5988826 Mphil Thesis Final on Credit Facilities for Smes by Puttu Guru Prasad
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Transcript of 5988826 Mphil Thesis Final on Credit Facilities for Smes by Puttu Guru Prasad
1
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, Andhra Pradesh 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 Guntur
district and in the State of Andhra Pradesh.
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
9
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
12
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
Guntur 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 Guntur District. The unregistered
industrial units are totally excluded from the purview of the study.
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 Guntur
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 5458 small and medium industrial units in DIC Registrar at
the end of December, 2007 out of which 2,880 units presently working and
remaining units were not working. 80% of units come under the tiny unit’s
14
category only. Among the Units having investment in P & M more 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 the sample units 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, Guntur, Hand Book of
Statistics, Guntur District and Industrial Profile, Guntur District. Primary data
is collected from the owners of Small Scale Industries in Guntur District.
Period of study:
The study covers a period of 5 year from 2002-2003 to 2007-2008.
This period seems to be the normal 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.
15
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
Guntur 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”
16
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. Besides, efforts are also made to ascertain and outline of
the development and growth of SME industries in Andhra Pradesh
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.
17
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
18
responsible for attaining ‘financial inclusive growth’. Creation of higher levels
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 Government of India (GoI) and Small Industries Development
Bank of India (SIDBI) set up the CGTMSE in August 2000 to provide
guarantee support to banks and lending institutions for their exposure to the
Micro, Small and Medium Enterprises (MSMEs) sector. This is the only credit
guarantee institution in the country exclusively set up for the benefit of
entrepreneurs in the MSME sector.
For a small fee, the credit facilities upto Rs.50 lakh extended by
Member Lending Institutions (MLIs) which are not backed by collateral
security and / or third party guarantee are provided guarantee cover by
CGTMSE to the extent of 75% of the sanctioned credit facility (80% for
women entrepreneurs, units in North Eastern Region and loans to micro
entrepreneurs upto Rs.5 lakh).
MLIs are requested to utilize the CGS to increase their lending to the
micro and small enterprises sector, particularly, those enterprises being set up
by women, young first generation entrepreneurs and those from
disadvantaged sections of society. While generating business for their
19
respective institutions, MLIs would also be directly contributing to the
economic development process.
The operations of CGTMSE during the past few years have recorded
sharp growth both in number and amount approved. This is indicative not only
of the growing confidence amongst MLIs about the beneficial aspects of CGS
but, also about the ability of CGTMSE in delivering on its commitments. Since
inception, CGTMSE has been constantly endeavoring to improve its services
by pushing the envelope, enriching the in-house team, setting higher
performance parameters and encouraging innovative practices in all areas of
operation.
To all those whom we are privileged to serve, we wish to thank you for
your support and pledge to continue delivering superior performance at all
times and look forward to your useful suggestions for improving our
effectiveness.
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
20
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.
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.
21
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
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.
22
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
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
23
--- 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.
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
24
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.
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
25
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.
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. Small and Medium industry is providing
employment at an increased rate which is evident from Table.
26
Table 2.1
Data on Small and Medium Industries in India in the last decade
YearFixed Investment
(Rs. Crore)Production (Rs. In crore)
Employment(lakh persons)
Export(Rs. Crore)
1990-91 93555 63518 158.34 9664
1991-92 100351 73072 165.99 13883
1992-93 109623 85581 174.84 17784
1993-94 115795 98804 182.64 25307
1994-95 123790 122210 191.40 29068
1995-96 125750 148290 197.93 36470
1996-97 130560 168413 205.16 39248
1997-98 133242 189178 213.16 44442
1998-99 135482 212901 220.55 48979
1999-00 139982 234255 229.10 54200
2000-01 147348 261289 239.09 69797
2001-02 154349 282270 249.09 71244
2002-03 162533 311993 260.13 86013
2003-04 170726 351427 271.36 155.10
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
0
50000
100000
150000
200000
250000
300000
350000
400000
Fig.2.1 Performance of Small Scale Sector in India
Fixed Investment Production (Rs. In crore)
27
SME Contribution to GDP:
Small and Medium Industries has been contributing significantly to
Gross National Product of the Country. Table shows that 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 10th Five year plan period is
projected to rise to Rs.7, 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
exports. The increase in the total exports is depicted in Table. The
contribution of small scale industries to exports has gradually increased
from 2,580 crores in 1984-85 to nearly 55,000 crores during 2003-2004.
