Nayak committee

NAYAK COMMITTEE

Group – 9 Astha Shiv- 11020241075 Meghna George- 11020241118 Madhavi Neema- 11020241116

INDEXCHAPTER

TOPIC

Chapter 1 Introduction

Chapter 2 Institutional credit agreement for SSI

Chapter 3 Adequacy and flow of institutional credit for working capital

Chapter 4 Institutional credit for term finance

Chapter 5 Norms for working capital and lending methods

Chapter 6 Rehabilitation of sick SSI units

Chapter 7 Suggestions/ recommendations

INTRODUCTION

•Tandon committee and Chore committee – too strict and sophisticated for SSI

•Nayak committee under the chairmanship of SH. P.R Nayak, appointed by RBI to look into the problem.

•Nayak committee was constituted by RBI in December 1991

•Its main role is to examine the issues confronting SSIs(now MSE) in the matter of obtaining finance

TERMS OF REFERENCE FOR NAYAK COMMITTEE

1. To examine the adequacy of institutional credit for the SSI sector• Increase in cost of raw materials• Term finance• Revision in RBI guidelines- rehabilitation of sick SSI units

2. In the light of the above, to suggest:• ensuring adequate flow of institutional credit for working capital and term

finance• modifications/relaxations of norms prescribed by the Tandon / Chore

Committee.• Methods for minimizing delays in realization of bills

3. Recommendation required for on any other related matter.

CHAPTER TOPIC


Chapter 2

INSTITUTIONAL CREDIT FACILITIES FOR SSI







SMALL SCALE INDUSTRIES

•includes industries with high capital investment •Also includes tiny industrial units • Village and cottage industries.

Subsectors:

• SSI engaged in manufacturing processing preservation of goods( investment <= 60 lakh, 70 lakh in case of EOUs)

• Tiny enterprises ( investment in plant and machinery <= 5 lakh)• Village and cottage industries( eg artisians, khadi, handloom,

sericulture, handicrafts)


ROLE OF SSIs IN 19921992 2012

Employment generation-4.3 Cr, March 1991

Employment generation-59 million persons in over 26 million units

57% Share of the traditional industries, 27% of Exports

45 per cent of the manufacturing output and 40 per cent of the total exports

Rs 84,413 crore in 1992-93

Rs. 9,82919 crore in 2009-10

Play significant role in rural upliftment & removal of poverty

Mobilize rural resources


DISADVANTAGES FACED BY SSI IN 1992

•Inadequacies in Infrastructure and technology

•Captive to large industries or middlemen

•Weak Capital base

•Large reliance on borrowed funds

•Lack of organizational, managerial and financial skills

•Credit Institutions are thus hesitant to cater to financial needs of SSI sector


•Credit guarantee scheme introduced in 1960•RBI initiated multi agency approach for growth of SSI•For smooth flow of credit: RBI issued set of guidelines to CB’s

AGENCIES INVOLVED IN GRANTING LOANS TO SSI

•Commercial Banks•State Financial Corporations•Industrial Development Bank of India(IDBI)•Small Industrial Bank of India(SIDBI)•National Bank for Agricultural & rural Development (NABARD)•Other financing agencies•Other institutions


1990- SSI

•Advances to the SSI sector by scheduled commercial banks was Rs.17,513 crores as at the end of March 1991.

•share of advances to SSI in total bank credit was16%.

•Outstanding advances to the SSI sector from all scheduled commercial banks by way of working capital was Rs. 12,399 crores as at the end of March 1990.

• Working capital finance formed a high proportion of the total advances of scheduled commercial banks to the SSI sector (78% as at the end of March 1990).

