Bill discounting Scheme; b) Hire purchase and equipment leasing scheme

c) Composite term loan scheme; d) General excise exemption schemes

S.No

Particulars No. of

RespondentsPercentage

(%)

1 All Schemes 10 10.00

2 3 Schemes 30 30.00

3 1 or 2 Schemes 45 45.00

4 None 15 15.00

Total 100 100.00

All Schemes 3 Schemes 1 or 2 Schemes None0

5

10

15

20

25

30

35

40

45

50

10

30

45

15

No.

of R

espo

nden

ts

From the above table and graph it vividly clear that only 10% of the

respondents know all schemes. 30% of the respondents know only few

schemes and remaining owners are not aware of such schemes. They have

not shown interest to learn about those schemes. Because they have very

bad experience with the governmental agencies granting the loans. Whenever

they applied for the loan the banks or the credit granting agencies made

109

hassle with the officials of the banks. Generally they are not interested to go

fro bank loans ad depending on the friends and relatives and money lenders

for their source of credit.

Table- 3.25 : Suggestions

S.No

ParticularsNo. of

Respondents

Percentage

(%)

1 Create awareness about the credit facilities 30 30.00

2 Quick disbursal of credit 40 40.00

3 Regular interaction with the entrepreneurs 20 20.00

4 Redress our grievances effectively 10 10.00

5 Any other (Please specify) – –

Total 100 100.00

Create

aware

ness ab

out the c

redit f

aciliti

es

Quick disb

ursal o

f credit

Regular

interac

tion with

the e

ntrepren

eurs

Redres

s our g

rieva

nces eff

ective

ly 0

10

20

30

4030

40

20

10

No.

of R

espo

nden

ts

From the above table and graph it is clear that 30 respondents feel that

awareness should be increased about the credit facilities available for the

enterprises. 40 respondents are of the opinion that the agencies should focus

on quick dispersal of credit. 20 respondents feel that the government

employees should have interaction to the entrepreneurs at regular intervals to

110

know their grievances. 10 respondents feel that their grievances should be

redressed effectively.

111

Testing of Hypothesis:

It is observed from the study that SMEs suffer from several problems

which hamper their growth. It is found that no single unit is free from

problems and that every unit is hit by some problem or the other based on

its size and structure

The shortage of finance is considered to be the most important

problem responsible for a host of problems in small units. Small units require

two types of capital, fixed capital and working capital. The sources of capital

are self finance and borrowed funds. The important sources of borrowed

funds are commercial banks. The problems of security, delays in sanction

and release of funds, inadequate financing etc., were experienced by the

sample units while dealing with commercial banks which happened to be

the important source of borrowed funds. Because of these problems a few

units could not approach commercial banks for financial assistance.

Before starting the study of this project the hypothesis is that the SMEs

are facing severe and acute finance problems. But after conducting the study

the H0 formed is rejected, because the government and the commercial

banks in public and private sector are providing very good service to the

SMEs. The main problem lies in the perception of the entrepreneurs about the

banks and governmental agencies. Still the promoters of the SMEs thinking

that the above institutions are not helping them in getting the credit facilities.

But in my study I came to know that the banks and other financial institutions

are very much ready to offer and extend the credit facilities to the small and

medium enterprises, if they come with proper documentations and ready to

112

fulfill the minimum parameters to avail the credit facilities from those

institutions. Entire my study was focused on the various credit facilities

available to the SMEs from the government and commercial banks. To my

surprise I came across the new enactment of MSMED act 2006, especially for

the promotion and protection of the small and medium enterprises.

The Government of India identified the need for the more credit

facilities for the SMEs in the wake of invasion of MNCs and TNCs in India.

The post economic reforms period is a testing time for the SME sector. All the

MNCs entering into India are capturing the products which were once

produced by the small and medium scale industries. The intrinsic problems of

the SMEs are that they cannot compete with the amount of investment and

technology of the MNCs.

So many key financial institutions are providing sector wise credit

facilities to the SMEs. The entrepreneurs are unaware of the schemes and

struggling from the financial crunch. More ever all the promoters are not highly

qualified to run the business strategically. They are ailing from low education

and traditional methods of production methods. The SMEs are still following

the traditional and conventional system of manufacturing. This is the main

cause for their underdevelopment. The government should create the

awareness and change their attitude to sustain and continue in the

operations. For ex, the handloom industry giving more employment than any

other SME segments are still using the conventional methods in producing the

cotton material for dhotis and saris. It causes the low production with more

labor.

113

Contribution by the national and state level agencies in fostering the

overall growth of the SME sector is phenomenal. Currently even public private

partnerships (ppp) have become models to hasten the process of SMEs

development. Apart from providing extension, advisory services, these

agencies play a significant role to channelize financing by various institutions

and intermediaries through different schemes and acting as a bridge between

financial intermediaries and entrepreneurs in the context of SMEs heading

towards epitome in the market economy. These institutions are also

instrumental mopping up of foreign institutional investments indifference

sector, which is considered to be note worthy. Financial strengthening of

these enterprises particularly in bringing in technological advancement in the

production and operations process is considered most crucial in the context of

with standing the global competition. These agencies are considered to play a

pioneering role in coordinating the efforts of the governments with those of the

financial intermediaries, which will go a long in taking India into the ranks of

highly developed nations.

