bank financing for ssi sector

BANK FINANCING FOR THE SSI SECTOR

SMALL SCALE INDUSTRY

DEFINITION OF THE SME SECTOR

Though the definitions are not part of the terms of reference for the Working

Group, a clearer definition of the SME sector vis-à-vis conventional SSI and

Tiny sectors was felt necessary.

(a) At present small scale industry is defined as one having original

investment in plant and machinery not exceeding Rs.1 crore. While

recognizing need of larger investment in some of the more important

segments of SSI, the Government of India has enhanced this to Rs.5 crore in

respect of certain specified industries. A process of graduation of several

SSIs into medium enterprises, having larger investment is a natural

progression of successful units. Therefore, it was agreed that a separate

category of medium enterprises (ME) needs to be recognized. While ME may

not qualify for priority sector lending, it must be seen as contiguous with SSI.

(b) The SME definition, adopted by other countries is generally based

on number of employees, capital investment or turnover. The

existing definition of SSI adopted in India, based on investment in plant

and machinery, excludes the rapidly growing service sector. The past

decade has witnessed the services sector contributing almost half of

the GDP. The Working Group strongly recommends the adoption of

turn over as a measure for defining the SME sector. Based on turn

over, Tiny, Small and Medium enterprises may be redefined as under:

Tiny: Turn over up to the financial limit of Rs.2 Crore,

Small: Turn over up to the financial limit of above Rs 2 Crore

and Up to Rs.10 Crores

1


Medium: Turn over above the financial limit Rs.10 Crores and

up to Rs. 50 Crores.

SSI SECTOR IN INDIA – A BRIEF

The SSI sector has been contributing immensely to the Indian economy, in terms

of employment, production and exports. Figures available show that in the year

2001-02 the SSI sector registered a higher growth rate than the growth in overall

industrial production. While the SSI sector registered a growth of 8.03%,

industrial production went up by 2.7%.

The SSI sector in India with an estimated 3.6 million units produces over 8000

items and provides employment to about 20 million individuals. What further

highlights the importance of this sector is its share of 39% in industrial value

added and 34% in India’s total exports.

SSIs IN INDIA

Source: Ministry of Small Scale Industries, Government of India.

An analysis of time series data shows that from 1980 to 1997 an additional 80

lakh jobs were created in the SSI sector. This figure is way ahead of the 54 lakh

new jobs created in the Organized Sector during the same time period. With an

annual average increase in employment of 5.1% during the period 1980 to 1997,

this sector has been the mainstay of employment generation and livelihood for

many in our country. The SSI sector has tremendous potential for generating

sustainable employment at comparatively low costs and this potential must be

exploited if the economy has to maintain a sustained growth in employment.

2


SME in India

Total Units 3.57 Million

Employment 19.96 Million

Share in Industrial Value Added 39%

Share in Total Exports

DIRECT 34%

OVERALL 45%

Total Number of Items Produced Over 8000

Number of Reserved Items 675

Dr. S.P. Gupta Study Group on ‘Development of Small Enterprises’

acknowledged the critical role played by small enterprises in industrialization of

rural and backward areas, reduction of regional imbalance and in ensuring a

more equitable distribution of national income and wealth. The Interim Report of

the Study Group, while recognizing the importance of the small-scale sector in

the Indian economy, stressed on the problems plaguing the sector and made

recommendations to overcome these problems relating to inadequate credit flow

from banks and FIs, inadequate infrastructure facilities, low quality standard of

products, use of obsolete technology, plant, machinery and equipment and

inefficient management techniques.

The Government of India has been helping the sector through supportive policy

measures, with focus on improving the credit flow to the sector. The policy

support provided so far has acted as a catalyst in promoting this sector.

However, opening up of the economy has thrown up new challenges to the

3


sector. As units in this sector prepare themselves to withstand the pressures of

global competition, their credit needs have increased manifold.

A disturbing trend seen over the last few years is the fall in the share of the SSI

sector in the net bank credit outstanding. While in March 2000 the share of the

SSI sector in the net bank credit outstanding was 14.2%, the figure had come

down to 11.1% by March 2003. A look at the figures for priority sector lending

also show that there has been a decline in the credit extended to this sector over

time. Figures for March 2000 show that lending to the SSI sector accounted for

36.12% of the total priority sector lending. This figure has since then declined

continuously from 32.45% in March 2001 to 29.1% in March 2002 and further to

26.1% in March 2003- a trend that does not augur well for the SSI units.

The government and the RBI have taken cognizance of the problems, which the

SSI units face on the bank financing front. With the view to adequately pass on

the benefits of the declining interest rate regime to the SSI sector, the Finance

Minister in his budget speech for the year 2003-04 had made an appeal to banks

for adopting an interest rate band of 2 percent above and below their prime

lending rate for secured advances to the SSI sector. With regard to improving the

flow of credit to the SSI sector, a working group was constituted by the RBI under

the chairmanship of Director, Central Board of the RBI in February 2004. The

group’s terms of reference include assessing the progress made in

implementation of Kapur Committee and Gupta Committee recommendations

and also suggesting ways to improve credit flow to the SSI sector. In the Interim

Budget for the year 2004-05, the Finance Minister announced that the public

sector banks would increase the credit limit of their Laghu Udyami Credit Cards,

for borrowers who have a satisfactory track record, from Rs. 2 lakh to Rs.10 lakh.

The modified scheme is expected to be operational from March 1, 2004.

4


In the past also several initiatives have been taken for addressing the problems

of the SSI sector. A brief of the committees constituted, their recommendations

and subsequent follow up action is given below.

Nayak Committee (1991-92)

Nayak Committee was set up by RBI in December 1991 to look into the aspects

of adequacy of the credit that was being advanced to the SSI sector and also the

time involved in processing loan applications.

Nayak Committee found that the SSI sector was receiving advances only to the

extent of 8.1% of their annual output, which was way below the normative

requirement of 20%. On the basis of the recommendations of the Nayak

Committee RBI advised banks to grant working capital to the extent of 20% of the

projected annual turnover. RBI also issued a number of circulars advising banks

to process loan applications without delay and also set up specialized bank

branches to provide SSI loans in areas where there is a high concentration of

SSI units.

Seven Point Action Plan (1995-96)

The Nayak Committee recommendations were incorporated in the Seven Point

Action Plan that was announced by the Finance Minister in the Budget speech of

1995-1996 to enhance the flow of credit to the SSI sector. The recommendations

incorporated included the following:

1. Setting up of specialized SSI bank branches

2. Adequate powers to be delegated to the branch and regional levels

5


3. Banks to conduct sample surveys of their performing SSI accounts to find

out whether they were getting adequate credit.

4. Steps to be taken for sanctioning of composite loans, covering both term

loans and working capital, to SSI entrepreneurs as far as possible.

5. Sensitization of bank managers towards the working of the SSI sector.

6. Simplification of procedural formalities by banks for SSI entrepreneurs.

7. Regular meetings to be held by the banks at both zonal and regional

levels with the SSI entrepreneurs.

Kapur Committee (1997-98)

The RBI appointed a one-man committee under the chairmanship of Shri.

S.L.Kapur to study the working of the credit delivery system to the SSI sector and

suggest measures for improving the delivery system and also simplifying the

procedural formalities for credit to the SSI sector. The Committee submitted its

report to RBI on 30th June 1998 containing 126 recommendations. The major

recommendations were as follows:

1. Special treatment to smaller among small industries.

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

lakhs

3. Simplification of procedural formalities.

4. Raising the exemption limit for collateral security from Rs. 25,000 to Rs. 5

lakhs.

5. Enhancement of SIDBI’s role and status to match with that of NABARD.

6. Opening of more specialized SSI bank branches.

7. Allowing access to low cost funds to SIDBI for refinancing SSI loans.

8. Setting up of Collateral Reserve Fund to provide support to first party

guarantees.

6


9. Introduction of Credit Guarantee Scheme.

. Initiatives Steps taken in the Budget of 1999-2000

1. Launch of a new credit insurance scheme.

2. Composite loan scheme limit enhanced to Rs.5 lakhs.

3. For working capital loans, the annual turnover limit was raised from Rs. 4

crores to Rs. 5 crores

SP Gupta Study Group – Interim report, July 2000

The SP Gupta Study Group on development of Small enterprises submitted its

interim report in July 2000. Some of the suggestions relating to fiscal and

financial measures were as follows –

1. Setting up of targets for tiny and SSI units for credit from banks and FIs

under priority sector lending.

2. Need for reduction of cost of credit for SSI sector.

3. Setting up of more specialized bank branches for SSI sector.

4. Standardization of procedure and simplification of norms by banks.

5. More effective monitoring of credit flow to SSI sector by the Monitoring

Committee of Reserve Bank of India.

6. To make available credit to SSI sector at a reasonable cost, viz, PLR plus

three per cent.

7. Raising the limit of composite loans from Rs.10 lakh to Rs.25 lakh to

encourage tiny units to get term loan and working capital from same

bank/FI.

8. Not to cover all future fixed assets of assisted units for securing its

advances.

7


9. Measures for time-bound disposal of loan applications and easy

documentation.

Comprehensive policy package - August 2000

Based on the recommendations made by the Nayak Committee, the Kapur

Committee and Dr. S.P. Gupta Study Group a comprehensive policy package

was announced in August 2000. It included the following:

1. Launch of Credit Guarantee Scheme to cover loans up to Rs. 25 lakhs.

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

against loans taken for technological upgradation.

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

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

lakhs.

Steps taken over-time by the RBI for improving the flow of credit to the SSI

Sector

The RBI from time to time has resorted to ‘moral suasion’ to improve credit

delivery from the banks to the small-scale sector. Some of the steps taken by the

RBI in this regard include –

1. In order to ensure that credit is available to all segments of SSI sector,

RBI has issued instructions that out of the funds normally available to SSI

sector, 40% be given to units with investment in plant and machinery up to

Rs.5 lakhs, 20% for units with investment between Rs.5 lakhs to Rs.25

lakhs and remaining 40% for other units.

8


2. Public sector banks have been advised to operationalise more specialised

SSI branches at centres where there is a potential for financing many SSI

borrowers. As on March 2002, 391 specialised SSI branches are working

in the country.

3. Extension of 'Single Window Scheme' to all districts to meet the financial

requirements (both term loan & working capital) of SSIs.

4. With a view to moderating the cost of credit to SSI units, banks have been

advised to accord SSI units with a good track record, the benefit of lower

spreads over the prime lending.

5. In order to take expeditious decision on credit proposals of SSI units,

banks have been advised to delegate enhanced powers to the branch

managers of the specialized SSI branches so that most of the credit

proposals are decided at the branch level.

6. Laghu Udyami Credit Card (LUCC) Scheme launched by Public Sector

Banks for providing simplified & borrower friendly Credit facilities to SSI,

tiny enterprises retail traders & artisans.

7. An interest rate band of 2% above & below PLR should be applicable to

SSIs.

8. Bank advised to fix self set targets for growth in advances to SSI sector

based on previous year's achievements and overall tread in growth of net

bank credit.

9. Bank to consider 3 slabs for rate of interest-loans unto Rs.50,000,

between Rs.50,000 and Rs.2 lakhs and above Rs.2 lakhs.

10. Composite loan limit to be enhanced to Rs.50 lakhs from Rs.25 lakhs.

11. Limit on collateral free loans to be increased to Rs.25 lakhs in deserving

cases.

12. Deposits of foreign banks with SIDBI to earn interest at Bank Rate.

13. Working Group to be set up on flow of credit to SSI sector.

TIME SERIES DATA FOR SSIS IN INDIA

9


Time

Series

data for

SSIs in

India

Export

Year No. of units

(millions)

Fixed

investment

Production Employment

(at current

prices)

(Rs. billion)

(at current

prices)

(Rs. Bn.)