CHAPTER TOPIC


Chapter 2 Institutional credit facilities for SSI

CHAPTER 3

ADEQUACY AND FLOW OF INSTITUTIONAL CREDIT FOR WORKING CAPITAL





ADEQUACY AND FLOW OF INSTITUTIONAL CREDIT FOR WORKING

CAPITALRBI issued a set of comprehensive instructions/ guidelines to commercial banks in 1988 in the matter of financing the working capital requirements of SSI units. These instructions envisage, inter alia, the following :

•Full working capital limits, on the basis of “need” related to the rated capacity of the unit(sanctioned at the commencement itself, contingency provision of about 10 per cent)

•Branches should regulate the operations in the account consistent with the actual requirements and the contingencies which may arise(limits sanctioned, drawls should be allowed automatically to match the increasing levels of operations)

•Communication regarding credit assistance to applicant( within 8-9 weeks from the date of receipt of application)

•Requests for increase in limits should be considered expeditiously and decisions taken promptly and ,within 6 weeks.

•To ensure that limits are rejected or reduced (from the level applied for) after due consideration, the following procedure should be adhered to:-

• Applications for fresh limits/enhancement of existing limits should not be rejected without the approval of the next higher authority.

• Sanction of reduced limits should be reported to the next higher authority immediately with full details for review and confirmation

OPEN SYSTEM FOR SSI & BANKS

Open system :• Shared responsibility which, in turn, will• fosters mutual confidence• . Facilitates detection of sickness at the very early

stages

Credit Planning Process• Meet general capital requirements• Budget in respect of the working capital required by SSI

Budgeting Should Include1. functioning (healthy) units which already have

borrowing limits with the banks,2. new units/units whose proposals are under

appraisal3. sick units under nursing and also sick units found

viable and for which rehabilitation programmes are under preparation.

WORKING CAPITAL BUDGETING

•Requests for increase in limits should be considered expeditiously and decisions taken promptly and ,within 6 weeks.

•To ensure that limits are rejected or reduced (from the level applied for) after due consideration, the following procedure should be adhered to:-

• Applications for fresh limits/enhancement of existing limits should not be rejected without the approval of the next higher authority.

• Sanction of reduced limits should be reported to the next higher authority immediately with full details for review and confirmation

GRIEVENCE REDRESSAL FOR SSI

•One day in a month : Grievance redressal of customers,

•Periodical banker-borrower meets,

• Senior officials dealing with customers complaints during their regular visits to branches, should be preserved with.

•Creation of an ‘ombudsman’ type of authority, on a full time basis, at the regional / controlling offices within the banks.

•RBI should undertake a periodical review of the working of the grievance redressal machinery in each bank with a view to toning up the same, wherever deficiencies are observed.

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CHAPTER 4

INSTITUTIONAL CREDIT FOR TERM FINANCE




INSTITUTIONAL CREDIT FOR TERM FINANCE

Institutional sources of term credit: not for all capital investments in SSI

The flow of term finance to the SSI units is dependent, to a large extent, on the refinance assistance from SIDBI, Table Below

Year Refinance disbursed an bills rediscounted by IDBI/SIDBI

Term credit corresponding to Col.2

1985-86 527.5 621

1986-87 587.2 808

1987-88 711.4 837

1988-89 834.8 902

1989-90 946.2 1113

1990-91 1099.9 1294

1991-92 1246.3 1466

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•Term credit requirements of the SSI sector are mainly met by • SFC’S• Commercial banks; • Regional Rural Banks (RRBs)• National Small Industries Corporation Ltd. (NSIC) • Khadi and Village Industries Commission (KVIC) also assist the

SSI sector by providing term loans, besides other types of assistance.

95%

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CHAPTER 5

NORMS FOR WORKING CAPITAL AND LENDING METHODS



RECOMODATION BY TANDON COMMITTEThe Tondon committee recommended radical changes in the

system of bank lending• Shifted the basis of bank lending from erstwhile security-

oriented system to a production oriented• The major changes introduced as a sequel to the Working

Group’s recommendations consisted of • norms relating to inventory and receivables (current assets) • method of lending

METHODS OF ARRIVING AT MAXIMUM PERMISSIBLE LEVEL OF BANK FINANCE(MPBF)1. Banks could provide finance up to a maximum of 75 percent

of the Working Capital gap ensuring current ratio 1:12. The balance 25% of total current assets should be to be

contributed by a borrowing unit out of its long term funds ensuring current ratio 1.33:1

3. A borrowing unit is required to contribute from out of its long term funds towards the build-up of the entire Core Current assets, further strengthening the current ratio

RECOMODATION BY TANDON COMMIITTE

•SSI units which are producing import substitutes, ( activities which are seasonal such as the fire work industry, pesticides formulators etc. should receive special attention particularly in matter of inventory levels that can be help and permissible bank finance for working capital.

