To Study the Assessment of Financing SME Units Project Final

8/11/2019 To Study the Assessment of Financing SME Units Project Final

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To Study the Assessment of Financing SME Units

INTRODUCTION TO SMEs:

Small and Medium Enterprises (SMEs) have played a significant role world over in the

economic development of various countries. Over a period of time, it has been proved that

SMEs are dynamic, innovative and most importantly, the employer of first resort to millions

of people in the country. The sector is a breeding ground for entrepreneurship. The

importance of SME sector is well-recognized world over owing to its significant contribution

in achieving various socio-economic objectives, such as employment generation, contribution

to national output and exports, fostering new entrepreneurship and to provide depth to the

industrial base of the economy.

Small and medium-sized enterprises (SMEs) are the backbone of all economies and are a key

source of economic growth, dynamism and flexibility in advanced industrialized countries, as

well as in emerging and developing economies. SMEs constitute the dominant form of

business organization, accounting for over 95% and up to 99% of enterprises dependingon the country. They are responsible for between 60-70% net job creations in Developing

countries. Small businesses are particularly important for bringing innovative products or

techniques to the market. Microsoft may be a software giant today, but it started off in typical

SME fashion, as a dream developed by a young student with the help of family and friends.

Only when Bill Gates and his colleagues had a saleable product were they able to take it to

the marketplace and look for investment from more traditional sources. SMEs are vital for

economic growth and development in both industrialized and developing countries, by

playing a key role in creating new jobs. Financing is necessary to help them set up and

expand their operations, develop new products, and invest in new staff or production

facilities. Many small businesses start out as an idea from one or two people, who invest their

own money and probably turn to family and friends for financial help in return for a

share in the business. But if they are successful, there comes a time for all developing

SMEs when they need new investment to expand or innovate further. That is where they


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often run into problems, because they find it much harder than larger businesses to

obtain financing from banks, capital markets or other suppliers of credit.

Defining SMEs:

In India, the enterprises have been classified broadly into two categories:

(i) Manufacturing; and

(ii) Those engaged in providing/rendering of services.

Both categories of enterprises have been further classified into micro, small and medium

enterprises based on their investment in plant and machinery (for manufacturing enterprises)or on equipments (in case of enterprises providing or rendering services). The classification

on basis of investment is as under:

Table 1.1

Classification Of Micro, Small And Medium Enterprises


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Table 1.2

Classification Of Micro, Small And Medium Enterprises Before 2ndOctober, 2006

While calculating the investment in plant and machinery/equipment referred to above, the

original price thereof shall be taken into account, irrespective of whether the plant and

machinery/equipment are new or second hand. In case of imported machinery/equipment, the

following duty/charges/costs shall be included in calculating their value:

Import Duty (not to include miscellaneous expenses such as transportation from the

port to the site of the factory, demurrage paid at the port);

Shipping Charges;

Customs Clearance charges; and Sales Tax or Value-added Tax. Cost of the following

plant & machinery/equipments etc would be excluded:;

Equipments such as tools, jigs, dies, moulds, and spare parts for maintenance and the

cost of consumable stores;


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Installation of plant &machinery;

Research and development and pollution control equipments;

Power generation set and extra transformer installed by the enterprises as per the

Regulations of the State Electricity Board;

Bank charges and Service Charges paid to the National Small Industries Corporation

or the State Small Industries Corporation;

Procurement or Installation of cables, wiring bus bars, electrical control panels (not

mounted on individual machines)

Oil circuit breakers or miniature circuit breakers which are necessarily to be used for

providing electrical power to the plant and machinery or for safety measures;

Gas producer plants;

Transportation charges (other than sales tax or value-added tax and excise duty) for

indigenous machinery from the place of their manufacture to the site of the

enterprise);

Charges paid for technical know-how for erection of plant machinery;

Such storage tanks which store raw materials and finished products only and are not

linked with the manufacturing process;

Fire-fighting equipment; and

Such other items as may be specified, by notification from time to time.

In case of Service Enterprises, the original cost to exclude furniture, fittings and other items

not directly related to the services rendered. Land and Building would also not be included

while computing the machinery/equipments cost.

SME would be meant to include Micro Small and Medium Enterprises (MSMEs). The above

definitions of Micro, Small and Medium Enterprises would be in place of the existing

definitions of Small & Medium Industries and SSSBEs/Tiny Enterprises.

Micro Enterprises would include Tiny Industries also.

Small Enterprises (Manufacturing) would mean Small Scale Industries (SSIs).

Medium Enterprises (Manufacturing) would mean Medium Industries (MIs).


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Small Enterprises (Services) and Medium Enterprises (Services) would mean other

Small & Medium Enterprises. Thus, SME Advances would be categorised as under:

All advances to segments viz. Micro, Small and Medium Enterprises in the

Manufacturing sector irrespective of sanctioned limits, (including advances against

TDRs/Govt. Securities etc for business purposes to these categories of Borrowers),

and

Advances to Services Sectors such as Professional & Self-Employed, Small Business

Enterprises, and Small Road/Water Transport Operators and other

enterprises, engaged in providing/rendering of services, conforming to the above

investment criteria and enjoying borrowing/non-borrowing facilities with the Bank

(including advances against TDRs/Govt. Securities etc for business purposes to these

categories of Borrowers).

Those enterprises exceeding the investment ceilings would be categorized as Large

Enterprises and be outside the purview of SME.

The sanctioned limits would no longer be the criteria determining the status as micro

or small or medium enterprises in these cases.

Reserve Bank of India has since reviewed the definition on Priority Sector and have

issued revised guidelines on lending to Priority Sector vide their Master Circular dated

2nd July, 2007. As per this circular Retail Trade is excluded from the activities

classified as SME.


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SMEs Financing The Rising India

The only way out of the mire is that the Indian manufacturing sector could be strengthened

by the existing rural systems and making them self-sufficient. This could take place only by

helping Small and Medium Enterprises and the rural artisans (people with innate skills and

talents) in becoming effective and competitive enough to face the future. A number of issues

and business practices of global players and markets can be observed, learnt and adapted for

ensuring competitiveness of Indian SMEs.

Let us take an anecdote, which is a part of the school days about the meaning of

domestic and global competition. It is about two friends who while walking through a

dense forest suddenly hear the roar of a bear. One of them immediately changes his

shoes that he is wearing in, to the one, he uses for running. His friend asked him: If

you change your shoes, do you think you can out beat the bear? The other one replied:

The idea is not to beat the bear, but you. The moral of the story is that the Indian SME

sector should be strong enough to out beat the other players in the economy and not the

competition itself.

SMALL and MEDIUM enterprises (SMEs) play a catalytic role in the development of any

country. They are the engines of growth in developing and transition economies. In India they

account for a significant proportion in manufacturing, exports and employment, and are

major contributors to GDP.

