DESERTATION REPORT

A DISSERTATION

ON

FINANCIAL PLANNING FOR A SMALL SCALE UNIT

Submitted for partial fulfillment of award of Post Graduate Degree in Business Administration

By

Amit Kumar GautamUnder the guidance of

ACKNOWLEDGEMENT

It has been a great learning experience on this dissertation report Financial Planning for A Small-Scale Industry. I would like to thank my faculty mentor Dr.Nidhi Srivastava for imparting knowledge and guidance to me in the field of Finance and support through out my project completion. I would also like to thank I.T.S. for giving me this opportunity to do this project.AMIT KUMAR GAUTAMMBA (FINANCE)

20010-11SIKKIM MANIPAL UNIVERSITYCONTENTS

CHAPTERSTOPICPAGES

ABSTRACT

OBJECTIVE

1INTRODUCTION6-29

i. Small-scale industry

ii. Objective

iii. Advantage

iv. Reforms

v. SSIs in India

vi. Challenges & Opportunities

2 LITERATURE REVIEW30-53

Nayak Committee

Kapur Committee

3FINANCIAL PLANNING54-92

Process of financial planning

Stages of financial planning

Elements of financial planning

Financial strategy

How to develop financial function

4Research Methodology93

5Conclusion94

6Limitations95

7Suggestion & Recommendation96

8Bibliography98

ABSTRACT

My project FINANCIAL PLANNING FOR A SMALL SCALE INDUSTRY deals with the study of growth of Small scale industry and mainly how financial planning is done in a Small scale industry.

The small-scale industries sector plays a vital role in the growth of the country. It contributes almost 40% of the gross industrial value added in the Indian economy. It has been estimated that a million Rs.10 of investment in fixed assets in the small scale sector produces 4.62 million worth of goods or services with an approximate value addition of ten percentage points

Financial planning is a part of a larger planning system in the firm. And this planning process begins with a statement of the firms goal or mission, which is stated in qualitative terms. Financial planning, involves analyzing the financial flows of a company, forecasting the consequences of various investments, financing and dividend decisions, and weighing the effects of various alternatives.

The project is intended to provide information regarding the financial planning procedure followed by various SSIs so that it can be useful to all those who are willing to gain knowledge about financial planning processes of a SSI. As the most valuable asset of organizations, financial planning now-a-days play a very significant role in success of every organization.

The comparative study conducted, can also be used by the companies to study their own financial planning process as compare to the other companies. This project can also be used to help employees of organization, customers, government bodies and can used by those person who is doing research on this topic.

OBJECTIVE

To know the process of financial planning.

To study the scope of Small scale industry.

How financial planning is done in SSI

What are the problems SSI faces while doing it.

The tools for elimination of these problems.

To make a comparative analysis of financial planning by the sample organization.

CHAPTER- IINTRODUCTION

The small scale sector has played a very important role in the socio-economic development of the country during the past 50 years. It has significantly contributed to the overall growth in terms of the Gross Domestic Product (GDP), employment generation and exports. The performance of the small scale sector, therefore, has a direct impact on the growth of the overall economy. The performance of the small scale sector in terms of parameters like number of units.

During the one year period i.e., 2000-01over 1999-2000, the number of SSI units is estimated to have increased by 1, 58,000, production at current prices by Rs. 72,609 crore and at constant prices by Rs. 33,714 crore. Employment increased by 7,14,000persons, while exports were higher by Rs.5,778crores.7.67According to projections made by the Ministry of Small Scale Industries during2000-01, the SSI sector recorded growth in production of 8.09 per cent over the previous year. The small scale industries sector has recorded higher growth rate than the industrial sector as a whole (4.9 per cent during2000-01). It contributed about 40 per cent towards the industrial production as a whole and 35 per cent of direct exports from thecountry.7.68 The Government has been taking various measures from time to time in order to enhance the productivity, efficiency and competitiveness of the SSI sector.

As on March 31, 2001, there were2, 49,630 sick SSI units which had obtained loans from banks. An amount of Rs. 4,506 crore of bank credit was blocked in these units. Of these only 13,076 units were considered potentially viable by the banks with outstanding credit of Rs. 399 crore. Further, banks had identifie2, 25,488 units with outstanding bank credit amounting to Rs. 3,943 crore as unviable. Rehabilitation of sick units is a costly proposition as it involves rescheduling of past over dues with concessions on interest amount due, additional credit for modernisation and technology upgradation and provision for fresh working capital. Presently, the State Level Inter- Institutional Committee (SLIIC) of banks and financial institutions is the only forum looking into rehabilitation of potentially viable sick SSI units. However, in the absence of statutory backing, SLIICs has no power to enforce its decisions.7.70 To tackle the problem of rehabilitation of potentially viable sick SSI units, the RBI constituted a working group on November 25, 2000 under the chairmanship of Shri S.S. Kohli, the then chairman of Indian Banks Association, to look into the issue. The Working Group Submitted its report in May, 2001. All the major recommendations of the working group have been accepted by the RBI, including a change in the definition of Sick SSI units, norms for deciding on the viability of sick units, etc. The revised definition would enable banks to take action at an early stage for revival of the units. Based on the accepted recommendations of the Working Group, the RBI has drawn up the revised guidelines for Rehabilitation of Sick SSI units, which have been circulated on January 16, 2002 to all the Banks for implementation.

The small-scale industries sector plays a vital role in the growth of the country. It contributes almost 40% of the gross industrial value added in the Indian economy. It has been estimated that a million Rs.10 of investment in fixed assets in the small scale sector produces 4.62 million worth of goods or services with an approximate value addition of ten percentage points.

The small-scale sector has grown rapidly over the years. The growth rates during the various plan periods have been very impressive. The number of small-scale units has increased from an estimated 0.87 million units in the year 1980-81 to over 3million in the year 2000, SSI sector has made significant contributions to employment generation and also to rural industrialization. This sector is ideally suited to build on the strengths of our traditional skills and knowledge, by infusion of technologies, capital and innovative marketing practices. The promotional and protective policies of the Govt. have ensured the presence of this sector in an astonishing range of products, particularly in consumer goods. Small industry sector has performed exceedingly well and enabled our country to achieve a wide measure of industrial growth and diversification

The Product Group Matrix

There are about twenty-one major industry groups in the small scale sector. These are listed below:

Food Products

Chemical & Chemical Products

Basic Metal Industries

Metal Products

Electrical Machinery & Parts

Rubber & Plastic Products

Machinery & Parts Except Electrical goods

Hosiery & Garments - Wood Products

Non-metallic Mineral Products

Paper Products & Printing

Transport Equipments & Parts

Leather & Leather Products

Miscellaneous Manufacturing Industries

Other Services & Products

Beverages, Tobacco & Tobacco Products

Repair Services

Cotton Textiles

Wool, Silk, Synthetic Fiber Textiles

Jute, Hemp and Mesta Textiles

Other Services

OBJECTIVE OF SMALL SCALE INDUSTRY

Elimination of economic backwardness of rural & underdeveloped regions in the country.

Attainment of self-reliance

Reduction of regional imbalance

Reduction of disparities in income, wealth and consumption

Mobilization of resources of capital and skills and their optimum utilization

Creation of greater employment opportunities and increased output, income and standard of living.

Meeting a substantial part of the economys requirements for consumer goods and simple producer goods.

Provide employment and a steady source of income to the low-income groups living in rural and urban areas of country.

Provide substitutes for various industrial products now being imported into the country.

Improve the quality of industrial products manufactured in the cottage industry sector and to enhance both the production and exports.

