bank support to sme sector (project)

ACKNOWLEDGMENT

It is immense pleasure for me to put on record my profound gratitude to the

persons who has supported me in substantial ways for the successful

submission of this dissertatin. I wholly confess that the credit of this report is

not only my treasure as I have merely brought together the teaching,

guidelines, knowledge, tips and notesfrom different sources.

May I also, in the same breath, express my gratefulness to our

honourable teacher and ourproject guide Mr. Kailesh Chandak sir for

enlightening and guiding us at every step of the completion

of this project and for acquainting us with the work environment and

providing productive suggestion to handle problems.

Bank Support to SME Sector

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INDEX

Sr. No.

Content Page No.

1 Executive summary 3 2 SME introduction, definition, history,

characteristic 3

3 Opportunity and role of SME sector 10 4 Development of SME in India 5 Problems of SME’s 13 6 SME financing 17 7 Role of public sector banks in SME/ How bank

supports to SME sector 20

8 Type of loan to SMEs 24 9 State bank of India support to SMEs 26

10 IDBI bank support to SMEs 28 11 SIDBI support to SMEs 29 12 Objectivity of the study 40 13 Conclusion 41 14 Recommendation 42 15 Bibliography 44


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Executive Summary: Many SMEs in emerging markets often rely on informal sources of capital, such as

borrowing from relatives, to meet finance needs. However, when a small or medium

enterprise does access formal channels, it typically looks to a bank as its primary

source of financial services. Banks have begun to turn their attention toward this

untapped market and their service of SMEs is a major factor in increasing SME

access to finance. Although, numerous issues surface when it comes to SME

lending, banks, by employing a range of measures, such as risk adjusted pricing,

credit scoring models, and SME-tailored non-lending products are developing ways

to mitigate risks, lower costs, and increase the overall benefit accrued from SME

banking. Question 1: Why Banks should lend to SMEs?

SME banking is an industry in transition. From a market that was considered

too difficult to serve, it has now become a strategic target of banks worldwide. The

“missing middle,” describing the gap in financial services provided to SMEs, is

shrinking. SME banking appears to be growing the fastest in emerging markets (low-

and middle-income countries) where this gap has been the widest. More and more

emerging market banks are developing strategies and creating SME units. IFC’s

committed portfolio of investments in SME financial institutions has grown

dramatically over the last five years — by 271 percent — totaling $6.1 billion as of

end of FY-09. The SME market has been perceived in the past by banks as risky,

costly, and difficult to serve. However, mounting evidence suggests that banks are

finding effective solutions to challenges such as determining credit risk and lowering

operating costs, and are profitably serving the SME sector. For these banks, unmet

SME demand for financial services has become an indicator of opportunity to expand

their market share and increase profit. There are various reason why bank look

forward lending to SMEs, which we will come to know from this project

1.1 INTRODUCTION TO SMEs SME sector of India is considered as the backbone of economy contributing to 45%

of the industrial output, 40% of India’s exports, employing 60 million people, create

1.3 million jobs every year and produce more than 8000 quality products for the

Indian and international markets. With approximately 30 million SMEs in India, 12

million people expected to join the workforce in next 3 years and the sector growing

at a rate of 8% per year, Government of India is taking different measures so as to

increase their competitiveness in the international market.


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There are several factors that have contributed towards the growth of Indian SMEs.

Few of these include; funding of SMEs by local and foreign investors, the new

technology that is used in the market is assisting SMEs add considerable value to

their business, various trade directories and trade portals help facilitate trade

between buyer and supplier and thus reducing the barrier to trade

With this huge potential, backed up by strong government support; Indian SMEs

continue to post their growth stories. Despite of this strong growth, there is huge

potential amongst Indian SMEs that still remains untapped. Once this untapped

potential becomes the source for growth of these units, there would be no stopping to

India posting a GDP higher than that of US and China and becoming the world’s

economic powerhouse.

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

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

proved that SMEs are dynamic, innovative and most importantly, the employer of first

resort to millions of people in the country. The sector is a breeding ground for

entrepreneurship. The importance of SME sector is well-recognized world over owing

to its significant contribution in achieving various socio-economic objectives, such as

employment generation, contribution to national output and exports, fostering new

entrepreneurship and to provide depth to the industrial base of the economy.

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

are a key source of economic growth, dynamism and flexibility in advanced

industrialized countries, as well as in emerging and developing economies. SMEs

constitute the dominant form of business organization, accounting for over

95% and up to 99% of enterprises depending on the country. They are responsible

for between 60-70% net job creations in Developing countries. Small businesses are

particularly important for bringing innovative products or techniques to the market.

Microsoft may be a software giant today, but it started off in typical SME fashion, as a

dream developed by a young student with the help of family and friends. Only when

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

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

economic growth and development in both industrialized and developing countries,

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

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

production facilities. Many small businesses start out as an idea from one or two

people, who invest their own money and probably turn to family and friends for


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financial help in return for a share in the business. But if they are successful,

there comes a time for all developing SMEs when they need new investment to

expand or innovate further. That is where they often run into problems, because

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

capital markets or other suppliers of credit.

History Small industry has been one of the major planks of India’s economic development

strategy since independence. India accorded high priority to SMEs right from

independence and pursued support policies to make these enterprises viable and

vibrant and over time, these have become a major contributor to the GDP of the

nation. Despite numerous protections and policy measures, SMEs remained mostly

small, technologically backward and lacked competiveness. The decade of 1990 was

characterized by policy changes, nationally as well as internationally. These policy

changes took place at the three levels – global, national and sectoral, which had the

major implication on the functioning of small industry of India as well as their

performance.

The policy marked: 1) the beginning of end of protective measures for small industry

and 2) promotion of competitiveness by addressing the basic concerns of the sector;

namely technology, finance and marketing. These resulted in the decline of number

of items reserved exclusively for small industry, to be brought down from 842 in 1991

to 239 in 2007. These policy changes led to the radical change in the environment for

the functioning of small industry. In the recent past the SMEs have performed better

than their larger counterpart. Between 2001 and 2006, net companies with the net-

turnover of Rs 1 Crore – 50 Crore had a higher growth rate of 701% as compared to

169% for large companies with turnover of over Rs. 1000 Crore. After a steep fall in

the production between 1991 and 2000, there are has been a continuous growth in

number of units, production, employment as well as the exports of the sector. Today

the scenario of Indian SMEs has changed completely. Some of the SMEs are

acquiring companies abroad as part of the globalization process. The SME sector

has transformed themselves to the need of large local manufacturers and suppliers

to global manufacturers. SMEs have also started investing in R & D activities in order

to compete in the global market. SMEs now occupy a position of strategic importance

in the Indian economic structure due to its significant contribution in terms of output,

exports and employment. The small scale industry accounts for over 40% of gross

industrial value addition and over 50% of total manufacturing exports. Further, there


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are approximately 30 million SME units, that are spread all over the country and

account for production of over 8000 different types of the products, right from very

basic to highly sophisticated. They have also become the biggest employment

generating engine in the country, providing employment to over 60 million and adding

over 1.3 million jobs each year.

With the positive outlook of Indian economy, Indian SMEs plan to increase their

capital expenditure and hire more staff in the coming months. To add to this there is

an increasing number of SMEs that are eyeing offshore expansion for their

businesses. Research findings indicate that number of Indian SMEs conducing

international business activities is expected to rise from 31% to 56% by 2013. The

increase is driven by the domestic SMEs, 24% of which plan to go international by

2013. With the initiatives that are being taken by the government and other SME

organizations, the future definitely looks bright for Indian SMEs.

Common Characteristics of SMEs (a) Born out of individual initiatives & skills: SME startups tend to evolve along a single entrepreneur or a small group of

entrepreneurs; in many cases; leveraging on a skill set. There are other

SMEs being set up purely as a means of earning livelihood. These includes

many trading and retail establishments while most countries continue SMEs

to manufacturing services, others adopt a broader definition and

include retailing as well.

(b) Greater operational flexibility: The direct involvement of owner(s), coupled with flat hierarchical structures

and less number of people ensure that there is greater operational flexibility.