114

CHAPTER - 4

FINDINGS, SUGGESTIONS AND CONCLUSIONS

All efforts were made by the researcher to make the study as scientific as

possible.

Findings:

1. The growth of small scale industries in Punjab in the recent past has been

significant. The available literature on the industrial front of Punjab denotes

that the state has a sound infra structural facilities.

2. There is a good number of industry promoting agencies functioning in the

state. In the absence of these agencies the state would have remained

industrially undeveloped.

3. It is found that difference in the size of total capital exist not only between

different types of industries but also among different units in the same

industry.

4. The capital base of small industries is very poor.

5. It is found that investment in fixed capital constitutes a greater proportion

of total capital in small scale industries.

6. It is observed that small industries are suffering from shortage of working

capital.

7. The important problems experienced by them at different stages are

related to production, labor, marketing and finance.

8. Many units have suffered in marketing their output because of non

availability of cash to invest in marketing their products.

115

9. Shortage of finance is considered to be the most important problem

responsible for a host of problems in small scale sector.

SUGGESTIONS:The following suggestions are made to resolve the various issues of

Small Scale Sector.

1. The industry promoting agencies should take care of the well being of

small scale sector and they should initiate such measures which would

result in the further promotion of small scale units in the state.

2. It is right time to adopt the idea of limited partnership with a view to boost

up the financial resources in small scale sector and to encourage small

entrepreneurs to bear the risk.

3. Timely finance should make available to the small units keeping in view

their needs.

4. The borrowings should be made cheaper by lowering the rate of interest

on landings of commercial banks.

5. The re-orientation program, workshops and seminars should be organized

at district level to provide latest information to the small entrepreneurs.

6. Banks should also provide consultancy services and professional

guidance at the time of setting up for considering the long-term and short-

term financial requirements of a small unit for lending purposes.

7. Small entrepreneurs should make feasibility studies before they finalize

their projects. They should undertake only such projects which are

technically, operationally and economically and financially viable.

116

8. The process followed by the government in sanctioning the loan is

cumbersome; hence it is suggested to make the process easier in

sectioning the credit facilities to the SMES.

9. the entrepreneurs are of the opinion that , the funding institutions are

taking much time in sanctioning the loan. Hence it is suggested that the

funding institutions should take less time in offering credit to the

entrepreneurs.

10.The Entrepreneurs are of the opinion that they are not getting proper

assistance from the Government employees in documentation to obtain

the loan from the funding institutions. Hence it is suggested that the

government employees should be very cooperative and help the

entrepreneurs in documentation for obtaining the credit

117

CONCLUSIONS:

From the above major findings of the study the following conclusions

are drawn:

1. The growth of small and medium scale industries in Punjab has been

significant in the recent past.

2. Ludhiana District is moving towards greater industrialization through Small

and medium Scale Sector.

3. Industrial promoting agencies have made a mark in the development of

state as well as the district industrially.

4. Capital base of small units is very poor and they are facing several

financial crisis.

5. Shortage of finance is the main problem responsible for a host of

problems.

6. The SMEs are not aware of the credit schemes offered by the commercial

banks and nodal agencies.

7. The delays in sanctioning of the loan and the neglecting attitude of the

bank officials are the main causes behind the bad perception of SMEs

towards the banks.

8. The Central Government should take the initiative in propagating the credit

facilities for the SMEs through the channel of NGOs.

9. Financial problems are the root cause for all the problems faced by the

SMEs. The State Government should encourage this segment through its

Finance Corporation.

10.The entrepreneurs should be motivated to run successfully of their units by

taking the advantage of various credit facilities

118

SUGGESTIONS FOR FURTHER RESEARCH:

In recent years some initiatives have been taken by both governments

and banks of developed and developed countries to make SMEs more

acceptable for funding by banks. These initiatives aim to reduce cost and risk

in financing SMEs.

These may be summed up as follows:

Venture capital funds have been floated to share risk, cost of funding and

to provide support on market and management know how.

Credit guarantee and rating institutions have floated to support banks to

assume risk unhesitatingly in financing SMEs

More appropriate credit instruments have been developed to help SME to

have facile credit with less cost and collaterals

Better information systems and training have been developed to make

SME viable and acceptable.

Despite these recent changes, SMEs need some more hand holding to

become attractive and viable.

Existing gaps:

Delivery of finance not linked with delivery of business development.

Financing institutions do not assume the role of partners to SMEs both in

assuming risks and assisting in management and marketing.

Non- existence of reliable information systems to study the risk pattern and

to provide market intelligence to SMEs.

Non availability of suitable debt and equity instruments to help SMEs to

raise fund from the capital market.

119

Innovative strategy to finance SMEs

Creating partnership relationship of micro financing institutions with SMEs

for risk sharing.

Developing equity market and venture capital for SMEs

Evolving credit cards to maintain required liquidity in operation of SMEs.

Building kiosks at village centers to disseminates market intelligence and

data on technological up gradation and climate.

Providing facilities for securitization of debts for improving liquidity of

financing

Developing derivative market for price risk

The study on “credit facilities for SMWs” is a comprehensive in nature

and highlighting the credit facilities available for SMEs. But there still exits

some gaps like

To study the perception of the SMEs towards commercial banks.

To study the perception of the SMEs towards the central and state

governments.