IMPORTANCE OF SMALL SCALE INDUSTRY

Small is beautiful : Mans current pusuit of profit and progress, which promotes giant organization and increased specialization has infact resulted in gross inefficiency, environmental pollution and inhuman working conditions. INNOVATIVE & PRODUCTIVE : It is the small units which are highly innovative though they do not maintain their own research and development wings. Individual tastes, fashion & personalized services: Small firms are quick in studying the changes in tastes and fashions of consumers and in adjusting the production process and subsequent production accordingly. Symbols of national identity: Small enterprises are almost locally owned and controlled and they can strengthen rather than destroy the extended family and other social systems and cultural tradition that are perceived as valuable in their own right as well as symbols of national identity. Happier in work: People who work in small enterprises are happier in their work than those who work in large ones inspite of lower wages and inadequate standards of safety, comfort and welfare facilities Always Winners of the Games: Small enterprises were at the forefront of practically every business boom of the last decade whether it was computers, consumer electronics, diamond exports or advertising. They frequently put the established large industrial house in the shade with the quality of their performance. Their ability to seize business opportunities and their aggressive feeding of burgeoning markets. Dispersal Over Wide Areas: It is only Small scale units which have a tendency to disperse over wide areas. According to the second All-India Census of Small-scale units, 62.19% of the units are located in backward areas.ADVANTAGE OF SMALL SCALE INDUSTRIES

Small scale industries do not require a high level of technology They are generally labour-intensive and do not require a large amount of capital . Projects related to these industries can be undertaken in a short period and hence can increase production both in the short and the long run. Most developing countries are rich in certain agricultural, forest and mineral resources and small-scale enterprises can be based on the processing of locally-produced raw-materials. It is possible both to save and to earn foreign exchange by producing and exporting goods from local resources From Small-scale industrial enterprises, skills and knowledge can be transferred to other enterprises and small enterprises may grow into medium-sized enterprise. By creating opportunities for the small business, small industrial enterprises can bring about a more equitable distribution of income which is socially necessary and desirable. Imperfect competition protects the small firms markets and enables them to exist even where they are not efficient in terms of costs. There is an essential linkage between large-scale enterprises and small-scale enterprises in the sense that the former create opportunities or facilities for the growth of the latter. These enterprises in developing countries help to create economic stability in society by diffusing prosperity and by checking the expansion of monopolies. Small scale enterprises will make possible a transfer of manufacturing activities from the congested metropolitan to the non-metropolitan and rural areas. It creates immediate and permanent employment at a relatively small capital cost. It meets a substantial part of increased demand for consumer goods including mass consumption goods. It facilitates mobilizations of resources of capital and skills which often would remain inadequately utilized It offers equitable distribution of national income It involves a short gestation period It doesnt require as heavy and costly infrastructure as large enterprises. It has a favorable capital output ratio The products of these enterprises earn a substantial exchange It assists in dispersal and avoids problems which unplanned urbanization tends to create.Structure of Small-Scale industry:-

Role of Small-Scale industry in a Developing Economy:-

In a developing economy it is the SSI that constitutes the backbone of its economic structures.

It creates vast employment opportunities for the people, effects decentralization of industries by the creation of industrial estates and makes possible a redistribution of economic power and income

It also raises the standard of living of people.

Reforms in Small-Scale Industry:-

Reforms have touched the SSIs, but marginally, in the form of a relaxation of the investment limits of Rs.60 lakhs to Rs.3 crore for garment units exporting over 50 percent of their output.

Non-SSI units are allowed into the reserved for SSIs on a case by case basis, provided they export over 75 percent of their production.

For 177 items they do make SSIs get purchase and price preferences, subsidized loans, and tax exemptions at state level.

Many corporates continue to manufacture the same products- reservation only prevents them from expanding their capacities- they also market these products, outsourced from SSI units, under their own brand name, thus moping up the margins.

FORM OF OWNERSHIP ORGANIZATION IN A SMALL-SCALE INDUSTRY:-

SSI IN INDIA

India is ranked among the ten most industrialized countries in the world. The country derived its economic strength from the growth of small industries throughout its length and breadth. The pivotal role the small industries play in the economy of India i.e. more than 55% of total production in India today is from small scale sector.

SSI Sector in India creates largest employment opportunities for the Indian populace, next only to Agriculture. It has been estimated that 100,000 rupees of investment in fixed assets in the small-scale sector generates employment for four persons SSI Sector plays a major role in India's present export performance. 45%-50% of the Indian Exports is contributed by SSI Sector. Direct exports from the SSI Sector account for nearly 35% of total exports. Besides direct exports, it is estimated that small-scale industrial units contribute around 15% to exports indirectly. This takes place through merchant exporters, trading houses and export houses. They may also be in the form of export orders from large units or the production of parts and components for use for finished exportable goods.

It would surprise many to know that non-traditional products account for more than 95% of the SSI exports. The exports from SSI sector have been clocking excellent growth rates in this decade. It has been mostly fuelled by the performance of garments, leather and gems and jewellery units from this sector. The product groups where the SSI sector dominates in exports are sports goods, readymade garments, woolen garments and knitwear, plastic products, processed food and leather products. The SSI sector is reorienting its export strategy towards the new trade regime being ushered in by the WTO.

PERFORMANCE OF SMALL SCALE INDUSTRY

Employment

Production

Exports

Opportunities

Economic Indicators

Employment GenerationSSI 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.

According to the SSI Sector survey conducted by the Ministry and National Informatics Centre with the base year of 1987-88, the following interesting observations were made related to employment in the small scale sector.

Food products industry has ranked first in generating employment, providing employment to 4.82 lakh persons (13.1%).The next two industry groups were Non-metallic mineral products with employment of 4.46 lakh persons (12.2%) and Metal products with 3.73 lakh persons (10.2%).

In Chemicals & chemical products, Machinery parts and except Electrical parts, Wood products, Basic Metal Industries, Paper products & printing, Hosiery & garments, Repair services and Rubber & plastic products, the contribution ranged from 9% to 5%, the total contribution by these eight industry groups being 49%.

In all other industries the contribution was less than 5%.Per unit employment was the highest (20) in units engaged in Beverages, tobacco & tobacco products mainly due to the high employment potential of this industry particularly in Maharashtra, Andhra Pradesh, Rajasthan, Assam and Tamil Nadu.

Next came Cotton textile products (17), Non-metallic mineral products (14.1), Basic metal industries (13.6) and Electrical machinery and parts (11.2.) The lowest figure of 2.4 was in Repair services line.

Per unit employment was the highest (10) in metropolitan areas and lowest (5) in rural areas. However, in Chemicals & chemical products, Non-metallic mineral products and Basic metal industries per unit employment was higher in rural areas as compared to metropolitan areas/urban areas. In urban areas highest employment per unit was in Beverages, tobacco products (31 persons) followed by Cotton textile products (18), Basic metal industries (13) and Non-metallic mineral products (12).

Non-metallic products contributed 22.7% to employment generated in rural areas. Food Products accounted for 21.1%, Wood Products and Chemicals and chemical products shared between them 17.5%.

As for urban areas, Food Products and Metal Products almost equally shared 22.8% of employment. Machinery and parts except electrical, Non-metallic mineral products, and Chemicals & chemical products between them accounted for 26.2% of employment. In metropolitan areas the leading industries were Metal products, Machinery and parts except electrical and Paper products & printing (total share being 33.6%).

Tamil Nadu (14.5%) made the maximum contribution to employment. This was followed by Maharashtra (9.7%), Uttar Pradesh (9.5%) and West Bengal (8.5%) the total share being 27.7%.Gujarat (7.6%), Andhra Pradesh (7.5%), Karnataka (6.7%), and Punjab (5.6%) together accounted for another 27.4%. Per unit employment was high - 17, 16 and 14 respectively - in Nagaland, Sikkim and Dadra & Nagar Haveli. It was 12 in Maharashtra, Tripura and Delhi. Madhya Pradesh had the figure of 2. In all other cases it was around the average of 6.

Production

The small scale industries sector plays a vital role for the growth of the country. It contributes 40% of the gross manufacture to the Indian economy.