Decision making such as changes in price mix or product mix in response to

market conditions is faster.

(c) Low cost of production: SMEs have lower overheads. This translates to lower cost of production, least

upto limited volumes.

(d) High propensity to adopt technology: Traditionally SMEs have shown a propensity of being able to adopt and

internalize the technology being used by them.


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(e) High capacity to innovate export: SMEs skill in innovation, improvisation and reverse engineering are

legendary. By being able to meet niche requirements, they are also able to

capture export markets where volumes are not huge.

(f) High employment orientation: SMEs are usually the prime drives of jobs, in some cases creating up to 80%.

Jobs SMEs tend to be labour intensive per se and are able to generate more

jobs for every unit of investment, compared to their bigger counterparts.

(g) Reduction of regional imbalances: Unlike large industries where divisibility of operations is more difficult, SMEs

enjoy the flexibility of location. Thus, any country, SMEs can be found spread

virtually right across, even through some specific location s emerge as

‘clusters’.

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

growth, increasing trade, generating employment and creating new entrepreneurship

in India. In keeping in view its importance, the promotion and development of SMEs

has been an important plank in our policy for industrial development and a well-

structured programme of support has been pursued in successive five-year plans for.

SMEs in India have recorded a sustained growth during last five decades. The

number of SMEs in India is estimated to be around 13 million while the estimated

employment provided by this sector is over 31 million. The SME sector accounts for

about 45 per cent of the manufacturing output and over 40 per cent of the national

exports of the country.

SMEs In India

Figure 1.1


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

global economy in 1991. The liberalization of economy, while offering tremendous

opportunities for the growth and development of Indian industry including SMEs, has

also thrown up new challenges in terms of fierce competition. The very rules which

provide increased access for our products in the global markets also put domestic

industry under increased competition from other countries. In today’s world, access

on a global basis to modern technology, capital resources and markets have become

the most critical determinants of international competitiveness.

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

(i) Manufacturing; and

(ii) Those engaged in providing/rendering of services. Both categories of enterprises have been further classified into micro, small

and medium enterprises based on their investment in plant and machinery (for

manufacturing enterprises) or on equipments (in case of enterprises providing or

rendering services). The classification on basis of investment is as under:

Classification Of Micro, Small And Medium Enterprises Classification Investment Ceiling for Plant, Machinery or Equipments

Manufacturing Enterprises Service Enterprises Micro Upto Rs. 25 lakh Upto Rs. 10 lakh

Small Above Rs. 25 lakh & upto Rs. 5 Crore

Above Rs. 1 0 lakh & upto Rs. 2 Crore

Medium Above Rs. 5 Crore & upto Rs. 10 Crore

Above Rs. 2 Crore & upto Rs. 5 Crore

Table 1.1

Classification Of Micro, Small And Medium Enterprises Before 2nd October, 2006 Classification Investment Ceiling For Plant, Machinery Or Equipments*@

Manufacturing Enterprises Service Enterprises Micro Upto Rs. 25 lakh Upto Rs. 10 lakh

Small Above Rs. 25 lakh & upto Rs. 1 Crore

Not defined

Medium Not defined Not defined

Table 1.2


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

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

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

machinery/equipment, the following duty/charges/costs shall be included in

calculating their value:

• Import Duty (not to include miscellaneous expenses such as transportation

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

• Shipping Charges;

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

following plant & machinery/equipments etc would be excluded:;

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

maintenance and the cost of consumable stores;

• Installation of plant &machinery;

• Research and development and pollution control equipments;

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

per the Regulations of the State Electricity Board;

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

Corporation or the State Small Industries Corporation;

• Procurement or Installation of cables, wiring bus bars, electrical control

panels (not mounted on individual machines)

• Oil circuit breakers or miniature circuit breakers which are necessarily to be

used for providing electrical power to the plant and machinery or for safety

measures;

• Gas producer plants;

• Transportation charges (other than sales tax or value-added tax and excise

duty) for indigenous machinery from the place of their manufacture to the site

of the enterprise);

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

• Such storage tanks which store raw materials and finished products only and

are not linked with the manufacturing process;

• Fire-fighting equipment; and

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

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

and other items not directly related to the services rendered. Land and Building

would also not be included while computing the machinery/equipments cost.


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SME would be meant to include Micro Small and Medium Enterprises

(MSMEs). The above definitions of Micro, Small and Medium Enterprises would be in

place of the existing definitions of Small & Medium Industries and SSSBEs/Tiny

Enterprises.

• Micro Enterprises would include Tiny Industries also.

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

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

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

other Small & Medium Enterprises. Thus, SME Advances would be

categorised as under:

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

Manufacturing sector irrespective of sanctioned limits, (including advances

against TDRs/Govt. Securities etc for business purposes to these categories

of Borrowers), and

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

Business Enterprises, and Small Road/Water Transport Operators and other

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

above investment criteria and enjoying borrowing/non-borrowing facilities with

the Bank (including advances against TDRs/Govt. Securities etc for business

purposes to these categories of Borrowers).

• Those enterprises exceeding the investment ceilings would be categorized as

Large Enterprises and be outside the purview of SME.

• The sanctioned limits would no longer be the criteria determining the status

as micro or small or medium enterprises in these cases.

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

have issued revised guidelines on lending to Priority Sector vide their Master

Circular dated 2nd July, 2007. As per this circular Retail Trade is excluded

from the activities classified as SME.

Sectors in which Indian SME’s Operate • Food Processing • Agricultural Inputs • Chemicals and Pharmaceuticals • Engineering, Electrical and Electronics • Textiles and Garments • Leather and leather goods • Leather and leather goods • Bio-engineering • Sports Goods • Plastic products • Computer Software


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Opportunity of SME sector • India is among the three most attractive FDI destinations in the world

• India has evolved as one of world’s leading technology centers

• India has highest return on foreign investment in the world

• By 2032, India will be among the three largest economies in the world

• India is a developed country as far as Intellectual Property is concerned

• The Indian market has two core advantages – an increasing presence of

multinationals and an upswing in the IT exports.

These factors indicate the current the outlook of the world economy towards the

investments in India. The Government of India has always given top priority to the

Indian SMEs, leading to their growth and have contributed heavily to the growth of

the Indian economy. The government too has introduced incentives for the SMEs in

order to make them competitive in the international markets. In order to enable SMEs

get easy access to the finance, government has also introduced priority sector

lending and has made mandatory on the domestic and foreign banks to lend 40%

and 32% of their Net Bank Credit (NBC) to the SMEs.

The opportunities exists for foreign SMEs looking to expand in the Indian market in

the field of technology transfer, setting up the new business in the country, obtaining

the sub-contracting rights, out-sourcing to their Indian partners etc.

Role of SME sector in emerging economy The small and medium enterprises today constitute a very important segment of the

Indian economy. The development of this sector came about primarily due to the

vision of our late Prime Minister Jawaharlal Nehru who sought to develop core

industry and have a supporting sector in the form of small scale enterprises. SMEs

sector has emerged as a dynamic and vibrant sector of the economy. Today, it

accounts for nearly 35% of the gross value of output in the manufacturing sector and

over 40% of the total exports from the country. In terms of value added this sector

accounts for about 40% of the value added in the manufacturing sector. The sector's

contribution to employment is second highest next to agriculture.


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The SMEs sector has grown rapidly over the years. The growth rates during the

various plan periods have been very impressive. The number of small-scale units has

increased from an estimated 6.79 million units in the year 1990-91 to over 13 million

in the year 2007-08. When the performance of this sector is viewed against the

growth in the manufacturing and the industry sector as a whole, it instills confidence

in the resilience of the SMEs Essector.

Development of SMEs In India: Making the best use of the material resources by employing higher order of skill and

artistic talents through traditional handicrafts, India has occupied a permanent

place of pride in the world before industrial resolution. However, the advent of

modern large scale mechanized industry, the imposition of restrictions on Indian

trade by the British rulers and deteriorating socio-economic conditions lead to the

decline of Small Scale Industry. But with the provisions of permanent place in

the nation's policy of economic development after the attainment of the

Independence, it has staged a grand recovery and is now well entrenched on the

path of progress towards great expansion.