To study the perception of the SMEs towards the promotional institutions

like SIDBI. SIDO, NSIC and SFCs.

To study ‘how to protect the SMEs from the existing competitions from the

MNCs and TNCs’.

To study ‘viable financial management strategies’ to implement in SMEs.

SME financing has gained momentum in the last few years, because of

their contribution to the GDP growth, Employment opportunities, and

their Export potential. In line with the RBI directives, Commercial

120

Banks, especially private sector banks have relaxed the lending norms

to accelerate the credit flow. The crux of the issue in financing SMEs is

to find all the managerial, entrepreneurial qualities required to start and

to meet the challenges posed in a competitive scenario. Besides the

central and state governments, the financial institutions also have

launched entrepreneurial development schemes, on going trainings

and redressal mechanisms, so that entrepreneurial skills are fully

exploited for the growth of the economy. Hence financial opportunities

are a plenty to an entrepreneurs with zeal and enthusiasm.

121

BIBLIOGRAPHY

1. Beyond Old Equations - Small Enterprise Experience and perspectives in

India - P.M. Mathew, Kanishka Publishers, New Delhi, 2002.

2. Business Environment, Francis Cherunilam, Himalaya Publications,2002.

3. Essentials of Environment, K.Ashwathappa, Himalaya Publications,2002.

4. Economic Environment of Business, M. Adhikary, S.Chand & sons, 2002.

5. Indian Economy, Ruddar Datt & K.P.M.Sundharam, S.Chand & Sons,

2002.

6. SSI & Entrepreneurship : Vasant Desai, Himalaya Publications, 2002.

7. SSI & Entrepreneurship Development : C.S.V. Murthy

8. Role of Small Industries in India's Economic Development, Asia

Publications, Mumbai

9. Cottage & Small Scale Industries and Planned Economy, Sterling

Publications, Mumbai, R.V. Rao

10.Small Industry Extension Training Institute Publication. Developing

Entrepreneurship issues and problems.

11.M.U.Deshpande, Entrepreneurship of SSI: Deep & Deep Publications,

New Delhi, 1982

12.Small Manufacturing Enterprises - World Bank Report.

13.Economic Survey : Government of India Publications

14.Report on currency & Finance : RBI, Mumbai

15.Policy Measures for promoting & Strengthening Small, Tiny & Village

Enterprises, New Delhi, of Industry, GOI, 1991.

16.SSIs in India: Opportunities in the small sector, 1994, Government of

India, New Delhi.

122

17.Report of the committee on Financial System: Narasimham Committee,

1991.

18.Nayak Committee Report, 1993. Report of the committee to review

appraisal norms of Small Industries

19.Goswami Committee Report on Industrial Sickness, 1993.

ARTICLES

1. Development of SSI in Assam, Dr.S.S.Khanka, Yojana, Sep, 1998, P.41-

44.

2. Small Scale Industry: Lease Financing by Banks, J, Halayudha Rao,

Management Accountant, Dec, 1981, Vol16.No.12, P.589

3. Financing of SSIs in a notified Backward Division, Dr. S.Skhanka, Finance

India, Vol.IV, NO.1, Mar, 1990, P.17-28

4. Survival of Small Industry, The Hindu, Tues, Feb,4, 1997,P.27

5. SSI Reservations over New Guidelines, The Hindu, Tues, Mar, 2003,97

6. Financing Small Industries - Some Recent changes, Dr. C.S.Prasad,

Yojana, Feb 1-28, 1995, P.8-11.

7. SSIs in India, A Policy perspective, B. Yerram Raju, ASCI Journal of

Management.

8. Business Development Services for Small Enterprises: A case study of

Hyd, India, Sri Ram. M.S., Phansalkar S.J. Small Enterprise Development,

Vol.12, June, 2001.

9. Stock Market for the small and medium industries: Is the Market informally

efficient with respect to money - supply growth? M.S. Habibullah &

A.Z.BaharumShaH, Finance India, Vol. IX, NO.3, Sep'95.

123

10.Need for easy capital to make SSI's Viable, Indian Express, 1998, Jul,26,

P.5.

11.Abolition of Reservation for SSIs : Panel moots cluster approach, Indian

Express, Jan, 29, Wednes,1997.

12.An evaluation of credit to SSIs by Nationalised Commercial Banks, An

Econometric Study, Dr.C.K. Mukhopadhyay.

13.Efficacy & effectiveness of single window scheme of SIDBI for working

capital finance of Tiny & Small Industrial Units in Karnataka. Dr. S.S.

Hugar.

14.Export orientation for small and medium enterprises: Yojana, Sep, 2000.

15.Khadi & Village Industries Programme: An Employment Evaluation. D.

Das, Yojana, Vol.45, Oct, 2001, P.24 to 34.

16.Small Industries: An overview, Raju B.Y. Yojana, Vol.39, 1995.

17.Modern Small Industry in India: Problems & Prospects Ram K. Vepa

18.Place & Problems of SSI, S.K. Basu

19.Financing of Small Industries, Balakrishnan.G.