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.

The small scale sector has grown rapidly over the years. The growth rates during the various plan periods have been very impressive.

The number of small scale units has increased from an estimated 8.74 lakhs units in the year 1980-81 to an estimated 31.21 lakhs in the year 1999.

From the year 1990-91 this sector has exhibited a comparatively lower growth trend (though positive) which continued during the next two years. However, this has to be viewed in the background of the general recession in the economy. The transition period of the process of economic reforms was also affected for some period by adverse factors such as foreign exchange constraints, credit squeeze, demand recession, high interest rates, shortage of raw material etc.

When the performance of this sector is viewed against the growth in the manufacturing and the industry sector as a whole, it instills confidence in the resilience of the small scale sector.

The estimates of growth for the year 1995-96 have shown an upswing. The growth of SSI sector has surpassed overall industrial growth from 1991 onwards. The positive trend is likely to strengthen in the coming years. This trend augurs a bright future for the small scale industry.

Export contribution

SSI 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.

Besides direct exports, it is estimated that small scale industrial units contribute around 15% to exports indirectly. This takes place through merchant exporters, trading houses and export houses. They may also be in the form of export orders from large units or the production of parts and components for use for finished exportable goods.

It would surprise many to know that non traditional products account for more than 95% of the SSI exports. The exports from SSI sector have been clocking excellent growth rates in this decade. It has been mostly fuelled by the performance of garment, leather and gems and jewellery units from this sector.

The lucrative product groups where the SSI sector dominates in exports, are sports goods, readymade garments, woolen garments and knitwear, plastic products, processed food and leather products.

Opportunities

Small industry sector has performed exceedingly well and enabled our country to achieve a wide measure of industrial growth and diversification.

By its less capital intensive and high labour absorption nature, SSI sector has made significant contributions to employment generation and also to rural industrialization. This sector is ideally suited to build on the strengths of our traditional skills and knowledge, by infusion of technologies, capital and innovative marketing practices.

The opportunities in the small scale sector are enormous due to the following factors:

Less Capital Intensive

Extensive Promotion & Support by the Government

Reservation for Exclusive Manufacture by small scale sector

Project Profiles

Funding

Finance & Subsidies

Machinery Procurement

Raw Material Procurement

Manpower Training.

Technical & Managerial skills.

Tools & Tools utilization support.

Reservation for Exclusive Purchase by Government.

Export Promotion.

Growth in demand in the domestic market size due to overall economic growth.

Increasing Export Potential for Indian products.

Growth in Requirements for ancillary units due to the increase in number of Greenfield units coming up in the large scale sector.

So this is the opportune time to set up projects in the small scale sector. It may be said that the outlook is positive, indeed promising, given some safeguards. This expectation is based on an essential feature of the Indian industry and the demand structures. The diversity in production systems and demand structures will ensure long term co-existence of many layers of demand for consumer products / technologies / processes. There will be flourishing and well grounded markets for the same product/process, differentiated by quality, value added and sophistication. This characteristic of the Indian economy will allow complementary existence for various diverse types of units.

The promotional and protective policies of the Govt. have ensured the presence of this sector in an astonishing range of products, particularly in consumer goods. However, the bug bear of the sector has been the inadequacies in capital, technology and marketing. The process of liberalization will therefore, attract the infusion of just these things in the sector.

Economic Indicators

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.

Small Scale Sector has emerged as a dynamic and vibrant sector of the economy.

Today, it accounts for nearly 35% of the gross value of output in the manufacturing sector and over 40% of the total exports from the country.

In terms of value added this sector accounts for about 40% of the value added in the manufacturing sector.

The sector's contribution to employment is next only to agriculture in India. It is therefore an excellent sector of economy for investment.

By its less capital intensive and high labour absorption nature, SSI sector has made significant contributions to employment generation and also to rural industrialization. This sector is ideally suited to build on the strengths of our traditional skills and knowledge, by infusion of technologies, capital and innovative marketing practices. So this is the opportune time to set up projects in the small scale sector. It may be said that the outlook is positive, indeed promising, given some safeguards.

This expectation is based on an essential feature of the Indian industry and the demand structures. The diversity in production systems and demand structures will ensure long term co-existence of many layers of demand for consumer products / technologies / processes. There will be flourishing and well grounded markets for the same product/process, differentiated by quality, value added and sophistication.

This characteristic of the Indian economy will allow complementary existence for various diverse types of units. The promotional and protective policies of the Govt. have ensured the presence of this sector in an astonishing range of products, particularly in consumer goods. However, the bug bear of the sector has been the inadequacies in capital, technology and marketing. The process of liberalization will therefore, attract the infusion of just these things in the sector.

A survey of indices of industrial production (IIP) maintained for these major industry groups reveals what the sunrise industriesare and on what segments the sun has set. SSI units produce an amazing variety and type of products. Over 7500 products are known to be manufactured in this sector. Even in a particular product, there would exist a wide range ofqualities or specifications catering to different marketsegments, particularly in consumer/household products. Small Scale sector has emerged as a major supplier of mass consumption items like

leather and leather goods

plastic and rubber goods

ready-made garments

hosiery goods, sheet metal goods

stationery items - soap and detergents

domestic utensils

toothpaste and toothpowder

safety matches

preserved foods and vegetables

wooden and steel furniture

paints and varnishes etc.,

Among the sophisticated items mention may also be made of

Television sets

calculators

microwave components

plastic film capacitors

carbon film registers

electrometrical equipments

electronic teaching aids

digital measuring equipments

air-conditioning equipments

optical lenses

drugs and pharmaceuticals

electric motors

pesticide formulators

photographic sensitized paper

razor blades

collapsible tubes,etc.

Entrepreneurs in small scale sector are normally not required to obtain a license either from the Central Government or the State Government for setting up units in any part of the country. Registration of a small scale unit is also not compulsory. But, its registration with the State Directorate or Commissioner of Industries or DIC's makes the unit eligible for availing different types of Government assistance like financial assistance from the

Department of Industries, medium and long term loans from State Financial Corporations and other commercial banks, machinery on hire-purchase basis from the National Small Industries Corporation, etc. Registration is also an essential requirement for getting benefits of special schemes for promotion of SSI viz. Credit guarantee Scheme, Capital subsidy, reduced custom duty on selected items, ISO-9000 Certification reimbursement & several other benefits provided by the State Government.

CHALLENGES AND OPPORTUNITIES

In the emerging scenario, characteristics of a liberalized regime, unrestricted competition from multinational entering the consumer durables and non-durables market segment with their internationally known brand names, technological superiority and intensive marketing efforts would offer formidable challenge to the small-scale sector

Large-scale exports of agricultural commodities in processed and semi-processed form by large export houses and multinational leaving gaps in the supply of these resources which have traditionally been the input for tiny industries.

Liberalization in imports of capital goods and related components, it is feared, would exert pressures on the existing markets of ancillaries and SSI vendors.

FDI (Foreign Direct Investments) will have the spin-off effects of linkages with small-scale units which can provide the supply base to large undertakings.

Indian industry is at the crossroads where on the one hand it has to integrate itself with the global markets, while on the other, it has to face competition in the domestic market from international suppliers.

On moving from a protected economy to a market-oriented economy, some amount of transitional problems seem unavoidable, but given the intrinsic strength of the sector and several support services available to it, the sector can look forward to a level of sustained development in the coming years.