SME has emerged into prominent sector in Indian economy in general and industry in

particular. SSI sector in India has posted impressive growth in 1990's from 15% in

1991-92 to 55% in 2001-02. The growth in employment generation has been

equally impressive from 3% to 45% during the same period. Employment in SME

touched 19 million, just behind agriculture. Share of SSI exports crosses 40% of total

exports.

Growth by itself in SME sector is impressive enough indicating a positive

response to the Economic Reform process initiated in the country since 1991.

� Development of infrastructure

� Assured supply of Raw Materials

� Availability of Cheap Credit

� Concessionary Taxes and Tariffs.

� Financial subsidies

� Equity contributions are all the protective measures for the sector


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Progress of SMEs In India:

Year Total SME Units

(Lakhs) Fixed Investment

(Rs Crores) 1990-91 67.87 93555 1991-92 70.63 100351 1992-93 73.51 109623 1993-94 76.49 115795 1994-95 79.60 123790 1995-96 82.84 125750 1996-97 86.21 130560 1997-98 89.71 133242 1998-99 93.36 135482 1999-00 97.15 139982 2000-01 101.1 146845 2001-02 105.21 154349 2002-03 109.49 162317 2003-04 113.95 170219 2004-05 118.59 178699 2005-06 123.42 188113

Table 1.3 Role of SME sector in Nation Development The Small and Medium sector plays an important role in the Indian economy in

terms of employment and growth has recorded a high rate of growth after

independence. SMEs play a vital role for the growth of Indian economy by

contributing 45% of the industrial output, 40% of exports, 42 million in employment,

create one million jobs every year and produces more than 8000 quality products for

the Indian and international markets. As a result, SMEs are today exposed to greater

opportunities for expansion and diversification across the sectors.

The root cause for unemployment in India is the over growing population

which has outpaced the development of industry and agriculture. For a country like

ours, with limited financial resources and huge reservoir of human resources, Small

and Medium industry is the only means for solving the unemployment problem. Small

and Medium industry is providing employment at an increased rate which is

evident from the table above.

The Indian market is growing rapidly and Indian industry is making remarkable

progress in various Industries like Manufacturing, Precision Engineering, Food

Processing, Pharmaceuticals, Textile & Garments, Retail, IT, Agro and Service

sectors. SMEs are finding increasing opportunities to enhance their business


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activities in core sectors. The good performance of the small scale units is evident

from their number, production, employment and foreign exchange earnings.

Problems of SMEs: Despite its commendable contribution to the Nation's economy, SME Sector does not

get the required support from the concerned Government Departments, Banking

Sector, Financial Institutions and Corporate Sector, which is a handicap in becoming

more competitive in the National and International Markets and which needs to be

taken up for immediate and proper redressal. SME sector faces a number of

problems - absence of adequate and timely banking finance, limited knowledge and

non-availability of suitable technology, low production capacity, follow up with various

agencies in solving regular activities and lack of interaction with government

agencies on various matters.

Some of the major problems are briefly as follows: a) Financial problems of SMEs: The financial problem of SMEs is the Root Cause for all the other problems

faced by the SME sector. The small and medium industrialists are generally

poor and there are no facilities for cheap credit. They fall into the clutches of

money lender who charges very high rates of interest, or else they borrow

from the dealers of their goods, who exploit them by completing them to sell

their products at very low price. After the nationalization of 14 major Indian

Banks in July, 1969, the Commercial banks were providing only a small

proportion of SMEs financial requirements. Credit to the SME sector

continues to be non-commensurate with its contribution to the total industrial

output. As against the share of the village and SME at 40% in the industrial

output, its share in total credit to the industrial sector is only about 30%.

b) Raw Material problem of SMEs:

This difficulty is experienced in a very pronounced form. The quantity, quality

and regularity of the supply of raw materials are not satisfactory.

There are no quantity discounts, since they are purchased in small

quantities and hence charged, higher prices by suppliers. Difficulty is

also experienced in procuring semi-manufactured materials. Financial

weakness stands in the way of securing raw materials in bulk in a competitive

market.


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c) Production problem of SMEs:

SME units suffer from inadequate work space, power, lighting and

ventilation, and safety measures etc. These short comings have tended to

endanger the health of workmen and have adversely affected the rate of

production. Many units are following primitive methods of production.

Adoption of modern techniques is either disliked by the entrepreneurs is not

feasible. Wage rates and service conditions of small industries

are not attractive to skilled labor.

d) Technological problem of SMEs:

Today technology is changing at a very fast phase; it becomes difficult for

SMEs to cope up with changing technology. Technology up gradation and the

frequent need to renew the equipment has emerged as a big problem.

e) Marketing problem of SMEs:

As marketing is not properly organized, the helpless artisans are

completely at the mercy of middle man. The potential demand for their goods

remains under developed. The SMEs have to face the competitions from

large scale units in marketing their products. It causes damage to the growth

and stability of SMEs. SMEs cannot afford to spend lavishly for

advertisement to promote their sales.

f) Managerial problem of SMEs:

Small scale industries in our country have suffered from the lack of

entrepreneurial ability to develop initiative and undertake risks in

the unexplored industrial fields. The in efficiency in management

comes first among managerial problems. The entrepreneurial ability of

promoters of cottage industries and SMEs are handicapped by technical

know how in the areas of production, finance, accounting and marketing

management.

g) Sickness of SMEs:

A serious problem which is hampering small and medium sector has been

sickness. Many small units have fallen sick due to one problem or the other.

Sickness is caused by two sets of factors, Internal and external factors. From

among the various internal and external causes of sickness the

important ones are bud management, high rate of capital gearing,


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inadequacy of finance, short of raw materials, outdated plant and machinery,

low labor productivity etc.

Reasons For The Sickness Of SMEs

Figure 1.2

The above figure shows that finance has been the major reason for the sickness of SME units. The other major reasons are ineffective management and technology Upgradation according to the latest technological changes. Need of the hour The need of the hour for Indian SMEs is to upgrade their technology, quality and

adopt modern management techniques to keep pace with the changes that are

taking place in the global market. Investment would be a prerequisite in these areas

to bring about transformation. The availability of adequate credit at affordable cost,

thus, becomes critical for Indian SMEs. SIDBI is the national level principal financial

institution for promotion, financing and development of SMEs.

To empower the SME Sector to take its rightful place as the growth engine of Indian

economy, it is necessary to support the SMEs, educate and empower them to make

optimum utilization of the resources, both human and economic, to achieve success.

The SMEs need to be educated and informed of the latest developments taking place

globally and helped to acquire skills necessary to keep pace with the global

developments.

SME Chamber of India has decided to start various activities to empower and

educate the SME Sector by organising various trade promotional activities in India


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and abroad. Also provide assistance and support for the promotion of domestic

business as well as export promotion of the SME sector.

To encourage the growth of small scale industries in India, Government has reserved

certain products for manufacture in the small scale sector in areas where there is

techno-economic justification for such an approach. Large/Medium units can,

however, manufacture such reserved items provided they undertake to export 50% or

more of their production. As on 10 October 2008, following items are reserved for

exclusive manufacture by micro and small enterprise sector:

• Food and Allied Industries:

Pickles & Chutneys, Bread, Mustard Oil (except solvent extracted), Ground nut oil (except solvent extracted).

• Wood and Wood Products:

Wooden furniture and fixtures • Paper Products:

Exercise books and registers • Injection Moulding Thermo Plastic Product:

PVC Pipes, including conduits upto 110 mm dia, Fittings for PVC pipes • Other Chemicals & Chemical Products:

Wax candles, Laundry soap, Safety matches, Fire works, Aggarbatties • Glass & Ceramics:

Glass Bangles • Mechanical Engg. Excluding Transport Equipment:

Steel almirah, Rolling shutters, Steel chairs – all types, Steel tables – all other types, Steel furniture – all other types, Padlocks, Stainless steel utensils, Domestic utensils – Aluminium


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SME Financing SME Finance is the funding of small and medium sized enterprises and represents a major function of the general business finance market – in which capital for firms of types is supplied, acquired, and costed/priced. Capital is supplied through the business finance market in the form of bank loans and overdrafts; leasing and hire-purchase arrangements; equity/corporate bond issues; venture capital or private equity; and asset-based finance such as factoring and invoice discounting Importance The economic and social importance of the small and medium enterprise (SME) sector is well recognized in academic and policy literature. It is also recognized that these actors in the economy may be underserved, especially in terms of finance. This has led to significant debate on the best methods to serve this sector. There have been numerous schemes and programmes in markedly different economic environments. However, there are a number of distinctive recurring approaches to SME finance. � Collateral based lending offered by traditional banks and finance companies

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

based finance, and factoring based finance, using reliable debtors or

contracts.

