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TRANSCRIPT
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Chapter-1
INTRODUCTION TO THE STUDY
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1.1 Introduction SMEs are the backbone of any developing nation like India. Its importance and
contribution to the nation cannot be ignored. These enterprises have been in existence since
ages but it got an organised format only after the independence. The growing importance and
the its contribution to the economy has resulted in the making of this report. The following
data gives a quick review of the Indian SME sector:
1.1.1 Evolution of SME
Evolution of SME can be broadly grouped into three periods:
Phase – I: 1948-1991
Recognition to the M & S Enterprises;
To expand employment, equitable distribution of the national income, etc.,
The Micro, Small and Medium Enterprises Development Organisation was set up in
1954 as an apex body for sustained and organised growth of micro, small and medium
enterprises. In 1956 -National Small Industries Corporation, Khadi and Village
Industries Commission and the Coir Board set up.
The supportive measures like reservation of items for their exclusive manufacture,
access to bank credit on priority through the Priority Sector Lending, etc.,
MSME – Development Institutes set up all over India to train youth in
skills/entrepreneurship. German and Danish assistance for providing technical skill-
training to MSMEs.
Phase – II: 1991 - 1999
The new Policy for Small, Tiny and Village Enterprises of August ,1991.
To replace protection with competitiveness to infuse more vitality and growth to
MSEs in the face of foreign competition and open market.
Measures concentrated on improving infrastructure, technology and quality.
The Small Industries Development Bank of India (SIDBI) and a Technology
Development and Modernisation Fund were created to accelerate finance and
technical services to the sector.
A Delayed Payment Act was enacted to facilitate prompt payment of dues to MSEs
(Maximum period upto 45 days).
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Phase – III: 1999 onwards.
The Ministry of MSME created in 1999 to provide focused attention to the sector
The new Policy Package -August, 2000 to address the persisting problems relating to
credit, infrastructure, technology and marketing more effectively.
A Credit Linked Capital Subsidy Scheme was launched to encourage technology up
gradation
Credit Guarantee Scheme to provide collateral-free loans to micro and small
entrepreneurs.
In 2006, enactment with the passage of the MSME Act.
In March, 2007 - a third Package for the Promotion of Micro and Small Enterprises
was announced for the promotion and development of the sector
1.1.2 Traditionally defined as
Small Scale Industries (SSIs)
Small Scale Enterprises (traders and services)
Small Road Transport Organisation
Professionals
Focus primarily on manufacturing and less on servicing
Concentration on traditional industry - textile, engineering, jute, auto ancillary
According to a UNIDO report, SMEs are generally based on three assumptions.
it sustains a broad and diversified private sector and creates employment and
thus benefits the country as a whole
a strong SME sector will not emerge without support from the state, but they
suffer disadvantages in the markets because of their size
the programs aimed at smallest enterprises, have been justified more in terms
of their welfare impact than their economic efficiency.
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1.1.3 Sectors of SME
There are basically three sectors of SME. They are:
Manufacturing
Servicing
The Importance of Small and Medium Enterprises (SMEs) in any economy cannot be
overlooked as they form a major chunk in the economic activity of nations. They play a key
role in industrialization of a developing country like India. They have unique advantages due
to:-
• their size
• their comparatively high labour-capital ratio
• need a shorter gestation period
• focus on relatively smaller markets
• need lower investments
• ensure a more equitable distribution of national income
• facilitate an effective mobilization of resources of capital and skills which
might otherwise remain unutilized and
• Stimulate the growth of industrial entrepreneurship.
1.1.4 Indian SME at a Glance
In India, SME sector accounts for around 95% of the industrial units, 40% of the value
added in the manufacturing sector output, 34% of exports and provides direct employment to
20 million persons in around 3.6 million registered SME units. The SME sector in India
contributed to about 8% of India’s GDP during 2010-11. Now, the question is, Can it
overtake the invasion of foreign companies through their innovative, quality,
affordable/reasonable and readily available products?
In developing countries like India, making the SMEs more competitive is particularly
pressing as trade liberalization and deregulation increase the competitive pressures and reduce
the direct subsidies and protection that Governments offer to SMEs.
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1.1.5 SMEs Financing – “The Rising” India
The only way out of the mire is that the Indian manufacturing sector could be
strengthened by the existing rural systems and making them self-sufficient. This could take
place only by helping Small and Medium Enterprises and the rural artisans (people with
innate skills and talents) in becoming effective and competitive enough to face the future. A
number of issues and business practices of global players and markets can be observed, learnt
and adapted for ensuring competitiveness of Indian SMEs
Let us take an anecdote, which is a part of the school days about the meaning
of domestic and global competition. It is about two friends who while walking
through a dense forest suddenly hear the roar of a bear. One of them immediately
changes his shoes that he is wearing in, to the one, he uses for running. His friend
asked him: “If you change your shoes, do you think you can out beat the bear?”
The other one replied: “The idea is not to beat the bear, but you.” The moral of the
story is that the Indian SME sector should be strong enough to out beat the other players in
the economy and not the competition itself.
1.1.6 Prime Minister’s Task Force on Micro, Small and Medium Enterprises
A High Level Task Force was constituted by the Government of India (Chairman: Shri T
K A Nair) to consider various issues raised by Micro, Small and Medium Enterprises
(MSMEs).The Task Force recommended several measures having a bearing on the
functioning of MSMEs, viz., credit, marketing, labour, exit policy,
infrastructure/technology/skill development and taxation. The comprehensive
recommendations cover measures that need immediate action as well as medium term
institutional measures along with legal and regulatory structures and recommendations for
North-Eastern States and Jammu & Kashmir.
Banks are urged to keep in view the recommendations made by the Task Force and take
effective steps to increase the flow of credit to the MSE sector, particularly to the micro
enterprises.
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A circular was issued to all scheduled commercial banks vide RPCD. SME & NFS BC.
No. 90/06.02.31/2009-10 dated June 29, 2010 advising implementation of the
recommendations of the Prime Minister‟s task Force on MSMEs.
1.1.7 Micro, Small & Medium Enterprises Development (MSMED) Act, 2006
The Government of India has enacted the Micro, Small and Medium Enterprises
Development (MSMED) Act, 2006 on June 16, 2006 which was notified on October 2, 2006.
With the enactment of MSMED Act 2006, the paradigm shift that has taken place is the
inclusion of the services sector in the definition of Micro, Small & Medium enterprises, apart
from extending the scope to medium enterprises. The MSMED Act, 2006 has modified the
definition of micro, small and medium enterprises engaged in manufacturing or production
and providing or rendering of services. The Reserve Bank has notified the changes to all
scheduled commercial banks. Further, the definition, as per the Act, has been adopted for
purposes of bank credit vide RBI circular ref. RPCD.PLNFS. BC.No.63/ 06.02.31/ 2006-07
dated April 4, 2007
Considering the growth potential of Indian SMEs, the Government of India has asked
public sector banks to achieve a minimum 20 per cent year-on-year growth in the funding of
SMEs that will lead to double the flow of credit to the sector from Rs 67,000 crore in 2004-
2005 to Rs 1, 35,000 crore by 2009-2010. A small-scale unit is defined as one having original
investment in plant and machinery not exceeding Rs 1 crore. While recognizing the needs for
larger investment in some of the more important segments of small scale industries (SSIs), the
Government has enhanced this to Rs 5 crore for specified industries.
The Government felt that a separate category of medium enterprises (MEs) needs to be
recognised and, accordingly, the new policy package clearly defined the medium enterprises
as those units having investment in plant and machinery above the small-scale industry limit
and up to Rs 10 crore, as recommended by the Working Group on Flow of Credit to the SSI
sector, headed by Mr A. S. Ganguly.
The Indian SME (small and medium enterprise) market seems to be emerging as a
promising hunting ground for banks and financial institutions because it poised for
tremendous growth. As the access of SMEs to capital markets is very limited, they largely
depend on borrowed funds from banks and financial institutions. In majority of the
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economies, while the investment credit to SMEs was being provided by financial
institutions, commercial banks extended working capital. In the recent past, with growing
demand for universal banking services, the term loan and working capital are becoming
available from the same source. Besides the traditional needs of finance for asset creation
and working capital, the changing global environment has generated demand for
introduction of new financial and support services by SMEs.