Nos. in

million

(Rs.

billion)1973-74 0.416 22.96 72.0 3.97

3.93 1974-75 0.498 26.97 92.0 4.04

5.41 1975-76 0.546 32.04 110.0 4.59

5.32 1976-77 0.592 35.53 124.0 4.98

7.66 1977-78 0.67 39.59 143.0 5.40

8.45 1978-79 0. 734 44.31 157.0 6.38

10.69 1979-80 0.805 55.40 216.35 6.70

12.26 1980-81 0.874 58.50 280.6 7.10

16.43 1981-82 0.962 62.80 326.0 7.50

20.71 1982-83 1.059 68.00 350.0 7.90

20.45 1983-84 1.155 73.60 416.2 8.42

21.64 1984-85 1.24 83.80 505.2 9.00

25.41 1985-86 1.353 95.85 612.28 9.60

27.69 1986-87 1.462 108.81 722.5 10.14

36.43 1987-88 1.583 126.10 873.0 10.70

43.72 1988-89 1.712 152.79 1064.0 11.0

54.89 1989-90 1.823 N.A. 1323.2 11.96

76.25 1990-91 1.948 N.A. 1553.4 12.53

10


96.64 1991-92 2.082 N.A. 1786.99 12.98

138.83 1992-93 2.246 N.A 2093.0 13.406

177.84 1993-94 2.388 35.376 2416.48 13.938

253.07 1994-95 2.571 40.799 2988.86 14.656

290.68 1995-96 2.658 49.620 3626.56 15.261

364.7 1996-97 2.803 54.698 4118.58 16.0

392.48 1997-98 2.944 60.549 4626.41 16.72

444.42 1998-99 3.08 86.106 5206.5 17.158

489.79 1999-00 3.212 72.633 5728.87 17.85

542.00 2000-01 3.312 79.703 6390.24 18.564

697.97 2001-02 3.442 84.329 6903.16 19.223

712.44 2002-03 3.572 90.450 7420.21 19.965

Source: Development Commissioner (SSI), Ministry of Small Scale

Industries, Government of India

GROWTH OF SSI EXPORTS

Cooperative Statement of Export Performance

Year Total exports

(Rs. Crores)

Exports from SSI

sector

(Rs. Crores)

Percentage share

1951-52 716 Negligible -

1961-62 660 Negligible -

11


1971-72 1608 155 9.6

1976-77 5142 766 14.9

1981-82 7809 2071 26.5

1986-87 12567 3644 29.0

1991-92 44040 13883 31.5

1992-93 53688 17785 33.1

1993-94 69547 25307 36.4

1994-95 82674 29068 35.1

1995-96 106353 36470 34.2

1996-97 118817 39249 33.4

1997-98 126286.00 44442.18 35.19

1998-99 141603.53 48979.23 34.59

1999-00 159561.00 54200.47 33.97

2000-01 202509.7 69796.5 34.47

2001-02 207745.56 71243.99 34.29

2002-03 252789.97 86012.52 34.03

Status Classification of SSIs

According to Sample Survey of 1994-95 of registered small scale industries (for

the base year 1992-93), the status classification of SSI units is given below. The

status has been compared with the findings of Second All India Census (base

year 1987-88).

SAMPLE SECOND

12


SURVEY CENSUS

1994-95 1987-88

1) Locational Status

Rural Areas 42.20% 42.20%

Urban Areas 48.50% 48.00%

Metropolitan Areas 9.30% 9.90%

Backward Areas 48.30% 62.20%

2) Organisational Status

Proprietory Units 80.48% 78.00%

Partnership Units 16.84% 16.03%

Limited Companies 2.01% 3.78%

3) Distribution By Categories of Industries

Small scale Industries 96.24% 87.28%

Ancillary Industries 0.52% 1.57%

Small Service Establishments 3.24% 11.15%

4) Activity Status

Engaged in manufacturing activity only 50.19% 51.01%

Engaged in processing activity only 15.23% 10.37%

5) Ownership Status

By scheduled caste entrepreneur 6.84% 4.57%

By scheduled tribe entrepreneur 1.70% 1.41%

By women entrepreneur 7.69% 5.15%

6) Important Parameters

Per unit fixed investment (book value) (Rs. 3.08 1.60

13


lakhs)

Per unit fixed investment in P&M (original

value) (Rs. lakhs) 4.0 0.93

Per unit working capital (Rs. lakhs) 6.98 1.23

Per unit production (Rs. in lakhs) 30.93 7.38

Per unit employment (numbers) 8.54 6.29

Capacity utilisation (percentage) 79.7% 50.6%

7) Important Ratio

Production/investments in fixed assets (Rs.

lakhs) 10.00 4.62

Net value added/Investment in fixed assets

(Rs. lakhs) 6.75 1.10

Employment/Investment in fixed assets (Rs.

lakhs) 2.73 3.94

Wages paid/Employment excluding self

employment (Rs. 000) 12.50 8.00

PARTNERS IN PROGRESS

SIDO has been working towards the development of the small scale sector

industry, in India, but the efforts are enormous. Its partners, who play a key role

in the progress achieved, are aiding the gigantic task.

The Key Partners in the Progress are:

SSI Ministry

14


Ministry of SSI and ARI

KVIC

Coir Board

SIDO

NSIC

FFDC

Other Partners

UNIDO

EAN India

15


IIP

IP&P

WIPO

CMC Web Tech

TBSE

APCTT

TANSTIA

CEDOK

Financial

Institutions

16

http://www.laghu-udyog.com/frame.htm?http://www.iip.in.com


SIDBI

RBI

CGTSI

Training Institutes

NIESBUD

NISIET

ITC

SEPTI

IIE - Guwahati

Other Web References

Other Web Links

17


CSIR

ICAMT

Toy Association

Stone Association

CODISSIA

COINTEC

Useful Websites

CBEC

18

http://www.laghu-udyog.com/frame.htm?http://www.icamt.org

http://www.laghu-udyog.com/frame.htm?http://www.tai-india.org


Tax india Online

Department of Revenue

Directorate of Service Tax

Development

Commissioner

(Handicrafts)

Technology Information,

Forecasting &

Assessment Council

Department of Science &

Technology

HELPING HANDS OF SSI SECTOR IN INDIA

Ministry

The Ministry of SSI designs policies, programmes, projects and schemes in

consultation with its organizations and various stakeholders and monitors their

implementation with a view to assisting the promotion and growth of small scale

19


industries. The Ministry also performs the function of policy advocacy on behalf

of the SSI sector with other Ministries/Departments of the Central Government

and the State and Union Territories.

The implementation of policies and various programmes/projects/schemes for

providing infrastructure and support services to small enterprises is undertaken

through its attached office, namely the Small Industry Development Organization

(SIDO) and the National Small Industries Corporation (NSIC) Ltd., a public sector

undertaking under the Ministry.

Small Industry Development Organization (SIDO)

The Office of the Development Commissioner (Small Scale Industries) is also

known as the Small Industry Development Organization (SIDO). It is an apex

body for assisting the Ministry in formulating, coordinating, implementing and

monitoring policies and programmes for the promotion and development of small

scale industries in the country and is headed by the Development Commissioner

(SSI).

In addition, the SIDO provides a comprehensive range of common facilities,

technology support services, marketing assistance, etc., through its network of

30 Small Industries Service Institutes (SISIs), 28 Branch SISIs, 7 Field Testing

Stations (FTS), 4 Regional Testing Centers, 2 Small Entrepreneur Promotion and

Training Institutes (SEPTI) and 1 Hand Tool Design Development and Training

Centre. The SIDO also has a network of Tool Rooms, Process-cum-Product

Development Centers (PPDCs) and technology and training support institutes

which are run as autonomous bodies registered as societies under the Societies

Act.

NATIONAL SMALL INDUSTRIES CORPORATION (NSIC) LTD.

20


The National Small Industries Corporation Ltd. was set up with a view to

promoting, aiding and fostering the growth of small scale industries in the

country with focus on commercial aspects of these functions. NSIC continues to

implement its various programmes and projects throughout the country to assist

the SSI units. The Corporation has been assisting the sector through the

following schemes and activities:

Supply of both indigenous and imported machines on easy hire-

purchase terms

Composite term loan scheme

Procurement, supply and distribution, of indigenous and imported raw-

materials

Marketing of small industries products

Export of small industries products and developing export-worthiness

of small scale units

Enlisting competent units and facilitating their participation in

Government Stores Purchase Programme

Training in several technical trades

Sensitizing SSI units on technological up gradation through Software

Technology Parks and Technology Transfer Centers

Mentoring & advisory services

Technology business incubators

Setting up small scale industries in other developing countries on

turnkey basis

Other areas & international co-operation

Over the years, the Corporation has made significant contribution to the growth

of the SSI sector in India. The Corporation has also set up a large number of

turnkey projects in a number of developing countries. The Corporation is an

ISO: 9001-2000 Company.

21


SMALL SCALE INDUSTRIES BOARD

SSI Board is the apex non-statutory advisory body constituted by the

Government of India to render advice on all issues pertaining to the SSI sector.

The Minister incharge of the SSI Ministry is the Chairman of the Board. Members

of the Board, include inter alia State Industries Ministers, selected Members of

Parliament, Secretaries of various Departments of the Central Government,

Heads of Financial Institutions, Representatives of Industry Associations and

Eminent Experts.

The SSI Board provides to its members a forum for interaction to facilitate co-

operation and inter-institutional linkages and to render advice to the Government

on various policy matters, for the development of the sector.

The Board was first constituted in 1954. Its term is for two years. The Board was

last constituted on 18th January 2003, with 101 members and held its 48 th

meeting on 17 January, 2004.

NATIONAL INSTITUTES FOR ENTREPRENEURSHIP DEVELOPMENT

As entrepreneurship development and training is one of the key elements for the

promotion of small scale industries, the Ministry has established three National

Institutes, viz. the National Institute of Small Industry Extension Training (NISIET)

at Hyderabad, the National Institute of Entrepreneurship and Small Business

Development (NIESBUD) at NOIDA and the Indian Institute of Entrepreneurship

22


(IIE) at Guwahati as autonomous bodies. These Institutes are responsible for

development of training models and undertaking of research and training for

entrepreneurship development in the SSI sector.

National Commission FOR Enterprises in the Unorganized Sector

The National Commission for Enterprises in the Unorganized Sector was

constituted in September, 2004 under the chairmanship of Dr. Arjun K. Sengupta,

an eminent economist. It has three full-time Members and two part-time

Members and an Advisory Board consisting of 11 eminent experts from different

fields relating to the unorganized/informal sector. The Commission will

recommend measures considered necessary for bringing about improvement in

the productivity of the informal sector enterprises, generation of large scale

employment opportunities on a sustainable basis, particularly in the rural areas,

enhancing the competitiveness of the sector in the emerging global environment,

linkage of the sector with institutional framework in areas such as credit, raw

material, infrastructure, technology up gradation, marketing and formulation of

suitable arrangements for skill development.

In accordance with its terms of reference, the Commission and its Advisory

Board have held several rounds of deliberations on a host of issues relating to

the unorganized/informal sector enterprises. In the light of these deliberations,

the following issues have been identified so far by the Commission for detailed

consideration and recommendations:

● Notion of growth poles for the informal sector in the form of clusters/hubs,

where external economies need to be provided to spur employment generation

and productivity enhancement and the feasibility of integrating the initiatives and

programmes of various Ministries in this domain;

23


● Skill formation in the informal sector and potential for public private partnership

in providing the required skills;

● Provision of micro finance and related services to the informal sector

enterprises and strengthening of the institutional framework in this area; and

● Issues concerning social security for the workers in the informal sector and

instrumentalities for achieving this objective.

Performance and policy initiatives in SSI sector during 2004-05

Over the last five decades, the small-scale industries (SSI) sector has acquired a

place of prominence in the economy of the country. It has contributed

significantly to the growth of the Gross Domestic Product (GDP), employment

generation and exports. The sector now includes not only SSI units but also

small scale service and business enterprises (SSSBEs) and is thus referred to as

the small enterprises sector.

During 2000-01 to 2004-05, the SSI sector registered continuous growth in the

number of units, production, employment and even exports (till 2002-03). During

this period, the average annual growth in the number of units was around 4.1 per

cent, while employment grew by 4.4 per cent annually. Further, the average

annual growth in production, at current and constant prices, was 10.6 per cent

and 7.6 per cent respectively.

24


Performance of small scale sector

Year

No. of units (lakh) Production (Rs.

crore)

Employ

ment

in lakh

Export

s

(Rs.

crore)

Regd.