COMPETITIVE ADVANTAGES OF SMALL-SCALE UNITSADVANTAGES

Ability to perceive opportunities Action orientation Ability to mobilize local resources Risk management Ability to utilize resources efficiently Increased resource specialization Better managerial control Ability to react to rapidly changing environmentOUTCOMES

Innovation and technological development Development of venture capital funds Higher profitability Lower factor cost, particularly labour costs. Greater innovative capabilities Better equipped to compete in the growing service industry and in knowledge intensive industries.CHAPTER II

LITERATURE REVIEW

Ministry of Small Scale Industries

The Ministry of Small Scale Industries acts as the nodal agency for growth and development of SSIs in the country. The ministry formulates and implements policies and programmes in order to promote small scale industries and enhance their competitiveness. It is assisted by various public sector enterprises like:-

Small Industry Development Organization (SIDO) is the apex body for assisting the Government in formulating and overseeing the implementation of its policies and programmes/projects/schemes.

National Small Industries Corporation Ltd (NSIC) was established by the Government with a view to promoting, aiding and fostering the growth of SSI in the country, with focus on commercial aspects of their operation.

The Ministry has established three National Entrepreneurship Development Institutes which are engaged in development of training modules, undertaking research and training and providing consultancy services for entrepreneurship development in the SSI sector. These are:-

National Institute of Small Industry Extension Training (NISIET) at Hyderabad,

National Institute of Entrepreneurship and Small Business Development (NIESBUD) at NOIDA

Indian Institute of Entrepreneurship (IIE) at Guwahati

The National Commission for Enterprises in the Unorganized Sector (NCEUS) has been constituted with the mandate to examine the problems of enterprises in the unorganized sector and suggest measures to overcome them.

Small Industries Development Bank of India (SIDBI) acts as apex institution for financing SSIs through various credit schemes.

INSTITUTION PRIME FUNCTION Small Scale Industries Board =Providing refinance facility

SIDO= Provide working capital finance to SSIs

NSIC= Render advise to government on various policies/programmes for SSIs

SIDBI =Supply machines on hire-purchase basis and assist SSIs in procuring government orders for supply of their product

SFCs Provide long term finance

Commercial Banks= Assist government in formulating, coordinating, implementing policies and programmes for the promotion of SSIs

Credit FlowCredit is the prime input for sustained growth of small scale sector and its availability continues to be a matter of concern. Credit provided for creation of fixed assets like land, building, plant and machinery is called long term credit. Credit provided for running the industry for its day to day requirement for purchasing raw material and other inputs like electricity and water etc. and for payment of wages and salaries is called short term credit or working capital.

Institutional Arrangement

Small Scale Industrial Sector is provided working capital by commercial banks and in some cases by cooperative banks and regional rural banks. Term loans are provided by State Financial Corporations (SFCs), Small Industries Development Corporations (SIDCs), National Small Industries Corporation (NSIC) and National Bank for Agriculture and Rural Development (NABARD). Financial assistance from NSIC and to some extent from SIDCs is available in the form of supply of machinery on hire purchase basis/deferred payment basis. Small sized SSI and tiny units also get some term loans from commercial banks along with working capital in the form of composite loans.

Refinance to these institutions is provided by the Small Industries Development Bank of India (SIDBI). Such refinance comprises assistance provided to State Financial Corporation Bills, Finance Scheme, Special Capital/Seed Capital Scheme, new debt instruments and to National Small Industries Corporation. Long term loan are provided to the smalls scale industrial units by SFCs mainly through Single Window Scheme and National Equity Fund as also direct assistance provided to State Financial Corporations in the form of refinance. Some part of working capital for pre-operative expenses is also provided by State Financial Corporations to Small Scale Industrial Units under the Single Window Scheme.

Credit to SSI Sector from Public Sector Banks

The table below gives the positions with regard to flow of credit to SSI Sector:-

At the end of March 1995 At the end of March 1996 At the end of March 1997 At the end of March 1998 At the end of March 1999

Net Bank Credit 1,69,038 1,84,381 1,89,684, 2,18,219 2,46,203

Credit to SSI 25,843 29,485 31,542 38,109 42,674

No. of SSI Accounts (in lakhs) 32.25 33.77 N.A. 29.64 N.A.

SSI Credit as percentage of Net Bank Credit 15.29 15.99 16.6 17.5 17.33

There is a marginal decline in share of credit to SSI sector as a percentage of net bank credit.

Credit to Tiny Sector

The Table below gives the status of credit flow to tiny sector since 2004

At the end of March 2004At the end of March 2005At the end of March 2006At the end of March 2007

Net Credit to Tiny Sector 7734 8183 9515 10273.13

Tiny credit as percentage of net SSI credit29.93 27.76 30.2 27.0

The advances outstanding against Tiny sector increased from Rs.9515 crores at the end of March, 1997 to Rs. 10273 crores at the end of March, 1998. The share of tiny sector in the advances to SSI sector has, however, decreased from 30.2% at the end of March 1997 to 27.0% at the end of March, 1998. As per RBI guidelines, 40% priority sector lending going to SSI has to go to tiny units with investment in plant and machinery below Rs. 5 lakhs and another 20% to tiny units with investment in plant and machinery between Rs. 5 lakhs and Rs. 25 lakhs. Thus, against the target of 60% of SSI credit for tiny units, actual flow at 27% is very low.

Nayak Committee

Nayak Committee was set up by the Reserve Bank of India in December. Nayak Committee, RBI issued a number of circulars 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 SSI loaning in areas of higher SSI concentration.

As a follow up of Nayak Committee recommendations, Finance Minister in the Budget speech of 1995-96, announced a Seven Point Action Plan for improving the flow of credit to small scale sector consisting of the following:

i) Time bound action for setting up specialized SSI branches in 85 identified districts; at least 100 such dedicated branches to be opened before the need of 1995-96.

ii) Adequate delegation of powers at the branch and regional levels.

iii) Banks to conduct sample surveys of their performing SI accounts to find out whether they are getting adequate credit.

iv) Steps to be taken to see as far as possible that composite loans (covering both term loans and working capital) are sanctioned to SSI entrepreneurs.

v) Regular meetings by banks at zonal and regional levels with SSI entrepreneurs.

vi) Need to sensitize bank mangers and reorient them regarding working of the SSI sector. vii) Simplification of procedural formalities by banks for SSI entrepreneurs.

Steps taken by Reserve Bank of India to improve credit flow to SSI sector

a) The Government had raised the investment limit for SSIs from Rs.60 lakhs to Rs.300 lakhs and for tiny units from Rs.5 lakhs to Rs.25 lakhs. In order to ensure that credit is available to all segments of tiny sector. RBI has issued instructions that out of the funds normally available to SSI sector, 40% be given to units with investment in plant and machinery up to Rs. 5 lakhs; 20% for units with investment between Rs. 5 lakhs to Rs.25 lakhs and remaining 40% for other units.

b) Public sector banks have been advised to operationally more specialized SSI branches at centers where there is a potential for financing many SSI borrowers. As on March 1998, 370 specialized SSI branches are working in the country.

c) To extend 'Single Window Scheme' of SIDBI to all districts to meet the financial requirements (both term loan & working capital) of SSIs.

d) With a view to moderating the cost of credit to SSI units, banks are advised to accord SSI units with a good track record the benefits of lower spread over the Prime Lending Rate.

e) In order to take expeditious decision on credit proposals of SSI units, banks have been advised to delegate enhanced powers to the branch managers of the specialized SSI branch so that most of the credit proposals are decided at the branch level.

Monitoring

Credit to SSIs is monitored periodically by Reserve Bank of India, Department of SSI & ARI, National Advisory Committee of SIDBI, State Level Bankers Committee and District Level Coordination Committees of the Bank.