1.2 Rationale of the Study
SME is one of the important sectors of our country. It contributes around 8 % to the
country‟s growth story and employs around 20 million people. The concept of Micro,
Small and Medium Enterprises was set up in the year 1948 and has been developing since
its inception.
Developing SMEs is not only a means to improve the competitiveness but also for
alleviation of poverty, generation of sustainable employment, fostering innovation,
infusing technology, enabling better credit flow and sustenance of environment issues
more effectively and sustainably.
The financial requirements of SMEs have been a matter of concern for the
government and hence over the years gained much importance. This study helps in
understanding the financial requirements of SMEs as well as suggesting methods of
improving the borrowing and lending procedure of the bank.
SMEs in India are in its developing stage and the Government is taking steps enough
to bring it in lines with other important sectors and at the same time finding innovative
methods of funding such small scale enterprises.
1.3 Objectives of the Study
In view of the above backdrop, the present study has been undertaken with the
following specific objectives:-
1. To get an overall view of the performance of the two enterprises over the years.
2. To study the growth and development of SMEs in India
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3. To calculate the future financial requirements of the two enterprises taken as case
studies.
1.4 Research Methodology
The study has been done about the development and growth of SMEs and their
financial requirements. The Scope for Credit Growth for Punjab National Bank in the
SME, by collecting information about them and having a thorough study on the topic
through questionnaire and journals.
1.4.1 Scope of the Study
This study covers various aspects of SME and their financial requirements. All the
aspects that are necessary for the growth, development and future financial requirements of
such SMEs have been considered. The study also includes the credit appraisal, risk rating and
post sanction monitoring of the two enterprises taken into consideration. Moreover the scope
of study is limited to understanding only the working capital requirements of the enterprises
as this has been an important part of financial requirement of the small industries at the same
time the study is limited to the two SMEs of Kolkata falling under SME HUB of PNB branch.
Thus this project will act as a learning device for finance students.
1.4.2 Sources of Data
The project includes data that has been collected both from primary and secondary
sources.
Primary sources
Primary source includes first hand data from the people in the practical field visit.
They are the employees of both the enterprises as well as the owners. The method of
collection of such data includes personal interaction and interview through unstructured
questionnaire.
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Secondary sources
Valuable information was collected from secondary sources like annual reports of the
enterprises from the bank officials, magazines, journals, books, newspapers, annual reports of
certain SMEs, circulars, and internet websites.
1.5 Limitations of the Study
Time was a limiting factor in this study. The area of study considered was quite vast
field of study and lack of sufficient time was also a constraint. Inherent limitation of the study
has been the accuracy and authenticity of published data. The study required personal
interrogation with the owners. The primary limitation has been the owner‟s non-cooperation
in providing much of their financial data. Number of enterprises in Kolkata being very large
and spread in different parts of the district, it was not possible to interrogate the owners of
each and every enterprise.
Thus this research work mainly tries to understand the health of the SMEs with
primary focus on their financial requirements limited to the scope of working capital
requirements within a stipulated time of two months. Thus it hopes to be of use for further
research work.
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Chapter2
COMPANY PROFILE
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PUNJAB NATIONAL BANK
2.1 Introduction
With over 56 million satisfied customers and more than 5000 offices including 5
overseas branches, PNB has continued to retain its leadership position amongst the
nationalized banks. The bank enjoys strong fundamentals, large franchise value and good
brand image. Besides being ranked as one of India's top service brands, PNB has remained
fully committed to its guiding principles of sound and prudent banking. Apart from offering
banking products, the bank has also entered the credit card, debit card; bullion business; life
and non-life insurance; Gold coins & asset management business, etc
Since its humble beginning in 1895 with the distinction of being the first Swadeshi
Bank to have been started with Indian capital, PNB has achieved significant growth in
business which at the end of March 2010 amounted to Rs 435931 crore. PNB is ranked as the
2nd
largest bank in the country after SBI in terms of branch network, business and many other
parameters. During the FY 2009-10, with 40.85% share of CASA deposits, the Bank achieved
a net profit of Rs 3905 crore. Bank has a strong capital base with capital adequacy ratio of
14.16% as on Mar‟10 as per Basel II with Tier I and Tier II capital ratio at 9.15% and 5.01%
respectively. As on March‟10, the Bank has the Gross and Net NPA ratio of 1.71% and 0.53%
respectively. During the FY 2009-10, its ratio of Priority Sector Credit to Adjusted Net Bank
Credit at 40.5% & Agriculture Credit to Adjusted Net Bank Credit at 19.7% was also higher
than the stipulated requirement of 40% & 18% respectively.
The Bank has been able to maintain its stakeholders‟ interest by posting an improved
NIM of 3.57% in Mar‟10 (3.52% Mar‟09) and a Return on Assets of 1.44% (1.39% Mar‟09).
The Earning per Share improved to Rs 123.98 (Rs 98.03 Mar‟09) while the Book value per
share improved to Rs 514.77 (Rs 416.74 Mar‟09). Punjab National Bank continues to
maintain its frontline position in the Indian banking industry. In particular, the bank has
retained its NUMBER ONE position among the nationalized banks in terms of number of
branches, Deposit, Advances, total Business, Assets, Operating and Net profit in the year
2009-10. The impressive operational and financial performance has been brought about by
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Bank‟s focus on customer based business with thrust on CASA deposits, Retail, SME & Agri
Advances and with more inclusive approach to banking; better asset liability management;
improved margin management, thrust on recovery and increased efficiency in core operations
of the Bank. The performance highlights of the bank in terms of business and profit are shown
below:
( Rs in Crore)
Parameters Mar'08 Mar'09 Mar'10 CAGR (%)
Operating Profit 4006 5690 7326 22.29
Net Profit 2049 3091 3905 23.98
Deposit 166457 209760 249330 14.42
Advance 119502 154703 186601 16.01
Total Business 285959 364463 435931 15.09
(Source:www.pnb.co.in)
PNB has always looked at technology as a key facilitator to provide better customer
service and ensured that its „IT strategy‟ follows the „Business strategy‟ so as to arrive at
“Best Fit”. The Bank has made rapid strides in this direction. All branches of the Bank are
under Core Banking Solution (CBS) since Dec‟08, thus covering 100% of its business and
providing „Anytime Anywhere‟ banking facility to all customers including customers of more
than 3000 rural & semi urban branches. The Bank has also been offering Internet banking
services to its customers which also enables on line booking of rail tickets, payment of
utilities bills, purchase of airline tickets, etc. Towards developing a cost effective alternative
channels of delivery, the Bank with more than 3700 ATMs has the largest ATM network
amongst Nationalized Banks.
With the help of advanced technology, the Bank has been a frontrunner in the
industry so far as the initiatives for Financial Inclusion is concerned. With its policy of
inclusive growth, the Bank‟s mission is “Banking for Unbanked”. The Bank has launched
a drive for biometric smart card based technology enabled Financial Inclusion with the
help of Business Correspondents/Business Facilitators (BC/BF) so as to reach out to the
last mile customer. The Bank has started several innovative initiatives for marginal
groups like rickshaw pullers, vegetable vendors, dairy farmers, construction workers, etc.
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Under Branchless Banking model, the Bank is implementing 40 projects in 16 States.
Backed by strong domestic performance, the Bank is planning to realize its global
aspirations. Bank continues its selective foray in international markets with presence in 9
countries, with 2 branches at Hongkong, 1 each at Kabul and Dubai; representative
offices at Almaty, Dubai, Shanghai and Oslo; a wholly owned subsidiary in UK; a joint
venture with Everest Bank Ltd. Nepal and a JV banking subsidiary “DRUK PNB Bank
Ltd.” in Bhutan. Bank is pursuing upgradation of its representative offices in China &
Norway and is in the process of setting up a representative office in Sydney, Australia
and taking controlling stake in JSC Dana Bank in Kazakhastan.
2.2 History
Punjab under the British especially after annexation in 1849 witnessed a period of rapid
development giving rise to a new educated class fired with a desire for freedom from the yoke
of slavery. Amongst the cherished desires of this new class was also an overriding ambition to
start a Swadeshi Bank with Indian Capital and management representing all sections of the
Indian community. The idea was first mooted by Rai Mool Raj of Arya Samaj who, as
reported by Lal Lajpat Rai, had long cherished the idea that Indians should have a national
bank of their own. He felt keenly "the fact that the Indian capital was being used to run
English banks and companies, the profits accruing from which went entirely to the Britishers
whilst Indians had to contend themselves with a small interest on their own capital".