� Information based lending usually incorporates financial statement lending,

credit scoring, and relationship lending.

� Viability based financing is especially associated with venture capital.

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

fillip to this sector through infrastructure development; skill set

development/entrepreneurship development, technology up gradation etc. With the

deregulation of the financial sector, the general ability of the banks to service the

credit requirements of the SME sector depends on the underlying transaction costs,

efficient recovery processes and available security. There is an immediate need for

the banks generally to focus on credit and finance requirements of SMEs. Although

the banks are allowed to fix their own targets for funding SMEs in order to achieve a

minimum 20% year-on-year growth, the Government’s objective is to double the flow

of credit to the SME sector from Rs. 67,600 Crore in 2004-05 to Rs. 1,35,200 Crore

by 2009-10 i.e. within a period of 5 years. Also, Credit risk in the SME sector is

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

traditional advances where the spread is getting gradually reduced. The SME

clientele base could also be utilized by the Branches to step-up “cross selling” of

various other products including technology-enabled products.


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SME Financing Gap: A substantial portion of the SME sector may not have the security required for

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

venture capitalists and other risk investors. In addition, markets may be characterized

by deficient information (limiting the effectiveness of financial statement-based

lending and credit scoring). This has led to claims of an "SME finance gap”. The

SMEs that fall into this category have been defined as Small Growing Businesses

(SGBs) at a workshop in Geneva in July 2008, hosted by The Network for

Governance; Entrepreneurship & Development (GE&D) There have been at least two

distinctive approaches to try to overcome the so-called SME finance gap. The first

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

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

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

the schemes concerned run counter to basic free market principles they tend to be

unsustainable. Thus, the second approach has been to broaden the viability based

approach. Since the viability based approach is concerned with the business itself,

the aim has been to provide better general business development assistance to

reduce risk and increase returns.

Sources of SME Finance:

The most common sources of SME finance are as follows Various ways of Financing SMEs:

Figure 1.3


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Problems of SMEs Financing: The main problem faced by SME’s when trying to obtain funding is that of uncertainty: • SME’s rarely have a long history or successful track record that potential

investors can rely on in making an investment;

• Larger companies (particularly those quoted on a stock exchange) are

required to prepare and publish much more detailed financial information –

which can actually assist the finance-raising process;

• Banks are particularly nervous of smaller businesses due to a perception that

they represent a greater credit risk.

Because the information is not available in other ways, SME’s will have to provide it

when they seek finance. They will need to give a business plan, list of the company

assets, details of the experience of directors and managers and demonstrate how

they can give providers of finance some security for amounts provided. Prospective

lenders – usually banks – will then make a decision based on the information

provided. The terms of the loan (interest rate, term, security, and repayment details)

will depend on the risk involved and the lender will also want to monitor their

investment. A common problem is often that the banks will be unwilling to increase

loan funding without an increase in the security given (which the SME owners may

be unable or unwilling to provide).A particular problem of uncertainty relates to

businesses with a low asset base. These are companies without substantial tangible

assets which can be use to provide security for lenders. When an SME is not growing

significantly, financing may not be a major problem. However, the financing problem

becomes very important when a company is growing rapidly, for example when

contemplating investment in capital equipment or an acquisition. Few growing

companies are able to finance their expansion plans from cash flow alone. They will

therefore need to consider raising finance from other external sources. In addition,

managers who are looking to buy-in to a business ("management buy-in" or "MBI") or

buy-out (management buy-out" or "MBO") a business from its owners may not have

the resources to acquire the company. They will need to raise finance to achieve

their objectives


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1.2 ROLE OF PUBLIC SECTOR BANKS IN SME FINANCING/ how bank support to SME sector? Banks are playing a major role in financing SMEs in India. Nearly 82% of the total

SME financing in year 2006-07 is through banks. And among them the major share is

of public sector banks i.e. 57%. Thus it is clear that the most common source of

finance for SMEs is Bank Financing. There is no. of banks that help in assisting the

SMEs for financing. The main channel used by the SMEs via Banks is

Specialized loans by various Banks. The Main reason for choosing bank loans by

SMEs compared to other sources of financing like venture capital, PE funding etc is

that is only interest to be paid no stake is to be diluted thus the whole command of

the SME is with the owner only. There are a number of Private as well as Public

sector banks who assist SME in Financing

Sources Of SME Finance (2006-07)

Figure 1.4

Public sector

banks

57%

Private sector

abnks

25%

Others

18%


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The role of Banks, in general, has become very important in the above context The

SME sector’s demands were comprehensively taken care of by the Public sector

Banks through several initiatives such as:

• Single Window dispensation,

• Quick decision with least Turnaround Time through specially constituted SME

Cells, and above all,

• Better service. Cluster-based Schemes are also on the list of the Bank’s

initiatives. The Bank prioritized the following more particularly:-

• Provision of timely and adequate credit to the SMEs,

• Encouraging Technology Up gradation, for better quality and competitiveness

of their product(s), and

• Proactively detecting sick and viable units in time so as to nurse them back to

health through appropriate re-structuring.

• Financing of Clusters with adequate and concessional Bank finance on liberal

terms in several pockets for specified activities concentrated in these pockets,

which would result in reducing transaction cost and greater economies of

scale.

Credit to SME sector from Public Sector Banks The table below gives the status of credit flow to the micro and small enterprises

(SME) sector from the public sector banks since 2000: Credit to SME sector from Public Sector Banks

Year Net Bank Credit Credit to SMEs % of NBC

2000 316427 46045 14.6%

2001 341291 48400 14.2

2002 396954 49743 12.5

2003 477899 52988 11.1

2004 558849 58278 10.4

2005 718772 67634 9.4

2006 1017614 82492 8.1

2007 1317705 104703 8.0

Table 1.5


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Steps For SME Loans By Public Sector Banks:

Figure 1.5

The above figure shows the steps for availing finance through Public

sector Banks using loans. Here is the brief description of the above shown

procedure:

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

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

SME.

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

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

documents are submitted the next step comes whereby the officials of that

local branch go to the premises of that SME and just have a brief survey of

promoter as well as the premises.

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

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

credit appraisal takes place, which consist of credit appraisal of

promoter, financial appraisal, determining cost of project, understanding

various means of finance used, profitability estimate, cash flow projections ,

marketing appraisal etc., which is explained in next section. This step

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

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

Sending the Documents of survey by Local branch to SMECC branch

Preparing credentials of Promoters and firm by SMECC branch and

investigating the same

Estimating the amount of loan to be sanctioned and forwarding the

documents for sanctioning.

If the loan is been sanctioned by the central authority then

disbursement of the loan amount into account of the SME.


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brings out the clear picture whether the loan should be given to the SME or

not?

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

granting loan to the sanctioning authority.

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

loan amount takes place in the account of that SME

• This whole procedure right from application to disbursement of loan

amount takes approximately 20-25 days as the procedure involves

analysis of documents by various branches and thus the movement of

documents amongst them, if all this procedure would have taken place at

single place then it would take only 10-12 days for disbursement.