Considering the growth potential of Indian SMEs, the Government of India has asked public

sector banks to achieve a minimum 20 per cent year-on-year growth in the funding of SMEs


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that will lead to double the flow of credit to the sector from Rs 67,000 crore in 2004-2005 to

Rs 1,35,000 crore by 2009-2010.3

A small-scale unit is defined as one having original

investment in plant and machinery not exceeding Rs 1 crore. While recognizing the needs for

larger investment in some of the more important segments of small scale industries (SSIs),

the Government has enhanced this to Rs 5 crore for specified industries.

The Government felt that a separate category of medium enterprises (MEs) needs to be

recognised and, accordingly, the new policy package clearly defined the medium enterprises

as those units having investment in plant and machinery above the small-scale industry limit

and up to Rs 10 crore, as recommended by the Working Group on Flow of Credit to the SSI

sector, headed by Mr A. S. Ganguly.The Importance of Small and Medium Enterprises (SMEs) in any economy cannot be

overlooked as they form a major chunk in the economic activity of nations. They play a key

role in industrialization of a developing country like India.

They have unique advantages due to:-

Their size

Their comparatively high labor-capital ratio

Need a shorter gestation period

Focus on relatively smaller markets

Need lower investments

Ensure a more equitable distribution of national income

Facilitate an effective mobilization of resources of capital and skills which might

otherwise remain unutilized and

Stimulate the growth of industrial entrepreneurship.

According to a UNIDO report, supports for SMEs are generally based on three assumptions.

It sustains a broad and diversified private sector and creates employment and thus

benefits the country as a whole

Second, a strong SME sector will not emerge without support from the state, but they

suffer disadvantages in the markets because of their size

The programs aimed at smallest enterprises, have been justified more in terms of theirwelfare impact than their economic efficiency.


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In developing countries like India, making the SMEs more competitive is particularly

pressing as trade liberalization and deregulation increase the competitive pressures and

reduce the direct subsidies and protection that Governments offer to SMEs. If our SMEs are

to be competitive enough to withstand and fight back the foreign MNC products, they have to

be nurtured. According to Porter, the only meaningful concept of competitiveness at the

national level is Productivity, which is the value of output produced by a unit of labour or

capital. Productivity in turn depends on both the quality and features of products (which

determines the prices that they can command) and the efficiency with which they can be

produced. Productivity is the prime determinant of a nations long-run standard of living; it is

the root cause of national per capita income. Further, to find answers, we must focus not on

the economy as a whole but on specific industries and industry segments. We must

understand how and why commercially viable skills and technology are created, which can

only be fully understood at the level of particular industry.

International trade and foreign investment can both improve a nations productivity as well asthreaten it. They expose the nations industries to the test of international standards of

productivity. An industry will lose out if its productivity is not sufficiently higher than its

rivals to offset any advantage in the local wage rates. As wage rates in India are sufficiently

less to attract multi-nationals, the only way is to increase the productivity of local small

industries. This means, the increase in the productivity of labour i.e. human resources, the

productivity of capital and that of the process, which in turn relates to the use of technology

that yields quality and innovative products.


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According to Ex-Commerce and Industry Minister and President of the National Productivity

Council, Mr. Arun Jaitleyat the 47th meeting of NPC, It has become so competitive these

days that bulk of the labour, for reasons of higher productivity, has now shifted to female

labour. If we look at other Asian economies, Bangladesh or Srilanka, Cambodia or Myanmar,

we find that in manufacturing, it is female labour, which is being encouraged because they

have been found more disciplined and hence with higher Productivity.

As every coin has two sides, similarly, even SME financing has a share in the overall

financing. The following are the issues of SME financing:

They are unable to capture market opportunities, which require large production

facilities and thus could not achieve economies of scale, homogenous standards and

regular supply.

They are experiencing difficulties in purchase of inputs such as raw materials,

machinery and equipments, finance, consulting services, new technology, highly

skilled labour etc.

Small size hinders the internalization of functions such as market research, market

intelligence, supply chain, technology innovation, training, and division of labor that

impedes productivity.

Emphasis to preserve narrow profit margins makes the SMEs myopic about the

innovative improvements to their product and processes and to capture new markets.

They are unable to compete with big players in terms of product quality, range of

products, marketing abilities and cost.

And most importantly, absence of a wide range of Financing and other services those

are available to raise money and sustain the business.

Absence of Infrastructure, quality labour, Business acumen and limited options /

opportunities to widen the business.

Poor IT and Knowledge infrastructure.

To overcome all these difficulties, Indian SMEs and rural artisans deserves all the policy

support the Government can offer. What they need is, not protection but institutional support

to fund modernization and technology up gradation, infrastructure support and adequate

working capital finance. Also they have to have professional inputs and knowledge aboutvarious happenings in their own industries in and around the country. This brings in the


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concept of SME networks and clusters that stimulate innovative and competitive SMEs.

These concepts (are not something new, but can be traced back to Alfred Marshalls analysis

of industrial districts in Britain in 1890s) essentially bring together various stakeholders like

technology providers, labor force, financing arms, consultants, marketing arms, and others,

for a common good that will help in enhancing the strength of SMEs.

THE Indian SME (small and medium enterprise) market seems to be emerging a promising

hunting ground for banks and financial institutions because it poised for tremendous growth.

As the access of SMEs to capital markets is very limited, they largely depend on borrowed

funds from banks and financial institutions. In majority of the economies, while the

investment credit to SMEs was being provided by financial institutions, commercial banks

extended working capital. In the recent past, with growing demand for universal banking

services, the term loan and working capital are becoming available from the same source.

Besides the traditional needs of finance for asset creation and working capital, the changing

global environment has generated demand for introduction of new financial and support

services by SMEs.

Importance of SME Financing:

Small and medium-sized enterprises (SMEs) are the backbone of all economies and are a key

source of economic growth, dynamism and flexibility in advanced industrialized countries, as

well as in emerging and developing economies. SMEs constitute the dominant form of

business organization, accounting for over 95% and up to 99% of enterprises depending on

the country. They are responsible for between 60-70% net job creations in Developing

countries. Small businesses are particularly important for bringing innovative products or

techniques to the market. Microsoft may be a software giant today, but it started off in typical

SME fashion, as a dream developed by a young student with the help of family and friends.

Only when Bill Gates and his colleagues had a saleable product were they able to take it to

the marketplace and look for investment from more traditional sources

SMEs are vital for economic growth and development in both industrialized and developing

countries, by playing a key role in creating new jobs. Financing is necessary to help them set


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up and expand their operations, develop new products, and invest in new staff or production

facilities. Many small businesses start out as an idea from one or two people, who invest their

own money and probably turn to family and friends for financial help in return for a share in

the business. But if they are successful, there comes a time for all developing SMEs when

they need new investment to expand or innovate further. That is where they often run into

problems, because they find it much harder than larger businesses to obtain financing from

banks, capital markets or other suppliers of credit.

(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, 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:


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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.

(f) High employment orientation:

SMEs are usually the prime drives of jobs, in some cases creating up to 80%. Jobs SMEs tend

to be labour intensive per se and are able to generate more jobs for every unit of investment,

compared to their bigger counterparts.

(g) 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.