Unregd.l

Total

(at

current

prices)

(at

constant

prices)

2000-01 13.1 88 101.1 2,61,289 1,84,428 239.09 69,797

-4.1 -11.5 -8 -4.4 -28.8

2001-02 13.75 91.46 105.21 2,82,270 1,95,613 249.09 71,244

-4.1 -8 -6.1 -4.2 -2.1

2002-03 14.68 94.81 109.49 3,11,993 2,10,636 260.13 86,013

-4.1 -10.5 -7.7 -4.9 -20.7

2003-04 15.54 98.41 113.95 3,57,733 2,28,730 271,36 N.A.

-4.1 -11.6 -8.6 -4.3

2004-05 16.38 102.15 118.53 3,99,020 2,45,747 282.82 N.A.

-4 -11.5 -7.4 -4.2

Website: http:/indiabudget.nic.in

Policy initiatives in SSI sector during 2004-05

1. The National Commission on Enterprises in the Unorganized/Informal

Sector was set up in September 2004. The Commission will, inter-alias,

recommend measures considered necessary for improvement in the

productivity of these enterprises, generation of large scale employment

opportunities on a sustainable basis, linkage of the sector to institutional

25


framework in areas like credit, raw material supply, infrastructure,

technology up gradation, marketing facilities and skill development.

2. 85 items reserved for exclusive manufacture in the SSI sector were

dereserved in October 2004. The total number of reserved items now

stands at 605.

3. To facilitate technology up gradation and enhancing competitiveness, the

investment limit (in plant and machinery) has been raised in October 2004,

from Rs. 1 crore to Rs. 5 crore, in respect of 7 items of sports goods,

reserved for manufacture in the small scale sector.

4. The Small and Medium Enterprises (SME) Fund of Rs. 10,000 crore was

operationalised by the SIDBI since April 2004. Eighty per cent of the

lending from this fund will be for SSI units, at interest rate of 2 per cent

below the prevailing PLR of the SIDBI.

5. The Reserve Bank of India enhanced the composite loan limit for the SSI

sector to Rs. 1 crore from Rs. 50 lakh.

6. With a view to integrate small and medium enterprises, facilitating their

growth and enhancing their competitiveness (including measure for

freeing the sector from “Inspector Raj”), a suitable legislation is being

finalized.

7. A new “Promotional Package for small enterprises" is being formulated.

This would include measures to provide adequate credit, incentives for

technology up gradation, infrastructural and marketing facilities, etc.

26


CREDIT - THE LIFELINE OF BUSINESS

Of all the elements that go into a business, credit is perhaps the most crucial.

The best of plans can come to naught if adequate finance is not available at the

right time. SSIs need credit support not only for running the enterprise &

operational requirements but also for diversification, modernization/ up gradation

of facilities, capacity, expansion etc. In respect of SSIs, the problem of credit

becomes all the more critical when ever any episodic event occurs such as a

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

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

loans from friends and relatives and some bank credit.

Government of India recognised the need for a focused credit policy for SSIs in

the early days of promotion of SSIs. This in turn led to a credit policy with the

following components:-

Priority Sector Lending: Credit to the small scale sector is ensured as part

of the priority sector lending by banks. Banks are required to compulsory ensure

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

sectors as classified by Government. These sectors include agriculture, small

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

eligible for this earmarked credit.

Institutional Arrangement: Small Industries Development Bank of India

( SIDBI ) was set up as the apex refinance bank. Term loans are provided by

State Financial Corporations (SFCs) and Scheduled Banks. Credit lending in

direct/indirect forms is also undertaken to some extent by NABARD , NSIC etc.

27


With the liberalization of the Indian economy, greater emphasis was placed on

meeting the credit needs of SSIs. This was manifest through the following

initiatives:-

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

2. Opening of specialized SSI bank branches.

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

4. Technology Development & Modernization Fund through SIDBI.

5. Enhancement of turnover limit for assessing aggregate working capital

requirement.

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

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

The Comprehensive Policy Package announced on 30th August 2000 took this

process further. This included:-

1. Launch of Credit Guarantee Scheme to cover loans up to Rs. 25 lakhs.

(Rs 2.5 million)

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

against loans taken for technology up gradation.

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

2.5 million)

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

lakhs.(Rs 5 million)

Many of these initiatives were based on the recommendations made by the

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

28


Credit to SSI Sector from Public Sector Banks

Indian Bank Charters

The Jammu & Kashmir Bank

Ltd.State Bank of Mysore

State Bank of Indore Bank of Baroda

State Bank of Travancore Oriental Bank of Commerce

Central Bank of India United Bank of India

State Bank of Bikener and

JaipurAllahabad Bank

Indian Bank State Bank of Hyderabad

Syndicate Bank Union Bank of India

Bank of India UCO Bank

Indian Overseas Bank Bank of Maharashtra

SBI Canara Bank

PNB

29


The table below gives the status of credit flow to Village & Small Industries (VSI) Sector

since 1991:-

YearNet Bank Credit

(in Rs. crores)

To SSI

(in Rs. crores)Share of SSI

March 1991 1,05,632 16,783 15.89%

March 1992 1,12,160 17,398 15.51%

March 1993 1,32,782 19,388 14.60%

March 1994 1,40,914 21,561 15.30%

March 1995 1,69,038 25,843 15.29%

March 1996 1,84,381 29,485 15.99%

March 1997 1,89,684 31,542 16.60%

March 1998 2,18,219 38,109 17.50%

March 1999 2,46,203 42,674 17.33%

March 2000 2,92,943 45,788 15.6%

March 2001 3,40,888 48,445 14.2%

March 2002 3,96,954 49,743 12.5%

March 2003 4,77,899 52,988 11.1%

Source: RBI

30


The Table below give the status of credit flow to Tiny Sector since 1995:-

At the

end of

March

'95

At the

end of

March

'96

At the

end of

March

'97

At the

end of

March

'98

At the

end of

March

'99

At the

end of

March

'2000

At the

end of

March

'2001

At the

end of

March

'2002

At the

end of

March

'2003

Net Credit

To Tiny Sector (Rs.

Crore)

7734 8183 9515 10273.138837.47*22,742**26,01927,03026,937

Tiny Credit as

percentage

of net SSI credit

29.93 27.76 30.2 27.0 20.7 54.03 53.7 54.34 50.84

Refers to units with investment in P&M upto Rs. 5 lakhs.

** Refers to units with investment in P&M upto Rs. 25 lakhs.

Note: Rs. 1 Crore = Rs. 10 million, Rs. 1 Lakh = Rs. 100,000/-

Assistance to SSIs by SFCs

The main objective of State Financial Corporations(SFCs) is to meet Term

Loan/Fixed Capital needs of the Small Scale Industries. There are 18 SFCs in

the country.

31


The Table below gives the total assistance and assistance to SSIs by SFCs:-

Year

SANCTIONS (Rs Crores)DISBURSEMENTS (Rs

Crores)

Total

AssistanceTo SSIs

Total

AssistanceTo SSIs

1992-93 2015.3 1686 1557.4 1163.9

1993-94 1908.8 1561 1563.4 1175.2

1994-95 2702.4 1920 1880.9 1314.5

1995-96 4188.5 2513 2961.1 1675.4

1996-97 3544.8 2115 2782.7 1529.6

1997-98 2626.0 1786 2110 1222

1998-99 1864 1365 1625 1004

1999-2000 2203 1617 1754 1083

Source: IDBI Annual Report

32


HISTORY OF BANKING IN INDIA

Without a sound and effective banking system in India it cannot have a healthy

economy. The banking system of India should not only be hassle free but it

should be able to meet new challenges posed by the technology and any other

external and internal factors.

For the past three decades India's banking system has several outstanding

achievements to its credit. The most striking is its extensive reach. It is no longer

confined to only metropolitans or cosmopolitans in India. In fact, Indian banking

system has reached even to the remote corners of the country. This is one of the

main reasons of India's growth process.

The government's regular policy for Indian bank since 1969 has paid rich

dividends with the nationalization of 14 major private banks of India.

Not long ago, an account holder had to wait for hours at the bank counters for

getting a draft or for withdrawing his own money. Today, he has a choice. Gone

are days when the most efficient bank transferred money from one branch to

other in two days. Now it is simple as instant messaging or dial a pizza. Money

have become the order of the day.

The first bank in India, though conservative, was established in 1786. From 1786

till today, the journey of Indian Banking System can be segregated into three

distinct phases. They are as mentioned below:

Early phase from 1786 to 1969 of Indian Banks

33


Nationalization of Indian Banks and up to 1991 prior to Indian banking sector

Reforms.

New phase of Indian Banking System with the advent of Indian Financial &

Banking Sector Reforms after 1991.

To make this write-up more explanatory, I prefix the scenario as Phase I, Phase

II and Phase III.

Phase I

The General Bank of India was set up in the year 1786. Next came Bank of

Hindustan and Bengal Bank. The East India Company established Bank of

Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as

independent units and called it Presidency Banks. These three banks were

amalgamated in 1920 and Imperial Bank of India was established which started

as private shareholders banks, mostly Europeans shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians,

Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore.

Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda,

Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of

India came in 1935.

During the first phase the growth was very slow and banks also experienced

periodic failures between 1913 and 1948. There were approximately 1100 banks,

mostly small. To streamline the functioning and activities of commercial banks,

the Government of India came up with The Banking Companies Act, 1949 which

was later changed to Banking Regulation Act 1949 as per amending Act of 1965

(Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers

for the supervision of banking in India as the Central Banking Authority.

34


During those days public has lesser confidence in the banks. As an aftermath

deposit mobilization was slow. Abreast of it the savings bank facility provided by

the Postal department was comparatively safer. Moreover, funds were largely

given to traders.

Phase II

Government took major steps in this Indian Banking Sector Reform after

independence. In 1955, it nationalized Imperial Bank of India with extensive

banking facilities on a large scale especially in rural and semi-urban areas. It

formed State Bank of India to act as the principal agent of RBI and to handle

banking transactions of the Union and State Governments all over the country.

Seven banks forming subsidiary of State Bank of India was nationalized in 1960

on 19th July, 1969, major process of nationalizations was carried out. It was the

effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major

commercial banks in the country were nationalized.

Second phase of nationalization Indian Banking Sector Reform was carried out in

1980 with seven more banks. This step brought 80% of the banking segment in

India under Government ownership.

The following are the steps taken by the Government of India to Regulate

Banking Institutions in the Country:

1949: Enactment of Banking Regulation Act.

1955: Nationalization of State Bank of India.

1959: Nationalization of SBI subsidiaries.

1961: Insurance cover extended to deposits.

1969: Nationalization of 14 major banks.

1971: Creation of credit guarantee corporation.

1975: Creation of regional rural banks.

35


1980: Nationalization of seven banks with deposits over 200 crore.

After the nationalization of banks, the branches of the public sector bank India

rose to approximately 800% in deposits and advances took a huge jump by

11,000%.

Banking in the sunshine of Government ownership gave the public implicit faith

and immense confidence about the sustainability of these institutions.

Phase III

This phase has introduced many more products and facilities in the banking

sector in its reforms measure. In 1991, under the chairmanship of M

Narasimham, a committee was set up by his name which worked for the

liberalization of banking practices.

The country is flooded with foreign banks and their ATM stations. Efforts are

being put to give a satisfactory service to customers. Phone banking and net

banking is introduced. The entire system became more convenient and swift.

Time is given more importance than money.

The financial system of India has shown a great deal of resilience. It is sheltered

from any crisis triggered by any external macroeconomics shock as other East

Asian Countries suffered. This is all due to a flexible exchange rate regime, the

foreign reserves are high, the capital account is not yet fully convertible, and

banks and their customers have limited foreign exchange exposure.

36


BANKS IN INDIA

In India the banks are being segregated in different groups. Each group has their own

benefits and limitations in operating in India. Each has their own dedicated target market.

Few of them only work in rural sector while others in both rural as well as urban. Many

even are only catering in cities. Some are of Indian origin and some are foreign players.