• Some Banks Offering Financial Assistance to SMEs

Bank URL

Allahabad Bank www.allahabadbank.com

Andhra Bank www.andhrabank-india.com

Bank of India www.bankofindia.com

Bank of Baroda www.bankofbaroda.com

Bank of Maharashtra www.maharashtrabank.com

Canara Bank www.canbankindia.com

Central Bank of India www.centralbankofindia.co.in

Corporation Bank www.corpbank.com

Dena bank www.denabank.com

ICICI Bank www.icicibank.com

Indian Bank www.indian-bank.com

Indian Overseas Bank www.iob.com

IndusInd Bank Ltd. www.indusind.com

The Jammu & Kashmir Bank Ltd. www.jkbank.net

Punjab National Bank www.pnbindia.com

Syndicate Bank www.syndicatebank.com

State Bank of Travancore www.statebankoftravancore.com

State Bank of India www.sbi.co.in

State Bank of Bikaner & Jaipur www.sbjbank.com

State Bank of Hyderabad www.sbhyd.com

State Bank of Mysore www.mysorebank.com

State Bank of Indore www.indorebank.org

Small Industry Development Bank of India (SIDBI)

www.sidbi.com

Union Bank of India www.unionbankofindia.co.in

United Bank of India www.unitedbankofindia.com

UCO Bank www.ucobank.com

Vijaya Bank www.vijayabank.com


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Types of loan given by banks to SMEs The following are the types of loan facilities offered by commercial banks: 1. Overdraft: An overdraft allows a current account holder to withdraw in excess of his/her

credit balance up to an approved limit. The utilised portion of the overdraft will

be subject to interest charges.

2. Bridging Loan: Usually granted for housing or mixed development projects, the terms of the

loan are flexible to meet customers’ needs and are designed to meet the cash

flow requirements pending the receipt of project income.

3. Term Loan: A term loan is a loan granted for a period of time, and repaid in monthly

instalments. A loan of this structure is suitable for asset acquisition as it

caters to the borrower’s cash flow requirements.

4. Fixed Loan: A fixed loan is a loan granted for an agreed period of time with periodic

repayments, which includes interest charges. It is somewhat similar to a term

loan.

5. Revolving Credit: Revolving credit is usually useful as short-term working capital funding and

allows for flexible drawdown of funds as and when required. Borrowers are

also given repayment options of either servicing of monthly interest and roll

over of principal amount or partial repayment of principal amount, whichever

is within their financial means.

6. Blanket Hire-Purchase: This is a facility suitable for hire-purchase of commercial equipment and

vehicles. An agreed limit is fixed and drawdown will run down upon utilisation

of the loan amount. Here, repayment will be over a fixed schedule which will

usually compliment borrowers’ needs.


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7. End-Financing:

Usually granted to property developers to enable the shops and houses

developed to be sold to purchasers. Financing is almost automatically given

to the purchaser of a new property under this facility.

8. Financial Guarantee: This facility offers financial guarantee in the event of default or non-

performance by a borrower. Some of the financial guarantees offers include

performance guarantee, security deposit guarantee, advance payment

guarantee and financial guarantees issued to insurance companies.

Types of Trade Financing Facilities:

In addition to loan facilities, commercial banks also offer the following trade financing

products:

1. Letter of Credit (LC)

This facility enables a business to import goods promptly.

2. Banker’s Acceptance (BA)

This is a useful facility when your SMI business is of export nature and

requires immediate funds for working capital or if yours is a business of import

nature, you will require funds to pay your suppliers promptly for goods

delivered. Similarly, you may be a trader wanting to pay in cash to obtain

discounts.

3. Trust Receipt (TR)

This is an ideal financial tool that can help improve your liquidity simply by allowing your goods to be delivered to you with payment to be made later.

4. Shipping Guarantee (SG)

This facility allows you to take delivery of your imports before receipt of the

bills of lading, thus avoiding unnecessary delays.

5. Bank Guarantee (BG)

This allows you to supplement your cash flow through Performance

Guarantees and/or Financial Guarantees.


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STATE BANK OF INDIA State Bank of India has been playing a vital role in the development of small scale

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

has 55 specialized SSI branches, 99 branches in industrial estates and more than

400 branches with SIB divisions. The Bank finances for Small Business activities

which are of special significance to a large number of people as many of these

activities can be started with relatively lower investment and with no special skills on

the part of the entrepreneurs. The following are the SME products offered by State

Bank of India:

• Commodity Packed Warehouse Receipt Financing

• Surabhi Deposit Scheme

• Traders Easy Loan Scheme

• SSI Loans

• Business Current Accounts

• Open Term Loan

• Retail Trade

• Doctor Plus

• SBI Shoppe

• Cyber Plus

• SME Credit Plus

• Small Business Credit Card

• SME Petrol Credit

• Dal Mill Plus

• Paryatan Plus

• Auto Loans

• Transport Operators

• Rice Mills Plus

• School Plus


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Interest Rates on Advances made to MICRO & SMALL ENTERPRISES MSME SEGMENT ADVANCES : BASE RATE-10.50% w.e.f. 01.11.2011 1. INTEREST RATES FOR MICRO & SMALL ENTERPRISES ADVANCES TO

INDUSTRY AND SERVICE SECTOR (A) Working Capital up to Rs. 25.00 lacs.

Size of the Credit Limit INTEREST

w.e.f 01.11.2011 (BR-10.50%)

Interest Rate

Advances under DIR Scheme — 4.00

Limits upto Rs. 50000 BR + 2.25 12.75

Above Rs. 50000/ & Upto Rs. 2.00 lacs BR + 3.25 13.75

Above Rs. 2.00 lacs & upto Rs. 5.00 lacs BR + 4.00 14.50

Above Rs. 5.00 lacs & below Rs. 25.00 lacs BR + 4.50 15.00

(B) Working Capital Rs. 25.00 lacs and above (CRAS)

CRA Rating Interest Rate (%)

SB 1 BR + 4.00 14.50 SB 2 BR + 4.25 14.75 SB 3,4&5 BR + 5.00 15.50 SB 6&7 BR + 5.50 16.00 SB 8&9 BR + 6.00 16.50 SB 10 BR + 6.25 16.75 SB 11&12 BR + 6.75 17.25 SB 13&14 BR + 7.25 17.75 SB 15&16 BR + 7.75 18.25

2. ADVANCES TO MICRO & SMALL ENTERPRISES - INDUSTRIAL AND

SERVICES SECTOR (FOR TERM LOANS)

TERM LOANS Period Upto Rs. 50,000

(%) > Rs. 50,000

To Rs. 2.00 lacs (%)

>Rs. 2.00 lacs to Rs. 5.00 lacs

(%)

>Rs. 5.00 lacs to Rs. 25.00 lacs

(%) Upto 3 years

BR + 2.25 12.75 BR + 3.25 13.75 BR + 4.00 14.50 BR + 4.50 15.00

> 3 to 5 years

BR + 2.75 13.25 BR + 3.75 14.25 BR + 4.50 15.00 BR + 5.00 15.50

> 5 years

BR + 3.00 13.50 BR + 4.00 14.50 BR + 4.75 15.25 BR + 5.25 15.75


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b) (i) Rs. 25.00 lacs and above (CRAS) — TERM LOAN

CRA Rating TENOR UP TO 3 YEARS

> 3 YEARS TO < 5 YEARS

5 YEARS & ABOVE

SB 1 BR + 4.00 14.50 BR + 4.50 15.00 BR + 4.75 15.25 SB 2 BR + 4.25 14.75 BR + 4.75 15.25 BR + 5.00 15.50 SB 3, 4 & 5 BR + 5.00 15.50 BR + 5.50 16.00 BR + 5.75 16.25 SB 6 & 7 BR + 5.50 16.00 BR + 6.00 16.50 BR + 6.25 16.75 SB 8 & 9 BR + 6.00 16.50 BR + 6.50 17.00 BR + 6.75 17.25 SB 10 BR + 6.25 16.75 BR + 6.75 17.25 BR + 7.00 17.50 SB 11& 12 BR + 6.75 17.25 BR + 7.25 17.75 BR + 7.50 18.00 SB 13 &14 BR + 7.25 17.75 BR + 7.75 18.25 BR + 8.00 18.50 SB 15 &16 BR + 7.75 18.25 BR + 8.25 18.75 BR+ 8.50 19.00

MY BANK- MSE WELCOME BR + 0.50 For the First year @ 11.00% p.a. and applicable floating rate from 2nd year onwards

IDBI BANK:

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

SMEs. With a view to improving the credit delivery mechanism and shorten the Turn

around Time (TAT), IDBI Bank has developed a special business model to serve the

SMEs in India. The Bank has set up 24 City SME Centres (CSCs) across India in

Mumbai, Delhi, Kolkata, Chennai, Bangalore, Hyderabad, Pune to name a few.