20.Manchoo N.N.: Growth of Entrepreneurship - Vital Role of Small Industries

21.An article on Small Scale Industries – Prospects in a Free Economy by

Shilpa Bichitra

124

ANNEXURE - 1

MICRO, SMALL AND MEDIUM, ENTERPRISES DEVELOPMENT (MSMED) ACT, 2006 SALIENT FEATURES

Salient features of the Micro, Small and Medium Enterprises

Development Act, 2006 passed by the Parliament in 2006, and became

operational from October 2006 are as follows:

1. Need for a New Law

SSIs earlier dealt only in two sections of ID&R Act, 1951

Different issues related to SSIs dealt by multiple laws

Need for a single legislation pointed out by different committees and

voiced by industry associations

Absence of any statutory consultative and recommendatory body

Most of the policies such as purchase preference policy, registration of

SSI, etc., not having statutory basis

Need to strengthen laws to check delayed payments

Need to provide a statutory basis to credit availability for the sector

Simplification of registration process

Need to define the MSME concept

Need to promote the service sector

Need for facilitating closure

2. Classification of Enterprises

The earlier concept of' Industries' has been changed to 'Enterprises'.

Enterprises have been classified broadly into:

(i) Enterprises engaged in the manufacture I production of goods

pertaining to any industry; &

(ii) Enterprises engaged in providing I rendering of services.

Manufacturing enterprises have been defined in terms of investment in

plant and machinery (excluding land and buildings), and further

classified into:

(i) Micro Enterprises - investment up to Rs.25 lakh

(ii) Small Enterprises - investment above Rs.25 lakh & up to Rs.5 crore

125

(iii) Medium Enterprises - investment above Rs.5 crore & up to Rs.I 0

crore.

Service enterprises have been defined in terms of their investment in

equipment (excluding land & buildings), and further classified into:

- Micro Enterprises - investment up to Rs.l 0 lakh.

- Small Enterprises - investment above Rs.1 0 lakh & up to Rs.2

crore

- Medium Enterprises - investment above Rs.2 crore & up to 5 crore.

3. Filing of Memoranda by MSMEs

Process of two-stage registration of Micro & Small Enterprises

dispensed with & replaced by filing of memoranda.

Filing of memorandum is optional for all Micro & Small Enterprises.

Filing of memorandum is optional for Service Sector Medium

Enterprises.

Filing of memorandum mandatory for Manufacturing Sector Medium

Enterprises.

4. Apex Consultative Body with Wide Representation of Stakeholders

Constitution of Board

National Board for Micro, Small and Medium Enterprises (MSME) to be

headed by the Central Minister Vc of MSMEs, and consisting of 46

members from among MPs and

Representatives of Central Ministries

State Governments

UT Administration, RBI, SIDBI, NABARD

Associations ofMSMEs, including of women

Persons of eminence, and

Central Trade Union Organisations

National Board to be now statutory, as against non-statutory SSI

Board.

Quarterly meetings of National Board made mandatory.

Functions of the National Board

126

Examine the factors affecting the promotion and development of

MSMEs, and review the policies and programmes of Central

Government in this regard.

Make recommendations on matters referred to as above or any other

matter referred to it by the Central Government.

Advise the Central Government on the use of Fund or Funds

constituted under section 12.

5. Advisory Committee

Headed by Central Government Secretary Vs of MSMEs, and including: .

Not more than five officers of the Central Government;

Not more than three representatives of State Governments; &

One representative each of the Associations of Micro, Small and Medium

Enterprises.

Functions of the Advisory Committee

to examine the matters referred to it by the National Board;

to advise Central Government on matters specified in clauses 7( 1),

9,10,11,12 or 14; &

to advice State Governments on matters specified in the rules under

Clause 32.

6. Promotional and Enabling Provisions

Central Government to notify programmes, guidelines or instructions for

facilitating the promotion and development, and enhancing the

competitiveness of MSMEs.

Central Government to constitute, by notification, one or more Funds.

Central Government to credit to the Fund or Funds, such sums as the

Government may provide after due appropriation made by Parliament by

Law in this behalf. Central Government to administer the Fund or Funds

for purpose mentioned in section 9, and coordinate and ensure timely

utilisation and release of sums with such criteria, as may be prescribed.

7. Credit

The policies and practices in respeCt of credit to the MSMEs shall be

127

progressive, and such as may be specified in the guidelines or instructions

issued by the Reserve Bank of India with the aims of:

Ensuring smooth credit flow to the MSMEs,

Minimising sickness among them, and

Ensuring enhancement of their competitiveness.

8. Procurement Policies

Central Government or a State Government to notify preference policies

in respect of procurement of goods and services, produced and provided

by MSEs, by its Ministries, Departments or its aided institutions, and

public sector enterprises (non-statutory till now).

Valid only for micro and small enterprises, and not for medium

enterprises.

Services also covered.

9. Provisions to check Delayed Payments

Provisions related to delayed payments to micro and small enterprises

(MSEs) strengthened.

Period of payment to MSEs by the buyers reduced to 45 days.

Rate of interest on outstanding amount increased to 3 times the

prevailing Bank rate of Reserve Bank of India compounded on monthly

basis.

Constitution ofMSE Facilitation Council(s) mandatory for State

Government.

Provision for inclusion of one or more representatives of MSE

Associations in the Facilitation Council.

Jurisdiction of the council in a State to cover wherever the buyer may be

located. . MSE Facilitation Council may utilise the services of any

Institution or Centre for conciliation and alternate dispute resolution

services.