All these details and many more are discussed over here. The banks and its relation with

the customers, their mode of operation, the names of banks under different groups and

other such useful informations are talked about.

One more section has been taken note of is the upcoming foreign banks in India. The RBI

has shown certain interest to involve more of foreign banks than the existing one

recently. This step has paved a way for few more foreign banks to start business in India.

MAJOR BANKS IN INDIA

ABN-AMRO Bank

Abu Dhabi Commercial Bank

Indian Overseas Bank

IndusInd Bank

37


American Express Bank

Andhra Bank

Allahabad Bank

Bank of Baroda

Bank of India

Bank of Maharastra

Bank of Punjab

Bank of Rajasthan

Bank of Ceylon

BNP Paribas Bank

Canara Bank

Catholic Syrian Bank

Central Bank of India

Centurion Bank

China Trust Commercial Bank

Citi Bank

City Union Bank

Corporation Bank

Dena Bank

Deutsche Bank

Development Credit Bank

Dhanalakshmi Bank

Federal Bank

HDFC Bank

HSBC ICICI Bank

IDBI Bank

Indian Bank

ING Vysya Bank

Jammu & Kashmir Bank

JPMorgan Chase Bank

Karnataka Bank

Karur Vysya Bank

Laxmi Vilas Bank

Oriental Bank of Commerce

Punjab National Bank

Punjab & Sind Bank

Scotia Bank

South Indian Bank

Standard Chartered Bank

State Bank of India (SBI)

State Bank of Bikaner & Jaipur

State Bank of Hyderabad

State Bank of Indore

State Bank of Mysore

State Bank of Saurastra

State Bank of Travancore

Syndicate Bank

Taib Bank

UCO Bank

Union Bank of India

United Bank of India

United Bank Of India

United Western Bank

UTI Bank & Vijaya Bank

38


39


INDUSTRY PROFILE

Small Industries Development Bank of India (SIDBI) was established in April

1990 under an Act of Indian Parliament as a wholly-owned subsidiary of

Industrial Development Bank of India. SIDBI has since completed 8 years of

service to the small scale sector. As at March 31, 1998, SIDBI had a total staff

strength of 861 comprising of 685 professionals and 176 support staff.

SIDBI's statute provides that it should serve as the principal financial institution

for:

Promotion

Financing and

Development of industry in the small scale sector and

Co-ordinating the functions of other institutions engaged in similar

activities.

SIDBI became operational on April 2, 1990.

The Small Scale Industry (SSI) sector, which is a vibrant and dynamic sub-sector

of the India's industrial economy, comprises the area of SIDBI's business. The

contribution of the SSIs in terms of production, employment and export earnings

has been significant. The objectives of Government policy have been to impart

vitality and growth impetus to the sector by removing bottlenecks that affect the

growth potential. In the liberalised era and emerging economic scenario, the

sector is assured of continued support.

RANGE OF SERVICES

SIDBI REFINANCES:

Loans granted by PLIs for new SSI projects and for expansion,

technology upgradation, modernisation, quality promotion.

40


Loans sanctioned by PLIs to small road transport operators,

qualified professionals for self-employment, small hospitals and

nursing homes and to promote hotels and tourism-related activities.

SIDBI DIRECTLY FINANCES:

SSI units for new/expansion/diversification/modernisation projects.

Marketing development projects which expand the domestic and

international marketability of SSI products.

Existing well-run SSI units and ancillaries/sub-contracting units/

vendor units for modernisation and technology upgradation.

Infrastructure development agencies for developing industrial

areas.

Leasing and hire purchase companies for offering leasing/hire

purchase facilities to SSI units.

Existing export-oriented units to enable them to acquire ISO-9000

Series Certification

SIDBI HELPS:

SSIs to obtain credit rating from accredited credit rating agencies

SIDBI PROVIDES FOREIGN CURRENCY LOANS TO:

Import equipment by existing export-oriented SSIs and new units

having definite plans for entering export markets.

Execute confirmed export orders by way of pre-shipment

credit/letter of credit and provides post-shipment facilities.

SIDBI's VENTURE CAPITAL FUND PROVIDES ASSISTANCE TO:

Small scale entrepreneurs using innovative indigenous technology

and expertise.

41


LINES OF CREDIT ARE ESTABLISHED BY SIDBI IN FAVOUR OF:

State Financial Corporations

State Small Industries Development Corporations for supplying raw

material and extending marketing support to SSI units.

Factoring Companies to factor receivables of SSIs.

Commercial banks to cover their pre-shipment credit in foreign

currency of SSI exporters.

Merchant Banks for supporting equity issues of SSIs on Over The

Counter Exchange of India.

DEVELOPMENT AND SUPPORT SERVICES BY SIDBI ARE FOCUSED AT:

Enterprise promotion with emphasis on rural industrialisation

Human Resource Development of the SSI sector

Technology Upgradation

Special Emphasis Programmes - Quality and Environment

Management and

Information Dissemination

Programmes implemented for Enterprise promotion include:

Micro Credit Scheme

Rural Industries Programme

Mahila Vikas Nidhi

Entrepreneurship Development Programme

Programmes for Human Resource Development of the SSIs:

SIDBI supports the reputed management and technical institutions spread

throughout the country to conduct.

Small Industries Management Assistance Programme (SIMAP)

Skill-cum-Technology Upgradation Programme (STUP)

42


While the SIMP is aimed at providing to SSIs a trained cadre of

managers, STUP seeks to offer skill development opportunity to

owners/senior managers of SSIs.

Programmes for Technology Upgradation include:

Technology upgradation in identified industry clusters

Technology Transfer

Quality Enhancement

Quality and Environment Management programmes include support to

programmes and workshops on quality management techniques and assistance

to create awareness among the SSIs for abatement of environmental pollution.

Information Dissemination initiatives aim at promoting new units by

identification and publicity of viable project ideas and business opportunities

through :

Publication of Project Profiles

Broadcasting Udyog Sadhana Radio Programme

Production of video films on various entrepreneurship themes and

telecasting them through electronic media.

RANGE OF SERVICES

INSTITUTIONAL BUILDING:

SIDBI Co-promoted

Factoring Companies

Technology Bureau of Small Enterprises

North Eastern Development Finance Corporation Ltd.

IDBI Bank Ltd.

Indian Institute of Entrepreneurship, Guwahati

43


SPECIAL PURPOSE FUNDS IN SIDBI

National Equity Fund

Mahila Vikas Nidhi

Mahila Udyam Nidhi

Venture Capital Fund

Technology Development and Modernisation Fund

Marketing Development Assistance Fund with special earmarked

corpus for women.

UCO BANK-CHARTER FOR SMALL SCALE

INDUSTRIES

Both term and working capital loan sanctioned for setting up of a new

Industrial Unit or expansion/modernization/technological up gradation of an

existing industrial unit.

Simple Loan Application Forms

Acknowledgement for receipt of Loan

Application.

TIME NORMS:

Disposal of Loan Applications

Upto Rs.25,000 Two Weeks

Over Rs. 5 lacs Four Weeks

Upto Rs.5 lacs Eight to Nine

Weeks

44


COLLATERAL FREE LOANS :

No collateral security/Third Party Guarantee is required.

For loans upto Rs.5 lacs

For loans upto Rs.25 lacs on the basis of good track record and financial position

For loans upto Rs.25 lacs under the scheme of Credit Guarantee Trust Fund for

Small Industries (CGTSI)

Composite Loan upto Rs. 50 Lacs to SSI Units :

Rate of Interest :

Total funded exposure :

Upto Rs.50,000 9%

More than Rs.50,000 &upto Rs.2

lacs10%

More than Rs.2 lacs &upto Rs.5 lacs 11.5%

More than Rs.5 lacs &upto Rs.10

lacs* 12%

More than Rs.10 lacs &upto Rs.25

lacs* 13%

*with maturity less than 3 years

INDUSIND BANK- CHARTER FOR SMALL SCALE

INDUSTRIES

Working Capital Finance

45


It offers working capital facilities - both fund-based and fee-based. Fund-based

working capital products include cash credit, overdraft, bill discounting, short-

term loans, export financing (pre-shipment as well as post-shipment). Fee based

facilities include letters of credit and bank guarantees.

Working Capital facilities are provided to finance the day-to-day business

requirements. Funding requirements are structured to finance procurement of

raw materials/stores and payment towards manufacturing costs and other

overheads. Sales are financed against sundry debtors/ receivables.

The Bank offers a combination of operative cash credit and working capital

Short Term Finance

The Bank offers short-term loans for a period ranging from 3 months to 12

months to sound corporates for meeting their specific short-term working capital

requirements. The funds are provided with interest rates either linked to our

BPLR or at a fixed rate with varying repayment patterns.

Term Loans

It offers term loans to both Industrial as well as Infrastructure sectors promoted

by strong business houses. These loans are for a period of 3-5 years with a

moratorium period. Interest rates could be fixed or floating linked to the bank's

BPLR.

Bills Finance - Supply /Purchase

This product enables corporate to fund their operating cycle right from the stage

of procurement to sale. Bill Financing is extended by IndusInd Bank to its clients

at competitive rates.

Letter of credit backed bill discounting and clean bill discounting are the

convenient mode of financing for domestic trade transactions.

46


BOE could be broadly classified into Demand and Usance bills and are further

classified into clean and documentary bills.

Asset Securitization

It also extend loans for asset securitization comprising lease rental receivables

and other receivables backed by firm arrangements. In such cases, the future

cash flows of the client are discounted applying a discount rate and arrived at the

Net Present Value (NPV) which is the amount lent to the borrower.

BOI Artisan Credit Card (ACC)

Purpose

To provide adequate and timely assistance to artisans to meet their credit

requirements both investment needs as well as working capital. Investment loans

for purchase of tools/equipments by way of Demand Loan/Term Loan with

appropriate repayment schedule. The scheme would be applicable both in rural

and urban areas.

Eligibility

All artisans involved in production/ manufacturing process. Preference would be

given to artisans registered with Development Commissioner (Handicrafts) ·

Thrust in financing on cluster of artisans and artisans who have joined to form

Self-Help Groups (SHGs) · Beneficiaries of other Government Sponsored

Schemes are not eligible

47


Issue of cards

A photo Identity Card with sanctioned limit, validity period of credit facilities along

with a passbook incorporating Name, Address, Borrowing Limit, Validity Period,

etc. will be issued.

Credit limit

Credit limit to be fixed based on assessment of Working Capital requirements as

well as cost of tools and equipments required for carrying out manufacturing

process. For assessing working capital requirement, 20% of anticipated turnover

will be taken into consideration.

Maximum Limit

Rs.2 lakhs per borrower.

Security

Hypothecation of Assets created out of Bank Finance.

Margin

Up to Rs.25,000/- Nil

above Rs.25,000/- 20% to 25%

Rate of Interest *

Present

Upton Rs.50,000/- - 9% p.a

48


Above Rs.50,000/- upto Rs.2 lakhs - 9.75% p.a

* subject to change

Validity/Renewal of limits

1) Small scale units, artisans, village and cottage industry.

2) Self-Help Groups (SHGs) for their economic activities.

Purpose

i) Purchase of equipment machinery, vehicle, furniture/fixtures etc.

ii) Working capital needs.

Loan Amount Need based depending on project cost/turnover etc.

Margin

For limits up to Rs.25,000/- - NIL

For limits over Rs.25,000/-

up to Rs.5 lakhs - 10% - 20%

For limits over Rs.5 lakhs 15% - 30%

Rate of interest 1% less than the applicable interest rate for limits above

Rs.50,000/-.

Security No collateral for advances up to Rs.5 lakhs. If account is eligible for

cover under CGFTSI, no collateral is required for limits up to Rs.25 lakhs.

49


Repayment Period Repayment schedule will be spread over 3 to 7 years

depending upon nature of manufacturing activity proposed.

BOI - Laghu Udyami Credit Card (LUCC)

Eligibility

All existing customers under SSI sector who are having satisfactory dealings for

last 3 years and enjoying loan/operation limit up to Rs.2 lakhs.

Purpose

To meet the credit requirements of Small Scale Industries and Tiny Sector.

Assessment of credit

For assessing working capital requirement, 20% of anticipated turnover will be

taken into consideration, as per Nayak Committee recommendations.