Fresh initiatives announced in the Budget of 2006-2007

In this budget speech the Finance Minister has announced the following measures for improving credit supply to SSI sector

a) A new credit insurance scheme launched.Inability to provide adequate security to banks and low recovery are often sighted as major constraint in flow of investment credit of SSI units. The problem is more acute for

Export oriented and tiny sector enterprises. To alleviate this problem, the Finance Minister announced that a new credit insurance scheme will be launched.

b) Composite Loan Scheme Limit Enhanced to Rs. 5 Lakh

The composite loan scheme of SIDBI and commercial banks is designed to case operational difficulties of the small borrowers by presiding term loan and working capital through a single window. The limit for composite loans currently at Rs. 2 lakhs has been enhanced to Rs. 5 lakhs.

c) Working Capital Limit Enhanced to Rs. 5 Crores

For SSI units the working capital limit is determined by the banks on the basis of simple calculation of 20% of their annual turnover. The turnover limit for this purpose has been enhanced from Rs. 4 Crore to Rs. 5 Crore.

d) Credit Delivery to Tiny Sector

To increase the outreach of banks to the tiny sector, leading by banks to Non-Banking Financial Companies (NBFCs) or other financial intermediaries for purposes of on-lending to the tiny sector is being included within the definition of priority sector for bank lending.

High level committee for credit (Kapur committee)

In December, 1997, Reserve Bank of India has appointed a One-Man Committee under the Chairmanship of Shri S.L. Kapur, former Secretary (SSI), Government of India, to suggest measures for improving the delivery system and simplification of procedures for credit to small scale industrial sector. The Committee has submitted its report to RBI on

30th June, 1998. Some of the major recommendations of the Committee are:-

i) Special treatment to smaller among small industries;

ii) Enhancement in the quantum of composite loans;

iii) Removal of procedural difficulties in the path of SSI advances;

iv) Sorting out issues relating to mortgages of land including removal of stamp duty and permitting equitable mortgages;

v) Allowing access to low-cost funds to Small Industries Development Bank of India (SIDBI) for refinancing SSI loans

vi) Non-obtaining of collaterals for loans up to Rs.2 lakhs;

vii) Setting up of a collateral reserve fund to provide support to first party guarantees;

viii) Setting up of a Small Industries Infrastructure Development Fund for developing industrial areas in/around metropolitan and urban areas;

ix) Change in the definition of sick SSI units;

x) Giving statutory powers to State Level Inter-Institutional (SLIIC);

xi) Setting up of a separate guarantee organization and opening of 1,000 additional specialized branches; and

xii) Enhancement of SIDBI's role and status to match with that of National Bank for Agriculture and Rural Development (NABARD).

Kapur Committee has made 126 recommendations out of which RBI has already accepted 40 recommendations for implementation.

Amendment of interest on delayed payment act

To tackle the problem of settlement of dues of SSI units by large companies. Interest on Delayed Payment Act has been amended. The following amendments have been made in the Act.

a) The payment has to be made within 120 days to the SSI supplier from the date of acceptance of the goods by the buyer.

b) Interest on delayed payment has been revised from 5% above the floor rate to one and half time the prime lending rate charged by SBI.

c) Mechanism has been prescribed for settling disputes by Industry Facilitation Councils to be set up by State Governments through notification.

Small Industries Development Bank of India (SIDBI)SIDBI was set up by an Act of Parliament, as an apex institution for promotion, financing and development of industries in small scale sector and for coordinating the functions of other institutions engaged in similar activities. It commenced operations on April 2, 1990. SIDBI extends direct/indirect financial assistance to SSIs, assisting the entire spectrum of small and tiny sector industries on All India basis.

The range of assistance comprising financing, extension support and promotional, are made available through appropriate schemes of direct and indirect assistance for the following purposes:-

Setting up of new projects

Expansion, diversification, modernisation, technology upgradation, quality improvement, rehabilitation of existing units

Strengthening of marketing capabilities of SSI units.

Development of infrastructure for SSIs and

Export promotion.

Direct Assistance Schemes

SIDBI directly assists SSIs under Project Finance Scheme, Equipment Finance Scheme, Marketing Scheme, Vendor Development Scheme, Infrastructural Development Scheme, ISO-9000, Technology Development & Modernisation Fund, Venture Capital Scheme, assistance for leasing to NBFCs, SFCs, SIDCs and resource support to institutions involved in the development and financing of small scale sector.

These Schemes are mainly targeted at addressing some of the major problems of SSIs in areas such as high tech project, marketing, infrastructural development, delayed realization of bills, obsolescence of technology, quality improvement, export financing and venture capital assistance.

Indirect Assistance Schemes

Under its indirect schemes, SIDBI extends refinance of loans to small scale sector by Primary Lending Institutions (PLIs) viz. SFCs, SIDCs and Banks. At present, such refinance assistance is extended to 892 PLIs and these PLIs extend credit through a net work of more than 65,000 branches all over the country. All the Schemes of SIDBI both direct and indirect assistance are in operation in all the States of the country through 39 regional/branch offices of SIDBI.

Promotional and Development Activities

SIDBI is actively involved in promoting tiny and small scale industries by means of its promotional and developmental activities through suitable professional agencies for organizing Entrepreneurship Development Programmes, Technology Upgradation & Modernisation Programmes, Micro Credit Schemes and assistance under Mahila Vikas Nidhi to bring about economic empowerment of women specially the rural poor by providing them avenues for training and employment opportunities.

A.Refinance against term loans in respect of projects/activities eligible for assistance under the SchemeInterest on term loans for fixed assets and working capital advances (excluding interest tax) (% p.a.)Interest on Refinance (% p.a.)

(i) Upto and inclusive of Rs. 25,000 12.0 9.0

(ii) Over Rs. 25,000 and upto Rs. 2 lakh Not exceeding 13.5 10.5

B. Refinance against term loans in respect of projects/activities eligible for assistance under TDMF and ISO 9000 Schemes (Applicable to all eligible institutions) (except RRBs) Interest on term loans (excluding interest tax) (% p.a.) Interest on Refinance (% p.a.)

(i) Upto and inclusive of Rs. 25,000 12.0 9.0

(ii) Over Rs. 25,000 and up to Rs. 2 lakh Not exceeding 13.5 10.5

(iii) Over Rs. 2 lakh Not exceeding 14.0* 12.0

Performance

SIDBI's efforts have resulted in increased flow of credit to SSI sector since inception as indicated below:

Year Sanction Disbursement

1999-200024101839

2000-0128472028

2001-0229092146

2002-0333572672

2003-0447063390

2004-0560664801

2005-066485 4585

2006-0774845241

SIDBI's assistance to:

(i) Tiny Units - about 89.2 per cent of the number of projects assisted under Refinance Scheme during 1996-97 were tiny, receiving assistance upto Rs. 5 lakh per project. The sanctions for such projects accounted for 39.6% of the total amount of sanctions in 1996-97 as against 36.0% during the previous year.

(ii) Women entrepreneurs - under various schemes assistance amounting to Rs. 19.07 crores was given to 1067 women entrepreneurs during 1996-97.

(iii) Backward areas - during 1996-97, projects emanating from backward areas received assistance to the tune of Rs. 775 crores of sanction which accounted for 37% of total assistance under Refinance Scheme of SIDBI.

Measures to simplify Rules/Regulations

To fill the gaps in the existing structure of credit delivery mechanism to the small scale sector, Small Industries Development Bank of India (SIDBI) keeps on effecting simplification of procedures, liberalization of new schemes and introduction of new schemes.

Endeavour of SIDBI is to ensure that no worthwhile proposal is denied credit for want of funds.

Norms lay down by Reserve Bank of India and Government of India is followed by SIDBI for granting assistance to SSI units.

Liberalization effected

(i) Enhancement in the ceiling on loan amount of the Composite Loan Scheme to Rs. 2 lakh from the earlier ceiling of Rs. 50,000/- to ensure timely availability of term loan and working capital to the small units. The scheme was also liberalized to include units in all areas other than metropolitan areas.

(ii) Scope of Technology Development & Modernisation Fund Scheme and Refinance Scheme for Technology Development & Modernization has been expanded to cover non-exporting SSIs/ancillary units graduating out of SSI sector for assistance under the scheme.