•The problems faced by the SSI units in regard to the availability of raw material, have been brought to the notice of the Committee. •Apart from their need for stocking the raw materials ,there is also the problem of price •Eg.As in the case of steel, coal and petroleum products. •In the case of small scale industries which are mainly dependent upon such raw materials, there should be an automatic provision in the system of providing working capital •This will enable the borrower to draw higher amounts to procure the normal level of raw materials at the enhanced prices, even if the existing credit limit may not he adequate for the purpose.

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Chapter 6

Rehabilitation of sick SSI units


REHABILITATION OF SSI SICK UNITS

Increase in institutional credit for SSI units and the rapid growth of the industries the phenomenon of sickness in the SSI sector also became prominent. This led to:

• Wastage of precious capital investment in the units,• Increase in NPA of the credit institutions RBI as well as the

Central/State Governments

Resulted to issuing appropriate guidelines to banks and financial institutions, these efforts also resulted in the setting up of state level forums of coordination known as the State Level Inter Institutional Committees (SLIIC).

REHABILITATION OF SSI SICK UNITSSickness in the SSI sector is mainly from •limited financial resources•lack of organisational, financial and management skills and expertise.

SSI units are extremely susceptible to even minor environmental pressures.

The external causes of sickness are many, the more important of which are (i) Availability of raw materials and other inputs including power,(ii) marketing difficulties(iii) delayed and inadequate credit(iv) high rates and taxes(v) labour problems(vi) faulty appraisal of projects (vii) Management which is

In the case of SSI where more than 97%£ of the units have proprietary / partnership forms of organisations, management efficiency is of crucial importance for the success of the unit.

CLASSIFICATION OF SICK UNITS

SSI Meaning(Prior to Narsimham Committee)Cash loss in two consecutive years(cumulative cash losses to the extent of 50%)Continuously defaulted(4quarter) Tiny SSI – (a) or (b)

Large SSI – Both (a) & (B)

Narsimam Committee: Classification of Assets Standard AssetsSub Standard AssetsDoubtful Assets Losses

SSI unit may be classified as sick when - Borrowable accounts has become a ‘doubtful,i.e., overdue for periods exceeding 2 ½ years, and Erosion in net worth due to accumulated cash losses >50% in preceding two years.

CHAPTER TOPIC







Chapter 7

Suggestions/ recommendations

Report of the Committee to Examine the Adequacy of Institutional Credit to SSI

Sector(now MSE) and Related Aspects (Nayak Committee)

All the major recommendations of the Committee have been accepted and the banks have been inter-alia advised to:

i. Give preference to village industries, tiny industries and other small scale units in that order, while meeting the credit requirements of the small scale sector;

ii. Grant working capital credit limits to SSI (now MSE) units computed on the basis of minimum 20% of their estimated annual turnover whose credit limit in individual cases is upto Rs.2 crores [ since raised to Rs.5 crores ];

iii. Prepare annual credit budget on the `bottom-up’ basis to ensure that the legitimate requirements of SSI (now MSE) sector are met in full;

iv. Extend ‘Single Window Scheme’ of SIDBI to all districts to meet the financial requirements (both working capital and term loan) of SSIs(now MSE)

v. Ensure that there should not be any delay in sanctioning and disbursal of credit. In case of rejection/curtailment of credit limit of the loan proposal, a reference to higher authorities should be made;

vi. Not to insist on compulsory deposit as a `quid pro-quo’ for sanctioning the credit;

vii. Open specialised SSI (now MSE) bank branches or convert those branches which have a fairly large number of SSI (now MSE) borrowable accounts, into specialised SSI (now MSE) branches;

viii. Identify sick SSI (now MSE) units and take urgent action to put them on nursing programmes;

ix. Standardise loan application forms for SSI (now MSE) borrowers;

x. Impart training to staff working at specialised branches to bring about attitudinal change in them.