Margin - 25%

Rate of interest (*)

Upto Rs.50,000/- - 9% p.a

Above Rs.50,000/- upto Rs.2 lakhs - 9.75% p.a

50


Above Rs.2 lakhs upto Rs.10 lakhs - 10.75% p.a

(*)subject to change

Women holding LUTC card are granted 1% p.a. concession in rate of interest

when the limit exceeds Rs. 50,000/-.

Validity

Limit sanctioned under LUCC will be valid for 3 years subject to satisfactory

conduct of account.

Limit valid for 3 years subject to annual review. Annual review without asking

financial statements from the borrower but based on assessment of performance

by field inspections.

CANARA BANK- CHARTER FOR SMALL SCALE

INDUSTRIES

1. Simplified & bilingual applications for credit facilities to SSI units are

available at all our branches.

2. Acknowledgments are issued to SSI units immediately on receipt of loan

application by branches.

3. SSI loan applications/credit proposals are disposed off within the

stipulated Time Norms from the date of receipt of application completed in

all respects:

a. Up to Rs.25000/- 2 Weeks

b. Over Rs.25000/- & up to Rs.5 lakhs 4 Weeks

c. Over Rs.5 lakhs 8 to 9 Weeks

4. Margin:

Up to Rs.25000/- Nil

Over Rs.25000/- 15% to 25% as determined by Bank

51


5. Rate of Interest:

Up to Rs.50000/- 8.75% for working capital & 9.25% for Term Loans

Over Rs.50000/- up to Rs.2 lakhs for Working Capital and Term Loans at

BPLR ( presently 10.75%)

Over Rs. 2 lakhs at attractive rate of interest.

6. Collateral-free loans up to Rs.5 lakhs.

7. Collateral -free loans over Rs. 5 lakhs & up to Rs.25 lakhs based on good

track record and financial position of the borrowing unit.

8. Collateral/Third Party Guarantee free credit limits (Fund Based) up to

Rs.25 lakhs if covered under Credit Guarantee Fund Scheme for Small

Industries (CGFSI).

9. Composite Loans under Single Window concept of RBI up to Rs.100

lakhs.

10.Loans under Margin Money Scheme of Khadi &Village Industries

Commission under their Rural Employment Generation Programme

(REGP) for setting up industrial/service units in Rural/ Semi Urban areas

focussing on employment generation.

11.Equity type Soft Loans under National Equity Fund (NEF)/Mahila Udyam

Nidhi (MUN) Schemes of SIDBI and Special Assistance to Women

Entrepreneurs through CED for Women/Mahila Banking Branches.

12.Loans under Technology Upgradation Fund Scheme (TUFS) for Textile &

Jute industrial units in SSI sector AND to 39 Specified Industries in SSI

sector for Technology Upgradation under Credit Linked Capital Subsidy

Scheme (CLCSS).

13.Loans for Acquisition of ISO 9000 Series certification by SSI units.

14.Standby Credit for Capital Expenditure of SSI units up to Rs.5 lakhs along

with renewal of working capital facilities for making small additions to fixed

assets of the unit.

15.Laghu Udyami credit card / Artisan credit cards upto a limit of Rs. 10 lakhs

& Rs. 2 lakhs respectively.

52


16.Focussed attention to SSI units at our 38 Specialized SSI branches

located in different parts of the country.

TERM LOANS

ELIGIBILITY Individuals, Proprietorship, Partnership, Ltd. Companies etc.

PURPOSE For acquisition of fixed assets (viz, land/building,

plant/machinery, other fixed assets) towards setting up of new

units and for expansion, modernization and diversification in

case of existing units

QUANTUM Depending on the project cost.

REPAYMENT 36 months and above in monthly/quarterly/half yearly/yearly

installments depending on the cash generation and Debt

Servicing capacity.

SECURITY 1st charge on fixed assets financed by us. Collateral Security

and Personal/Third Party guarantee shall be insisted wherever

required.

GUARANTEE

COVER

Cover under credit guarantee fund for small industries (CGFSI)

(in case the aggregate credit facility permitted is upto Rs. 25

lakhs)

ROI, Insurance cover etc., as per Bank's norms

53


SIMPLIFIED OPEN CASH CREDIT (SOCC)

A LIBERALISED credit facility to SSI entrepreneurs who are not in a position to

maintain detailed stock books.

PURPOSE For working capital needs of Small SSI units. Facility available

as Running Limit.

MAXIMUM LIMIT Rs.5 lakhs only

SECURITY Prime security - Assets created out of the credit facility

Collateral security - Fixed assets of the unit wherever

applicable

REPAYMENT Facility is permitted as a Running Limit subject to review

/renewal every year.

GURANTEE

COVER

Cover under Credit Guarantee Fund for Small Industries

(CGFSI) would be available

COMPOSITE LOAN SCHEME

A SIMPLIFIED scheme devised under Single Window Concept of RBI to suit

the requirements of Tiny Units under SSI sector.

PURPOSE For acquiring equipments, construction of work sheds and to

meet working capital needs of the unit

ELIGIBILITY Artisans, village and cottage industries engaged in

manufacturing, processing, preservation and servicing by

utilizing locally available natural resources and/or human skills

where individual credit limit does not exceed Rs.25 lakhs.

54


Tiny units under SSI sector irrespective of their location and

whose investment in plant and machinery does not exceed

Rs.25 lakhs.

LOAN

AMOUNT

Maximum Rs.100 lakhs

MARGIN * NIL up to Rs.2 lakhs

* 25% for loans over Rs.2 lakhs

SECURITY Prime security - Assets created out of the credit facility

Collateral security - Nil up to Rs.5 lakhs.

For loans over Rs.5 lakhs and as determined by Bank on merits

REPAYMENT Repayment within 3 to 10 years including initial moratorium of

12 to 18 months.

GURANTEE

COVER

Cover under Credit Guarantee Fund for Small Industries

(CGFSI) would be available. For collateral free/3rd party

guarantee, free loans upto Rs. 25 lakhs.

55


BANK OF INDIA- CHARTER FOR SMALL SCALE

INDUSTRIES

1. To acknowledge loan applications.

2. To issue applications accompanied by checklists.

3. To comply with time norms for disposal of applications, received complete in

all respects –

(a) 2 weeks for loan up to Rs.25, 000/-

(b) 4 weeks for loan up to Rs.5 lakhs

(c) 8-9 weeks for loan over Rs.5lakhs

4. No collateral security for loans up to Rs.5 lakhs.

5. No collateral for loans over Rs.5 lakhs and up to Rs.25 lakhs subject to good

track record and financial position.

6. To consider composite loan up to Rs.100 lakhs.

7. To compute working capital requirements based on Nayak Committee norms.

Loan quantum: minimum 20% of anticipated annual turnover.

8. To cover loan accounts with limits up to Rs.25 lakhs without collateral

security/third party guarantee under CGFTSI, if eligible.

9. To offer concession in interest rates up to 1% under “Priyadarshini Scheme”

(Scheme for women entrepreneurs).

10. To consider short term loan facility at Sub-PLR rates to meet temporary

liquidity requirements of eligible credit worthy existing borrowers with good track

record under “Star - SSI Supreme Scheme”.

11. We also participate in -

(a)Rural Employment Generation Programme (REGP) of KVIC.

(b) Credit Linked Capital Subsidy Scheme for Technology Up gradation

administered by SIDBI.

(c) National Equity Fund Scheme of SIDBI.

56


Bank of India’s product spectrum

To assist the SSI sector, Bank has been adopting innovative and growth

measures. Keeping in view, the Bank's past rich experience in financing this

sector and in tune with Government/Reserve Bank of India guidelines, the Bank

has recently launched innovative products with defined objectives and refined

methodology exclusively for SSI units. The philosophy behind launch of new

products/schemes has been to promote growth of industries and to provide

hassle free assistance to borrowers who have established their credentials with

the Bank and shown their commitment to run the unit successfully. These

products/schemes are listed below :-

i) Star - SSI Suprime Scheme (SSS)

ii) BOI - Artisan Credit Card (ACC)

iii) BOI - Laghu Udyami Trade Card (LUTC)

iv) "Priyadarshini Scheme" (Scheme for Women Entrepreneurs)

Star - SSI Suprime Scheme (SSS)

Objective

The product has been designed to offer loans at BOI Sub-PLR rates to existing

credit worthy borrowers coming under SSI Sector.

Purpose

Short Term Loans up to 180 days to meet/supplement temporary liquidity

requirements which may have arisen due to bunched despatch of goods,

execution of special orders with short delivery schedule, seasonal build up of

inventories awaiting despatch for which orders from reputed companies are on

hand.

57


Eligibility

"AAA" and "AA" rated borrowers having sound track record making net profit at

least during the last 3 years and having an annual turn-over in excess of Rs.50

lakh.

Facility : Short Term Loans up to 180 days against inland bills of our Prime,

"AAA" and "AA" rated borrowers accepted by the drawees, bills drawn on

Government Department/ Undertaking including SEBs with whom power of

attorney has been registered and against accepted bills drawn under L/C (DA) by

prime banks with usance not exceeding 180 days.

Quantum of finance : Minimum : Rs.5 lakhs

Maximum : Rs.25 lakhs

Margin

Short Term Loan : 25%

Against Bills : Nil

Interest Rate

<For customers with Credit Rating :

"AAA" : 2% below BOIPLR

"AA" : 1% below BOIPLR

Repayment

Identified at the time of consideration of the loan and depending on the type of

facility availed (maximum 180 days).

Security

Charge on assets/extension of charge, wherever needed.

58


1. Acknowledgments for receipt of loan application by branch by affixing date

stamp.

2. Time Norms for disposal of loan applications:

a. Upto Rs. 25,000 - Within 2 weeks*

b. Over Rs. 25000 & up to Rs. 5 lacs - Within 4 weeks*

c. Over Rs. 5 lacs - Within 8-9 weeks*

* from the date of receipt of duly completed loan application and check list

3. No collateral security for advances up to Rs. 5 lacs and for Advances over Rs.

5 lac up to Rs. 25 lakh based on good track record and financial position.

4. Guarantee cover is available under Credit Guarantee Scheme floated by

CGTSI for SSI for loans sanctioned without collateral security /third party

guarantee for advances upto Rs. 25 lacs. For availing guarantee cover under the

Scheme, a guarantee fee of 2.5 % of credit facility sanctioned for a period of 5

years and Annual service fee @ 1% of outstanding amount as on 31st March

every year is payable.

5. Composite loan upto Rs. 50 lakh is sanctioned to SSI units.

6. Loan quantum : Minimum 20% of projected annual sales turnover (Nayak

committee norms) for working capital requirement.

7. Margin Money Requirement(Contribution by the Borrower):

Loans upto Rs. 25,000/- NIL

Loans above Rs. 25,000/- 15% to 25%

59


8. Rate of Interest

a. Credit limits upto & inclusive of Rs. 2 lakhs: At COBAR (presently 10.5%) for

loans of tenor upto & inclusive of 1 year

At COBAR +0.50% for loans of tenor above 1 year

b. Credit limits above Rs. 2 lakhs and upto & inclusive of Rs. 100 lakhs: At

COBAR +0.50% for loans of tenor upto & inclusive of 1 year

At COBAR + 1% for loans of tenor above 1 year

c. Credit limits above Rs. 100 lakhs:

Maximum at COBAR +2% for loans of tenor upto & inclusive of 1 year

Maximum at COBAR + 2.5 % for loans of tenor above 1 year

(Corporation Bank Benchmark Advance Rate [COBAR] is presently fixed at

10.5%)

9. Bank has launched the following entrepreneur friendly Schemes:

A. Corp Artisan Credit Card Scheme: Financing Artisans to meet the cost of

acquiring tools and equipments and working capital requirements

B. Corp Laghu Udyami Credit Card Scheme: Hassle-free Scheme for Financing

Small Businessmen, Retail traders, Artisans, Village Industries, SSI and tiny

units, Professionals and Self Employed.

C. Establishment of Creches: Finance for setting up of Creches for children of

working women to assist them to take up employment and become economically

independent.