At the instance of Rai Mool Raj, Lala Lajpat Rai sent round a circular to selected
friends insisting on an Indian Joint Stock Bank as the first special step in constructive
Swadeshi. Lala Harkrishan Lal who had returned from England with ideas regarding
commerce and industry, was eager to give them practical shape.
On May 23, 1894, the efforts materialized. The founding board was drawn from
different parts of India professing different faiths and a varied back-ground with, however, the
common objective of providing country with a truly national bank which would further the
economic interest of the country.
The Bank opened for business on 12 April, 1895. The first Board of 7 Directors
comprised of Sardar Dayal Singh Majithia, who was also the founder of Dayal Singh College
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and the Tribune; Lala Lalchand one of the founders of DAV College and President of its
Management Society; Kali Prosanna Roy, eminent Bengali pleader who was also the
Chairman of the Reception committee of the Indian National Congress at its Lahore session in
1900; Lala Harkishan Lal who became widely known as the first industrialist of Punjab; EC
Jessawala, a well known Parsi merchant and partner of Jamshedji & Co. of Lahore; Lala
Prabhu Dayal, a leading Rais, merchant and philanthropist of Multan; Bakshi Jaishi Ram, an
eminent Civil Lawyer of Lahore; and Lala Dholan Dass, a great banker, merchant and Rais of
Amritsar. Thus a Bengali, Parsi, a Sikh and a few Hindus joined hands in a purely national
and cosmopolitan spirit to found this Bank which opened its doors to the public on 12th of
April 1895. They went about it with a Missionary Zeal. Sh. Dayal Singh Majithia was the first
Chairman, Lala Harkishan Lal, the first secretary to the Board and Shri Bulaki Ram Shastri
Barrister at Lahore, was appointed Manager.
A Maiden Dividend of 4% was declared after only 7 months of operation. Lala Lajpat
Rai was the first to open an account with the bank which was housed in the building opposite
the Arya Samaj Mandir in Anarkali in Lahore.
The first branch outside Lahore was opened in Rawalpindi in 1900. The Bank made
slow, but steady progress in the first decade of its existence. Lala Lajpat Rai joined the Board
of Directors soon after. in 1913, the banking industry in India was hit by a severe crisis
following the failure of the Peoples Bank of India founded by Lala Harkishan Lal. As many
as 78 banks failed during this crisis. Punjab National Bank survived. Mr. JH Maynard, the
then Financial Commissioner, Punjab, remarked...."Your Bank survived...no doubt due to
good management". It spoke volumes for the measure of confidence reposed by the public in
the Bank's management.
It was during this period that the Jalianwala Bagh Committee account was opened in the
Bank, which in the decade that followed, was operated by Mahatma Gandhi and Pandit
Jawaharlal Nehru. The five years from 1941 to 1946 were ones of unprecedented growth.
From a modest base of 71, the number of branches increased to 278. Deposits grew from Rs.
10 crores to Rs. 62 crores. On March 31, 1947, the Bank officials decided to leave Lahore and
transfer the registered office of the Bank to Delhi and permission for transfer was obtained
from the Lahore High Court on June 20, 1947.
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The Bank then embarked on its task of rehabilitating the displaced account holders. The
migrants from Pakistan were repaid their deposits based upon whatever evidence they could
produce. Such gestures cemented their trusts in the bank and PNB became a symbol of Trust
and a name you can bank upon. Surplus staff posed a big problem. Fast expansion became a
priority. The policy paid rich dividends by opening up an era of phenomenal growth.
A Maiden Dividend of 4% was declared after only 7 months of operation. Lala Lajpat
Rai was the first to open an account with the bank which was housed in the building opposite
the Arya Samaj Mandir in Anarkali in Lahore. His younger brother joined the Bank as a
Manager. Authorised total capital of the Bank was Rs. 2 lakhs, the working capital was Rs.
20000. It had total staff strength of nine and the total monthly salary amounted to Rs. 320.
The first branch outside Lahore was opened in Rawalpindi in 1900. The Bank made
slow, but steady progress in the first decade of its existence. Lala Lajpat Rai joined the Board
of Directors soon after. in 1913, the banking industry in India was hit by a severe crisis
following the failure of the Peoples Bank of India founded by Lala Harkishan Lal. As many
as 78 banks failed during this crisis. Punjab National Bank survived. Mr. JH Maynard, the
then Financial Commissioner, Punjab, remarked...."Your Bank survived...no doubt due to
good management". It spoke volumes for the measure of confidence reposed by the public in
the Bank's management.The years 1926 to 1936 were turbulent and loss ridden ones for the
banking industry the world over. The 1929 Wall Street crash plunged the world into a severe
economic crisis.
It was during this period that the Jalianwala Bagh Committee account was opened in
the Bank, which in the decade that followed, was operated by Mahatma Gandhi and Pandit
Jawaharlal Nehru. The five years from 1941 to 1946 were ones of unprecedented growth.
From a modest base of 71, the number of branches increased to 278. Deposits grew from Rs.
10 crores to Rs. 62 crores. On March 31, 1947, the Bank officials decided to leave Lahore and
transfer the registered office of the Bank to Delhi and permission for transfer was obtained
from the Lahore High Court on June 20, 1947.
PNB was then housed in the precincts of Sreeniwas in the salubrious Civil Lines, Delhi. Many
a staff member fell victim to the widespread riots in the discharge of their duties. The
conditions deteriorated further. The Bank was forced to close 92 offices in West Pakistan
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constituting 33 percent of the total number and having 40% of the total deposits. The Bank,
however, continued to maintain a few caretaker branches.
In 1951, the Bank took over the assets and liabilities of Bharat Bank Ltd. and became
the second largest bank in the private sector. In 1962, it amalgamated the Indo-Commercial
Bank with it. From its dwindled deposits of Rs. 43 crores in 1949 it rose to cross the Rs. 355
crores mark by the July 1969. Its number of offices had increased to 569 and advances from
Rs. 19 crores in 1949 to Rs. 243 crores by July 1969 when it was nationalised.
Since inception in 1895, PNB has always been a "People's bank" serving millions of
people throughout the country and also had the proud distinction of serving great national
leaders like Sarvshri Jawahar Lal Nehru, Gobind Ballabh Pant, Lal Bahadur Shastri, Rafi
Ahmed Kidwai, Smt. Indira Gandhi etc.
2.3 Vision of the Bank
To be a leading Global bank with Pan India footprints and become a household brand in
the Indo-Gangetic Plains providing entire range of financial products and services under one
roof.
2.3 Mission of the Bank
Banking for the Unbanked
2.4 Board of Directors
Name Designation
K. R Kamath Chairman
K.R Kamath Managing Director
Ravneet Kaur Director
Jasbir singh Director
V.K Mishra Director
T.N Chaturvedi Director
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G R Sundaravadivel Director
D. K Single Director
Pradeep kumar Director
Mohinder Paul Singh Director
Mushtaq A Antulay Director
Rakesh sethi Executive Director
M V Tanksale Executive Director
2.5 Products and Services
Insurance Business
Mutual fund
Merchant Banking
ASBA
Wealth Management Services
NSE Tracker
Internet Banking
Share Trading
Mobile Banking
From the above information we see that PNB has had a very humble beginning and has
slowly spread its wings. Moreover its experienced management base has been able to take the
organisation to greater heights along with its wide variety of products and services. This
contributes to the fact that PNB has been able to continuously improve its performance and
has successfully retained its position of being the second largest public sector bank in terms of
revenue.
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Chapter 3
SME – AN OVERVIEW
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SMALL and MEDIUM ENTERPRISES (SMEs) play a catalytic role in the development of
any country. They are the engines of growth in developing and transition of economies. In
India they account for a significant proportion in manufacturing, exports and employment,
and are major contributors to GDP.
3.1 Definition of Micro, Small and Medium Enterprises
(a) Enterprises engaged in the manufacture or production, processing or
preservation of goods as specified below:
(i) A micro enterprise is an enterprise where investment in plant and machinery does
not exceed Rs. 25 lakh;
(ii) A small enterprise is an enterprise where the investment in plant and machinery is
more than Rs. 25 lakh but does not exceed Rs. 5 crore; and
(iii) A medium enterprise is an enterprise where the investment in plant and machinery
is more than Rs.5 crore but does not exceed Rs.10 crore.