Action on Nayak Committee recommendations by RBI:

•Banks should take immediate steps to ensure full adherence in letter and spirit by all their branches and controlling offices to the RBI guidelines.

•The procedure and time frame laid down for disposal of loan application received from SSI borrowers should be strictly enforced.

•Problems faced by the SSI sector in regard to bank finance, to a large extent could be solved if the branch level officials have the right aptitude, skills and orientationOne of the complaints frequently voiced by the SSI units pertains to insistence by some banks on compulsory deposit mobilisation as a quid pro quo for the sanction of credit facilities to the units.

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•The 2nd All India Census of SSI (1988) carried out by the Development Commissioner(SSI), Govt. of India, has revealed that there were 85 district in the county each with more than 2000 registered SSI units with Industries Dept. of the State Govt. and another 110 districts each having between 1000 to 2000 registered SSI units.

• RBI decided during July 1993 that while SFCs - act as the principal financing agency for SSIs in 40 out of the 85 districts referred to above to take care of both the term loan and working capital requirements of all new SSI units which can be financed under Single Window Scheme (SWS) of SIDBI.

• The commercial banks should act as the principal financing agency under the SWS in the remaining 45 districts, as well as in rest of the country.

Important banking operational clarification on Nayak Committee

Recommendations

The implementation of recommendations of Nayak Committee, relating particularly to the assessment of working capital, gave rise to certain operational problems. Reserve Bank has clarified these issues on the following lines:

•The assessment of credit limits for all borrowers enjoying aggregate fund based working capital limits of less than Rs. 1 crores from the banking system, is to be done both as per the traditional method and on the turnover basis and the higher of the two limits is to be fixed as the permissible bank finance.

• Nayak Committee has stated that the working capital below the minimum level of 20% may be justified under special circumstances in which the requirement is demonstratively lower than the minimum level as in the case of ancillary units.

•Where the working capital cycle is shorter than 3 months, the working capital required would be less than 25% of the projected turnover. In such case it is not required to still give PBF at 20% of the turnover.

Continue…•If the liquid surplus available with the borrower is higher than 5% of the turnover, as stipulated under the recommendations, the limits can be fixed at a lower level than 20% of the turnover keeping in view that the genuine requirements of the unit are met adequately.

•If a unit has been managing its working capital efficiently, the limits can be set at a lower level.

•The units having longer operating cycle for working capital than three months, should be provided proper limits to operate at a viable level taking into account the recommendation that 20% of the turnover is the minimum stipulation and not the maximum.

•In case of seasonal industries the distinction between the peak and non-peak level of turnover has to be considered instead of annual turnover.

Important banking operational clarification on Nayak Committee

Recommendations

•The creditors and other current liabilities are among the sources of funds required for building up the current assets and will be treated in the same manner as in the traditional method.

•The borrower’s contribution (margin) will be 5% of the turnover in all cases except where the working capital cycle is not taken at three months.• The margin will proportionately increase with the increase in the period of operating cycle.

• Care is to be taken that the proportion of margin to bank finance should be maintained in the ratio of 1:4 or even higher in case of availability of higher liquid surplus.

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•If the borrower is not able to bring in minimum contribution of 5%, as a general rule, no dilution should be allowed except in special circumstance like sick units or when permitted being desirable due to peculiar circumstances in the sanction

•The sub-limits against the various components of stocks and receivables should be fixed taking into account the existing norms of inventory and receivables as bench mark and bankers should adopt flexible approach on case to case basis in a realistic manner while assessing the credit needs.

•While allowing deviations, the sanctioning authority must ensure that proper justification is available and given.

THANK YOU

Nayak committee

Economy & Finance

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