Reference made to the Council to be decided within 90 days from the

date of reference.

Declaration of payment outstanding to MSE supplier mandatory for

buyers in their annual statement of accounts

128

Interest (paid or payable to supplier) disallowed for deduction for Income

Tax purposes.

No appeal against order of the Facilitation Council to be entertained by

any court without deposit of75 per cent of the decreed amount payable

by Buyer.

Appellate Court may order payment of a part of the deposit to the

supplier MSE.

10. Facilitating the Closure of Business

Central Government may (within one year of the commencement of the

Act) notify a scheme for facilitating closure of business by a micro, small or

medium enterprise.

Source: "Micro, Small and Medium Enterprises Development (MSMED) Act, 2006",

Laghu Udyog Samachar, 30 (9-12), April- July 2006, pp. 3-5.

129

ANNEXURE – 2

MINISTRY OF SMALL SCALE INDUSTRIESAND AGRO & RURAL INDUTRIES

PACKAGE FOR PROMOTION OF MICRO AND SMALL ENTERPRISES

(ANNOUNCED BY SHRI MAHABIR PRASAD, MINISTER OF SMALL

SCALE INDUSTRIES AND AGRO AND RURAL INDUSTRIES IN LOK

SABHA ON 27 FEBRUARY 2007 – STATEMENT

ALSO MADE BY THE MINISTER IN RAJYA SABHA ON 2 MARCH 2007)

I. INTRODUCTION

1. Among the six basic principles of governance underlying the National

Common Minimum Programme (NCMP) of the Government, sustained

“economic growth in a manner that generates employment” has a pride of

place. The NCMP also describes the small scale industries as “the most

employment-intensive segment”.

2. This is indeed so. The small scale industries of India (including the tiny

industries and small scale service and business entities) have a long

history of promoting economic growth that is employment-oriented and

spatially widespread, and hence inclusive. At the beginning of the X Plan

(2002-03), the segment provided gainful employment to 24.9 million

people in the rural and urban areas of the country through 10.5 million

units, engaged in manufacturing and providing a wide range of goods and

services. Over the next four years (end 2005-06), they have grown to 12.3

million units providing employment to 29.5 million persons. This represents

an average annual growth rate of 4.33 per cent in the number of these

units and, what is more important, that of 4.57 per cent in employment. If

the units in the khadi, village industries and coir industries are also taken

into account, the employment is well over 332 million. This is thus rightly

called the segment which provides employment next only to agriculture. A

simple analysis shows that the employment intensity of the segment

(registered units) is 1 person for Page 1 of 10 every 1.49 lakh of rupees

invested in fixed assets, as against 1 person per Rs. 5.56 lakh in the large

130

organised sector. And, the rate of growth of employment in this segment is

well above that of the population of India (1.5 per cent) or, that in the large

industries segment (0.85 per cent).

3. The contribution of this segment to the economic sinews of the country is

no less significant. Nearly 39 per cent of the gross manufacturing output

and 34 per cent of the exports of India arise from these enterprises. During

the last four years of the X Plan, the output of the segment has recorded a

real growth rate of 8.87 per cent annually. Over six thousand products

manufactured by these include several sophisticated items used in high

technology areas like nuclear power, missile and space programmes,

information technology, biotechnology, etc. The level of exports by this

segment also testifies to its overall competitiveness in the global markets.

4. Yet, the segment does not constitute a homogeneous universe and a large

majority of the units faces several challenges. In order to assist them in

fully harnessing their potential by availing of the increasing opportunities

generated by trade liberalisation, it is necessary to build not only an

enabling policy environment but also supplement the former with a specific

set of measures to address the continuing challenges. The NCMP

declares, therefore, that a “major promotional package” will be announced

for this segment to provide full support in the areas of credit, technological

upgradation, marketing and infrastructural upgradation in major industrial

infrastructure.

II. RECENT INITIATIVES

1. By enacting the Micro, Small and Medium Enterprises Development Act,

2006, the Government has recently fulfilled one of the needs felt and

articulated by this segment for long. This Act seeks to facilitate promotion

and development and enhancing competitiveness of these enterprises. It

provides the first-ever legal framework for recognition of the concept of

“enterprise” (comprising both manufacturing and services) and integrating

the three tiers of these enterprises, namely, micro, small and medium.

Apart from clearer and more progressive classification of each category of

131

enterprises, particularly the small, the Act provides for a statutory

consultative mechanism at the national level with wide representation of all

sections of stakeholders, particularly the three classes of enterprises; and

with a wide range of advisory functions. Establishment of specific Funds

for the promotion, development and enhancing competitiveness of these

enterprises, notification of schemes/programmes for this purpose,

progressive credit policies and practices, preference in Government

procurements to products and services of the micro and small enterprises,

more effective mechanisms for mitigating the problems of delayed

payments to micro and small enterprises and simplification of the process

of closure of business by all three categories of enterprises are some of

the other features of this legislation.

2. The Government has also announced a Policy Package for Stepping up

Credit to Small and Medium Enterprises assuring, inter alia, a 20 per cent

year-on-year growth in credit flow.

3. Significant improvements have also been made in the Credit Linked

Capital Subsidy Scheme for Technological Upgradation, leading to a spurt

in the number of units availing of its benefits.