60


D. Village Information Centres: Financing village information centres to generate

employment and to derive benefits of information technology.

E. Self Employment Ventures: Financing ventures in rural areas under KVIC

margin money Scheme.

F. Technology Up gradation Fund Scheme: Under the Scheme, interest

reimbursement of 5% is available on the loans availed for induction of state of the

art or near state of the art technology.

G. Credit linked Capital subsidy Scheme for Technology Up gradation of the

Small Scale Industries: Back ended capital subsidy is admissible on the loans for

technology up gradation in certain sectors.

INDIAN BANK- CHARTER FOR SMALL SCALE

INDUSTRIES

Time - Bound Loans for Small Scale Industries

61


Loan Limit Time for Disposal from the date of receipt

of application complete in all respects.

Loans upto Rs.25,000/- 2 Weeks

Over Rs.25,000/- and upto

Rs. 5 lakhs

4 weeks

Over Rs.5 lakhs 8 - 9 weeks

The exemption limit of SSI borrowal accounts for obtention of collateral

security is Rs 5.00 lakhs

Based on good track record and financial position of the units the

dispensation limit of collateral requirement for SSI loans is now extended

upto Rs 25.00 lakhs

For loans sanctioned without collateral security/Third party Guarantee with

limits upto Rs 25 lakhs, guarantee is available under Credit Guarantee

Fund Trust Scheme for SSIs (CGTSI).

For loans covered under Credit Guarantee Fund Trust Scheme (CGTSI)

the one time up front fee of 2.5%* is borne by the Bank (from 01 04 2004

to 31 03 2006)

[* the fee is 1.5%

a) for all loans upto Rs 2.00 lakh

b) All eligible women entrepreneurs

c) All eligible borrowers located in the North Eastern Region (including

Sikkim) and Jammu & Kashmir]

Composite loans upto Rs 100 lakhs is sanctioned to SSI units

Loan Quantum

Loan quantum /credit requirement would be assessed based on the norms

of the Bank

Minimum 20 % of projected annual sales (Nayak Committee Norms) for

working capital limits upto Rs 5 crores

62


Branch Managers empowered to sanction adhoc limits upto 20% of

Working Capital Limits (both Fund based and Non-Fund based) This is

also applicable to Medium Enterprises.

Interest rate structure

Advances -

SSI

Interest Rate

Working Capital

& Term Loan < 36

months

Term Loan (36 months and

above)

Limits upto Rs

2 lakhs

BPLR - 1%

(presently 10%)

BPLR + TP - 1% (presently

10.50%)

Limits above

Rs 2 lakhs

PLR + 2% *

(presently

13.00%)

PLR + TP + 2% * (presently

13.50%)

* Finer rate of interest upto PLR are given based on credit rating and subject to

change from time to time .

Incentives

One time cash incentive of Rs 10,000/- for ISO certified SSI borrowers.

63


COMPANY PROFILE

1. SSI entrepreneurs have a right to seek credit assistance from bank-

branches convenient to them.

2. Our Bank sanctions loans/credit assistance to Small Scale Industries for

acquisition of fixed assets (factory land/buildings & machinery) and working

capital requirements at very competitive interest rates and against soft margins

Rate of interests effective from 01.06.2003:

PeriodUpto Rs. 2

lacsAbove Rs. 2 lacs

Having contractual maturity upto 180

days (STPLR-I)

10.00% 10.00% with band of 0% to 2% based

on credit ratings

Having contractual maturity more

than 180 days but upto 1 year

(STPLR-II)


on credit ratings

Having contractual maturity more

than 1 year (TPLR)


on credit ratings

Interest rates on new SSI advance accounts will have a band of 0.50% only in case of

loans above Rs. 2 lacs.

64


The above interest rates are subject to change from time to time as per RBI

directives/bank’s policy guidelines.

3. Trilingual Loan application forms for availment of loans by SSI

borrowers in Hindi, English and local Language are available at branches.

4. A “Check List” of requirements along with the application form to

enable the potential borrower to submit all necessary information and

documents required for consideration of his/her request for loan at one

time will be available at our branches

5. An acknowledgement of receipt of application forms along with

Check List will be issued and definite date for discussion, clarification etc.,

if considered necessary, will be intimated to the applicable by branches

6. Loan application forms complete in all respects will be disposed off within

the time schedule given below:

Upto Rs. 25,000

Within 2 weeks

Upto Rs. 25,000/- to upto Rs. 5 lacs Within 4 weeks

Over Rs. 5 lacs Within 8 to 9 weeks

7. Collateral /third party guarantee free loans are considered to Tiny/Small

Scale Industries for credit limits upto Rs. 25 lacs based on the criteria given

below:

For loans upto Rs. 5 lacs

To all the Tiny sector/ Small Sector units

For loans over Rs. 5 lacs &

upto Rs. 25 lacs

To all Tiny Sector/Small Scale Sector units, if covered

under Credit Guarantee Fund Scheme for Small

Industries (CGFSI)

65


For loans over Rs. 5 lacs &

upto Rs. 15 lacs

To Tiny Sector / Small Scale Sector units having

satisfactory dealings with the Bank for last 3 years and

sound financial position even if not covered under

Credit Guarantee Fund Scheme for Small Industries.

8. Composite Loans upto Rs. 50 lacs for Capital investment/working

Capital under Single Window Concept are considered

9. Hassel free credit limits upto Rs. 2 lacs under special scheme -

“BOB Laghu Udyami Credit Card Scheme” are considered to all our

existing customers in the categories of Tiny/Small Scale units having

satisfactory track record/dealings with our bank for the last 3 years

10. The Loans are available under following special schemes:

National Equity Fund Scheme where bank loan at Interest

Rates as mentioned aforesaid and Equity Loan at a service charge

of 5& p.a. from SIDBI for setting up new projects in tiny/small scale

sector and for undertaking expansion, modernization, technology

upgradation for existing SSI/Tiny units

Margin Money Scheme of Khadi & Village Industries

Commission Under Rural Employment Genertion Programme for

setting-up industrial/service units in Rural/Semi urban areas which

generate employment under which margin money subsidy upto a

maximum amount of Rs. 4 lacs is available to the beneficiaries

Technology Upgradation Fund Scheme (TUFS) under which

an interest incentive of 5 percentage points on the loans for

Technology upgraqdation /modernization of their units can be

availed by Textile Textile Industrial Units in SSI sector

Credit Linked Capital Subsidy Scheme under which 12%

capital subsidy for induction of proven technologies approved under

the scheme is provided for Technology Upgradation specified

industries in SSI sector to facilitate technology upgradation of their

units

66


11. Specialised services at our 38 Specialised SSI branches to SSI

units across the country

12. Interaction with our existing and potential SSI entrepreneurs

through periodical meetings conducted at SSI Clubs of our Specialised

SSI branches for furthering quality of service at branches

13. A grievance - redressal mechanism is in place in our Bank:

Customer’s Complaints against a branch can be lodged with respective

Regional Office of the Bank. If no action is initiated within 15 days,

customer may approach respective Zonal Office. If still no action for a

month, customer may directly write to Priority Sector Department, Baroda

Corporate Centre, Mumbai. Addresses of Regional, Zonal and Baroda

Corporate Centre are available at all our branches.

Charter of Credit Entitlements for SSI Borrowers

SSI Entrepreneurs have right to seek credit assistance from bank-

branches convenient to them

Bank considers loans/credit assistance to SSIs for acquisition

offixed assets (factory land/buildings & machinery) and working capital

requirements against : (a) soft margins (b) at very competitive interest

rates for loans above Rs. 2 lacs with a ban of 0% to 2% over respective

PLR for existing accounts based on credit ratings. For new accounts the

band is only 0.50% over respective PLR.

Loans upto Rs. 2 lacs are granted existing as well as new accounts

at 0.25% and 0.50% below respective PLRs for a period from 6 months to

1 year and above 1 year respectively.

Trilingual Loan application forms for availment of loans by SSI

borrowers in Hindi, English and local language are available at our

branches.

An acknowledgement of receipt of application forms along with

Check List will be issued and definite date for discussions, clarifications

67


etc., if considered necessary, will be intimated to the applicants by

branches.

Loan application forms complete in all respects will be disposed off

within a period of 2 weeks for limits upto Rs. 25,000/- within 4 weeks for

limits between Rs. 25,001/- to Rs. 5 lacs and within a period of 8 to 9

weeks for limits above Rs. 5 lacs.

Collateral/third party guarantee free loans are considered to all

Tiny/Small Scale Industries for credit limits upto Rs. 5 lacs. For loans over

Rs. 5 lacs and upto Rs. 25 lacs - no collateral security if covered under

Credit Guarantee Fund Scheme for Small Industries (CGFSI). For

Tiny/SSI units having satisfactory dealings for last 3 years and sound

financial position - no collateral security / third party guarantee insisted for

loans over Rs. 5 lacs and upto Rs. 15 lacs even if not covered under

CGFSi.

Composite Loans upto Rs. 50 lacs for Capital Investment/Working

Capital under Single Window Concept are considered.

Hassle free credit limits upto Rs. 2 lacs under “BOB Laghu Udyami

Credit Card Scheme” to all our existing Tiny/SSI units having satisfactory

track record/dealings with the bank for the last 3 years.

Loans are available under following special schemes.

National Equity Fund Scheme fir setting up new projects in

tiny/small scale sector and for undertaking expansion,

modernization, technology upgradation for existing SSI/Tiny units

Margin Money Scheme of KVIC for setting up

industrial/service units in Rural /Semi Urban areas with margin

money subsidy upto a maximum amount of Rs. 4 lacs

Technology Upgradation Fund Scheme (TUFS) - loans with

interest subsidy of 5% for technology upgradation / modernization

by Textile Industrial Units in SSI sector

68


Credit linked Capital Subsidy Scheme - Loans with 12%

capital subsidy for Technology Upgradation to specified industries

in SSI sector.

Specialised services at our 38 Specialised SSI branches to SSI

units across the country

Interaction with our existing and potential SSI entrepreneurs

through periodical SSI Club meetings at our Specialised SSI branches for

furthering quality of service

A grievance - redressal mechanism is in place at our Branches / Regional / Zonal

offices and Corporate Office to redress customers’ banking related

complaints/issues.

RESEARCH OBJECTIVE

To study the

To study.

To study the

RESEARCH METHODOLOGY

DATA ENVELOPMENT ANALYSIS

Measuring Efficiency

69


Data Envelopment Analysis (DEA) is concerned with comparing the efficiency of

organizations such as local authority departments, British Telecom districts,

schools, retailers and bank branches. It is applied where there are many fairly

similar units each of which has multiple inputs and multiple outputs.

For instance, to assess the efficiency of petrol stations one might draw up this list

of inputs:

number of pumps;

population in catchments area;

number of cars per head in catchments area;

competitors in the catchments area;

income of households;

state of repair of petrol station;

shelf space in convenience store;

And outputs:

petrol sales;

Convenience store sales.

If one simply had a single input and a single output one would define a measure

of efficiency as:

Efficiency = output / input

And normalize it to be less than or equal to 1.

The natural extension to multiple inputs and outputs is to use weighted sums of

the inputs and outputs:

Efficiency = weighted outputs / weighted inputs

70


= Σi ui xi / Σj vj yj

The DEA Approach

If everyone could agree on a common set of weights {ui, vj} that would be the

end of the story. But people cannot agree. This is where DEA comes in.

It allows units in the system to choose their own weights in the way which is most

advantageous to them. If a unit is inefficient even with the set of weights which is

most favorable to it, then there are serious grounds for investigating further.

Each unit is considered in turn and its most favorable weights are selected. The

efficiency of all other units is computed using this set of weights. The result is

that for each unit we obtain a series of relative efficiencies both using those

weights most favorable to it and those most favorable to other units.

Allowing this flexibility in setting the weights has both strengths and weaknesses.

Permitting each unit to show itself in its most favorable light strengthens the

evidence where units are found to be inefficient and at the same time makes

such results more palatable. On the other hand, if too many inputs and outputs

are considered, every unit may be efficient on its own terms. The underlying

linear model of efficiency is also open to criticism, although this can be

addressed to some extent by transforming the raw data (e.g. taking logarithms).