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.
28
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
29
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
30
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.
31
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.
32
(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 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
SME industries. The sector will thus be a major focus in the strategy to create
rapid growth in the State. By 2020, Andhra Pradesh 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
33
these industries will provide many opportunities for entrepreneurship and
employment, leading to a significant rise in income for the State’s people.
The state of Andhra Pradesh which is popularly known as the “Rice
Bowl of India", is also surging ahead on the industrial front. The state has
witnessed a faster transformation from agriculture to industrial advancement
in the recent Past. Andhra Pradesh has rich and abundant natural resources
and cheap and peaceful labor. Further, it has adequate power supply. It has
also recorded a steady growth in the number of large and medium industries.
Small and tiny sectors are assuming a greater role in the further
industrialization of the state. The state is going towards industrialization after
green revolution through the small scale and tiny sectors.
Growth of Small and medium enterprises in Andhra Pradesh:
The growth of small and medium industries in Andhra Pradesh in the
recent past has been significant. The District Industrial Centers, set up by the
Government have greatly contributed to the promotion of small and tiny units
in the rural areas. The number of Small and medium Industries significantly
increased to 1, 36,175 by the end of 2003 as against only 8,090 units in 1970.
This indicates that they are increased by more than 15 times in a period of 32
years. Their investment has also increased constantly. Similar growth is
observed in the case of generation of employment by the small and medium
sector.
Infrastructural facilities:
The available literature on the industrial front of Andhra Pradesh
denotes that the state has sound infrastructural facilities. The facilities are
34
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.
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).
35
SME PROMOTING AGENCIES:There is a good number of industry promoting agencies functioning in
the state. They are established after the formation of the state in the year
1956. They have made a mark in the development of the state industrially.
In the absence of these agencies the state would have remained industrially
under developed. Therefore, the role played by these agencies in the
industrialization of the state in the past is very significant.
Growth and Working of Industries in Guntur District:
Agriculture - the basic occupation:
The district has been developing in agriculture with nearly 40% of the
land put under agriculture; out of the total population, nearly 80% is living in
rural areas when agriculture is the main occupation for its livelihood. Out of
the total working population about 20% is engaged in agriculture sector, and
the rest is in non-agricultural sector. The Principal food crops shown in the
district are paddy, bazra, jower, wheat etc. A sizeable quantity of pulses like
red-grams, black-grams are also present. The district occupies a place of
pride in the production of cotton in India.
Small and Medium industrial units in the district:
The growth of SMEs in Guntur district is enormous. Table 3.1 gives a
picture of SMEs in the district. From the table it is easy to say that upto the
year 2000 there were 4,516 registered units with a capital investment of
Rs.58, 577 lakhs providing employment to 85,863 persons. But afterwards
the units rose to 4,738 in 2002-2003. Similarly, capital investment increased
to Rs.60, 840 lakhs. The employment creation also increased and reached
89,406 persons.
36
Table 2.2: Small and Medium industries in Guntur District
Year No. of UnitsCapital
investmentEmployment
Upto 2000 4, 561 58, 577 85, 863
2000 – 2001
4, 595 59, 447 86, 798
2001 – 2002
4, 682 60, 361 88, 592
2002 – 2003
4, 738 60, 840 89, 406
2003 – 2004
4, 837 61, 101 90, 043
2004 – 2005
4, 912 61, 450 91, 245
2005 – 2006
5, 176 61, 983 91, 796
2006 - 2007 5, 452 62, 093 92, 011
Source: SSI Register for permanent registration, DIC, Guntur.
Infrastructural facilities:
Availability of power, water, transport and communications, training and
education facilities, banking facilities etc, are basic necessities for industries
to develop in a region. The following are the infrastructure facilities
available in the district for the growth and development of industries.