These CSCs are the Bank's hubs while dedicated SME desks have been set up in

several branches across these cities. These branches serve as front offices for sales

delivery and customer service. IDBI Bank has a wide variety of products and services

catering to the needs of different segments within small business. Long years of

experience in being the trusted partner of large and mid Corporates has translated

into deeper understanding of needs of business and industries. The Bank has

parameterised products for transporters, dealers, traders, and vendors. In addition, it

has a separate Transaction Banking Group that has expertise in products like cash

management services, letter of credit, bank guarantees and treasury products”

IDBI Bank provides following SME products: • Sulabh Vyapar Loan • Dealer Finance • Funding Under CGFMSE • Direct Credit Scheme-SIDBI • Preferred Customer Scheme • Vendor Financing Programme • Lending against the security of future Credit Card Receivables • Working Capital Financing • Finance to Medical Practitioners • Loans to SRWOTs


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SIDBI Role of SIDB: SIDBI is committed to developing a strong, vibrant and responsive MSME sector. It is involved in both direct and indirect finance operations besides micro credit operations. It has many associate institutions engaged in venture capital, credit rating, credit guarantee, asset reconstruction and so on. It is the nodal agency for several GOI sponsored MSME schemes. It has new initiatives like setting up a Stock Exchange, meeting the shortfall in priority sector lending by banks, and it has a role to play in RBI’s recent support of Rs. 70000 Million to be used in incremental assistance to MSME sector after 30/09/2008. Thus SIDBI is required to play a responsible and vibrant role for the development of MSME sector. INTEREST RATE CRITERIA OF SIDBI: Interest Rate Structure - Direct Lending Products and Resource Support effective from August 17, 2012 Prime Lending Rate (PLR) 12.75% p.a. Sr. No

Scheme/ Product Type of Facility

Tenure Rate of Interest (% p.a.)

1. All loans/ advances to Micro enterprises - Exposures upto Rs. 2 lakhs

Fixed Rate 12.75

2. All loans/ advances to Micro enterprises - Exposures above Rs. 2 lakh and upto Rs. 10 lakhs

Floating Rate

Less than or equal to 3 years

12.50 to 13.00

More than 3 years

12.75 to 13.25

Fixed Rate Less than or equal to 3 years

12.50 to 13.00

More than 3 years

12.75 to 13.25

3. Structured Loan to MSMEs including Service Sector projects / Scheme of Infrastructure Development (other than micro enterprises, CRE Projects and Schemes / borrower segments covered at Sr. Nos. 1,2,4-7,9-12)

Floating Rate

Less than or equal to 5 years

12.25 to 14.50

More than 5 years and upto 7 years

12.75 to 15.00

More than 7 years

13.00 to 15.25

Fixed Rate Less than or equal to 5 years

12.25 to 14.50

More than 5 years and upto 7 years

12.75 to 15.00


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More than 7 years

13.00 to 15.25

4. Scheme for loans for Efficiency & Clean Production Options

Floating Rate Fixed Rate

11.50 to 14.50 11.50 to 14.50

5. CRE projects Floating Rate 14.00 to 16.25 Fixed rate 14.00 to 16.25

6. Foreign Currency Term Loan

FCTL in USD 450 bps to 700 bps over 6 Month USD LIBOR FCTL in EURO

450 bps to 700 bps over 6 Month EURIBOR

7. Advances under Working Capital Scheme 13.00 to 15.50

8. Resource support (all) / assistance to NBFCs – AFCs

Floating Rate Above 1 year 11.50 to 12.75 Fixed rate Above 1 year 11.50 to 12.75

For loan with repayment periods upto 1 year, the interest rates would be 25 bps less than the interest rates for above 1 year

Sr. No

Scheme/ Product Type of Facility

Tenure Rate of Interest (% p.a.)

9 Discount Rate Structure for MSME Receivable Finance

9.1 MSME Receivable Finance and Invoice Discounting Schemes (Discount Rates)

Based on Usance period

10.25 to 13.50

9.2 Seller-wise Receivable Finance Scheme (Discount Rates)

Based on Usance period

11.00 to 14.00

9.3 With co-acceptance of scheduled commercial banks / Inland LC (irrespective of usance period)

Irrespective of Usance Period

Floor interest rate : 10.50

10. Direct Discounting Scheme (Equipment)

a. With co-acceptance of scheduled commercial banks

Floor discount rate: 10.50

b. Against alternate security/others

12.75 to 15.00

11. Growth Capital and Equity Assistance Scheme for MSMEs (GEMs)

Fixed rate Upto 7 years 14.75 to 15.75

12 Start-up Assistance scheme (operated selectively)

Overall expected rate of return shall be 14.00% p.a.

Micro Enterprises as defined in MSMED Act, 2006 Performance of the MSME Sector as per SIDBI Report The report brought out by SIDBI on MSME Sector, 2010 provides a systemic

coverage of various aspects pertaining to the MSME sector, such as status,

structure, policy initiatives, institutional support, credit dispensation etc. It generally


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covers up to the period ranging from 2005 to 2009. The Report, while discussing

various issues concerning the MSME sector, has mentioned one such issue being

the inadequate infrastructure facilities, including power, water, roads, etc.

The Prime Minister had constituted, in 2009, a High Level Task Force (HLTF) on

MSME Sector to address its problems. As per the recommendations of this Task

Force, the share of Micro Enterprises in MSE lending needs to be increased from

50% to 60% in a phased manner i.e. from 50% in 2010-11 to 55% in 2011-12 and

further to 60% in 2012-13. It would be mandatory for the Public Sector Banks to

achieve this target. Further, the Banks should achieve an annual growth of 10%

every year in the number of micro enterprise accounts. Some of the important topics

that were dealt by HLTF in respect of MSMEs include:

� The importance of MSMEs

� The share of MSMES in Manufacturing Sector

� The share of MSMEs in the Exports of India

� Largest Job Creation by SMEs

� MSMES embracing Technology Share to GDP

� The impact of recession on MSMEs International Conference on Technology and Business Management

� Increase in the share of MSMEs in GDP

� Policy measures in MSME Sector The Reserve Bank of India constituted on 9 December 1991, a Committee under the

Chairmanship of Shri P. R. Nayank, Deputy Governor to examine the difficulties

confronting the small scale industries (SSI) in the country in the matter of securing

finance.

The Committee had a wide range of issues before it relating to institutional credit to

the SSI sector. The terms of reference of the Committee were:

� to examine the adequacy of institutional credit for the SSI sector, particularly,

with reference to the increase in the cost of raw materials and locking up of

the available resources due to delay in the realization of sale proceeds from

large companies and Government agencies,

� to examine the adequacy of institutional credit for term finance to the SSI

sector, to examine the need for making any modifications/relaxations in the

norms prescribed by the Tandon/Chore Committee in respect of SSI units,


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� to examine whether any revision is required in the present RBI guidelines for

the rehabilitation of sick SSI units,

Largest Job Creation by SMEs: As per the ‘Quick Results: Fourth All India Census of MSMEs 2006-2007′, 59.46

Million persons were International Conference on Technology and Business

Management employed during 2006-07 in the MSME Sector (latest available) and

the total production (value) from the MSME Sector (Registered units) for the year

2006-07 was Rs. 710 billion.

Currently, MSME sector accounts for 95% of industrial units and it is contributing

about 40% on the value addition in the manufacturing sector. More than 6 Million

industrial units, as per latest quick survey, are spread over the country producing

about 7500 items and providing employment to around 60 million persons.

SMEs contribute to 45% of the industrial output, 40% of exports, and provide

employment to 60 million people as mentioned above and creates 1 Million jobs per

year. The SME sector reported about 25% job losses during the recent global

recession. However, it has been one of the fastest to tide over the gloom, with steady

job creation. After the recession, the sector alone created 40% of all jobs in the

economy with flexibility and adaptability.