III. PROMOTIONAL PACKAGE

In fulfillment of the assurance in the NCMP, the following Package is

now announced.

1. LEGISLATION

1.1 With a view to facilitating the promotion and development and enhancing

the competitiveness of micro, small and medium enterprises, the Micro, Small

and Medium Enterprises Development Bill, 2006 has recently been passed.

The Government will take up effective and expeditious implementation of this

legislation in close collaboration with all stakeholders.

1.2 The Government will also soon enact a law on Limited Liability

Partnerships covering, among others, micro, small and medium enterprises,

with a view, inter alia, to facilitating infusion of equity and venture capital

funding in these enterprises.

132

2. CREDIT SUPPORT

2.1 In line with the Policy Package for Stepping up Credit to Small and

Medium Enterprises(SME), the Reserve Bank of India (RBI) has already

issued guidelines to the public sector banks to ensure 20 per cent yearon-

year growth in credit to the SME. Action has also been initiated to

operationalise other elements of the said Policy Package. Implementation of

these measures will be closely monitored by the RBI

and the Government.

2.2 The Small Industries Development Bank of India (SIDBI) will scale up and

strengthen its credit operations for micro enterprises and cover 50 lakh

additional beneficiaries over five years beginning 2006-07. Government will

provide grant to SIDBI to augment SIDBI’s Portfolio Risk Fund for this

purpose.

2.3 Government will also provide grant to SIDBI to enable it to create a Risk

Capital Fund (as a pilot scheme in 2006-07) so as to provide, directly or

through intermediaries, demand-based small loans to micro enterprises.

2.4 SIDBI’s direct lending operations will be expanded by increasing the

number of branches from 56 to 100 in two years beginning 2006-07, with a

view to catering to the credit needs of more clusters of micro and small

enterprises (MSEs).

2.5.1 The eligible loan limit under the Credit Guarantee Fund Scheme will be

raised to Rs.50 lakh. The credit guarantee cover will be raised from 75 per

cent to 80 per cent for micro enterprises for loans up to Rs.5 lakh.

Accordingly, to strengthen the Credit Guarantee Fund, the corpus of the Fund

will be raised from Rs.1189 crore as on 01 April 2006 to Rs.2500 crore over a

period of five years (with contribution by the Government and SIDBI in the

existing ratio of 4:1).

133

2.5.2 Moreover, to encourage public sector banks and public financial

institutions to contribute to the corpus of the Fund, the feasibility of allowing

deduction of their contributions to the Fund for income tax purposes would be

examined.

2.5.3 The Fund will continue to be maintained with and managed by the Credit

Guarantee Fund Trust for Small Industries (CGTSI). The Trust will be

renamed as “Credit Guarantee Fund Trust for Micro and Small Enterprises”

(CGTMSE).

3. FISCAL SUPPORT

Taking into consideration all the relevant factors, including the new

definition of small manufacturing enterprises, under the Micro, Small and

Medium Enterprises Development (MSMED) Act, 2006, the Government will

examine the feasibility of:

3.1 increase in the General Excise Exemption (GEE) limit and the existing

eligibility limit for GEE;

3.2 extending the time limit for payment of excise duty by micro and small

enterprises; and

3.3 extending the GEE benefits to small enterprises on their graduation to

medium enterprises for a limited period.

4. SUPPORT FOR CLUSTER BASED DEVELOPMENT

For comprehensive and speedier development of clusters of micro and

small enterprises, the existing guidelines of the Small Industries Cluster

Development Programme (SICDP, to be renamed as “Micro and Small

Enterprises Cluster Development Programme” - MSECDP) will be reviewed

during 2006-07 to accelerate holistic development of clusters, including

provision of Common Facility Centres, developed sites for new enterprises,

upgradation of existing industrial infrastructure and provision of Exhibition

Grounds/Halls and also for creation and management of infrastructure-related

assets in the public-private partnership mode. The ceiling on project cost will

be raised to Rs.10 crore.

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5. TECHNOLOGIES AND QUALITY UPGRADATION SUPPORT

5.1 Four Training-cum-Product Development Centres (TPDCs) for agro &

food processing industries would be set up at identified existing Small

Industries Service Institutes (SISIs) to facilitate promotion and development of

micro and small enterprises in the food processing sector.

5.2 The two existing Central Footwear Training Institutes (CFTIs) (at Chennai

and Agra) will be further strengthened to expand their outreach and assist the

MSE in upgrading their technology.

5.3 Vertical Shaft Brick Kiln (VSBK) Technology would be promoted for

adoption by MSEs engaged in manufacturing bricks to make them energy

efficient and eco-friendly. For this, one-time capital subsidy (limited to 30 per

cent of the cost or Rs.2 lakh, whichever is less) will be provided to micro and

small brick manufacturing enterprises.

5.4 With a view to promoting energy efficiency in electrical pumps and motors

manufactured by MSEs, a special programme of assistance will be launched

after a detailed technical study.

5.5 The existing scheme of assisting the attainment of ISO 9000 and 14001

standards will be operated as a continuing scheme during the 11 th Five Year

Plan.

5.6 The scope of the above-mentioned scheme will be expanded to cover

“Hazard Analysis and Critical Control Points” (HACCP) Certification obtained

by MSE.