In case of the above enterprises, investment in plant and machinery is the original cost
excluding land and building and the items specified by the Ministry of Small Scale Industries
vide its notification No.S.O. 1722(E) dated October 5, 2006 (Annex I).
(b) Enterprises engaged in providing or rendering of services and whose investment in
equipment (original cost excluding land and building and furniture, fittings and other items
not directly related to the service rendered or as may be notified under the MSMED Act,
2006) are specified below.
(i) A micro enterprise is an enterprise where the investment in equipment does not exceed
Rs.10 lakh;
(ii) A small enterprise is an enterprise where the investment in equipment is more than
Rs.10 lakh but does not exceed Rs.2 crore; and
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(iii) A medium enterprise is an enterprise where the investment in equipment is more than
Rs. 2 crore but does not exceed Rs. 5 crore.
These will include small road & water transport operators, small business, retail trade,
professional & self-employed persons and all other service enterprises.
Lending by banks to medium enterprises will not be included for the purpose of reckoning of
advances under the priority sector
3.1.1 Characteristics of SME
The growth recorded by SSI in India is 2% more than any other sector
The sector accounts for 9% of the country‟s GDP
The sector employs more than 20 million people
It has been estimated that a lakh rupees of investment in fixed assets
in the small scale sector generates employment for four persons
Among the large PSBs, state bank of India‟s SMEs exposure grew by
24% in 2008
All banks are targeting SMEs credit growth of 25%
It has been estimated that a lakh rupees of investment in fixed assets
in the small scale sector produces 4.62 lakhs worth of goods or
services with an approximate value addition of ten percentage points
Public sector banks‟ overall credit to SME sector grew by 26%
in 2006-2007, which amounted to Rs.1,85,000 cores
Reserve Bank of India has advised all commercial banks to
achieve 20% annual growth in SME lending till 2010
Non-traditional products constitute a massive 95% of the SSI
exports
SIDO, SIDBI, NABARD, NSIC, export promotion authorities are
actively involved in the development of SMEs in India
45%-50% of the Indian Exports is being contributed by SSI sector
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3.1.2 Business Environment of SMEs units
These units are mainly dependent on larger customers for business
SMEs do not have very good reach for marketing that restricts their volumes
and makes them too dependent on large units (in spite of SME
expertise in niches)
SMEs are generally starved for funds and have to spend too much time for
collections of Accounts Receivable & external funding arrangements
Banks are not very keen on supporting these units for working capital due to
uncertain business cycles and growth
Too much time required to be spent with Govt. / Semi Govt. Agencies
3.1.3 Challenges Faced by SMEs
Lack of adequate Management Training and Bandwidth amongst promoters of
such units resulting in lack of:
Non-availability of Business plan leading to ad hoc decision making
Lack of Business & Financial discipline
Lack of Forward planning resulting in unforeseen situations
Lack of cognizance to even appreciate that there is a better way to manage the
projects
Lack of inadequate internal systems
Inability to attract & retain highly trained manpower in this segment since there is
lot of poaching from larger units / MNCs
Lack of succession plans and new generation not available for such causes
Lack of awareness of modern Management practices and specifically Project
Management practices and methodologies amongst them
Inadequate attention to financial disciplines and cash flow control (controllable &
uncontrollable) affecting even the sheer existence of these units. This leads to:
Lack of available funds (perpetually caught up in this vicious cycle)
Inability to pay competitive wages / salaries to trained professional in working
classes
Need for training of the leadership and Promoters of such units
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To overcome all these difficulties, Indian SMEs and rural artisans deserve all
the policy support the Government can offer. What they need is, not protection but
institutional support to fund modernization and technology up gradation,
infrastructure support and adequate working capital finance. Also they have to have
professional inputs and knowledge about various happenings in their own industries
in and around the country. This brings in the concept of SME networks and clusters
that stimulate innovative and competitive SMEs. These concepts (are not something
new, but can be traced back to Alfred Marshall‟s analysis of industrial districts in
Britain in 1890s) essentially bring together various stakeholders like technology
providers, labour force, financing arms, consultants, marketing arms, and others, for a
common good that will help in enhancing the strength of SMEs
3.1.4 Risks Faced by SMEs
Management Risks
General Management skills / methods / training / attitudes
Perpetuation of the units as an ongoing concern
Financial Risks
Lack of Financial Plans (Too many surprises & ad hoc decisions)
Funds & Cash Flow planning Marketing Risks
Reach & Net working
Dependence on few customers Technology Risks (Scope / Costs / Quality)
Need for perpetual R&D
Technology obsolescence
Human Resource Risks
Need for formally trained manpower
Ability to pay competitive wages
Support Structure & Associates
23
3.1.5 Some vital statistics
Number of enterprises in this sector- 2.6 Cr
Number of Manufacturing enterprises – 70 lakh
Number of Service enterprises – 1.8 Cr
Number of Women enterprises – 20 lakh (8%)
Number of rural enterprises 54.5%
3.2 SME- A Global Scenario
SMEs are one of the principal driving forces in the economic development of every
nation. They stimulate private ownership and entrepreneurial skills, they are flexible and can
adapt quickly to changing market demand and supply situations, help diversify economic
activity and make a significant contribution to exports and trade. Many transition economies
have acknowledged that SMEs are crucial for industrial restructuring and have formulated
national SME policies, programmes and enterprise development policies. Most governments
have policies that encourage the growth of SMEs because they facilitate in alleviating poverty
by increasing income levels and creating jobs.
The underlying table gives a global comparison of SMEs.
Country Definition Number of
SMEs (in
units)
Employment
generated by
SMEs
Percentage of
total business
China Defined on the
basis of fixed
assets and
number of
employees
0.43 crore
75% of the
country's
employment
99.0%
India Defined on the
basis of limit of
historical value
of investment in
plant &
1.30 crore
4.1 crore 99.7%
24
machinery, as
per the
MSMED Act of
2006.
European Union Defined on the
basis of number
of people
employed in the
enterprise.
2.30 crore
8.5 crore 99.0%
Japan Defined on the
basis of capital
size and number
of employees
0.57 crore 2.9 crore 99.2%
USA Defined by the
number of
Employees
Not Available Not Available Not Available
( Source: Government websites of SMEs of respective countries)
China
In China there are two definitions being used: one, on the basis of fixed assets that is, the
level of fixed assets(small industry is up to $1.8 million in book value of fixed assets); and the
other definition is in terms of the number of employees (small enterprises are between
10 and 50 employees). The actual industrial census shows that the average size for small
enterprises is about 15 employees; that of medium enterprises are 893 employees; and that of
large enterprises is 3,755.
India
SMEs form the backbone of the Indian Economy. The SME segment in India has come
into the limelight, with increased focus from several government institutions,
corporate bodies and banks, and is viewed as agents of growth. Apart from the policy focus
and government's thrust towards promoting the SME segment, globalisation and India's robust
economic growth has opened several latent business opportunities for this
25
segment. The classification of SMEs in India is discussed in the next section.
The European Union (EU)
SMEs play a central role in the European economy. They create wealth, foster new ideas
and are a key source of new jobs. According to the EU definition, an SME is defined as a
company, which –
Employs fewer than 250 people
Has a turnover of less than € 40 million per annum or net balance sheet assets of less
than € 27 million
Must be less than 25 percent owned by larger company/companies which do not
qualify as an SME themselves
Japan
SMEs are the economic base of the industrial value chain and the underpinning of the
Japanese economy. 99.2% of all businesses are SMEs and these enterprises have provided a
safety net by covering 70-80% of total employment. 60% of SMEs in Japan have direct or
indirect transactions with large enterprises in the manufacturing industry.