Aligning DEA with an Organization’s Aims

The implication is that DEA is a tool which needs to be applied with care and

judgment. There needs to be a large enough number of similar units and this

number must be much greater than the number of inputs and outputs chosen.

71


Value judgments may be needed to constrain weights to ensure that the results

are consistent with the purpose of the units.

At their least controversial, constraints on weights are simply common-sense. For

instance, in a study of prenatal care there were separate measures of output for

the numbers of very satisfied mothers, satisfied mothers and not dissatisfied

mothers. The weights on these were constrained so that the weight on very

satisfied mothers was greater than or equal to that on satisfied mothers which

was greater than or equal to that on not dissatisfied mothers. It would be an odd

health authority which proclaimed its efficiency by placing greater weight on

those who acquiesced to its services than those who were pleased with them.

Similarly, few would challenge the need to restrict weights when faced with a

finding that Liverpool's Rates Department appeared efficient only by loading its

entire output weights onto the number of summons and distress warrants issued

with zero weight on the revenue raised.

Performance Targets

When DEA assesses a unit as inefficient, it identifies those other units’ m* by

which the unit has been found to be inefficient. It produces a set of weighting

factors {λm*} such that the outputs of the inefficient unit could be produced using

fewer inputs by a "target" unit comprising a weighted combination of the units m*.

(An alternative formulation constrains the inputs and then shows the greater

outputs which would be achieved by the composite efficient unit).

It is one of the strengths of DEA that it automatically produces targets where it

finds units to be inefficient. However, the target which is generated automatically

is not necessarily that to which the inefficient unit would aspire and DEA software

(such as that developed at Warwick) enables the user to explore the entire

efficient frontier which improves on the unit's current performance.

72


Figure 1: Setting Targets for an Inefficient Unit

In the diagram there are two outputs, y1 and y2 whose values are shown relative

to a single (fixed) input. The efficient frontier is defined by points P1, P2, P3 and

P4. Unit P5 is inefficient and its natural target is the point P* which lies where the

ray traced from the origin intersects the efficient frontier (i.e. pro rata increases in

the outputs). However, there is no reason why it should not choose any target on

the efficient frontier between P' and P": this would amount to increasing one of

the outputs more than the other. If it really wanted to, it could choose any point

on the efficient frontier at all, but this would raise questions about why it was

producing its current levels of the outputs.

73


Using DEA in Practice

One way in which DEA is used, for instance in studies commissioned by the

Audit Commission, is to identify those units worth further investigation (either

because they are very good or very bad). The more detailed study then leads on

to a report describing best practice and making recommendations.

Somewhat similar to this is the use which a brewery made of DEA when required

to divest itself of a large number of pubs. Rather than simply selling those which

were least profitable, it used DEA to assess the performance of its pubs. Those

which were efficient but unprofitable or marginally profitable were sold but those

which were inefficient and unprofitable were investigated further to determine

whether they could become profitable and should be retained.

When DEA is used to set targets one needs to beware of the possibility of

undesirable behavioral responses. For instance, if one of the output measures for

a university department is the number of papers published, academics may

improve their measured efficiency by submitting each minor advance as a fresh

paper to a different journal.

DEA therefore cannot be used in isolation but must be seen as a tool within the

complete cycle of management.

Figure 2: Performance Measurement and Control

74


The stages of DEA: defining inputs and outputs; determining value systems;

measuring performance; assessing it and setting targets, must all be related to

the aims and values of the organization. Within this context DEA becomes part of

a mission-driven framework of performance measurement and improvement.

DATA ENVELOPMENT ANALYSIS AND ITS USE IN

BANKING

Data Envelopment Analysis

Data Envelopment Analysis (DEA) is a way of assessing the comparative

performance of units within an organization, e.g. branches of a bank, schools

within a Local Education Authority, and sales outlets of a retailer. These units

must perform broadly comparable functions but may vary in size, environment,

resources used and results achieved. DEA seeks to measure their efficiency in

terms of how well each unit performs when compared with its peers.

CONSIDER AN EXAMPLE

75


A bank has 4 branches within which there are two types of labor: supervisors and

trainees, and a single measure of output: thousands of transactions processed.

The data are as shown in the table.

Branch Inputs Outputs

Supervisory

Hours

Trainee Hours Transactions (000)

1 2 3 1

2 4 1 1

3 2 2 1

4 1 4 1

Clearly branch 1 is doing worse than branch 3 because it uses the same number

of supervisory hours but more trainee hours to achieve the same output. But you

cannot make direct comparisons with branches 2 and 4. These results are

typical: pair wise comparison normally doesn't get very far.

In order to make progress we make some assumptions. Consider two possible

sets of inputs and outputs, P1, P2. In our example they could represent branches

1 and 2, i.e. the sets {2, 3; 1}, {4, 1; 1}. Then we assume that:

given any two possible sets of inputs and outputs, P1, P2, any weighted

average of these is also possible, i.e. we can define new sets of inputs

and outputs of the form [P1 + ( 1 )P2 ] for 0 < < 1;

there are constant returns to scale, i.e. if you double the inputs you can

double the outputs;

You can dispose of excess inputs and outputs at zero cost.

Assumption 1 means that we can make a new possibility by weighting branch 3

by 0.5 and branch 4 by 0.5 to yield:

76


0.5 * {2, 2; 1 } + 0.5 * { 1, 4; 1 } = { 1.5, 3; 1 }

This combination can now be compared directly with branch 1. It uses the same

trainee hours but fewer supervisory hours to achieve the same result and so is

clearly more efficient.

Using other values of and considering combinations of branches 2 and 3 as

well as branches 3 and 4 we can define the efficient frontier, B2 B3 B4 as shown in

Figure 1.

Figure 1: Combinations of Trainee and Supervisory Hours to Achieve 1 Unit of

Output

77


These are possible ways of producing 1 unit of output which are efficient in the

sense that for each ratio of supervisory to trainee hours it is not possible to

achieve the output with fewer hours' labor.

Assumption 3 means that any point in the shaded area above the efficient frontier

is also a possible way of achieving the outputs. It is known as the production

possibility set. Points strictly within the interior, such as B1, are inefficient. Their

efficiency is defined as the proportion by which their inputs could be reduced

while retaining the mix of inputs, i.e. how far one could move along the radius

from the origin before reaching the efficient frontier. The efficiency of B1 is thus

the ratio OM/OB1 = 0.857. The point M is known as the target and B3 and B4 are

B1's efficient peers.

Issues with the DEA Approach

78


In using DEA one is making a fundamental leap of faith with assumption 1, that

convex combinations of observed possibilities will work. DEA should only be

used where this is credible. On the other hand, assumption 2, about constant

returns to scale, can be relaxed (and is in the Warwick DEA software).

Assumption 3 is more generally applicable, although there will be some situations

where it is not.

DEA tackles problems which might also be tackled using regression. DEA offers

the advantage that it identifies an efficient rather than an average level of output

against which the performance of individual units is judged. Further, while in

regression we must specify in advance the functional form linking inputs to

output, that is not necessary in DEA. This makes it possible to consider multiple

inputs against multiple outputs in DEA while in regression we must either have a

single input with multiple outputs or a single output with multiple inputs. Set

against this there is a greater risk of distortion of results by outliers. It is normal to

do several runs with different sets of inputs and outputs and check that the

results are robust.

Uses in Banking

Two approaches are used in applying DEA in banking:

the production view, in which branches are viewed as using labor, capital,

space, etc to process transactions, make sales of financial products, etc;

The intermediation view, in which branches are viewed as collecting funds

and deposits from the neighborhood and intermediating them into loans

and other income-earning activities.

These two views are complementary and can be integrated into an overall

assessment, as shown in Figure 2.

79


Figure 2: Integrating DEA Assessments in Banking

The intermediation view was used in a sales maximization model at a UK bank.

Branches were considered as using resources of sales people, opening hours,

market size, customer base, transactions processed and facilities. The outputs

were mortgage applications, insurance sales and savings accounts sales. This

model assumed fixed returns to scale and market size was one of the main

inputs. The model served to measure the efficiency of branches in generating

business within their markets and comparisons were made primarily among

branches with similar types of market.

This model was supplemented by a resource optimization model which took

direct staff costs as its input and considered mortgage applications, insurance

sales, savings account sales and transactions as outputs. This model used

variable returns to scale and was used to set target values to emphasize to

branches the potential to improve performance.

The Bank of Finland (i.e. the Finnish central bank) uses DEA in its Financial

Markets Department to monitor banks operating in Finland. It uses the production

view and seeks to assess the efficiency of banks' payment and account

transaction services. The inputs are the number of branches, number of ATMs,

the use of labor and the number of computer terminals used. The outputs are the

number of transactions handled by clerks, the number of ATM transactions, cash

withdrawals and loans processed. Its model uses variable returns to scale and

80


seeks to identify banks' overall efficiency and decompose it into that part which is

attributable to the scale at which the unit is operating and the rest, which is

attributable to management.

As well as studies across banks, the Bank of Finland also does cross-time

studies to compute Malmquist indices. These decompose changes in a unit's

productivity over time into that due to the unit's becoming more efficient and that

due to shifting of the boundary.

Outcome from DEA Assessments

The main outcome from DEA assessments tends to be the identification of

efficient peers as role models for each inefficient unit and the setting of targets.

This gets away from the underlying theory of DEA and its applicability, which may

well be open to challenge. It therefore acts as a spur to improvement within the

normal processes of management. At a higher level, DEA assessments may be

used to gauge the level of returns to scale with a view to long-term changes in

the structure of an organization, e.g. whether to reduce the number of branches

or concentrate transaction processing.

81


Data Collection

We have considered secondary data for the research study.

SECONDARY DATA: mainly consists of books, periodicals, magazines,

Internet etc.

STUDY ON

‘BANK FINANCING FOR THE SSI SECTOR’

SURVEY PROFILE

The survey attracted responses from 100 individual SSI units. The participating

SSI units exhibited a wide range of product mix that included items like sacks,

bags and tarpaulins, paraffin wax, foundry materials, stainless steel castings,

measuring instruments, aroma & fine chemicals, auto components, shoes, gas

cylinder valves, mixer machine, spices and other foodstuffs, adhesives, copper

pipes, coir products, rubber goods, natural essential oils, welding electrodes,

cooling tower and heat exchanger, sports goods and telecommunication

products.

STUDY ON


HIGHLIGHTS

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Working Capital Financing

There has been some improvement over time in the availability of working capital

finance from banks to the SSI units.

Five years ago

35% of the respondents were getting between ‘10% to 20%’ of their projected

annual turnover as working capital loans

Now

42% of the respondents are getting between ‘10% to 20%’ of their projected

annual turnover as working capital loans

Despite the above improvement nearly a third of the participating SSI units are

presently getting less that 10% of their projected annual turnover as working

capital loans from their respective banks.

Interest rate on working capital loans

The rate of interest charged by banks to the SSI units for advancing working

capital loans has come down over the last five years. A larger number of SSI

units are now paying interest in the 12% to 14%.

Five years ago

47% of the respondents have reported that for working capital loans they were

charged interest in the range of ‘14% to 16%’ five years ago.

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17% of the respondents were paying interest in the range of ‘12% to 14%’ on

their working capital loans

Now

51% of the respondents are paying interest in the range of ‘12% to 14%’ on their

working capital loans.

Only 12% of the respondents are paying interest in the range of ‘14% to 16%’.

While the rate of interest charged to the SSI units have gone down, some of the

banks have increased the frequency of compounding from quarterly

compounding to monthly compounding. This increases the financial burden and

also negates the benefits of reduced interest rates.

Interest rate on term loans

41% of the respondents are paying interest in the range of the ‘12% to 14%’ for

term loans for a period of five years on average.

While 23% said that they are paying interest in the range of ‘14% to 16%’,

another 16% reported paying interest between ‘16% to 18%’ on their term loans.

. 50% of the respondents have said that the bank authorities do not provide

reasons in case of refusal of loan applications.

. 70% feel that the banks are not giving adequate publicity to various schemes

relating to SSIs.

. 59% of the respondents said that obtaining funds from banks is moderately

difficult. Another 20% felt that it is an extremely difficult process.