The district has a fairly adequate railway system of broad gauge. The
most important broad gauge double lines from Madras to Howrah, to Delhi
and to Hyderabad pass through this district, thus providing an easy access
to all important places in the state and country. The double broad gauge
line between Madras and Vijayawada is electrified. The district has gained
significantly after the Nadikudi – Bibinagar railway line. Many long distance
trains pass through Guntur now and it has become an important junction.
37
The district is served by the National Highway No.5 from Chennai to
Calcutta. The district is well connected with the state high ways, Zilla
Parishad roads and Panchayat Samithi roads linking all the important
centres.
Water requirement of Guntur town is met from the Tenali and
Vijayawada, Water pumping scheme at a Point of 20 Kms from Guntur, At
present, the industries on Industrial Estate and meeting their water needs
from the ground water resource.
Having sufficient infrastructure facilities, the district provides an
opportunity to start various categories of small and tiny units in the years to
come. The district is rich in agriculture produce and natural resources. By
establishing a good number of Small and Medium Units, the problems of
unemployment among working class and educated youth in the district can
be brought down to a considerable extent. Thus, there is a scope for further
industrialization of the district with the help of Small Scale Sector with the
support of financial agencies, particularly commercial banks in the years to
come.
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
38
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
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.1346.54 crore to the corpus of the Trust up to
September 30, 2007. Based on the future requirement, the corpus is likely to
be raised to 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
39
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.
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.
40
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
41
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-
42
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
43
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.
44
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
45
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
In Rupee or foreign currency
46
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
47
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
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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
49
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. 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.1346.54 crore to the corpus of the Trust up to
50
September 30, 2007. Based on the future requirement, the corpus is likely to
be raised to Rs.2500 crore.
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), North Eastern Development Finance Corporation
Ltd. (NEDFi) and SIDBI have also been made eligible institutions. As on
September 30, 2007, 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, NEDFI 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.
51
However, the unit already assisted by the State Level Institution/NSIC/NEDFi
can be covered under the scheme for the credit facility availed from member
bank, subject to fulfillment of other eligibility criteria. Any credit facility in
respect of which risks are additionally covered under a scheme, operated by
Government or other agencies, will not be eligible for coverage under the
scheme.
Guarantee Cover
The guarantee cover available under the scheme is to the extent of 75
per cent of the sanctioned amount of the credit facility. The extent of
guarantee cover is 80 per cent for (i) micro enterprises for loans up to Rs.5
lakh; (ii) MSEs operated and/or owned by women; and (iii) all loans in the
North-East Region. In case of default, Trust settles the claim up to 75% (or
80%) of the amount in default of the credit facility extended by the lending
institution. For this purpose the amount in default is reckoned as the principal
amount outstanding in the account of the borrower, in respect of term loan,
and amount of outstanding working capital facilities, including interest, as on
the date of the account turning Non-Performing Asset (NPA).
Tenure of Guarantee
The Guarantee cover under the scheme is for the agreed tenure of the
term loan/composite credit. In case of working capital, the guarantee cover is
of 5 years or block of 5 years.
Fee for Guarantee
The fee payable to the Trust under the scheme is one-time guarantee
fee of 1.5% and annual service fee of 0.75% on the credit facilities
52
sanctioned. For all loans in the North-East Region, the one-time guarantee
fee is only 0.75%.
Scheme Awareness Programmes
CGTMSE has adopted multi-channel approach for creating awareness
about its guarantee scheme amongst banks, MSE associations,
entrepreneurs, etc. through print and electronic media, by conducting
workshops/seminars, attending meetings convened at various
district/state/national forum, etc. As on 30 September 2007, 527 workshops
and seminars were conducted on Credit Guarantee Scheme. Also, CGTMSE
participated in 15 exhibitions and attended 165 SLBC/meetings convened by
RBI/other Government offices. Posters and mailers have been circulated to
banks, industry associations, and other stakeholders for promoting the
scheme and creating its greater awareness. With a view to imparting training
to MLIs through their training colleges, multimedia CD-ROM containing
operational modalities of the scheme, was distributed to the staff training
centers/colleges of the MLIs. The Trust has recently launched an
advertisement campaign in 194 newspapers across the country through
DAVP, which has created considerable awareness about the scheme among
the target audience.