5.7 A Technology Mission will be established with a view to assisting micro,

small and medium enterprises (MSMEs) in technology upgradation, energy

conservation and pollution mitigation.

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6. MARKETING SUPPORT

The National Manufacturing Competitiveness Programme (NMCP)

announced in the Budget Speech of 2006-07 will include components relating

to marketing support to MSE. Implementation of the NMCP will be taken up

soon.

7. SUPPORTS FOR ENTREPRENEURIAL AND MANAGERIAL DEVELOPMENT

7.1 20 per cent of the entrepreneurship development programmes (EDP) will

be organised for SC/ST, women and physically challenged persons with a

stipend of Rs.500 per capita per month for the duration of the training.

7.2 50,000 entrepreneurs will be trained in information technology, catering,

agro and food processing, pharmaceuticals, biotechnology, etc., through

specialised courses run by SISIs, over the period coterminous with the XI

Plan.

7.3 A new scheme will be formulated to provide financial assistance to select

management/business schools and technical institutes, to conduct tailor-made

courses for new as well as existing micro and small entrepreneurs.

7.4 A new scheme will also be formulated to provide financial assistance to 5

select universities/ colleges to run 1200 entrepreneurial clubs.

7.5 A new scheme will be launched for capacity building, strengthening of

database and advocacy by Industry/ Enterprise Associations, after

consultation with the Associations and States.

7.6 A comprehensive study will be conducted to assess the needs and scope

of Government intervention required for enhancing the competitiveness of

micro and small enterprises in the service/ business sector.

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8. EMPOWERMENT OF WOMEN ONED ENTERPRISES

8.1 Under the Credit Guarantee Fund Scheme, 80 per cent guarantee cover

will be provided to micro and small enterprises operated and/or owned by

women.

8.2 Under the SICDP/MSECDP financial assistance of up to 90 per cent of the

cost, subject to ceiling of Rs. 9 crore, will be provided for clusters developed

exclusively for micro and small enterprises operated and/or owned by women.

8.3 Associations of women entrepreneurs will be assisted under the

SICDP/MSECDP in establishing exhibition centres at central places for

display and sale of products of women- owned micro and small enterprises.

8.4 To encourage entrepreneurship among women, 50 per cent concession in

fees would be given to women candidates in entrepreneurship/ management

development programmes conducted by SISIs.

8.5 To facilitate export by women entrepreneurs, the National Small Industries

Corporation Ltd. (NSIC) will assist them to participate in 25 exhibitions over

the period co-terminus with the XI Plan.

9. STRENGTHENING OF PRIME MINISTER’S ROZGAR YOJANA (PMRY)

9.1 The Prime Minister’s Rozgar Yojana (PMRY), introduced in 1993, has

been one of the important credit-linked subsidy schemes to generate self-

employment opportunities for the educated youth by assisting them in setting

up viable micro enterprises. By the end of 2005-06, it is estimated to have

provided self-employment opportunities to 38.09 lakh persons. A recent

review has, however, established the need to improve its effectiveness as a

measure for self-employment through this route.

9.2 The design parameters of the PMRY, in terms of family income limits for

eligibility, project cost ceilings, corresponding ceilings of subsidy, rates of

assistance to States towards training of beneficiaries before and after

selection, etc., will be improved with effect from 2007- 08, keeping in view the

findings of the review.

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10. STRENGTHENING OF DATA BASE FOR MSME SECTOR

10.1 To strengthen the data base for the MSME sector, statistics and

information will be collected in respect of number of units, employment, rate of

growth, share of GDP, value of production, extent of sickness/closure and all

other relevant parameters of micro, small and medium enterprises, including

khadi and village industry units set up

under Rural Employment Generation Programme and Prime Minister’s

Rozgar Yojana as well as coir units, through annual sample surveys and

quinquennial census.

10.2 The quinquennial census and annual sample surveys of MSMEs will also

collect data on women-owned and/or managed enterprises.

10.3 A scheme will also be formulated and implemented to regularly collect

data on exports of products/services manufactured/provided by micro, small

and medium enterprises, including khadi and village industries.

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APPENDIX - II

List of Sample Industrial units covered under the study

1. B. Srinivasa Rao Power Constructions Pvt., Ltd., Tenali

2. Rayalaseema Power Projects Ltd., Muppalla

3. M/s. Noble Industrial Corporation, Autonagar, Guntur.

4. Sai Ram Traders, Guntur.

5. V.S.Engineering (P) Ltd., Guntur.

6. Radhakrishna Rice Mill, Repalle.

7. Jaya Lakshmi Mills Stores, Tenali

8. Nayagara Tiles, Repalle

9. Annapurna Paper Works, Repalle.

10. Sri Srinivasa Cotton & Ginning Mill, Pulladigunta.

11. Venkateswara Dal Mill, Guntur.

12. Sri Venkata Sai Teja Cotton Ginning Mill, Pulladigunta.

13. Pavan Cotton Products Pvt. Ltd., Pulladigunta.

14. Pavan Enterprises, Pulladigunta.

15. Sri Siva Rama Krishna Ginning Mill, Pulladigunta.

16. Sri Lakshmi Cotton Ginning & Pressing Mill, Kurnuthala & Pulladigunta.

17. Y.S.R. Spinning & Weaving Pvt. Ltd., Ganapavaram.

18. T.S.R. Spinning Mills Pvt Ltd., Guntur.

19. Sri Teja Spinner Pvt Ltd., Ganapavaram.

20. Sri Venkateswara Cotton Company, Narasaraopet.

21. Jaya Lakshmi Cotton Mills, Guntur.

22. Southern Cotton Trading Company, Guntur.

23. Ushodaya Cotton Traders, Guntur.

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24. Jaya Lakshmi Cotton Traders, Guntur.