United States
In the US, a Government Department called SmallBusiness Administration (SBA) sets
the definition of small business. In the United States, small business is defined by the number
of employees and it refers to those businesses with less than 100 employees, while medium-
sized business often refers to those with less than 500 employees
3.3 SME- An Indian Scenario
The Small and Medium Enterprises (SMEs) constitute an important segment of the
Indian economy in terms of their contribution to the country's industrial production, exports,
employment and creation of an entrepreneurial base. According to a World Bank study, there
are said to be more than 60 definitions of small and medium industries used in 75 countries
surveyed. In some other countries, annual turnover of the company determines the size of an
enterprise, whereas certain countries define SMEs on the basis of number of Employees. In
26
the Indian context an SME is defined on the basis of limit of historical value of investment in
plant & machinery, as per the MSME Act 2006
(Investment in plant & micro enterpriseDoes n
3.3.1 Total Bank Credit to SMEs
Year ended
March
Public Sector
Banks
Private Sector
Banks
Foreign Banks All SCBs
2007 102550 13136 11637 127323
2008 151137 46912 15489 213538
2009 191307 47916 18138 257361
(Source: RBI)
3.3.2 Growth And Development of SMEs
1948-1991 1991-1999 1999-2006 2006 onwards
Recognition
given to micro
and small
enterprises
SIDO set up
in 1954
NSIC
established in
1955
SISI set up for
entrepreneurial
and skill
DICs set up at
state level
SIDBI set up in
1990
IID scheme
introduced in
1994
Introduction of
technology
development
and
modernization
fund in 1995
Ministry of
MSME
came into
being in
1998
CLCSS
launched to
encourage
technology
upgradatio
n
CGS
started to
provide
collateral
free loans
to
entreprene
urs
Performanc
e and credit
rating
Scheme
introduced
in 2005
MSMED Act
introduced in
2006
The Act
defines
medium
enterprise for
the first time
The Act
provided the
first ever
legal
framework for
recognition of
the concept of
„enterprise‟
which
comprises
both
manufacturing
and
service entities
11
(Source: Ministry of Small and Medium Enterprises, GOI)
27
3.3.3 Indian SMEs future trends
With the growth of SMEs the business environment have now started demanding
improved servicing standards and a faster cycle time for achieving business success. The
future of SMEs can be briefly explained as follows:
SMEs in future aim to concentrate on lean manufacturing systems in order to keep up
with the rising competition.
National Manufacturing Competitiveness Programme
(NMCP) plans to launch a lean manufacturing project worth Rs 2,30,000 crore. The
project is scheduled to a turnover of 7,000 to 10,000 units by 2012.
10 new tool rooms are to be set up under Public Private Partnership (PPP) as training
needs of SMEs are rapidly rising.
Policies that create an enabling environment for SME growth are devised for the
future. Cluster based financing approach and encouragement to credit ratings, are
some of the initiatives to be undertaken to double the flow of institutional credit
towards SMEs by 2010.
3.4 SWOT analysis of SMEs in India Strengths Weaknesses Opportunities Threats Self reliance -
Flexible and self
managed business
Manufacturing
flexibility-
Production as per
requirement
Availability of
cheap labour -
Extensive use of
unskilled labour
which is easily
available in India
High cost of input
material -
Concentration on
high quality raw
material to keep up
with intense
competition
Lower
productivity -
Lack
of specialization
and skilled work
force resulting in
poor efficiency
Technological
obsolescence -
Deployment
of outdated
technology and
excessive
dependence on
manual operations
End of quota
regime – End of
quota regime
replaced protection
with
competitiveness to
infuse more
vibrancy and growth
to SMEs in the face
of foreign
competition and
open market
Shift in domestic
market -Due to
globalisation and
liberalization,
manufacturers
can increase
production and
export surplus,
thereby increasing
overall profitability
Increased
disposable income
- Resulting in an
increase in
Stiff competition
from developing
economies -
China poses as a
serious threat as
they manufacture in
bulk and enjoy
large scale
economies in
manufacturing
and distribution of
goods and services
Pricing pressure -
SMEs are forced to
sell at lowest
possible prices in
order to keep up
with competition
from other SMEs as
well as from
established players
in the industry.
Locational
disadvantage -
Compelled to set up
manufacturing units
28
purchasing power
and consequently an
increased demand
for goods and
services
Emerging
economy and
expansion - Growth
in sectors like
manufacturing,
retail, automobile
etc resulting in
higher domestic
and international
trade
in rural areas, due
to high cost of
land and labour in
urban areas
International
labour and
environmental
laws - These
laws pose
restrictions on
functioning of
SMEs
199
3.5 CGTMSE
One of the major causes for low availability of bank finance to this sector is the
high risk perception of the banks in lending to MSEs and consequent insistence on
collaterals which are not easily available with these enterprises. The problem is more
serious for micro enterprises requiring small loans and the first generation entrepreneurs.
The Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGMSE) was
launched by the Government of India to make available collateral-free credit to the
micro and small enterprise sector. Both the existing and the new enterprises are eligible
to be covered under the scheme. The Ministry of Micro, Small and Medium Enterprises
and Small Industries Development Bank of India (SIDBI), established a Trust named
Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) to implement
the Credit Guarantee Fund Scheme for Micro and Small Enterprises. The scheme was
formally launched on August 30, 2000 and is operational with effect from 1st January
2000. The corpus of CGTMSE is being contributed by the Government and SIDBI in the
ratio of 4:1 respectively and has contributed Rs.1346.54 crore to the corpus of the Trust
up to September 30, 2007. Based on the future requirement, the corpus is likely to be
raised to Rs.2500 crore.
29
3.6 PNB’s association with SME
PNB‟s association with the SME sector has been very fruitful. The following data would
make it all the more clear:
LEVEL OF ADVANCES
GOAL GAP
CATEGORY 31.3.10
(in Rs)
31.9.10
in Rs)
31.3.11
(in Rs)
NORMAL SUPER
ORDINATE
NORMAL SUPER
ORDINATE
GROSS
MSME
35034 40267 45296 45000 48000 +296 -2704
(Rs in Crores)
OUT OF THE ABOVE
Adv.To MSEs 27920 31994 35032 33500 1532
Adv.To Micro
enterprises
9923 11412 14370 13960 410
No. Of micro
enterprises
311169 348118 384859 357844 27015
(Source:www.pnb.co.in)
Observations:
MSME credit increased from Rs 35034 crore as at March 10 to Rs 45296 crore as at
March 11 stands achieved
MSE credit increased from Rs 27920 crore as at March 10 to Rs 35032 crore as at
March 11. The SOI budget of Rs 33500 crore for MSE advances stands achieved
Credit to micro enterprises increased from Rs 9923 crore as at March 10 to Rs 14370
crore as at March 11. The bank has for the first time achieved mandated level of
advances to micro enterprises i.e. 50% of MSE advances.
30
Steps taken by PNB to help accelerate growth in advances to Micro
Enterprises:
(a) Launched a new scheme for Working Capital Demand Loan with concession in rate of
interest and current account for day to day operations.
The salient features of the scheme are as under:
MSE borrowers in manufacturing sector with working capital requirements
maximum upto Rs 10 lakh are eligible for WDCL facility. Existing borrower
will also be provided option to switch over from cash credit to WCDL.
However, any borrower specifically opts for cash credit limit, the same may be
provided.
Current Account will be opened simultaneously.
Concession of 0.25% will be allowed from applicable ROI for WCDL up to Rs
50000 and 0.50% for WCDL above Rs 50000 and up to Rs 20 lakh on
applicable rate of interest.
The WCDL limit sanctioned will be valid for 3 years, subject to annual review
by the bank.
(b) Launched scheme for financing auto dealers under supply chain arrangement
The salient features of the scheme are as under:
Concessional rate of interest : base rate 2.50%
Margin: NIL, however 15% margin against book debts and spares
Relaxed collateral security norms i.e. 50% of the total credit facility
Working Capital to be assessed at 1/6 of the projected annual turnover
Advance payment can be made for supply of vehicles
Letter of assurance for reputed manufacturer companies is not required
(c) Concession to Micro Enterprises:0.50% concessions on chargeable interest rate to Micro
Enterprises for loans up to Rs 25 lakh.
(d) Funding of interest on term loan as well as on working capital during the moratorium
period.
(e) Collateral free loans up to Rs 1 crore.
(f) ROI under trading agreement has been reduced and re-aligned with MSE rates.
(g) For hassle free credit to MSE sector, credit scoring model launched w.e.f. 1st September
2010.
31
(h) Growth in service sector: tie-ups/MOUs with vehicle manufacturers like Ashok Leyland,
Asia Motors Works, Hindustan Motors etc. MOU has been entered in to with Escorts for
supply chain financing and more are in the offing.