(iii) Scope of Single Window Scheme has been enlarged to cover modernisation, technology upgradation in addition to new SSI units. Project outlay under the scheme has been gradually raised from s. 30 lakhs to Rs. 100 lakhs. Simultaneously, the sub-limits for working capital and term loan components has been done away with.

Main Schemes of SIDBI

A brief summary of the Schemes available with SIDBI

.More details are available under the Section Policies & Schemes. National Equity Fund Scheme which provides equity support to small entrepreneurs setting up projects in Tiny Sector.

Technology Development & Modernisation Fund Scheme for providing finance to existing SSI units for technology upgradation/modernisation.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 Udyam Nidhi (MUN) Scheme provides equity support to women entrepreneurs for setting up projects in Tiny Sector.

Scheme for financing activities relating to marketing of SSI products which provides assistance for undertaking various marketing related activities such as marketing research, R&D, product up gradation, participation in trade fairs and exhibitions, advertising branding, establishing distribution networks including show room, retail outlet, wears-housing facility, etc. 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. 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 & Modernisation FundSIDBI has set up Technology Development & Modernisation 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 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 modernisation 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 who 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 one per cent service charges. The scope of this scheme was widened in 1995-96 to cover all areas excepting Metropolitan areas, raising the limit of loan from Rs. 1.5 lakhs to Rs. 2.5 lakhs and covering both existing as well as new units:

(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, modernisation, 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 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. 10 lakhs in the case of new projects in the case of existing units and service enterprises, the outlay on expansion/modernisation/technology upgradation or diversification or rehabilitation should not exceed Rs. 10 lakh 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. 2.5 lakh per project.

State Financial Corporations (SFCs)In pursuance of the SFCs Act, 1951, SFCs were set up mainly to finance small and medium scale units. Their area of operation is generally restricted to the concerned States. SFCs also assist small scale units for their modernisation and technology up gradation programmes by providing soft loans, restructuring the sick small scale units through rehabilitation schemes and through equity type assistance under SIDBI's seed capital scheme.

At present, there are 18 SFCs (including TIIC which was set up as a company) in existence for more than 40 years and operate as Regional Development Banks. The SFCs have played an important role in the evolution and growth of small and medium scale industries in their respective states. They provide financial assistance to industrial units by way of term loans, direct subscription to equity, guarantees, etc. Over the years SFCs have expanded their activities and coverage of assistance.

One-Man Committee set up by RBI under the Chairmanship of former Secretary, SSI&ARI, to look into various problems regarding credit flow to SSI sector and support appropriate measures for their redressal has given the following recommendations in its report submitted to RBI which are being processed by them:-

Restructuring of weaker SFCs by the Government.

Funds for lending under Single Window Scheme by SFCs should be placed by SIDBI with the SFCs in adequate measures.

Each SFC should get into an MOU with one or two Public Sector banks and participate in joint lending in which both term loan and working capital is provided jointly. For example, 80 per cent of the term loan could be given by SFC and 20 per cent by bank. In case of working capital which may be sanctioned at the same time as term loan, the proportion could be reversed, i.e., 80 per cent by bank and 20 per cent by SFC. However, the working capital account be managed and supervised by the bank through its specialized SSI branches.

SIDBI should sign MOUs with the State Governments to provide some assistance to SFC prior to the approval of assistance packages by the Government of India/SIDBI.

The staff of SFCs has to be adequately trained and SIDBI may be asked to make arrangements for this purpose.

National Small Industries Corporation (NSIC)

Bill FinancingBills 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.

Equipment Leasing Scheme

The object of the Leasing Scheme is to assist SSI Units to procure industrial equipment for modernisation, expansion and diversification of their industries.

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 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.SMALL SCALE INDUSTRIESNO OF UNITSINVESTMENT.

(RS. IN LACS)EMPLOYMENT

(IN NO.)

TAXTILE20 650.00376

HANDLOOM18036.00380

PHARMACEUTICALS12240.00128

M. S. PIPES61218.00323

PVC PIPES10250.0090

CEMENT152.0015

PAPER/PAPER PRODUCT12145.0096

CERAMICS04162.00107

CHEMICALS 2626.20104

FOOD 2581580.00774

COTTON GINNING & OIL3121896.003712

AGRI IMPLEMENTS

REPAIRING WORK SHOP 516103.00778

STEEL AND WOODEN

FURNITURE418201.60896

PAINTS 636.0036

UTENSILS 424.0040

ROLLING MILLS5440.00214

ENGGINEERING ITEMS626313.00939

LATHER SHOES/JUTI ETC.39819.00597

MISC & OTHERS558238.552408

SSIs CONTRIBUTION

The SSI sector makes a valuable contribution of about 40 per cent to our total manufacturing sector production, 35 per cent to exports and employs over 160 lakh workers. Our commitment to the SSI sector is total. The commonest complaint of SSI entrepreneurs and associations are the insufficiency of timely credit and the harassment of the "Inspector Raj".

On the credit problems of the SSI sector, I propose the following initiatives: At present, for SSI units having aggregate working capital requirements up to Rs.2 crore, the working capital limit is determined by the banks on the basis of a simple calculation of 20 per cent of their annual turnover. This facility is being doubled to Rs.4 crore. This will ease the flow of bank credit to SSI.

To moderate the cost of credit to SSI units, RBI will advise the banks to accord SSI units with a good track record, the benefit of lower spreads over the prime lending rate. Enhanced powers would be delegated to bank managers of specialized SSI branches to ensure that most credit proposals are decided at the branch level.

At present, Small Industrial Development Bank of India (SIDBI) is a subsidiary of IDBI and IDBI is the major shareholder in State Finance Corporations (SFCs). To equip SIDBI to play its apex role in SSI credit provision more effectively, SIDBI will be delinked from IDBI and IDBI shareholding in SFCs will be transferred to SIDBI.

SSI units are often handicapped by delays in the settlement of their dues from larger companies. To tackle this problem, I am asking RBI to strengthen the existing mechanisms available to SSI for discounting of bills. RBI will also modify its guidelines to commercial banks on credit appraisal to give greater weight to the amount of overdue outstanding that large units have in respect of SSI supplier. Small Scale and Ancillary Industry Undertaking Act,1993 to make the existing legislation more effective.

As for the pervasive problem of the "Inspector Raj", I shall be announcing far reaching changes in the administration of Central Excise which should help SSI units significantly. I urge all States to review their laws and regulations and make necessary changes to lighten the burden of the inspector raj problem of SSI units. I shall also be announcing some tax concessions to the SSI sector later in my speech.

TARGETS AND ACHIEVEMENTS

The small-scale sector has continued to play an important role in the Indian economy. This sector helps generate cost effective employment and address the problem of poverty through well dispersed economic growth.

According to estimates, based on the Third All-India Census of SSI with references year of 2001-02, there are about 118.60 lakh small enterprises (2004-05) in the country contributing more than 39 per cent of the total industrial production in the manufacturing sector. It provides employment to about 282.91 lakh persons (2004-05), which is second only to that in the agriculture sector.

The SSI sector has, over the years, generally recorded higher growth rate than the industry sector as a whole. Indicative physical targets and achievements in respect of production, employment and exports are given in the table below:

2004-052005-062007

Target Target Achievement Target Achievement (Anticipated) Target

1.Prodution

(Rs.crore at current prices) 429548 412450* 493405 493405 566404

2.Employment (lakh persons) 275.73 282.91 284.53 284.53 293.33

3.Export (Rs. crore at current prices)93653 NA 107701 NA 126107

PLAN OUTLAY (LIKELY BUDGET ALLOCATION) FOR 2006-07

The Plan schemes of the Ministry provide support for the development and promotion of small scale sector in the form of infrastructure development, technology up-gradation, human resource development, enhanced credit availability, market development, etc. In order to continue these activities, the Plan outlay allocated for 2006-07 is 469.93 crore, as against Rs.412.26 crore in the BE, 2005-06. As in the previous years, a major portion of the Plan outlay is for the Credit Guarantee Fund Scheme (Rs.118.10 crore), Credit Linked Capital Subsidy Scheme (Rs.61.81 crore), and Scheme for Technology Up-gradation (Rs.62.93 crore).