MSME sector is the only one which has high employment potential at a low cost of

capital. It is more labor intensive which has registered higher growth compared to the

overall industrial sector. This sector has more adaptability to the changing market

and shown remarkable innovativeness in each vertical. According to the fourth

census of MSME sector, this sector employs 59.7 million people in over 26 million

enterprises. The job creation by MSME is larger than the large industry sector

SIDBI and the Role played by it in developing the MSME Sector: � Establishment: Established in 1990 under Act of Indian Parliament.

� Objective: Promotion, Financing & Development of MSMEs and co-ordinating the functions of institutions engaged in similar activities.

� Ownership: Public Sector Banks/FIs/Insurance Cos. owned or controlled by the Government of India.

� Structural Linkage: With Ministry of Finance and Ministry of MSME.

� Nodal Agency: For SME Schemes of Government of India (GoI).International


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IDBI’s Sphere of Activities

Sphere of Activity Details

Direct Finance Operations SMEs, Service sector, Infrastructure, etc. Indirect Finance Resource support to Banks, NBFCs, SFCs, other

State & Central financing/ development agencies. Micro Credit operations Pioneers in micro credit movement in the country.

Developed several leading MFIs .Associate Institutions SIDBI Venture Capital Ltd, MSME Rating Agency,

ISTSL & Credit Guarantee Fund, India SME Asset Reconstruction Company Ltd

Nodal Agency For several GoI MSME schemes like Technology Up-gradation Fund Scheme (TUFS), Credit Linked Capital Subsidy Scheme (CLCSS), Integrated Development of Leather Sector Scheme (IDLSS), Food Processing Industries and Development of Integrated Infrastructure Development (IID) Projects.

Focus Segments of SIDBI: 1. Manufacturing

� Micro: Investment in plant & machinery up to Rs. 25 Lacs.

� Small: Gross Machinery Investment up to Rs 5 Crore.

� Medium: Gross Machinery Investment less than or equal to Rs 10 Crore

2. Service Sector

� Healthcare, Hospitality, leisure, entertainment, IT/IT enabled businesses, etc. (Project Cost limit up to Rs 2500 Million)

3. Infrastructure Sector

� Power, Roads, Ports, Telecom, MSME infrastructure, etc. SIDBI: Direct Loans for MSME Segment Term Loans for MSME Units and Service Sector Entities Eligible Projects

• New projects; expansion / modernization / diversification projects, marketing

requirements, working capital margin, etc. of well run MSME units.

• Land acquisition and construction of factory building with or without additional

plant and machinery for units relocating to industrial areas.

Assistance Need based:

• Interest: Competitive (PLR -1 to + 2.5) – depending on the rating of the

customer – Current PLR –12.5%

• Security: Flexible, including collateral free lending for loans up to Rs. 5 Million

under CGTMSE (limit has since been increased to Rs. 10 Million).

• Other Benefits: Dovetailing with GoI sponsored schemes such as CLCSS,

TUFS, IDLSS and Food Processing subsidy based on eligibility.


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Indirect Assistance Scheme: Under its indirect schemes, SIDBI extends refinance of loans to MSME sector by

primary lending institutions viz. SFCs, SIDCs, and Banks. All the Schemes of SIDBI

both direct and indirect assistance are in operation in all the States of the country

through its various regional/branch offices.

Overall Operations of SIDBI during the Last 2 Years FY 2009-10 FY 2010-11 A. Sanctions (Rs. Mn) Rs. Million Rs. Million Indirect Credit 249,024.00 260,064.00 Direct Credit: 106,190.00 162,074.00 Total Sanctions: 355,214.00 422,138.00 FY 2009-10 FY 2010-11 B: Disbursements (Rs. Mn) Indirect Credit 227,580.00 259,474.00 Direct Credit: 91,600.00 128,485.00 Total Disbursements: 319,180.00 387,959.00

Financial Position/Results of SIDBI as on 31.3.2010 and 31.3.2011

Particulars

Paid-up Capital (Rs. Mn.) 4500 4500

Reserves & Surplus (Rs. Mn.) 52650 56480

Total Outstanding Credit (RS. Mn.) 379024 460536

Total Income (FY: 2010-11) (Rs. Mn.) 31980 38670

Net Profit (FY: 2010-11) (Rs. Mn.) 4210 5140

Performance Ratios of SIDBI for 2009-10 and 2010-11:

A. Analytical Ratios 2009-10 and 2010-11

Capital Adequacy Ratio (%) 30.1 30.6

EPS (Rs.) 9.36 11.42

B. NPA Ratios 2009-10 and 2010-11

Gross NPAs (Rs. Mn.) 771 2790

Net NPAs (Rs. Mn.) 691 1272

% Gross NPAs 0.2 0.6

% Net NPAs 0.18 0.28

Return on Assets (%) (After Tax) 1.15 1.09


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Performance of MSMEs:

Year

Total MSMEs (in Mn. Nos.)

Fixed Investment (Rs in bn.)

Production (Rs in bn.)

Employment (Mn. Persons)

2007 27.3 5582 7908 62.6

2008 28.5 6217 8808 65.9

2009 29.8 6938 9829 69.5

Main Benefits under Govt. sponsored Schemes: Credit Linked Capital Subsidy Scheme (CLCSS): Under this, 15% capital subsidy is provided for adoption of proven technologies, for

approved products / sub-sectors. Subsidy is limited to 15% of the purchase price

(basic price) of plant & machinery with a ceiling on loan under Scheme of Rs. 10

Million (4027 units assisted with Rs. 1450 Million).

Technology Up-gradation Fund Scheme (TUFS): Under this, interest subsidy of 5% or upfront capital subsidy of 15% is given under

CLCSS -TUFS. For the processing units, additional 10% capital subsidy is provided

on eligible machinery (7362 units for an amount of Rs. 3180 Million).

Integrated Development of Leather Sector Scheme: The Scheme is for existing units in leather and leather products. Under this, the

GoI provides grant up to 30% of cost of plant and machinery for SSIs and 20% for

non-SSIs subject to a ceiling of Rs. 5 Million (517 units assisted with investment

grants of Rs. 5700

Food Processing Industries: There is a scheme for new units as well as existing units undertaking modernization

/ expansion with eligible machinery. It covers 25% of the cost of eligible plant &

machinery and technical & civil works with a cap of Rs. 5 Million. Higher subsidy is

available to units being set up in difficult areas e.g. J&K, HP, North East,

Uttarakhand, etc. Limit is 33% of cost of plant & machinery & technical/civil work with

a cap of Rs. 7.5 Million.


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Scheme for Energy Saving in MSME Sector (JICA – Line of Credit)

• To fund new and improved technologies and processes for energy saving.

• New as well as existing MSME units propose to install equipments, changing the process and directly associated activities.

• The list of equipment will be revised/updated by Winrock International India duly appointed by JICA:

• Min. loan amount Rs. 1 Million

• Intt. Rate – 11% fixed.

• Asset coverage – Lower than the normal funding • Repayment period – up to 7 years.

• Energy efficiency project on registration under CDM also eligible for

CERs.

• Funding available through refinancing agencies which include select commercial banks and NBFCs.

Receivables Finance Scheme (RFS) This covers the Discounting of bills arising out of sale of components/intermediates

manufactured by MSMEs to large / medium scale units.

� Eligibility � Purchasers-wise Limit: The purchaser should � have been in commercial production for five years. � be a corporate entity with good track record & no statutory arrears

/ defaults. � Sellers-wise limit / Invoice discounting facility is also available � Clean Limit to Large Corporations with good track record and

sound financial position can be considered. Invoice Discounting Scheme: It is a market friendly receivable management scheme (without bills of exchange) for

SME sellers / service providers to the Established Corporates.

Working Capital:

Under MoU with IDBI Bank Objective

Meeting working capital requirements of SMEs and service sector units


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Eligibility:

All new or existing SME and service sector units and Government recognized Export

/ Trading Houses.