(i) Strategy initiatives like leveraging CGTSME to achieve SOG budgets.
3.7 Analysis of an SME
To have a detailed analysis about how a SME performs we need to have a good study
about the following aspects:
Industry analysis- Government regulations and policies, availability of infrastructure,
facilities, industry rating, scenario and outlook, technology up gradation,
Business analysis- operating efficiency, competition faced from the units engaged in
similar products, demand and supply position, cost of labour, cost of raw material
Management analysis- background, integrity and market standing, reputation of
promoters, organisational set up and management hierarchy, track record in execution of
projects, track record in debt repayment, track record in industrial relations etc.
Financial analysis- financial strength, reliability and reasonableness of projections,
past financial performance, reliability of operational data and financial ratios, qualifying
remarks of auditors/inspectors etc.
3.8 Financial Requirements of an SME
To understand the financial requirements of the firm, we need to have an intensive
study of the firm. For this purpose, a comparison of the need based requirements and demand
of the enterprise has been done and their future expansion and diversification plans have been
taken into consideration. To get a quantitative study of the need based requirement of the
firm, three methods of calculations have been used-
(a) Simplified Turnover Method
(b) MPBF
(c) Cash Budget System
32
3.8.1 Simplified Turnover Method
Under this method, bank credit for working capital purposes for borrowers requiring
fund based limits upto Rs 5 crore for Micro, Small and Medium enterprises borrowers and Rs
2 crore in case of other borrowers, may be assessed at minimum of 25% of the projected
annual turnover of which 1/5th
should be provided by the borrower(i.e. minimum margin of
5% of the annual turnover to be provided by the borrower) and the balance 4/5th
(i.e. 20% of
the turnover) can be extended by way of working capital finance.
Since in terms of Nayak Committee norms the banks are required to have minimum
20% of turnover of the business enterprises as the bank finance and 5% is to be obtained as
margin, the current ratio comes to 1.25. Therefore while considering working capital limits to
SMEs where working capital requirement is computed based on simplified turnover method
(Nayak Committee‟s norms), the maintenance of current ratio at the minimum level of 1.33
may not be insisted.
Since the bank finance is only intended to support need based requirement of a
borrower, if the available net working capital is more than 5% of the turnover the former
should be reckoned for assessing the extent of bank finance.
3.8.2 MPBF
Assessment of WC limits in respect of borrowers not eligible to be provided fund
based WC limits under Simplified Turnover Method, is to be done as per MPBF, except in
case of tea, sugar, construction companies, film industry and service sector where credit
requirement is assessed as per cash budget system.
Under this method, for assessment of borrower‟s WC needs, the projections submitted
by the borrower in the various forms for the following year are relevant. The first step in
assessing the quantum of WC finance is to find out whether the projections given by the
borrower are reasonable. Any optimism or pessimism in accepting projections is neither
desirable for the bank nor for the borrower as it may lead to over financing or under
financing.
To assess the reasonableness of borrower‟s projections, the following factors should be
kept in view:
33
The branches can use with advantage the past data given by the borrower as well as
the data available with it. The comparison has to be made between the past
performance and the future projections. If the future projections are markedly different
from the past trend in relation to projected rate of growth, the reasons for the same
have to be ascertained before accepting the various projections.
The projections given by the borrower are normally based on certain assumptions such
as market demand, cost of raw materials, price, availability of inputs, and other
environmental factors. The bank has to assess how far these assumptions are realistic
and likely to materialise.
How limits already sanctioned by the bank, have been utilized by the borrower in the
past, has the conduct of the account been as per terms of sanction or these have been
frequently violated.
While accepting the borrower‟s projections, it has to be ensured that the projections do
not go beyond the Choking Factor (i.e. the level beyond which the operations start
giving negative results), as this will inhibit the further expansion
Critical analysis of sales projections – the most important area to be looked into is
sales. All other aspects are directly related to the projected level of sales. Therefore,
determining the projected level of sales is the first step in assessing the working
capital needs of the borrower. Once the level of sales has been determined, the other
data can be easily determined in relation to sales.
A higher than normal sales for the following year can be accepted only after
the bank is satisfied on the basis of the above scrutiny that the projected level of sales
can be achieved and the available past data and future plans give positive indications
in this regard. The bank has also to ensure that the borrower is willing to create the
necessary support to achieve the sales target.
The branch having satisfied itself to the projected level of sales, can determine the other
data in relation to sales. The following steps can be taken for finalising other data:
The relationship between different items constituting cost of production
can be studied in relation to sales and cost of sales. It is to be ensured that
the projected increase in respect of any items is not out of proportion to the
past relationship. Valuation of various items should be based on current
costs.
34
After finalising the above mentioned projections, the holding period of
current assets is to be determined. The holding period of current assets is to
be determined. The holding period of chargeable current assets can be
determined based on the rule that the projected holding should be
preferably lower of norms or past practice.
The levels of other current assets can also be estimated on the basis of the
borrower‟s past trend.
The bank is to bridge the gap between current assets and current liabilities
after ensuring the borrower‟s contribution. Therefore, the quantum of bank
finance is very much dependent upon availability of short term credit from
other sources i.e. other current liabilities. The bank should ensure that the
level of other current liabilities is projected properly.
The projected level of NWC should at least be 25% of total current assets
under second method of lending.
Once the borrower‟s overall projections for the following year have been accepted by the
bank, the actual requirement of working capital and banking finance can be worked out on
the basis of steps given in HO circulars relating to computation of MPBF, mainly as
follows:
The actual requirement of working capital can be arrived at on the basis of
position of current assets and other current liabilities.
The bank is to partly meet the difference between the current assets and
the other current liabilities.
If the available NWC is more than the minimum stipulated working capital
under the second method of lending, the available NWC is to be taken into
account for arriving at the permissible level of bank finance i.e.
permissible bank finance will be reduced accordingly.
3.8.3 Cash Budget System
In case of tea, sugar, construction companies, film industries and service sector
requirement of finance may be at the peak during certain months while the sale proceeds may
be realised throughout the year to repay the outstanding in the account. Therefore, credit
limits are fixed on the basis of the projected monthly cash budgets to be received before
35
beginning of the season. Branches should follow the procedure/guidelines issued from time to
time through various circulars for financing these types of enterprises.
Thus SMEs since its inception have been a support to the economy and hence PNB‟s
association with SMEs has been very fruitful. From the above data we observe that PNB has
successfully achieved its target of lending to this sector. Moreover there are a number of steps
followed by PNB to achieve its target.
36
Chapter 4
CASE STUDIES – AN OVERVIEW
37
To make a comprehensive study about the SMEs and their financial requirements, two
SMEs have been taken up - one from the manufacturing sector and the other from the service
sector. Based on the detailed study of these two enterprises, an analysis of the scenario of the
entire sector has been derived.
CASE STUDY - 1
4.1 Company Profile
Name of the company: Power System
Date of Incorporation/Establishment: 1.05.1990
Directors/Promoters: Mr Subimal, Mr Sukumar
Activity engaged in: Manufacturing of electrical control panel
Sector: Manufacturing
Dealing with PNB since: 2001
Registered office: 1363, Garia Fartabad More, Kolkata-700084
Factory/Godown: Ramchandrapur, PO-Narendrapur, South 24 Paraganas, West Bengal
Existing facilities:
Facility No.1
Nature Cash Credit (H)
Limit Rs 70.00lakhs
Margin 25% on stock
Interest BPLR+1.00 which comes to 12%
Security Hypothecation of stocks of raw materials,
any other material required for
manufacturing process, WIP, FG
Facility No 2
Nature Term Loan
Limit Continuation of existing term loan of
38
35.27 lakhs
Facility No 3
Nature ILG
Limit 50 lakhs
Purpose For issuing guarantee in favour of
PSU/govt. Enterprise/Pvt sector
companies
Margin 25% in shape of FD/Cash
Security Counter Indemnity from the borrower
and counter guarantee from the
guarantors
Collateral security Extension of bank’s charge on CA and
FA
Facilities Proposed: Renewal of the existing limits.