Operational Highlights of CGTMSE
As on September 30, 2007, 81345 proposals from micro and small
enterprises have been approved for guarantee cover for aggregate credit of
Rs.2152.20 crore, extended by 44 MLIs in 35 States/UTs. As a result of
increased awareness campaigns of CGTMSE and active support of all the
53
stakeholders, the pace of proposals being accepted for guarantee cover has
gone up significantly. A year-wise growth position is indicated in the table
below:
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.
54
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
55
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.
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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
57
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
58
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.
59
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%
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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.
Tax Holiday Scheme
Direct Taxes
With effect from 1st April 2000, deduction in respect of profits and
gains for new SMEs is available under Sec. 80IB. The deduction allowed is
25% of profits for 10 years. For units in the NE & specified backward States,
the deduction allowed is 100% for first five years & 25% for the next five
years. To avail deduction under Sec. 80IB the SSI unit should commence
production between 1st April 1995 and 31st March 2002.
State Governments offer incentives to SMEs in respect of Sales Tax.
Some give a tax holiday for periods ranging from 5 to 10 years while others
offer deferment of tax.
Tax Holiday Scheme
In the Union Budget for 1993-94 a five year tax holiday has been
granted for new industrial undertakings located in all of the North Eastern
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States, Jammu & Kashmir, Himachal Pradesh, Sikkim, Goa and U.T. of
Andaman and Nicobar Islands, Dadar and Nagar Haveli, Daman and Diu,
Lakshadweep and Pondicherry. This has now been extended to backward
districts (list enclosed herewith) from the year 1994-95.
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.
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.
63
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.
Despite these recent changes, SMEs need some more hand holding to
become attracitive4 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.
64
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.
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
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.
Lending on the merit of the project rather than on the basis of collateral
is gradually evolving particularly with the help of venture capital
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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.
Similarly in Japan, credit guarantee schemes has helped improving not only
financing environment by also the business performance of SMEs
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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
assets (NPAs) that are blocking regular flow of funds to credit institutions
catering to SMEs.
67
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.
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
68
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. Schemes for Hostels / Motels / Restaurants
Entrepreneurs setting up Hostels/Motels/ Restaurants projects For
construction of Janata/single star/Two star/Three Star hotels, setting up of
restaurants with motel projects with wayside restaurants and lodging facilities
of about 10 rooms/dormitory. Assistance is considered to acquire land,
building, plant & machinery, kitchen equipment, furniture & fixtures, crockery
& cutlery, etc.
- Approvals from Dept of Tourism, Govt. of AP and Govt. of India.
- Muncipal approval for building plans.
- Minimum standards fixed by State/Central governments.
- For motels on par with Janata Category
- Minimum land area required for:
Janata Hotel :500sq.yds
1&2 Star Hotels:750sq yds.
3 star Hotels:1000 sq. yds
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5. 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.
6. 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
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
7. Assistance acquiring Electro-medical eqpt.
Qualified medical practitioners use/Entrepreneurs employing qualified
Doctors.
-For acquiring Electro-medical/other related equipment
70
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
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
71
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
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.
72
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
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
73
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.
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.
74
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
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.
75
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.
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
76
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
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)
77
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
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
78
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
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?
79
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. This is especially important during the
current liquidity crunch in Hong Kong.
If your fiscal year is March 31 and today is September 1, 1998, your
audited financial statements as of March 31, 1997 will be too "Old" and
financial institutions would not be able to ascertain your financial condition in
1998. If you are in need of heavy financing support from financial institutions,
you can consider having your external auditor prepare your financial
statements twice a year. With better and more timely reporting, you will be
able to win stronger support from your financial institutions.
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
80
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
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
81
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
ANDHRA BANK has also devised a host of loan schemes to meet the
financial requirements of an enterprise. These particularly cater to the
corporate and agricultural sector. Some of its important funding options
include:-
Working Capital Loans
Export & Import Finance
Advance against Shares
Term Finance
Corporate Loans
Project Finance
Infrastructure Project Finance
Kisan Vikas Card
Kisan Sampathi
82
Self Help Groups-Bank Linkage Programme
Kisan Green Card
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
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.
83
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)
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.
84
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
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.
85
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. There are 18 State Financial
Corporations (SFCs) in the country. For example:-
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) 294.91
Total 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
86
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
87
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.