Eligibility Parameters:

Eligible SME or service sector units

TOL / TNW not to exceed 4 : 1

Current Ratio – 1.33 : 1

Minimum Interest Coverage of 1.5 times

Margin on stock / WIP / Finished Goods / Receivables, etc.: 30% Rate of Interest

As per Credit Rating; Floating Rate linked to PLR Processing Fee

0.50% of the limit sanctioned. 0.25% of the limit for each renewal. Fee based Services:

Guarantee Scheme:

Both Financial and Performance Guarantee and Deferred Payment Guarantee

Eligibility:

• Existing customers of SIDBI in MSE sector and eligible service sector units with track record.

• New customers in need of both fund based and non fund based limits

• Stand alone facility (i.e. without debt) not to be considered. Medium Scale Units as of now are not eligible.

Letter of Credit:

SIDBI opens letter of credit for import of capital equipment by units as well as for

import of raw material for its customers under MSE sector.

Equity Assistance Scheme:

Objective:

To provide equity support to well-run MSMEs to enable them to scale up their

operations

Eligibility:

• Companies eligible under SIDBI schemes having good potential for scale up

of operations and following /willing to adopt corporate structure.

• Existing customers of SIDBI or willing to avail debt from SIDBI


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Sectoral Coverage:

Focus on Auto Components, Engineering, Pharma, Textiles, Software, IT / IT enabled services, EoUs Deal Size:

Generally up to Rs. 50-100 Million

Purpose:

• Expansion, modernization and diversification • New Businesses, preferably in the same line • Marketing, R&D, Product Development Expenses • Working Capital Requirement • Acquisitions in India and abroad • Any other expenditure required for growth of the company Instruments:

Equity capital/Equity linked Instruments – Convertible Pref. Shares or Convertible Debt. Investment Tenure

Horizon of about 5 years. Exit Trade sale or listing / Buyback. Delivery of Micro Credit to Rural Poor: Performance of SIDBI as on 31/03/2008)

• Delivery of Micro Credit to the Rural Poor is one of the thrust areas of SIDBI

• O/S as of 31/03/2008: Rs. 11000 Million

• Target for FY 09: Rs. 16000 Million

• Assistance provided to beneficiaries (Mainly women): More than Rs. 5 Million

• Equity Support: Rs. 57 Million

• Capacity Building Grant: Rs. 122 Million SMERA (Small & Medium Establishments Rating Agency) It is India’s First Dedicated Rating Agency for SME Segment

• Joint initiative of SIDBI, Dun & Bradstreet and CIBIL along with leading PSUs, Private and Foreign Banks.

• Rating cost substantially reduced in case of coverage of eligible SSI units under NSIC Subsidy Scheme

• Already done more than 2350 ratings. • Incentives for SMERA Rating for SIDBI’s Customers: � Nominal Rating fees.


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� Reduction in rate of interest by 0.50% p.a. on existing loans if the customer is rated in the first three grades

� Would facilitate approval of applications for fresh loans in future Credit Guarantee Scheme: It facilitates credit to MSE units in IT based activities from banking channel.

• Maximum loan guaranteed is Rs. 5 Million per unit (already increased to Rs. 10 Million recently)

• Guarantee cover up to 75% of loan amount, i.e. Rs. 3.75 Million per borrower (80% for loans up to Rs 0.5 Million advanced to micro enterprises/women entrepreneurs and units in North East). For loans up to Rs. 0.5 Million and, fee and annual service fee reduced to 1% and 0.5% respectively.

• Swift and simple settlement process fully backed by IT.

• Guarantee issued – Amount guaranteed – Rs. 38,200 Million


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

achieve the following objectives: -

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

and their usage.

• To know the effectiveness of various SME financing schemes of public sector

banks.

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

banks.

• To know the benefits of SME financing schemes of the public sector banks.

• To check the satisfaction level of Small and Medium enterprises regarding

SME financing schemes of the public sector banks.

.


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CONCLUSION OF THE STUDY: Over a period of time, it has been proved that SMEs are dynamic, innovative and

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

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

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

But the SME sector faces a lot of obstacles in obtaining adequate finance.

Government of India has started a number of SME financing schemes in its public

sector banks .These public sector banks are playing a major role in the development

of SME sector in India. But due to few obstacles, these schemes are not as effective

as they should be. The review of researches has showed that SME sector plays an

important role in the economic development of a country but obtaining adequate

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

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

purpose of conducting the study was to study the usage of SME financing schemes

of the public sector banks. The data was collected from SME units. Various tools of

data analysis and interpretation were used for carrying out the research. The major

findings of the study were that bank financing is the most popular source for financing

SMEs in India. The SME financing schemes provide credit to this sector at low rates

of interest and at attractive conditions but the procedure involved is lengthy.

Moreover, too much of documentation is required .Insufficient collateral and biasness

are also the major problems. The re-orientation program, workshops and seminars

should be organized at district level to provide latest information to the SMEs about

the various SME financing schemes of the public sector banks. New credit products

may be developed to take care of the diverse, unexpected and short-term

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

process followed in sanctioning the loan and documentation required is

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

THE BOTTOM LINE: Without adequate bank finance, SMEs cannot acquire or absorb new technologies nor can they expand to compete in global markets or even strike business linkages with larger fi rms. Similarly, banks cannot consider the financing of SMEs as a viable option unless their priorities are addressed by SMEs. In this regard, SMEs should be assisted largely by public initiatives involving participation of the banking industry. In India, however, the various public initiatives for promoting fi nance to SMEs have not been as successful as envisaged because there has been some overlapping of regional and national initiatives. Efforts to harmonise the standards and practices, therefore, need to be properly coordinated to facilitate SME fi nance further.


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

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

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

financing schemes of the public sector banks.

• Product innovations in banks have set the rule of the game “Innovate or

perish”. The same rule applies to SME segment. At present, there is a vast

gap between requirements of the SME customer and availability of

suitable/matching products and services in the public sector banks. New

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

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

in a short time.

• The conventional credit appraisal systems are heavily dependent on financial

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

adopt a balanced score card model for credit assessment under which risk

weights may be assigned to (i) managerial, technical and commercial

competence of the entrepreneur (ii) quality of trade references from

suppliers/buyers (need not be in writing) (iii) potential of the industry, unit and

person.

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

applicant and if required, his consultant, should be briefed on the objective

procedures which bank applies to arrive at decisions so as to educate them to

understand the requirements of bank and to prepare credit proposals in a

scientific manner .

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

essential for the banks to closely focus on the non-financial parameters also

during appraisal (i.e. ability of person behind the show).

• The process followed in sanctioning the loan and documentation

required is cumbersome; hence it is suggested to make the process

easier.


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• Small entrepreneurs should make feasibility studies before they finalize their

projects. They should undertake only such projects which are

technically, operationally and economically and financially viable.

• The problem that the SMEs face while acquiring funds from Public sector

Banks is that their financial systems lack transparency. Credit Ratings can

benefit both the parties. The credit ratings will give Public sector Banks

ratings an easy access to the financial information of SMEs that highlight the

unit's strength and weaknesses, making it easy for them to take a decision

while lending.

• The issue of high cost of acquiring, serving and monitoring SME customers

can be resolved by offering products which reduce frequent visit of SME

customers to the branch, provide flexibility to the borrowers as well as to the

bankers and fulfill other financial needs of the customer.

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

bankers’ cheques or drafts. Banks may capitalize on emerging electronic

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

customized and cost effective retail payment/remittance solutions or cash

management services to the SME customers.

• Public Sector Banks should develop flexible systems and procedures for

dealing with SME customers and modify their role to be a facilitator. It may

either provide software to these customers to prepare stock and financial

statements or help and guide them in preparation of renewal proposal /

statements.

• Banks may publish periodicals/magazines to disseminate information

pertaining to various schemes of bank, various ministries, RBI, SIDBI, CBDT,

CBEC and other tax related policy matters. It may also provide the same

information through its website and e-mails.


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BIBLIOGRAPHY http://www.statebankofmysore.co.in/index.php/interest-rates-.html http://www.sidbi.com/fpc.asp http://www.scribd.com/doc/36019627/Sme-Financing Referred magazine (India Forbes)