A promotional package for the small-scale sector is under preparation and is likely to be announced shortly. The Plan outlay for 2006-07 would need to be augmented to accommodate the requirement of funds for this purpose.

The National Manufacturing Competitiveness Council has recently approved a National Manufacturing Competitiveness Programme, with focus on small and medium enterprises. It is expected that the Plan outlay for 2006-07 would be able to accommodate the funds needed for starting implementation of this programme during 2006-07.

The NCEUS has also initiated steps for formulating pilot project(s) of Growth Poles (bases on PURA principles) for enterprises in the unorganised sector. Implementation of this project is expected to be started in 2006-07, for which a token sum of Rs. 28 crore has been included in the approved Plan outlay.

CHAPTER - III

FINANCIAL PLANNING

Financial planning is a part of a larger planning system in the firm. And this planning process begins with a statement of the firms goal or mission, which is stated in qualitative terms.

Financial planning involves analyzing the financial flows of a company, forecasting the consequences of various investments, financing and dividend decisions, and weighing the effects of various alternatives. The main idea is to determine where the firm has been, where it is now, and where it is going. The advantage of financial planning is that it forces management to take account of possible deviations from the companys anticipated path.

In general usage, a financial plan can be a budget, a plan for spending and saving future income. This plan allocates future income to various types of expenses, such as rent or utilities, and also reserves some income for short-term and long-term savings. A financial plan can also be an investment plan, which allocates savings to various assets or projects expected to produce future income, such as a new business or product line, shares in an existing business, or real estate In business, a financial plan can refer to the three primary financial statements (balance sheet, income statement, and cash flow statement) created within a business plan.

Financial forecast or financial plan can also refer to an annual projection of income and expenses for a company, division or department. A financial plan can also be an estimation of cash needs and a decision on how to raise the cash, such as through borrowing or issuing additional shares in a company While a financial plan refers to estimating future income, expenses and assets, a financing plan or finance plan usually refers to the means by which cash will be acquired to cover future expenses, for instance through earning, borrowing or using saved cash Financial planning is the task of determining how a business will afford to achieve its strategic goals and objectives. Usually, a company creates a Financial Plan immediately after the vision and objectives have been set. The Financial Plan describes each of the activities, resources, equipment and materials that are needed to achieve these objectives, as well as the timeframes involved

The Financial Planning activity involves the following tasks

Assess the business environment

Confirm the business vision and objectives

Identify the types of resources needed to achieve these objectives

Quantify the amount of resources ( labour, equipment, materials )

Calculate the total cost of each type of resource

Summarize the costs to create a budget

Identify any risks and issues with the budget set.

Performing Financial Planning is critical to the success of any organization. It provides the Business Plan with rigor, by confirming that the objectives set are achievable from a financial point of view. It also helps the CEO to set financial targets for the organization reward staff for meeting objectives within the budget set

Financial planning is the process of establishing personal and financial goals and creating a way to reach them.The ongoing process involves taking stock of all your existing resources, developing a plan to utilize them, and systematically implementing the plan in order to achieve your short- and long-term goals. The plan must be monitored and reviewed periodically so that adjustments can be made, if necessary, to assure that it continues to move you toward your financial goalsFinancial planning is the process of developing a personal roadmap for your financial well being. The inputs to the financial planning process are:

a. your finances, i.e., your income, assets, and liabilities,

b. your goals, i.e., your current and future financial needs and

c. Your appetite for risk.

The output of the financial planning process is a personal financial plan that tells you how to use your money to achieve your goals, keeping in mind inflation, real returns, and taxes.

In short, financial planning is the process of systematically planning your finances towards achieving your short-term and long-term life goals.

Financial planning System

A long term financial plan represents a blueprint of what a firm proposes to do in the future. Typically it covers a period of three to ten years. Most financial plans have certain common elements. These are:-

Economic assumptions

Sales forecast

Pro forma statements

Asset requirements

Financing plan

Cash budget.

These are discussed below in details.

1. Economic Assumption:-

The financial plan is based on certain economic assumptions about the economic development. ( Interest rates, inflation rate, growth rate, exchange rate, and so on )

2. Sales Forecast:-

The sales forecast is typically the starting point of the financial planning exercise. Most financial variables are related to the sales figure.

It may be prepared for varying planning horizons to serves different purposes. It may be for a period of 3-5 years or for even longer duration to aid investment planning. A wide range of sales forecasting techniques are

Qualitative technique = these techniques rely essentially on the judgment of experts to translate qualitative information into quantitative technique.

Time series projection method = These methods generate forecasts on the basis of the past behavior of time series

Casual models = this technique is based on cause-effect relationships expressed in explicit, quantitative manner.

3. Pro forma Statements:-

The heart of financial plan is the pro Forma statements which include:-

Profit & loss account and

Balance sheet.

Pro forma profit & loss account.

Two common method for preparing pro forma profit & loss account.

Percent of Sales method = it assumes that future relationship between various elements of costs to sales will be similar to their historical relationship. While using this method a decision has to be taken about which historical cost ratios to be used: should these ratios pertain to the previous year or the average of two more previous years.

Budgeted Expense Method = this method calls for estimating the value of each item on the basis of expected developments in the future period for which the pro forma profit and loss account is being prepared

Pro forma Balance sheet

Employ the percent of sales method to project the items on the assets side, except investments and miscellaneous and losses Estimate the expected values for investments and miscellaneous expenditure and losses using specific information applicable to them. Use the percent of sales method to derive the projected values of current liabilities and provisions. Obtain the projected value of reserves and surplus by adding the projected retained earnings to the reserves and surplus figure of the previous period. Set the projected values for loan funds will be tentatively equal to their previous values Assume that the projected values for loan funds will be tentatively equal to their previous levels repayments or retirements as per terms and conditions applicable to them.

Compare total the assets side with that of the liabilities side and determine the balancing item.

4. Asset Requirements:-

Firms need to invest in plant and equipment and working capital. The financial plan spells out the projected capital investments and working capital requirements overtime.

5. Financial Plan:-

Suitable sources of financing have to be thought of for supporting the investment in capital expenditure and working capital.

6.Cash budget:-

It shows the cash inflows and outflows expected in the budget period.

STAGES OF FINANCIAL PLANNING

There are three different phases of financial planning: The Accumulation phase

The Distribution phase and

The Preservation phase

In the accumulation stage is to hold the assets you are acquiring, and allow time to work its magic. Set time-bound goals for how long you intend to accumulate your assets before moving on to the next phase. Work diligently on your plan and keep your focus.

The distribution stage is the period when you get to enjoy the benefits of wealth, when you get to draw down income from your assets

The last phase is the preservation stage. This is the period when you plan to preserve and protect your accumulated wealth and prepare to safely transfer it to your rightful heirs.

The process of financial planning includes

1. The link between objectives, goals and action plans

2. The complementary nature of organizational mission and finance

3. Applying strategic evaluation and its application

4. Planning within a quality framework

5. The link between objectives, goals and action plans

6. The complementary nature of organizational mission and finance

7. Applying strategic evaluation and its application

8. Planning within a quality framework

Defining the Mission

Voluntary organizations should be clear as to why they exist and how they will fulfill their mission. Meeting a financial goal is not the mission of a voluntary organization but is essential if it is to fulfill its mission.

A voluntary organization mission and its financial goals are complementary to each other, not in competition.

Mission - strategic goals and operational objectives: an example mission statement, and set of strategic goals and operational objectives

Planning

Planning can be defined as the establishment of objectives and the formulation, evaluation and selection of the policies, strategies, tactics and action required to achieve these objectives.