. Problem faced by SSI units

Delay in loan sanction and disbursement

Lack of transparency with regard to sharing of information

Inadequate discretionary power with the bank manager

Absence of collateral security norms

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Inadequate publicity by banks of various schemes for the SSI sector

Present composite loan limit of Rs 25 lakh is inadequate

Operational issues

♠ The processing fee is charged by the banks even on limits not sanctioned,

as the same needs to be paid with the application.

♠ Most of the bank branches do not have forex facility. This proves to be a

major hindrance for SSI exporters as they receive payments in foreign

currency.

♠ In computing maximum permissible bank finance, banks give a lot of

weight age to stocks. This methodology adversely affects those SSI units

which through efficient inventory management have reduced their stocks

and have greater bills receivables on their books.

♠ The time taken for collection of cheques deposited for realization is

inordinately long.

Suggested remedial measures

1. The decision on the loan application should be taken in a time bound manner.

Once all the required documents have been filed by the applicant, the application

should be reviewed and a stand taken within 4 weeks.

2. Information relating to credit appraisal done by the banks should be shared

with the applicants. It would be helpful if the banks inform the units the areas

where their performance has fallen below the rating parameters and counsel the

units to perform better and measure up.

3. In case the loan application is rejected, the bank must apprise the applicant

about the reasons for not granting the loan. This will help the applicants in

rectifying his application the next time he applies for a loan.

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4. There should be devolution of greater authority at the branch manager level.

Further, as the branch manager is generally overworked with responsibilities

vested in him, officers should be specified in all branches, who would be

responsible for loans to the SSI sector for limits within the sanctioning power of

the branch manager.

5. Guidelines on the amount of collateral required for different loan amounts

(both fresh loans and renewals) should be specified by the RBI and implemented

by the banks.

6. The present collateral-free loan limit is Rs 5 lakh. Further, as per the SSI

charter of some of the banks, units with good track record and financial position

are eligible for collateral-free loans over Rs 5 lakh and upto Rs 15 lakh. This limit

for collateral-free loans should be enhanced further

7. Information on all loan schemes pertaining to the SSI sector should be made

readily available. The banks should interact regularly with customers by way of

mailers and keep them updated with regard to changes in such schemes.

8. The present composite loan limit for SSIs, which is Rs 25 lakhs, should be

revised upwards.

9. Banks should revert to quarterly compounding of interest on working capital

loans where it is presently being done on a monthly basis.

10. The processing fee should be commensurate with the loan amount

sanctioned.

11. Forex facility should be available at greater number of bank branches.

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12. For the benefit of those SSI units which through improved inventory

management have reduced their stock, the banks must give consideration to

other factors for computing maximum permissible bank finance.

13. The period of collection and credit of cheques should not exceed three days.

In case it takes longer for the cheque to be cleared, banks should compensate

the clients by paying penal interest for the inconvenience caused.

STUDY ON


INTRODUCTION

The SSI sector in India has over the years surpassed the growth targets and has

emerged as an important contributor to the growth and development of India’s

economy. The SSI sector is a key driver of economic growth and contributes

substantially to India’s total industrial production, exports and employment

generation. Statistics available for the year 2002-03 show that the sector

accounted for almost 40% of the industrial value added and 34% of the country’s

total exports. The 3.6 million SSI units in the country produced over 8000 items

and provided employment to about 20 million people.

Keeping in mind its importance, the government of India has been helping it

through supportive policy measures with focus on improving the credit flow to this

sector. In the last decade two high level committees were set up with the express

objective of studying the credit delivery system in place for the SSI units and

suggesting measures for improving the same. These were the Nayak Committee

(1991-92) and the Kapur Committee (1997-98). Besides these two committees, a

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special SP Gupta Study Group (1999-2000) on development of small enterprises

was set also set up. Besides forming these special groups, recommendations

and announcements have also been made in successive budgets for improved

credit flow to the SSI sector.

While several of the recommendations made by the special groups have been

incorporated by the banks in their policy charter for SSI lending, several voices

have been raised about the SSI units not being adequately benefited by the

policy measures announced. The units have expressed concerns with regard to

the problems faced on the bank-financing front. With the view to assess the

actual experience of the SSI units and to bring out the most pressing problems in

respect of bank financing, we has conducted the present survey.


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1. SOURCES OF FINANCE

An overwhelming majority of the respondents have cited obtaining funding

from banks as their most important source of finance. Bank financing does

not cater to the entire financing requirement and is generally supplemented by

promoters own contribution, loans from state financial corporations and financial

institutions and borrowings from relatives and friends.

2. RESPONDENTS’ VIEW ON OBTAINING FUNDS FROM BANKS

Types of Response Not difficult Moderately difficult Extremely difficult

% of Respondents 21% 59% 20%

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When asked to rate their experience with their respective banks while obtaining

funds, the respondents did not project a rosy picture. While 59% of the

respondents said that obtaining funds from banks is moderately difficult, another

20% felt that it is an extremely difficult process. It is their contention that the

banks do not consider the SSI units as valuable customers and this attitude gets

reflected in all stages right from obtaining information to filing of documents to

sanctioning and disbursement of loans.

3. WORKING CAPITAL FINANCING

A) Amount of loan sanctioned

The Nayak Committee set up by the Reserve Bank of India in December 1991

had mentioned as one of its recommendations that the SSI units should obtain

20% of its annual projected turnover by way of working capital. Following this the

RBI issued a number of guidelines advising the banks to grant working capital to

the extent of 20% of the projected annual turnover. Study of the SSI charter of

some of the public sector banks by us revealed that the banks have incorporated

this norm.

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An analysis of the responses received shows that there has been some

improvement over time in the grant of working capital loans to the SSI units by

the banks. While five years ago 35% of the respondents were getting between

‘10% to 20%’ of their projected annual turnover as working capital loans, the

proportion has improved to 42% at present. The banks would do well if they

could provide greater assistance to nearly the third of the respondents who have

been getting less than 10% of their projected annual turnover as working Capital loans.

0-10% 10-20% 20-30%More than

30%

Presently 30 42 20 8

3 years ago 34 40 16 10

5 years ago 33 35 22 10

B) Rate of Interest Charged

Less than 10% 10-12% 12-14% 14-16% 16-18% 18-20%

Presently 12 20 51 12 5 0

3 years ago 6 6 21 42 23 2

5 years ago 5 14 17 47 17 0

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41


The rate of interest charged to the SSI units for grant of working capital loans

have come down over the years. While five years ago 47% of the respondents

were paying interest at the rate of ‘14% to 16%’ on their working capital loans,

the proportion paying the same came down to 42% three years ago. Presently

only 12% of the respondents are paying interest at the rate of ‘14% to 16%’ on

their working capital loans.

Further analysis of the responses received shows that a large part of the number

of small scale units that were earlier paying interest in excess of 14% have now

come into the ‘12% to 14%’ bracket. Infact 51% of the respondents have reported

that they are currently paying ‘12% to 14%’ rate of interest on their working

capital loans.

In the context of interest rate to be charged from the SSI units, Indian Banks

Association vide a circular dated 5th March 2003 had advised all its member

banks to take appropriate follow up action to the Finance Minister’s appeal made

during the budget regarding charging interest from SSIs in the band of 2% above

or below the PLR.

With the present average PLR for the banks being around 11%, there are still

SSI units being charged at rates higher than those stipulated in the norms. This

shows that the benefit of the softening interest rate regime has not been passed

on fully to the small-scale units and that there exists scope for further reduction in

the rates charged to them.

4. TERM LOANS

INTEREST RATE CHARGED ON TERM LOANS

45

40

35

30

25 23

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2016 16

15

10

5 2 2

0

less than 10% 10-12% 12-14% 14-16% 16-18% 18-20%

On rates charged by banks on term loans (around 5 years), 41% of the

respondents checked the ‘12% to 14%’ bracket. While 23% said that they are

presently paying interest in the range of ‘14% to 16%’, another 16% reported

paying interest between ‘16% to 18%’ on their term loans. These responses

again bring to light the fact that the SSI sector in India has to pay interest that is

much higher than the rates being charged to some of the other sectors.

PROBLEMS AND SUGGESTED REMEDIAL MEASURES

The analysis of the feedback received from the respondents from the SSI sector

has brought out the following issues that they would like to be addressed at the

earliest. The participants in the survey have also suggested measures by way of

which the banks can improve credit delivery and services rendered to them.

1. Delay in loan sanction and disbursement

While the banks should observe all prudent norms while evaluating the loan

applications, the decision on the loan application should be taken in a time bound

manner. Presently, the amount of paperwork and formalities required is a big

impediment and as a first step the banks should address this issue. Once all the

required documents have been filed by the applicant, the application should be

reviewed and a stand taken within 4 weeks.

2. Lack of transparency with regard to sharing of information

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Information relating to credit appraisal done by the banks is kept confidential. It

would be helpful if the banks inform the units the areas where their performance

has fallen below the rating parameters and counsel the units to perform better

and measure up.

In case the loan application is rejected, the bank must apprise the applicant

about the reasons for not granting the loan. This will help the applicants in

rectifying his application the next time he applies for a loan. In the survey 50% of

the respondents have said that the bank authorities do not provide reasons in

case of refusal of loan applications.

3. Inadequate discretionary power with the bank manager

Powers delegated to the branch heads of SSI bank branches are inadequate.

Most decisions on credit proposals are not taken at the branch level and hence

approvals take a lot of time. To rectify this situation, there should be devolution of

greater authority at the branch manager level. Further, as the branch manager is

generally overworked with responsibilities vested in him, officers should be

specified in all branches, who would be responsible for loans to the SSI sector for

limits within the sanctioning power of the branch manager.

4. Collateral security norms

There are no formal guidelines from the RBI with respect to collateral security

that should be insisted upon for SSI advances. Guidelines on the amount of

collateral required for different loan amounts (both fresh loans and renewals)

should be specified by the RBI and implemented by the banks.

The present collateral-free loan limit is Rs 5 lakh. Further, as per the SSI charter

of some of the banks, units with good track record and financial position are

eligible for collateral-free loans over Rs 5 lakh and upto Rs 15 lakh. The

respondents have pointed out that they are not benefiting from this provision

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despite having a good track record. They have asked for proper implementation

and enhancement of the limit for collateral-free loans.

5. Inadequate publicity given to various schemes and facilities provided

by banks for SSIs

Information on schemes like collateral-free and composite loan schemes is not

available to majority of the SSI units. In the survey, a whopping 70% have said

that the banks are not giving adequate publicity to various schemes relating to

SSIs. As a result SSI entrepreneurs are not aware of such schemes and are

unable to take advantage of the same.

Information on all loan schemes pertaining to the SSI sector should be made

readily available. The banks should interact regularly with customers by way of

mailers and keep them updated with regard to changes in such schemes.

6. Composite loan limit

The present composite loan limit for SSIs, which is Rs 25 lakhs, has been

reported as being inadequate by some of the respondents and they have

accordingly called for an upward revision of this limit.

7. Operational issues

The following operational concerns have emerged from our interaction with the

members of the SSI sector and the same should be dealt with expeditiously.

. In the case of some banks the frequency of compounding interest charged on

working capital loans has been increased from quarterly compounding to monthly

compounding. This has had the effect of increasing the financial burden on the

SSI units.

. The processing fee is charged by the banks even on limits not sanctioned, as

the same needs to be paid with the application.

. Most of the bank branches do not have forex facility. This proves to be a major

hindrance for SSI exporters as they receive payments in foreign currency.

95


. In computing maximum permissible bank finance, banks give a lot of weightage

to stocks. This methodology adversely affects those SSI units which through

efficient inventory management have reduced their stocks and have greater bills

receivables on their books.

. The time taken for collection of cheques deposited for realization is inordinately

long. While in the case of local cheques it takes about a week for clearance, in

case of inter state cheques the time taken stretches up to 10 days or even more.

With modern communication facilities being adopted by banks, the period of

collection and credit should be brought down and should not exceed three days.

In case it takes longer for the cheque to be cleared, banks should compensate

the clients by paying penal interest for the inconvenience caused.

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bank financing for ssi sector

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