NEED, SCOPE AND OBJECTIVES OF THE STUDY

Need of the study

The researches that were conducted in past by the various professionals are in foreign context

and not in Indian context. Study relating to SMEs, their problems and source of financing has

been done but regarding the SME financing schemes of public sector banks has not been

done. This gap has been identified and it has led to the present research to be undertaken. So,

the need was felt to cover the areas neglected. Thus, here a study on SME financing schemes

of public sector banks and private sector banks were taken care of.

Scope of the study


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The scope of this study was limited to Indias SMEs.

Objectives of the study

Objectives are the guiding lights of a study. The present study was undertaken to achieve the

following objectives: -

To know about the various SME financing schemes of public sector banks and

private sector banks and their usage.

To know the effectiveness of various SME financing schemes of public & private

sector banks.

To know the problems faced by SMEs in getting credit from public & private sector

banks.

To know the benefits of SME financing schemes of the public & private sector

banks.

To check the satisfaction level of Small and Medium enterprises regarding SMEfinancing schemes of the public sector banks.

.

SMEs in India

India has a vibrant SME sector that plays an important role in sustaining economic growth,

increasing trade, generating employment and creating new entrepreneurship in India. In

keeping in view its importance, the promotion and development of SMEs has been an

important plank in our policy for industrial development and a well-structured programme of

support has been pursued in successive five-year plans for. SMEs in India have recorded a

sustained growth during last five decades. The number of SMEs in India is estimated to be

around 13 million while the estimated employment provided by this sector is over 31

million. The SME sector accounts for about 45 per cent of the manufacturing output and

over 40 per centof the national exports of the country.


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SMEs in India

India embarked on the path of opening up its economy and integrating it with the global

economy in 1991. The liberalization of economy, while offering tremendous opportunities for

the growth and development of Indian industry including SMEs, has also thrown up new

challenges in terms of fierce competition. The very rules which provide increased access for

our products in the global markets also put domestic industry under increased competition

from other countries. In todays world, access on a global basis to modern technology, capital

resources and markets have become the most critical determinants of international

competitiveness.

SCOPE OF THE STUDY


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SME Financing:

SME Finance is the funding of small and medium sized enterprises and represents a major

function of the general business finance market in which capital for firms of types is

supplied, acquired, and costed/priced. Capital is supplied through the business finance market

in the form of bank loans and overdrafts; leasing and hire-purchase arrangements; equity/

corporate bond issues; venture capital or private equity; and asset-based finance such as

factoring and invoice discounting

Importance The economic and social importance of the small and medium enterprise (SME)

sector is well recognized in academic and policy literature. It is also recognized that these

actors in the economy may be underserved, especially in terms of finance. This has led

to significant debate on the best methods to serve this sector. There have been numerous

schemes and programmes in markedly different economic environments. However, there are

a number of distinctive recurring approaches to SME finance.

! Collateral based lending offered by traditional banks and finance companies is usually

made up of a combination of asset-based finance, contribution based finance,

and factoring based finance, using reliable debtors or contracts.

! Information based lending usually incorporates financial statement lending, credit scoring,

and relationship lending.

! Viability based financing is especially associated with venture capital.

There is also a more favourable environment now with the Govt. committed to give fillip to

this sector through infrastructure development; skill set development/entrepreneurship

development, technology up gradation etc. With the deregulation of the financial sector, the

general ability of the banks to service the credit requirements of the SME sector depends on

the underlying transaction costs, efficient recovery processes and available security. There is

an immediate need for the banks generally to focus on credit and finance requirements of

SMEs. Although the banks are allowed to fix their own targets for funding SMEs in order to

achieve a minimum 20% year-on-year growth, the Governments objective is to double the

flow of credit to the SME sector from Rs.67,600 crore in 2004-05 to Rs.1,35,200 crore by2009-10 i.e. within a period of 5 years. Also, Credit risk in the SME sector is widely
http://en.wikipedia.org/wiki/Venture_capitalistshttp://en.wikipedia.org/wiki/Credit_scorehttp://en.wikipedia.org/wiki/Factoring_(finance)http://en.wikipedia.org/wiki/Asset-based_lendinghttp://en.wikipedia.org/wiki/Collateralhttp://en.wikipedia.org/wiki/Financehttp://en.wikipedia.org/wiki/Economichttp://en.wikipedia.org/wiki/Significanthttp://en.wikipedia.org/wiki/Small_and_medium_enterprisehttp://en.wikipedia.org/wiki/Private_equity


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dispersed and Banks get better yield from SME advances as against the traditional advances

where the spread is getting gradually reduced. The SME clientele base could also be utilized

by the Branches to step-up cross selling of various other products including technology-

enabled products.

SME Financing Gap

A substantial portion of the SME sector may not have the security required for conventional

collateral based bank lending, nor high enough returns to attract formal venture capitalists

and other risk investors. In addition, markets may be characterized by deficient information

(limiting the effectiveness of financial statement-based lending and credit scoring). This has

led to claims of an "SME finance gap. The SMEs that fall into this category have been

defined as Small Growing Businesses (SGBs) at a workshop in Geneva in July 2008, hosted

by The Network for Governance; Entrepreneurship & Development (GE&D) There have

been at least two distinctive approaches to try to overcome the so-called SME finance gap.

The first has been to broaden the collateral based approach by encouraging bank lenders to

finance SMEs with insufficient collateral. This might be done through an external party

providing the collateral or guarantees required. Unfortunately, to the extent that the schemes

concerned run counter to basic free market principles they tend to be unsustainable. Thus,

the second approach has been to broaden the viability based approach. Since the viability

based approach is concerned with the business itself, the aim has been to provide better

general business development assistance to reduce risk and increase returns.

Sources of SME Finance: The most common sources of SME finance are as follows:

Various ways of Financing SMEs
http://en.wikipedia.org/wiki/Free_market


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Common ways of financing SMEs:


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Thus it is clear that the most common source of finance for SMEs is Bank Financing. There

are a no. of banks who help in assisting the SMEs for financing. The main channel used by

the SMEs via Banks is specialized loans by various Banks.

The Main reason for choosing bank loans by SMEs compared to other sources of financing

like venture capital, PE funding etc is their is only interest to be paid no stake is to be diluted

thus the whole command of the SME is with the owner only.


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Banking Codes and Standards Board of India (BCSBI)

The code of Banks Commitment to Micro and Small Enterprises (MSE CODE)

communicated by the Banking Codes and Standards Board of India (BCSBI) is a voluntary

code, which sets minimum standards of banking practices for banks to follow when they are

dealing with Micro and Small Enterprises (MSEs) as defined in the Micro Small Medium

Enterprises Development (MSMED) Act, 2006. The code has been displayed on the banks

website.


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Objectives of the code:

The code has been developed to-

1. Give a positive thrust to the MSE sector by providing easy access to efficient banking

services.

2. Promote good and fair banking practices by setting minimum standards in dealing

with MSEs.

3. Increase transparency so that MSEs can have better understanding of what can be

reasonably expected of the services.

4. Improve the Banks understanding of MSE business through effective communication.

5. Encourage market forces, through competition to achieve higher operating standards.

6. Promote a fair and cordial relationship between the bank and MSEs and also ensure

timely and quick response to banking needs.