25. Maha Lakshmi Oils Pvt Ltd., Sangadigunta.

26. Vijayakrishna Dall Mill, Industrial Estate, Guntur.

27. Sri Gowri Sankar Engineering Works, Tenali.

28. Raghavendra Metal Industries, Tenali.

29. Sankar Sai Consumer Product, Angalakuduru, Tenali.

30. Sitar Spices (P) Ltd., Nallapadu.

31. Vijaya Lakshmi Industries, Industrial Estate, Guntur.

32. Dhulipalla Milk Line, Vadlamudi.

33. Vigneswara Modern Rice Mill, Guntur.

34. Vamsi Krishna Modern Rice Mill, Guntur.

35. Sri Venkata Srinivasa Traders, Ganapavaram.

36. Swathi Cottons Pvt Ltd., Ganapavaram.

37. Balaji Par Raw Rice Mill, Guntur.

38. Safe Formulations, Gollapadu.

39. Safe Pharmaceuticals (P) Ltd., Gollapdu.

40. Hindustan Agro Insecticides, Gorantla.

41. K.V.M. Organic Products, Satulur.

42. Sri Satyanarayana Furniture works, Gorantla.

43. Padmalaya Packaging Industries, Angalakuduru.

44. Sri Rama Bindary Works, Lalapet, Guntur.

45. Vishnusree paper Board, Dokiparru.

46. Spun Pipes & Cement, Jonnalagadda.

47. Safe Pharmaceuticals, Gollapdu.

48. Lakshmi Nut powder, Ponnur.

49. Sri Dhana Lakshmi Rice Mills, Ganapavaram.

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50. Bashyam Publishers, Lakshmipuram.

51. Sundaram Tobacco, Guntur.

52. Jaya Home pipes (P) Ltd., Obulnaidupalem.

53. Kommineni Spinning Mills, Industrial Estates, Guntur.

54. Lakshmi Industries, Guntur.

55. Associated Rubber Industries, Guntur.

56. Premier Shoe Mart, Narasaraopet.

57. Rajendra Oil Products (P) Ltd., Nallapadu.

58. Srinivasa Cotton Traders, Ganapavaram.

59. Omkarnath cotton Ginning Mill, Guntur.

60. Standard Metal Industries, Autonagar.

61. G.A.R. Bottling Industries, Guntur.

62. Prasuna Ginning Mill, Ganapavaram.

63. Sri Kanyaka Metal Rolling Mills, Industrial Estate, Guntur.

64. Aruna Tobacco Company, Ganapavaram.

65. Anveshana Poly Products, Tenali.

66. Marturi Plastics & Engineering Pvt., Ltd., Pedakakani.

67. Vigneswara Modern Rice Mill, Amaravathi Road, Guntur.

68. Nico Agro Oils Products (P) Ltd., Perecharla.

69. V.S.P. Rabar Industries, Amaravathi Road, Guntur.

70. Vijaya Sarathi Wire Helting Works, Sangadigunta.

71. Kallam Oil (P) Ltd., Perecherla.

72. Sri Venkata Kanaka Durga Ice Industry, Guntur.

73. Vijaya Sri Cotton Ginning Mill, Gorantla.

74. Sri Dhana Lakshmi cotton Traders, Ganapavaram.

75. Idupulapadu cotton Mills (P) Ltd.,Ganapavaram.

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76. Kumar Cotex Ltd., Dokiparru.

77. Sri Venkateswara Cotton Traders, Guntur.

78. Srinivasa Industry, Guntur.

79. Sri Manjunatha Polymers, Amaravathi Road, Guntur.

80. Padmavathi cotton Syndicate, Amarvathi Road, Guntur.

81. Vijaya Lakshmi Industries, Satuluru.

82. Venkateswara Swami Dals & Oil Producers, Jonnalagadda.

83. Hemalatha Oil Producers Ltd.,

84. Sri Lakshmi Ganapathi Dal Mill, Jonnalagadda.

85. Sri Lakshmi Srinivas Stone Crushers, Perecherla.

86. Arunodaya Metal Industries, Guntur.

87. Sri Ravi Teja Polymers, Guntur.

88. Kishore Granites (P) Ltd., Guntur.

89. M. Govind & Sons, Guntur.

90. Vijaya Krishna Poly Packs, Tenali.

91. Sai Ginning Mills, Amaravathi Road, Guntur.

92. Pardha Sarathi Stone Crushers, Perecherla.

93. Kishore Rocks, Ganapavaram.

94. Sai Raghavendra Stone Crushers, Perecherla.

95. B.P.S. Polish Slabs & Marble Industries, Guntur.

96. Chakradhar Granites, Guntur.

97. UNO Designer Tiles, Guntur.

98. Sri Shirdi Sai Dall Mill, Guntur.

99. M.S.R. Rice Industries, Guntur.

100.Rajeswari Nut Powder Works, Repalle.