88
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 Guntur
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.
89
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 met 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. Guntur district is
very famous for its cold storages. The cold storages comes under the purview
of service sector SMEs.
90
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.
91
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
92
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
93
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
94
working capital are 15. The no of respondents with 20 – 80% composition of
fixed assets to working capital are 55.
Table- 3.6 : Categories of Units
S.No
ParticularsNo. of
Respondents
Percentage
(%)
1 Small Scale 24 24.00
2 Medium Scale 15 15.00
3 Micro Scale 59 59.00
4 Public Private Participation 2 2.00
Total 100 100.00
Small Scale Medium Sclae Micro Scale PPF0
10
20
30
40
50
60
70
24
15
59
2
About Scheme of Unit
Scheme
No.
of R
espo
nden
ts
59% of the units are under micro scale category, followed by 24% of
the units are under small scale , 15% of the units come under medium scale
and remaining 2% comes under public private participations. The Guntur
district municipal corporation entered into joint ventures with Ramky group of
95
Hyderabad to produce electricity through BIO-Mass gas plat and village water
treatment plants erection and maintaining with TEAM company of Tamil Nadu.
96
Table- 3.7 : 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
97
98
Table- 3.8 : 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
99
100
Table- 3.9 : Agencies help in solving Financial Problems
S.No
ParticularsNo. of
Respondents
Percentage
(%)
1 SIDBI 5 5.00
2 MSME 5 5.00
3 SFC 25 25.00
4 SBI 40 40.00
5 Andhra Bank 25 25.00
Total 100 100.00
SIDBI MSME SFC SBI Andhra Bank0
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
A.B which helped 25% of the respondents in their financial problems,
especially In Guntur district.
101
Table- 3.10: 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.
102
Table- 3.11: 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.
103
Table- 3.12: 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.
104
105
Table- 3.13: 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 o0ther
commercial bank in dispersing the credit facility.
106
107
Table- 3.14 : 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.
108
Table- 3.15 : 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
109
Table- 3.16: 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.
110
Table- 3.17: 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
111
Table- 3.18: 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.
112
Table- 3.19: 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
113
and 10% of them are interested in borrowing Rs1-5lakhs, because of their
size of operations.
Table- 3.20: 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
114
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
115
Table- 3.21 : 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 .
116
Table- 3.22 : 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
117
Table- 3.23 : 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
118
above credit granting organizations. It is clear evidence that the SMEs sector
needs more awareness from the nodal agencies about the credit institutions.
Table- 3.24 : 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
119
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
120
know their grievances. 10 respondents feel that their grievances should be
redressed effectively.
121
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
122
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.
123
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.
124
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 Andhra Pradesh in the recent past
has been significant. The available literature on the industrial front of
Andhra Pradesh 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. It is found that many units have been suffering production problems due to
the shortages of inputs like credit. In the case of Regal, a Foot ware
125
manufacturing unit at Guntur could not produce quality foot wares because
they don’t have adequate funds to purchase latest machinery to get quality
out put.
9. Many units have suffered in marketing their output because of non
availability of cash to invest in marketing their products. The out door
campaign and canvassing material is very costly. There is a classical
example, in Guntur the JOCIL co., manufacturing good quality soaps with
a brand name JOY. But due to lack of product promotional activity it was
gradually suppressed by the MNCs who already exist in the market. From
the own voice of the managing director of JOCIL, they withdraw the JOY
only due to cut throat competition posed by the MNCs. If they have credit
facility for promotional activities then they would have succeed in the
market. It is also found that units are demand based but there is no
sufficient demand to meet their output.
10.Shortage of finance is considered to be the most important problem
responsible for a host of problems in small scale sector.
126
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 of
Andhra Pradesh and in Guntur District.
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.
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.
127
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
128
CONCLUSIONS:
From the above major findings of the study the following conclusions
are drawn:
1. The growth of small and medium scale industries in Andhra Pradesh has
been significant in the recent past.
2. Guntur District is moving towards 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
129
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.
130
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
131
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.
132
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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.
134
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
135
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
136
(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
137
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
138
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
139
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.
140
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
141
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
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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.
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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).
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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.
145
146
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.
149
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.
152
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.
153
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.