Planning comprises long-term and strategic planning, and short-term operations planning (usually for the coming year). Finance Managers have a key role in planning and should be integral to the planning process.

Voluntary organizations need to plan effectively but often do not because:

In many voluntary organizations, the demands of the moment - fire fighting, meeting income targets and controlling expenditure - leave little time for strategic analysis.

Too little is known about how complex external factors affect voluntary organizations.

Three stages of planning

Planning really happens in three stages:

Deciding general goals

1. Setting objectives

2. Creating action Plans

Understanding the Strategic Position :-

To answer the questions "what is, or will be our strategic position?" requires an organization to understand the external environment in which it operates, as well as its own internal structures. This has four aspects:

Environmental analysis (external appraisal)

This is the scanning of the organization environment for factors relevant to the organizations current and future activities. To assist this process NCVO has developed theThird Sector Foresight project, which seeks to understand these external factors, and how they impact on the sector.

Position audit

This examines the current state of an organization in respect of resources both financial and organizational for example, the qualities of the management committee.

Organizational appraisal (or SWOT analysis)

This is a critical assessment of the strengths, weaknesses, opportunities and threats to the organization.

Gap analysis

This arises from a projection of current activities into the future to identify if there is a difference between the organizations objectives and what will happen if the organization just continues its current activities.

Undertaking these assessments helps to identify the strategic choices open to the organization, for example:

To grow or to stay the same size or even reduce in size

Issues of current and future service provision, geography and policy

Evaluation

Once choices are identified they need to be evaluated, as it is unlikely that all options will be feasible within available resources. Each option should be examined on its merits as to whether it:

Increase strengths?

Strengthens existing weaknesses?

Is suitable to the organizations existing position?

Is acceptable to stakeholders?

In addition in testing their feasibility the following questions should be asked:

Is the leadership suitable?

Is the culture capable?

Is the organizational structure appropriate?

Are the functional policies appropriate?

Are the resources available?

Is this strategy an improvement on not changing at all?

Are there procedures for implementation and monitoring?

Each chosen strategy needs to satisfy all these points. If it fails on any, the organization must assess whether remedial action is possible.

Preparing day-to-day plans

Once the strategic goals have been identified they must be translated into day-to-day activities.

For example, a cancer charity aiming to reduce the incidence of smoking might set an objective to reduce smoking in women attending antenatal clinics by 25% within the next six months. To achieve this objective the following action plans have been formulated:

A pamphlet explaining the dangers

A counseling session

A chance to attend an anti-smoking course

The action plan for producing the pamphlet may be further broken down into a number of tasks as follows:

Identify major issues, medical and otherwise, which expectant mothers should be aware

Identify main contributors to pamphlet

Prepare draft, check accuracy of content and design

Conduct a limited testing with readers' or users' panel

Print

Market and promote pack to expectant mothers attending the clinics.

The persons responsible for each of these tasks, and the time allocated, should be identified, so as to provide a basis for performance appraisal. This information can then be collated along with other action plans in order for the Finance Manager to have an overall picture of the organization, are there any shortfalls, what are the fund-raising targets, what costs need to be recovered and to prepare budgets for the coming year.

Financial managers first need to assess what information they have, particularly on costs and income projections. These ties in with the issues of allocating core costs. Until they know what the costs currently are, what they are projected to be and what the projected income generating strategy is it is impossible to control or plan the future.

Financial Managers need to set clear goals for the organization; and project staff/ managers need to be sure of what their budgets are, understand their budgets and what margin of error has been allowed (if any).

These budgets also need to be checked against actual on at least a quarterly basis, preferably monthly and action to analyze any variances from budget should be undertaken promptly throughout the year.

Financial Management

Good financial management is key to organisational sustainability. It will impact on decision-making across the organisation and as such should be integrated into all aspects of an organisations operations, from managing project budgets to gathering information for strategic decision-making. This resource has been created to help organisations move towards having an integrated, strategic financial management function.

Financial Strategy

Voluntary and community organisations operate in a challenging and uncertain funding environment. Many manage income received from a number of difference sources, including donations, grants, contracts and income generated from trading. This increased complexity means that it is essential that organisations successfully manage their funding and financing sources to ensure the best and most efficient use of their financial resources.

Whatever the size of the organisation, sound financial management is a prerequisite to sustainability. Rather than being seen as a separate function (merely doing the books), the finance function should be integrated within, and add value to, the overall planning and management of an organisation.

The Financial Strategy section includes:

How to develop your finance function =Overview of the changes occurring in the finance function, and how Finance Managers and voluntary organisations will have to change to respond to them

Importance of financial planning =Why it's essential to do financial planning before preparing a budget

Financial planning =Objectives, goals, action plans, mission, strategy, quality: what you need to know

Mission = strategic goals and operational objectives An example mission statement, and set of strategic goals and operational objectives Internal performance review = The internal review will identify weakness as well as untapped strengths that should lead to more effective strategic planning Financial management = The role of trustee boards .Details on: the financial management functions of the board; who comprises the financial team; and differences from the commercial sector Financial monitoring = Activities and motivations that typify financial monitoring Financial benchmarking =A framework for financial performance monitoring, including case studies Financial procedures = Procedures designed to ensure the propriety and efficiency of the organisation's activities Financial management procedures =Procedures that would help towards creating and efficient and economical organisation Sample contents of financial procedures manual = The procedures manual is useful for establishing controls as well as laying out trustees financial responsibilities

Financial governance framework checklist =12-point checklist for creating a financial governance framework

How to develop the finance function

Voluntary organizations sit in an increasingly complex web in which services previously delivered by statutory services are now being delivered by voluntary agencies. The drivers of this change are complicated: an ageing population, a consumer society and a distrust of institutions. The UK has been moving away from welfare to a market state in which civil society and the responsibility of the individual have come to the fore.

The profile of the voluntary sector over the last ten years has reflected these changes. This is especially so in the shifting sources of income, with government now funding a third of total expenditure both through grants and, increasingly, service level contracts. With increased finance also comes responsibility and accountability and voluntary organizations have to respond to these changes.

Historically many finance teams have focused 80% of their time on the processing and only 20% focus on the strategic information requirement.

When thinking about finance, many people instinctively associate it with book-keeping and tiresome bureaucratic procedural controls, and only peripherally with forward planning, so the finance team can be seen as blockers rather than enablers for change and development.

To ensure that the finance function - whether that is a team or an individual - can add value to both planning and management it should see it as having the following key roles:

Providers of information for decision-making

Business managers

The finance function will be more useful to the organization if it:

Understands the importance of communicating information

Understands the cost profile/ strategic perspective of the organization

In essence there is the need to move away from bean counting - "I need to get the trial balance finished before I can produce management accounts" which may involve a cultural change too.

The finance function of the future will be moving to more of an organization service focus. This means:

Responding to challenges, not avoiding problems:

Strategic understanding of organization

In-depth knowledge of who its stakeholders are

Answering Key Questions

Regular checksthat they are meeting their stakeholder needs

Different ways of presenting information

Critically review the experience and capability of the finance function

The skills or can access the skills they need

Up-to-date knowledge and are regularly updating this knowledge

Having a range of skills and experiencesThe skills range from both the technical to strategic and it is important that the finance function has:

Technical Skills

Professional Knowledge

Management experience

Strategic thinking - this is perhaps the most important!

Initial questions

Questions to be considered

Where does our current finance function fit in the organizationshierarchy?

What strategies could I and my team put in place so we are providers of information for decision making and Business Managers?

Tools to help development

Staff induction - including job description design and recruitment of staff in the finance team and being involved in the induction of new staff in the organization

Training - identifying what personal training and development needs you and your team have. Courses, mentoring, receiving financial publications joining financial management networks are just some of the options to consider

Talking to your stakeholders finding out what information they need and how they would like this information presented

It is worth noting t