4.2 Analysis of the Enterprise:
4.2.1 Financial Analysis:
The following is the balance sheet of the company of the last 4 years along with the
projected balance sheet for the financial year 2011-2012:
(Rs in crores)
2007-08 2008-09 2009-10 2010-11 2011-2012
(estimated)
A.Sources of
Funds
Partners
Capital
179.91 332.62 432.66 521.60 569.69
Loan Fund 170.19 121.47 80.08 27.42 70.00
39
Total 350.10 454.09 512.74 549.02 639.69
B. Application
of funds
Net Fixed
Assets
161.59 162.52 173.44 173.76 147.62
Current
assets, loans,
advances
Closing stock
of raw
materials
32.34 30.03 23.22 120.48 35.00
Closing stock
of WIP
5.15 5.88 150.03 _ 220.00
Closing stock
of finished
goods
2.07 .73 .73 _ 4.00
Sundry
Debtors
296.46 481.00 408.03 346.40
410
Adjusted
deposits, other
CA
241.86 324.55 329.31 244.01 302.83
Total CA 577.88 842.19 911.32 710.89 971.83
Less: CL &
provisions
CL 326.96 412.98 452.03 235.97 405.04
Provisions 69.15 146.61 194.59 146.95 85.8
Total CL &
Provisions
396.11 559.59 646.62 382.93 490.84
Net CA 181.77 282.60 265.70 327.96 480.99
40
The following is the Profit and Loss account of the last 4 years along with the projected
P/L account for the financial year 2011-2012:
(Rs in crores)
2007-08 2008-09 2009-10 2010-11 2011-12
(estimated)
Incomes
Sales 1052.21 1460.07 1048.06 1131.85 1875.00
Other incomes 58.32 51.60 38.34 47.39 55.00
Total 1110.53 1511.67 1086.40 1179.24 1930.00
Cost of incomes
Material consumed 739.51 975.55 693.36 783.01 1120.00
Operating expenses 84.22 106.95 63.23 69.14 27.37
Administration and
other expenses
124.01 173.65 155.48 151.85 145.00
Depreciation 24.22 24.86 22.52 19.23 19.16
Total 971.96 1280.97 934.60 1023.24 1311.53
Add. opening stock
FS
_ 2.07 .73 .73 3.5
Total 971.96 1283.04 935.33 1023.97 1315.03
Less. closing stock
FS
2.07 .73 .73 _ 4.0
Balance 969.90 1282.31 934.60 1023.97 1311.03
PBIT
(income-COS)
140.63 229.36 151.79 155.27 618.97
Less. Interest 4.10 9.90 7.04 3.20 9.36
PBT 136.53 219.46 144.74 152.07 606.61
Provision for tax 47.76 76.29 50.73 48.07 68.97
Provision for FBT .86 1.17 _ _ -
PAT 87.90 141.99 94.02 104.00 537.64
41
Analysis of the financial performance of the enterprise through various ratios:
Ratios Score
Current Ratio 1.4 4
ROCE 48.47% 8
TOL/TNW 1.68 6
Inventory and debtors
holding(months)
6.53 0
Score under past financials 18
Subjective assessment of
financials
Reliability of annual
financial statement
Discounting factor for
above score
-30%
Net score under financials
after discounting
12.60
4.2.2 Business Analysis:
Parameters Score awarded Remarks
Expected sales growth 4 Positive growth rate of
min 5%, expected to grow
in next year
Availability of Inputs 2 Easy availability of inputs
Production/Product
strength
2 Good quality/norms
maintained
Marketing strength 2 Satisfactory customer
base/marketing network
Total score of
business/industry
10
42
4.2.3 Management Analysis:
Parameters Score Remarks
Achievement of sales vis-a-
vis estimates (sales
achievement-1086.41)(sales
target-2000)
0 Below 75%
Actual profits vis-a-vis
estimated profit(profit
achievement-144.75)
(profit target-255.25)
0 Below 75%
Constitution/establishment 4 Partnership>15 years
Commitment and sincerity 2 Satisfactory
Track record in debt
repayment and statutory
dues
2 No irregularity during
past 1 year/no statutory
liabilities overdue
Total score of management 8
4.2.4 Conduct of Account:
Parameters Score Remarks
Conduct of accounts 6 Good
Submission and reliability
of feedback statements and
other information
0 Delay in submission
beyond 30 days of due
date/lack of reliability of
date
Total score of code of
account
6
4.2.5 For Term Loan:
Parameters Actual Score
Debt equity ratio .06 8
43
DSCR/repayment period
(in case of existing
companies already
availing TL/DPG)
2.69 12
Total for TL 20
4.2.6 Overall Assessment of the enterprise:
Grand Total
Score out of 120 64.6
Score out of 100 53.83
Credit Risk Rating: PNB-BB
This implies Average Risk
4.3 Financial Requirements of the Enterprise:
Computation of MPBF (requirement based):
(As per projected balance sheet)
Value
1.Current Assets
669
2.Other Current Assets 302.83
3.Total Current Assets 971.83
4.Total Current Liabilities(excluding bank
borrowings)
490.84
5.Working Capital Gap 480.99
6.Minimum Stipulated Net Working Capital
(25% of 3)
242.95
7.Projected Net Working Capital 319.37
8.(5-6) 238.04
44
9.(5-7) 161.62
10.MPBF (8 or 9 w.e. is less) 161.62
Requirement of the enterprise (demand):
The party requires renewal of existing facilities available.
Conclusion
The conclusion here we arrive at is that the party should be granted loan as its demand is
much less than its requirement. Moreover the party is one of the oldest customers of PNB and
the bank is not aloof from its creditworthiness. Hence on the ground of being a trusted
customer and fulfilling all its criteria, the bank should grant all the credit facilities.
CASE STUDY-2
4.4 Company Profile
Name of the company: InfoTech Pvt Ltd (An ISO 9001:2000 certified organisation)
Date of Incorporation/Establishment: 15.02.1996
Directors/Promoters: Mr. Subhasis CMD, Mrs Anita ED
Activity engaged in: school computer education, corporate IT training, hardware sales and
maintenance, software development.
Sector: Services
Dealing with PNB since: 2005
Registered office: 11C, Dover Lane, Kolkata-700029
Branch office: B.O. Alipore Chetla, CO Kolkata
Sites: wherever the company gets assignments, like Mizoram, Bokaro, Sikkim, A&N
Islands, Bilaspur
Existing facilities: ILG- Rs 80.20 lakhs
45
Facilities Proposed: Bank Guarantee of Rs 150 lakh for furnishing Performance
Guarantees/Earnest Money for new bids, etc, ILG- Rs 340.71 lakhs
Brief of the proposal: The party has entered into a prestigious contract with Govt of
Mizoram, Education & Human Resources Department for supply, installation and
maintenance of IT, infrastructure, provision of IT Education and computer aided learning in
260 Govt. And Govt aided school having 272 computer labs across the nine districts in the
state of Manipur on BOOT basis to be executed within 5 years
Bank Guarantee No 1
Nature Specific letter of Guarantee (Inland)
Limit Rs 17367200
Security Counter indemnity from the company
and counter guarantee from the
guarantee
Margin 25% in form of FD
Beneficiary The Director, Directorate of Education
Validity 7 months
Purpose Advance Payment Guarantee
Bank Guarantee No 2
Nature Specific Letter of Guarantee (Inland)
Limit 8683600
Security Counter indemnity from the company
and counter guarantee from the
guarantee
Margin 100% in form of FD
Beneficiary The Director, Directorate of Education
Validity 5 years
Purpose Performance Guarantee
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4.5 Analysis of the firm
4.5.1 Financial analysis
The following is the balance sheet of the company of the last 4 years along with
the estimated balance sheet for the financial year 2011-2012:
(Rs in crores)
2007-08 2008-09 2009-10 2010-11 2011-2012
(estimated)
Sources of
Funds
Shareholder’s
fund
Capital 16.27 16.27 16.27 16.27 16.27
Reserves and
surplus
217.85 283.88 352.00 532.81 862.96
Deferred tax
liability
.66 .63 .34 -.11 -.41
Total 234.78 300.79 368.61 548.98 878.84
Applications
of Fund
Fixed assets
Net block
30.97 32.38 30.28 27.93 26.20
Investment 169.17 35.00 5.00 50.00 699.74
Current
assets, loans
and advances
S. Debtors 64.76 59.35 407.19 236.03 268.75
Cash and
bank
balances
34.67 135.69 241.67 422.9 35.37
Loans and 168.76 135.58 88.37 106.05 127.26
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advances
Other
current assets
0 0 0 115 165
Total 468.32 398.02 772.54 1383.44 1564.10
Less: current
liabilities and
provisions
Liabilities 233.54 97.17 403.91 742.26 517.45
Provisions - .04 - 92.20 167.81
Total 233.54 97.21 403.91 834.46 685.26
Net CA 203.81 268.43 338.34 521.25 852.54
Total 234.78 300.79 368.61 548.98
The following is the profit and loss account of the company of the last 4 years along
with the estimated profit and loss account for the financial year 2011-2012
(Rs in crores)
2007-08 2008-09 2009-10 2010-11 2011-12
(estimated)
Incomes
Education fees
and charges
667.98 650.33 1418.60 1889.31 2147.11
Profit on sale
of long term
non trade
investment
_ 2.39
Other non
operating
income
21.33 30.41 25.62 25.18 32.78
Total 689.31 680.74 1446.63 1914.49 2179.89
Expenditure
Consumables 275.96 167.60 888.95 1099.82 1128.99