7. Foster confidence in the banking system.


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Micro, Small & Medium Enterprises Development (MSMED ACT 2006)

The government of India enacted the Micro, Small and Medium Enterprises Development

(MSMED) Act 2006 on June 16,2006 that was notified on October 2, 2006. Consistent with

the notification of the Micro


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The role of Banks, in general, has become very important in the above context The SMEsectors demands were comprehensively taken care of by the Public sector Banks through

several initiatives such as:

Single Window dispensation,

Quick decision with least Turnaround Time through specially constituted SME Cells,

and above all,

Better service.Cluster-based Schemes are also on the list of the Banks initiatives.

The Bank prioritized the following more particularly:-

Provision of timely and adequate credit to the SMEs,

Encouraging Technology Up gradation, for better quality and competitiveness of their

product(s), and

Proactively detecting sick and viable units in time so as to nurse them back to healththrough appropriate re-structuring.

Financing of Clusters with adequate and concessional Bank finance on liberal terms in

several pockets for specified activities concentrated in these pockets, which would

result in reducing transaction cost and greater economies of scale.

Credit to SME sector from Public Sector Banks

The table below gives the status of credit flow to the micro and small enterprises

Public sector

banks

57%

Private sector

abnks

25%

Others

18%


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(SME) sector from the public sector banks since 2000:

Credit to SME sector from Public Sector Banks

(http://www.rbi.org.in/scripts/PublicationsView.aspx?id=11993)

Steps For SME Loans By Public Sector Banks
http://www.rbi.org.in/scripts/PublicationsView.aspx?id=11993


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The above figure shows the steps for availing finance through Public sector Banks

using loans. Here is the brief description of the above shown procedure:

First of all the SME who wants to avail loan has to visit the local branch office of the

bank of their area, where by the loan application is been filled by the SME.

After that the executives of that branch check whether all the necessary

documents are provided by the SME or not, then if all necessary documents are

submitted the next step comes whereby the officials of that local branch go to the

premises of that SME and just have a brief survey of promoter as well as the

premises.

After they are satisfied they send the file of necessary documents to the

SMECC branch, which is a special branch for SME loans. Where by the credit

appraisal takes place, which consist of credit appraisal of promoter, financial

appraisal, determining cost of project, understanding various means of finance used,

profitability estimate, cash flow projections , marketing appraisal etc., which is

Application for loan by SME to local branch of a particular bank in that area

. Inspection/Survey of SME by the Executives of that Local branch.

Sending the Documents of survey by Local branch to SMECC branch

Preparing credentials of Promoters and firm by SMECC branch and investigating

the same

Estimating the amount of loan to be sanctioned and forwarding the

If the loan is been sanctioned by the central authority then


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explained in next section. This step brings out the clear picture whether the loan

should be given to the SME or not?

If the SMECC branch is satisfied with the details then it forward the request of

granting loan to the sanctioning authority.

And finally after the verification by sanctioning authority, the disbursement of loan

amount takes place in the account of that SME

This whole procedure right from application to disbursement of loan amount

takes approximately 20-25 days as the procedure involves analysis of

documents by various branches and thus the movement of documents amongst them,

if all this procedure would have taken place at single place then it would take only

10-12 days for disbursement.

Some Public sector Banks offering SME financing schemes are as follows:

1) State bank of India and its subsidiaries 7) Central Bank of India

2) Allahabad Bank 8) Punjab National Bank

3) Oriental Bank of Commerce 9) IDBI Bank

4) Bank of Baroda 10) Indian Bank

5) Bank of India 11) Canada Bank

6) Punjab & Sind Bank 12) Corporation Bank

REVIEW OF LITERATURE

A review of literature is a critical analysis of a segment of a published body of knowledge.

Various studies on a number of issues concerning small and medium enterprises had been

conducted in foreign countries. However, in Indian context, the number is quite few. A

number of studies had been conducted related to SME Financing schemes of Public sector
http://finance.indiamart.com/investment_in_india/corporation_bank.htmlhttp://finance.indiamart.com/investment_in_india/canara_bank.htmlhttp://finance.indiamart.com/investment_in_india/bank_of_india.htmlhttp://finance.indiamart.com/investment_in_india/bank_of_baroda.htmlhttp://finance.indiamart.com/investment_in_india/allahabad_bank.htmlhttp://finance.indiamart.com/investment_in_india/central_bank_india.html


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banks. Due to shortage of time and inability to cover all these past studies, some of these

studies have been considered in this section that has provided a base for this research.

Wtterwulghe and Jannsen(1997): conducted a research and analyzed the roleof banks in

financing medium enterprises in Belgium. It shows that, like small firms, medium-sized

businesses have a preferencefor self-financing. As far as external funding is concerned,debt

is generally their main source. However, their low debt ratios indicate that, as compared to

the large firms, these enterprises take less recourse to banks and, as a result, pay little

attention to their financial function. The banker doesnot play an important role as an adviser

either, except whenthe firm decides to raise funds through the stock market. Thearticle calls

for greater specialisation on the part of thebanks so that they can avoid conflicts of interest

arising outof the mismatch between their service priorities and the needsof their clientele

Raju S (2002):conducted a research by revisiting the Seoul and Bologna Charterson the

SMEs and clarifies that the SME definition centers round the small scale industries in the

absence of a clearly definedmedium industry sector in India. A review of the policy, lawsand

the regulatory and institutional framework has been donein sufficient detail with a view to

highlighting the fact thatthe SSIS in India require globally compatible facilitation inorder to

be competitive both domestically and internationally. The author maintains that easy and

adequate institutional financesupport is a necessary but not sufficient condition for

thegrowth of this dynamic and vibrant sector. He envisages a clear role for the Small

Industry Associations recognized on the basisof well-defined criteria. He argues for a quick

enactment ofa comprehensive enabling law for the sector and for restructuringthe office of

the DC-SSI, to attain the envisaged competitiveness

Nambiar (2007): conducted a research on financing for the priority sectors that paved the

way for thinking strategy for financing of 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 was also discussed in the article. But that is not sufficient to promote the


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

Rani and Rao(2008):conducted a research that Small and Medium Enterprise sector is a

vibrant and dynamic one, and an engine of growth for the present millennium. Financing of

Micro and Small Enterprises (MSEs), which is part of the SME sector, has been given special

attention by banks and financial institutions, and is included in priority sector lending. In

spite of the special efforts, only 14.3% of registered small enterprises have availed

institutional credit, as per the 3rd All India Census of Small Scale Industries of 2001-02.

From 2000 to 2004, institutional credit for MSEs has shown disturbing trends, despite the

high level of liquidity in the banking system and the initiatives taken by the Union

Government and Reserve Bank of India (RBI). This paper examines the recent trends in credit

flow to MSEs, in particular, and medium enterprises, in a limited way, from commercial

banks and the Small Industries Development Bank of India (SIDBI), and outlines the

recommendations of A S Ganguly Working Group and Internal Group chaired by C S Murthy.

The Union Finance Ministry's directive to public sector banks is to double the credit flow to

SMEs during the five-year period 2005-10. The year, 2005-06 has shown good progress in

this direction. The task is to be pursued vigorously in the next four years, of which 2006-07

has been completed with encouraging performance. Innovative approaches and directions for

the future are presented in the paper. SMEs need special treatment through devising special

instruments of credit for strengthening their competitiveness.

Torre et al(2008):made a research and investigated the conventional wisdom in academic

and policy circles argues that, while large and foreign banks are generally not interested in

serving SMEs , small and niche banks have an advantage in doing so because they can

overcome SME opaqueness through relationship lending. This paper shows that there is a

gap between this view and what banks actually do. Banks perceive SMEs as a core and

strategic business and seem well positioned to expand their links with SMEs. The recent


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intensification of bank involvement with SMEs in various emerging markets documented in

this paper is neither led by small or niche banks nor highly dependent on relationship

lending. Rather, all types of banks are catering to SMEs and larger, multiple-service banks

have in fact a comparative advantage in offering a wide range of products and services on a

large scale, through the use of new technologies, business models, and risk management

systems.

Mercieca et al (2009): conducted a research and analyzed thathow the concentration and

competition in the European banking sector affects lending relationships between small and

medium sized enterprises (SMEs) and their banks. Recent empirical evidence suggests that

concentration and competition capture different characteristics of banking systems. Using a

unique dataset on SMEs for selected European regions, we empirically investigate the impact

of increasing concentration and competition on the number of lending relationships

maintained by SMEs. They find that competition has a positive effect on the number of

lending relationships, weak evidence that concentration reduces the number of banking

relationships and weak persistent evidence that they tend to offset each other.

Popli and Rao (2009):conducted a study and analyzed that Small and Medium Enterprises

have been globally recognized as vital components of a domestic economy and major

contributors to employment generation in a country, regardless of global barriers. SMEs

form the lifeblood of any vibrant economy. In an emerging economy like India, SMEs have a

significant socio-economic role to ensure overall development of the nation. Electronic

Sector is an upcoming sector in India. The Indian Electronic Industry is undergoing

transformation due to the new economic policy and business environment in the post WTO

regime. This paper examines the problems, strategies for investments, competences

development, technological up gradation, quality improvement, Govt. Policies, Equity

participation by MNCs and overall improvement of this sector in the post WTO regime. The

study has been done by using data acquired from an extensive survey of Indian SMEs in the

Textile Sector and from the experienced Bankers/ Officials/Policy makers of Govt. of India.

The key findings of the study are that lack of quality consciousness, growth conducive

environment, inadequate government support and difficulties in raising funds from market.


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Further, the study highlights the need to upgrade technology in the Indian

Electronic SME Sector and also develop a strong and supportive Financial System.

The perusal of literature reveals that Small and Medium enterprises face a lot of problems,

and inadequate financing is the major one. A rich literature house has been developed over

time, mostly in foreign countries, with regard to SME funding. A very few studies has been

conducted in India regarding the effectiveness of SME financing schemes of the public sector

banks. That is why a need was felt to conduct a study in Indian context and that too in case of

SME financing schemes of public sector banks and their usage that has not been extensively

researched.


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RESEARCH METHODOLOGY

Research Methodology is a way to systematically solve the research problem. The Research

Methodology includes the various methods and techniques for conducting a Research.

Marketing Research is the systematic design, collection, analysis and reporting of data and

finding relevant solution to a specific marketing situation or problem. D. Slesinger and

M.Stephenson in the encyclopedia of Social Sciences define Research as the manipulationof things, concepts or symbols for the purpose of generalizing to extend, correct or verify

knowledge, whether that knowledge aids in construction of theory or in the practice of an

art.

Research is, thus, an original contribution to the existing stock of knowledge making for its

advancement. The purpose of Research is to discover answers to the Questions through the

application of scientific procedures. Our project has a specified framework for collecting data

in an effective manner. Such framework is called Research Design. The research process

followed by us consists of following steps:

RESEARCH DESIGN

This research was descriptive and conclusion oriented research.

Conclusion Oriented Research: -Research designed to assist the decision maker in

the situation. In other words it is a research when we give our own views about the

research.

Descriptive Research: -A type of conclusive research, which has as its major

objective the description of something-usually market characteristics or functions. In


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other words descriptive research is a research where in researcher has no control over

variable. It just presents the picture, which has already studied.

SAMPLING DESIGN

Sampling can be defined as the section of some part of an aggregate or totality on the basis of

which judgment or an inference about aggregate or totality is made. The sampling design

helps in decision making in the following areas: -

Universe of the study-The universe comprises of two parts as theoretical universe and

accessible universe

Theoretical universe-It includes all the SMEs throughout India

Accessible universe- It includes the SMEs in rural areas

Sample Frame-Sample frame was Small and Medium enterprises all over India.

Sample Unit-Sampling unit is the basic unit containing the elements of the universe to be

sampled.

Sample Size-Sample size is the number of elements to be included in a study. Keeping in

mind all the constraints 100 respondents were selected.

Sampling Techniques- The sampling techniques used were convenience technique and

simple random sampling technique.

DATA COLLECTION AND ANALYSIS


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Data Collection:Information has been collected from both Primary and Secondary sources

of data collection.

Secondary sources-Secondary data are those, which have already been collected by

someone else, which already had been passed through the statistical process.

Secondary data had been collected through websites, newspapers and journals.

Primary sources- Primary data are those, which are collected are fresh and for the

first time and thus happen to be original in character. Primary data had been collected

by conducting surveys through questionnaire, which include several questions and

personal and telephonic interview.

b) Tools of Analysis and Presentation:

To analyze the data obtained with the help of questionnaire, following tools were used:

Tools of Analysis: -

Summated Score: This tool was used for the analysis of questions based on Likert

scale.

Weighted Average Score: This toolwas used to calculate highest and lowest rank.

Tools of Presentation:-

Tables: This tool was used to present the data in tabular form.

Bar Graphs and Pie Charts: These tools were used for analysis of data.


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Primary data

Questionnaires:

1. What percentage of IDBI Banks overall credit portfolio caters to SME

financing?

As on March 31, 2009, the banks total exposure to the SME sector was

around Rs 12,000 crore (which works out to about 12% of total exposure) out

of which around Rs 6,600 crore was extended to micro and small enterprises.

IDBI Bank has started focusing on SMEs recently. The bank is in the process

of strengthening its branch network and training manpower

2. What all are the loan/credit schemes offered to SMEs.?

IDBI Sulabh Vyapar Loan:This product has been exclusively designed for all

kinds of traders and service enterprises to provide them complete business

solutions.

Vendor Finance Programme:This programme meets pre-sale and post-sale

funding requirements of vendors of small and large companies.

Dealer Finance programme:This programme is an one-stop solution for dealers

of large companies for their working capital and other requirements.

Working capital finance to IT and ITeS companies:The bank provides short-

term working capital and meets the forex related requirements of the IT and ITeS

provider companies.

Loans to professionals and self-employed:The bank provides a complete

business package for professional and self employed persons.


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Loans to small road and water transport operators:Under this scheme, the

bank meets the business requirements of all kinds of road and water transport

operators in the SME segment.

Loans to medical practitioners:The bank caters to the needs of medical

practitioners who aspire to set up their own clinic, hospital or for any of their

business requirement.

Entrepreneur Development Fund:The Fund aims to provide assistance by way

of equity/ soft loan for meeting the financial gap for establishing the business.

SME Hosiery Current Account:This current account product is tailor-made

keeping in view the specific requirements of the SME Textile Hosiery units across

the country

Loans under CGTSME:Collateral free loans up to Rs 1 crore are provided by the

bank for new and aspiring SME entrepreneurs willing to set up a new unit or to

start a new business, and also for those entrepreneurs who wish to access bank

funding for their business but are not able to provide any collateral.

Trade finance and forex:The bank has a robust and flexible system to take care

of different trade finance related needs of its customers. It has dedicated offices for

handling different activities related to trade finance like offering bank guarantees,

issuing letter of credits, for both local and foreign trade. All activities related to

foreign exchange (remittances, capital account transactions, forward contracts,

inland bills) are duly taken care of by the bank.

3. What is the approach followed by the bank to select a cluster for investment?

The bank finances all the clusters identified by the Reserve Bank of India and the

Government of India. IDBI Bank is presently focusing on clusters where SME

clients are concentrated, showing good growth or new clusters, in the growing

industry. The bank has not reached the rural level of the SME segment as the bank

has just started these activities. However, the bank is catering to the semi-urban and

urban areas where SMEs are more prominent.


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4. Does the Bank provides any type of consultancy to the SMEs?

. The bank guides the SMEs and may provide them with financial advice. The Bank

helps the SMEs in preparing the project report, undertaking marketing activities,

helps them comply with regulatory issues under the Companys Act as well as the

Income Tax Act.

5. What are the latest initiatives started by the Bank for SME financing?

The Bank is liberalizing the process of SME financing. At IDBI Bank, all proposals

up to Rs 5 crore get sanctioned within a period of ten days. This is the biggest

strength of IDBI Bank as according to the banking industry norm, loans up to Rs 25

lakh get sanctioned in two weeks. The Bank has simplified its processes and has

introduced products where minimum information is required and also where not

much rigorous exercise of rating is required. Loans are being dispensed on the basis

of scoring model up to Rs 5 crore. The Bank is also sanctioning loans without

collaterals.

6. What are the challenges faced by IDBI Bank for financing SMEs?

SMEs are a big challenge for the banking industry. India has about 13 million SME

units and out of these hardly 17-18% has banking relationship. SMEs depend on

informal or other sources of funds like friends, family members or relatives. It is

difficult to convince SME clients about the benefits of obtaining finance from

banks. IDBI Bank is trying to reach the grassroots level and conducting

presentations for the SMEs to create awareness. The SME segment provides banks

a big opportunity for cross-selling. We provide lucrative liability products for the

SME segment. Since all banks are focusing IDBI Bank sanctions loan upto Rs 5

crore within 10 day T R Bajalia Executive Director IDBI Bank Limited T R

Bajalia Executive Director 39 on the SME segment on account of potential of

deposits from this segment; the competition is becoming stringent in this segment,

and tapping the SMEs a real challenge.

7. What is the main purpose of SMEs that come for loans to IDBI Bank?


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Generally any unit that comes to procure finance from banks wants funds for

working capital needs for carrying out day-to-day activities. Many units also seek

loans to set up a project at the base level or to go in for expansion of its unit or may

want to go in for diversification in some related projects. SMEs that export may

come in for Letter of Credit requirements as well. If they are getting many bills that

are accepted by other banks or from their sellers and buyers, those bills also can be

discounted and credit can be provided immediately. Thus IDBI Bank fulfils a

complete chain of requirements, whether it is directly or indirectly either for

working capital, term loan, including technical upgradation or any R&D effort. If

the SMEs during any period need any particular equipment that is a bottleneck for

running the plant, the bank directly finances it. Bank may also finance SMEs who

want to purchase particular equipment. IDBI Bank extends finance for a complete

chain and a complete project. IDBI Bank has also introduced a scheme for equity

participation in SME units.

8. Is the Bank concentrating on any specific sector in the SME clusters?

The Bank is not concentrating on any particular industry. IDBI Bank generally

tracks all the industries be it auto ancillary, textiles, readymade garments or leather

provided it is growing fast and there is scope to help that segment.

9. Does IDBI Bank have tie ups with associations?

The Bank is in touch with associations such as CII/FICCI, SME Chamber, etc. on a

regular basis and works closely with them. These associations provide leads to

some of the clients in need of funds. The associations also arrange joint meetings

with the clients at different places for IDBI Bank.


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CREDIT GUARANTEE FUND SCHEME FOR MICRO AND

SMALL ENTERPRISES

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 Industries Development Bank of India (SIDBI),

established a Trust named implement the Credit Guarantee Fund Trust for Micro and

SmallEnterprises (CGTMSE)to implement the Credit Guarantee Fund Scheme for Micro

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

operational with effect from 1stJanuary 2000. The corpus of CGTMSE is being contributed

by the Government and SIDBI in the ratio of 4:1 respectively and has contributed Rs.

1906.55 crore to the corpus of the Trust up to March 31, 2010. As announced in the Package

of MSEs, the corpus is to be raised to Rs. 2500 crore by the end of 11thplan.

Eligible Lending Institutions


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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 March 31, 2010, there

were 112 eligible Lending Institutions registered as (MLIs) of the Trust, comprising of 27

Public Sector Banks 16 Private Sector Banks, 61 Regional Rural Banks, 2 Foreign Bank and

6 other Institutions viz., NSIC, NEDFI, SIDBI and The Tamil Nadu Industrial Investment

Corporation (TNIC).

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. 100 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 lakhs, 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

guarantee scheme. It is noteworthy that the facility should be availed by the borrowing unit

from a single lending institution. 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 orother 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


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75% (or 80% wherever applicable) 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 sanctioned. For loans up to Rs. 5 lakh, the one-

time guarantee fee and annual service fee is 1% and 0.5% respectively. Further, for loans in

the North-East Region, the one-time guarantee fee is only .75%.

Website

Operations of CGTMSE are conducted through Interest. The website of CGTMSE has been

hosted at www.cgtsi.org.in.

SME Financing by State Bank of India

State Bank of India has been playing a vital role in the development of small scale industries

since 1956.The Bank has financed over 8 lakhs SSI units in the country. It has 55 specialized

SSI branches, 99 branches in industrial estates and more than 400 branches with SIB

divisions. The Bank finances for Small Business activities which are of special significance

to a large number of people as many of these activities can be started with relatively lower

investment and with no special skills on the part of the entrepreneurs. The following are the

SME products offered by State Bank Of India:

Commodity Packed Warehouse Receipt Financing

Surabhi Deposit Scheme
http://www.cgtsi.org.in/


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Traders Easy Loan Scheme

SSI Loans

Business Current Accounts

Open Term Loan

Retail Trade

Doctor Plus

SBI Shoppe

Cyber Plus

SME Credit Plus

Small Business Credit Card

SME Petro Credit

Dal Mill Plus

Paryatan Plus

Auto Loans

Transport Operators

Rice Mills Plus

School Plus

State Bank of India (SBI) is the forerunner in the field of SME financing. Majority of

the loans to SMEs are been provided by SBI. SBI has introduced various schemes for

SMEs. The various schemes are according to the sector in which a particular SME

belongs. SBI has introduced SME financing for SME belonging to sectors like:

Agriculture

Medical

Transport

Tourism

Art


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Education

And many more.

SME Business Unit is implementing multiple strategies to maintain Banks premier position

in SME financing.

! The Advances given By SBI to SME sector increased to Rs. 76,329 Crores as on

31.03.2008 from Rs. 58,674 Crores of the previous year registering a growth of

30%.

! The Deposits of SBI under SME sector increased to Rs. 1,65,168 Crores as at the end

of March 2008 from Rs. 1,23,054 Crores of previous year, recording a growth of

34% during the year.

! The SME architecture has been firmly established and with a focus on companies

with a turnover of less than Rs. 50 Crores, SBIs advances to SME rose by 26% in

FY08.

! Currently, SBI has 12-lakh SME customers.

SME Financing Schemes by SBI

1. Open term Loan

Purpose:

! Expansion and Modernization

! Upgradation of Technology/machinery, acquisition of hardware, software etc.

! Acquisition of ISO and other certificates.

! Visits abroad for business development etc.

Loan Amount:

! Maximum for service sector: Rs. 100 Lacs.

! Maximum for manufacturing sector: Rs. 250 Lacs.

Amount of loan available:

! 90% of cost


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Repayment Period:

! Maximum 3 years, extendable upto 5 years.

Collateral:

! Personal Guarantee of Promoters in all cases

! Pledge of Promoters equity in case of corporate.

Eligibility:

! Existing or new corporate/Non-corporate customers of SME segment with good

rating.

2. School Plus

Purpose:

! Construction of new building/repairing.

! Purchase of equipments, software, and furniture.

! Additional land for expansion or play ground, bus etc.

Loan amount:

! Need Based- No upper limit


! 85% of project cost

Repayment:

! Minimum-3 years, Maximum -7 years.

Collateral:

! For loan < Rs. 2 Lacs Personal Guarantee of promoters/others.

!

For loans > 2 lacs Personal Guarantee + Equitable mortgage of land & building ofthe school.


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Eligibility:

! Government schools/ Private schools/ Colleges having necessary approval from the

government (Excluding professional colleges & coaching institutes)

Interest Rate:

! Loan < Rs. 2 Lacs 9.25%

! Loan amount between Rs. 2 Lacs & 5 Lacs.- 10.25%


3.Paryatan Plus

Purpose:

! Construction, renovation, modernization, addition to hotels, Yatri niwas, Dharmsala,

Restaurants, Travel Agency etc.

! Construction of office premises.

! Purchase of computer & equipments; purchase of luxury buses, cars, vans, house

boats etc.

! Fast food centres, coffee houses, ice cream parlours, amusement park, ropeway, health

club etc. are also eligible.

Loan amount:

! Need Based- No upper limit


! 80% of project cost

! 60% for purchase of old vehicles ,not more than 5 years old

Repayment:

! Minimum-3 years , Maximum -7 years


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! Maximum moratorium period 1.5 years

Collateral:

! Tangible security for at least 50% of loan amount.

Eligibility:

! Individual, Partnership firm, Ltd. Company, Trust.

Interest Rate:

! Loan < Rs. 50,000 8.5%

! Loan amount between Rs. 50,000 & 2 Lacs.- 9.5%



! Loan above Rs. 25 Lacs 11.00 to 12.75%

4.SBI Shoppe

Purpose:

! Purchase of new/old shops/offices.

! Modernization/renovation Expansion/addition/alteration of shops.

! Building of Training /Service centres/ garage etc.

! Furniture/ fixtures, electrical fittings.

Loan amount:

! Maximum- Rs. 20 Lacs.


! 75% for new shop & 60% for old shop.

Repayment:


! Maximum moratorium period 6 months


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Collateral:

! Hypothecation/Pledge / Mortgage of property.

Eligibility:

! Individual, Partnership firm, Ltd. Company, Trust/Franchisees.

5. Rice Mill Plus

Purpose:

! Acquisition of machinery/factory building for modernization or expansion.

! Working capital needs.

Loan amount:

! Based on Project cost.

Amount of loan available:! 85-75% of project cost.

! Working capital- 85-75%

Repayment:


! Maximum moratorium period 12 months

Collateral:

! Loans < 5 Lacs No security

! Loans >5 Lacs - Equitable mortgage of property/ tangible security.

Eligibility:

! Profit making existing units and new units of good credit rating.


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Interest Rate:

! Loan < Rs. 50,000 8.5%

! Loan amount between Rs. 50,000 & 2 Lacs.- 9.5%


! Loan amount between Rs. 5 Lacs & 25 Lacs.- 11%

SME Financing by IDBI Bank

IDBI Bank has been actively engaged in providing a major thrust to financing of SMEs. With

a view to improving the credit delivery mechanism and shorten the Turn around Time (TAT),

IDBI Bank has developed a special business model to serve the SMEs in India. The Bank has

set up 24 City SME Centres (CSCs) across India in Mumbai, Delhi, Kolkata, Chennai,

Bangalore, Hyderabad, Pune to name a few. These CSCs are the Bank's hubs while dedicated

SME desks have been set up in several branches across these cities. These branches serve as

front offices for sales delivery and customer service.

IDBI Bank has a wide variety of products and services catering to the needs of different

segments within small business. Long years of experience in being the trusted partner of large

and mid corporates has translated into deeper understanding of needs of business and

industries. The Bank has parameterised products for transporters, dealers, traders, and

vendors. In addition, it has a separate Transaction Banking Group that has expertise in

products like cash management services, letter of credit, bank guarantees and treasury

products

IDBI Bank provides following SME products:

Sulabh Vyapar Loan

Dealer Finance

Funding Under CGFMSE

Direct Credit Scheme-SIDBI

Preferred Customer Scheme

Vendor Financing Programme


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Lending against the security of future Credit Card Receivables

Working Capital Financing

Finance to Medical Practitioners

Loans to SRWOTs

SME Hosiery Special Current Account

The bank factors in the risk profile and credit worthiness of the borrower before extending

any financial assistance. To make business easy for the SMEs, the bank has

introduced collateral free loans. The bank not only offers finance to its SME customers but

also takes care of their all banking needs under one roof with specific current accounts and

full range of other banking products and services.

IDBI Bank MSME Finance Products:

The bank endeavours to introduce new products with a view to offer wide array of solutions

to the SME units.

Sulabh Vyapar Loan (Loan for Traders/Service Sector)- Aims to provide hassle

free finance to traders and to meet their business needs at competitive interest rates

Dealer Finance/ Dealer Solutions- To provide Liquidity to the distribution chain

partners.

Loans to Small Road & Water Transport Operators-This product enables various

transport operators to acquire a small fleet of vehicles/ vessels.

Loans to Professionals & Self-employed- Special scheme to take care of financial

needs of Professionals and Self employed segment.

Lending Against the Security of Future Credit Card Receivables- Laghu Udhyami Credit Cards (LUCC) Provides easy finance to existing

borrowers running Small business units, retail traders, artisans and other MSE units.

Property Power (Loan against Property)-For unlocking the potential of property

and avail credit facility on easy terms for any business need.

SME Smart Line of Credit-Financial assistance available to the MSMEs in the form

of Pre-approved credit limits enabling them to grab unforeseen business opportunities.


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Funding under CGFMSE (Collateral Free Loans)-IDBI Bank offers Credit facility

upto Rs 1 Crore to Micro and Small Enterprises without insisting on collateral and

third party guarantee.


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SME Financing Issues/Limitations

! Approx. 85% of SMEs in emerging markets suffer from credit constraints

! Approx. 70% of all emerging-market SMEs do not use any formal credit

! This means informal sector meets their financial requirements, though at times

with stringent conditions

! Nearly 23.7% of SMEs disappear in two years and nearly 52.7% of SMEs exit the

market in four years due to business failure, bankruptcy, or other reasons

! Recent global economic downturn has further aggravated the problems that

already existed

Some of the key issues are:

! Financing assumes material role in SMEs experiencing high growth prospects

including opportunities for takeover

! Very few SMEs are able to finance their expansion through their Cash Flow and

have to explore external sources of funding

! In credit filtration process SMEs are at a disadvantageLack of successful track

record of SMEs creates a perception of greater credit risk among the banks

! SMEs lack the substantial asset base (collateral) to provide as security against

bank loans

! More pronounced for SMEs in the services sector

! Limited exposure to Direct Equity financing sources

Paucity of private equity investors for SMEs

Reluctance by SME to dilute their share holding


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CONCLUSION AND RECOMMENDATIONS

CONCLUSION OF THE STUDY

Over a period of time, it has been proved that SMEs are dynamic, innovative and most

importantly, the employer of first resort to millions of people in the country India has a

vibrant SME sector that plays an important role in sustaining economic growth, increasing

trade, generating employment and creating new entrepreneurship in India. But the SME

sector faces a lot of obstacles in obtaining adequate finance. Government of India has started

a number of SME financing schemes in its public sector banks .These public sector banks are

playing a major role in the development of SME sector in India. But due to few obstacles,

these schemes are not as effective as they should be. The review of researches has showed

that SME sector plays an important role in the economic development of a country but

obtaining adequate finance has emerged as a major problem faced by SMEs. The need, scope

and objectives of the study provided the framework for further research. The basic purpose of

conducting the study was to study the usage of SME financing schemes of the public sector

banks. The data was collected from SME units. Various tools of data analysis and

interpretation were used for carrying out the research. The major findings of the study were

that bank financing is the most popular source for financing SMEs in India. The SME

financing schemes provide credit to this sector at low rates of interest and at attractive

conditions but the procedure involved is lengthy. Moreover, too much of documentation is

required .Insufficient collateral and biasness are also the major problems. The re-orientation

program, workshops and seminars should be organized at district level to provide latest

information to the SMEs about the various SME financing schemes of the public sector

banks. New credit products may be developed to take care of the diverse, unexpected and

short-term requirements of the SME customers in a hassle free manner and in a short time the

process followed in sanctioning the loan and documentation required is cumbersome;

hence it is suggested to make the process easier.


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RECOMMENDATIONS

After carrying on the study, the following recommendations have been made:

The re-orientation program, workshops and seminars should be organized at district

level to provide latest information to the SMEs about the various SME financing

schemes of the public sector banks.

Product innovations in banks have set the rule of the game Innovate or perish. The

same rule applies to SME segment. At present, there is a vast gap between

requirements of the SME customer and availability of suitable/matching products and

services in the public sector banks. New credit products may be developed to take care

of the diverse, unexpected and short-term requirements of the SME customers in a

hassle free manner and in a short time.

The conventional credit appraisal systems are heavily dependent on financial

statements and miss the softer strengths inherent in the business. Banks may adopt a

balanced score card model for credit assessment under which risk weights may be

assigned to (i) managerial, technical and commercial competence of the entrepreneur

(ii) quality of trade references from suppliers/buyers (need not be in writing) (iii)

potential of the industry, unit and person.

The appraisal system is to be made more realistic and transparent. The applicant and

if required, his consultant, should be briefed on the objective procedures which bank

applies to arrive at decisions so as to educate them to understand the requirements of

bank and to prepare credit proposals in a scientific manner .

As 95.8% of SME customers are proprietorship type of customers, it is essential for

the banks to closely focus on the non-financial parameters also during appraisal (i.e.ability of person behind the show).

The process followed in sanctioning the loan and documentation required is

cumbersome; hence it is suggested to make the process easier.

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.


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Most SME customers have to make several small payments through cash, bankers

cheques or drafts. Banks may capitalize on emerging electronic payment and

settlement systems such as ECS, EFT, RTGS, etc., to offer customized and cost

effective retail payment/remittance solutions or cash management services to the SME

customers.

Public Sector Banks should develop flexible systems and procedures for dealing with

SME customers and modify their role to be a facilitator. It may either provide

software to these customers to prepare stock and financial statements or help and

guide them in preparation of renewal proposal / statements.

Banks may publish periodicals/magazines to disseminate information pertaining to

various schemes of bank, various ministries, RBI, SIDBI, CBDT, CBEC and other tax

related policy matters. It may also provide the same information through its website

and e-mails.


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REFERENCES/BIBLIOGRAPHY

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Mercieca, S. and Scheack, C. (2009). Bank Market Structure, Competition And SME

Financing Relationships In European Regions. Journal of Financial Services Research,

36(2-3), 137-155.

Popli, G.S.and Rao, D.N. (2009). Service Quality Provided By Public Sector Banks To SME

Customers: An Empirical Study In The Indian Context. Journal of Financial Services

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(http://www.statebankofindia.com/)

http://www.idbi.com/msme-banking.asp

(http://www. smallindustryindia.com/)

(http://www.laghu-udyog.com/)

Raju, B.Y. (2002). Small Scale Industries In The Liberalized Era Beg For Attention. Global

Business Review, 3(2), 351-367

Wtterwulghe and Janssen (2005) .The Role Of The Banker In Financing Medium Sized

Firms In Belgium: Lender Or Advisor.Journal of Entreneurship, 6(1), 75-85.

Rani and Rao, D.N. (2008). Financing Small enterprises: Recent Trends. ICFAI Journal of

Entrepreneurship Development, 5(1), 6-22.

(http://www.businessworld.in/bw/

2009_11_19_Reforms_To_Improve_Credit_Access_To_SMEs.html )
http://www.businessworld.in/bw/2009_11_19_Reforms_To_Improve_Credit_Access_To_SMEs.htmlhttp://www.idbi.com/msme-banking.asp


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To Study the Assessment of Financing SME Units Project Final

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