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Personnel
expenses
0 255.47 278.84 319.33 326.62
Administrative
expenses and
other expenses
324.42 155.68 178.03 194.96 198.90
Loss from sale
of units of
mutual fund
.01 _
Depreciation 3.62 5.24 5.56 5.83 5.20
Total 604.00 584.02 1351.04 1619.94 1659.71
Profit before
Tax
85.31 96.71 95.58 294.55 520.18
Provision for
tax
Income tax
-Current tax 28.70 27.75 91.74 167.52
-Deferred tax (.02) (.28)
Fringe Benefit
Tax
2.00 _
Profit After
Tax
59.19 66.03 68.11 202.81 352.66
Balance b/f 134.72 200.75 268.87 471.68
Balance
carried to BS
134.72 200.75 268.87 471.68 824.34
Analysis of the financial performance of the enterprise through various ratios
Parameters Value Score
TOL/TNW 1.1 6
Current ratio 1.54 6
ROCE 28.56% 8
Inventory & Debtors 1.97 8
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Holding
Score under past financials 28
Discounting factor for
score obtained
-30%
Net score under financials 19.60
Estimated cash profit to
net repayment obligations
250% 8
Net score of financials 27.60
Ratios 2008 2009 2010 2011
Current ratio 1.87 3.76 1.84 1.62
TOL/TNW .99 .32 1.10 1.52
4.5.2 Business Analysis
Parameters Score Remarks
Expected sales growth 4 Positive growth of
minimum 5% for last
three years
Availability of inputs 2 Easy availability of inputs
Production/production
strength
2 Good quality/norms
maintained
Marketing strength 2 Satisfactory customer base
Total score of business 10
4.5.3 Management
Parameters Score Remarks
% achievement of sales
vis-a-vis estimates
4 100%
% achievement of profit to 0 45.24%
50
estimated profit
Constitution/establishment 4 Partnership >15 years /Pvt
ltd >10 years
Commitment & sincerity 2 Satisfactory
Track record in debt
repayment and statutory
dues
2 No irregularity during
past 1 year/no statutory
liabilities overdue
Total score of management 12
4.5.4 Conduct of Account
Parameters Score Remarks
Conduct of accounts 6 Good
Submission and reliability
of feedback statements
N.A
Total score of conduct of
accounts
6
4.5.5 Overall assessment of the enterprise
Grand Total
Score out of 120 60.43
Score out of 100 60.43
As the party has not availed for any term loan, the score remains the same even out of a
total of 120. The 20 is for evaluating the firm for eligibility for term loan.
Credit risk rating PNB- A-
This implies – Modest risk
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4.6 Financial Requirements of the Enterprise:
4.6.1 Assessment of Non-Fund Based Limit
As the firm has non fund based requirement, so here MPBS does not hold true (MPBS is
applicable in case of only fund based limit) In such cases the bank usually grants what the
party has demanded. As it is obvious that the party would demand only that what it has to pay
to the third party and not more than that.
Conclusion
The conclusion here we arrive at is that the party should be granted the facility as the
contract that the party has entered into is one of the prestigious one as it comes from the
Government of Manipur. Here the bank is at least risk. Moreover seeing the party‟s financial
performance it would be advisable to grant the credit facility.
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Chapter 5
CONCLUSION
53
5.1 Findings
Financial Performance:
The net profit of both the enterprises has increased by Rs 122.68 from the year 2010 to
2011 i.e. by 75%
The turnover of both the enterprises has also increased by Rs 560.7 from the year 2010
to 2011 i.e. by 22%
The general trend of net profit and turnover over the past 4 years has generally shown
an increasing trend.
The favourable conditions and the market trend of Kolkata have enabled the SMEs to
make positive projections of their financial statements.
Business and Management:
Lack of formal training of the Team
Vulnerable due to non-availability of trained staff is an important challenge / risk for
the SME segment and the risk is real
Bank loan is a major source of finance of these enterprises.
The working capital requirement of the enterprises varies from time to time but mostly
varies within the range of 50 lakhs to 1 crore.
PNB has been a good choice amongst the SMEs for loan financing, as data shows that its
customer base has increased by 16% from the year 2010 to 2011.
Demand of the customers for Working Capital finance has been in line with the need
based requirement assessment by the bank.(the need based assessment by bank has been
done mainly by following the Nayak committee recommendations)
Both the enterprises are though technologically upgraded yet do not have the expertise to
make effective utilisation of such technology.
Availability of inputs have not been commensurate with the requirements.
There are prospective plans of expansion of both the enterprises for which there financial
requirements are to increase manifold.
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5.2 Suggestions
Chit fund model can be established to finance such SMEs
A partnership should be established between the bank and the firm so that the risk can
be minimised and both parties have a share in the profit.
Lack of formal training of staff can be managed if right from the beginning the
enterprises have planned for such exercises and training programs for technology plus
leadership skills as part of the on-going activity.
Need for training of the leader and promoters of such units with right management
thinking / attitudes & practices is recommended.
Risk can be managed through proper identification, analysis, planning, controlling and
proper preparation and execution of strategy.
The Government should take steps to bring about improvements in the guidelines for
this sector along with increase in subsidy.
Models of setting up of an SME can be adopted from the corporate sector as these are
more objectively framed by experts.
The bank should be more liberal in providing funds to these enterprises as the county‟s
development depends on the development of these enterprises.
At the same time bank should also improve on its monitoring system to check whether
their funds are being used effectively or not.
Creating partnership relationship of micro financing institutions with SMEs for risk
sharing.
Developing equity market and venture capital for SMEs
Evolving credit cards to maintain required liquidity in operation of SMEs
5.1.1 A short but effective plan to improve the situation
Capacity to Excellence:
Capacity is basic potential
Capacity is converted to Capability once you are willing to put in action your
potential capacity and develop ability
Capability is honed into Competence when you do well over & over again in
flawless way. You develop a particular skill at reflex level and can repeat the same in
an effortless way
55
Excellence emerges when you develop passion for your activities and master the art of
doing it and living your life with zest and vigour.
At times journey and the process are far more important than the destination.
Organization Development path would mean that we move from Capacity to Excellence.
Journey from Capacity to Excellence is the Path one needs to travel all life for
actualizing Goals in Life of an individual as well for an organization.
5.3 Conclusion
The evolution of SME dates back to the post independent period. Since its inception it
has developed a lot. At the same time we cannot deny the fact that the Government has also
played an important role in bringing about a lot of changes in the sector. Acts like MSMED
Act, Committee to Examine the Adequacy of Institutional Credit to SSI Sector and Related
Aspects (Nayak Committee) (1992) Report of the High Level Committee on Credit to SSI
(Kapur Committee, 1992) Report of the Working Group on Flow of Credit to SSI Sector
(Ganguly Committee, 2004) Report of The Internal Group to Review Guidelines on Credit
Flow to SME Sector (Shri. C. S. Murthy, 2005) Report of the Working Group to Review the
Credit Guarantee Scheme of the Credit Guarantee Fund Trust for Micro and Small Enterprises
(Shri.V.K.Sharma, 2010) etc.
But after a detailed analysis of some of the small enterprises, we observe that there are
still a number of flaws in the sector. To cite a few- the various risks attached like
technological, marketing, human resources, support structure etc.- various challenges to be
met like non-availability of Business plan leading to ad hoc decision making, lack of Business
& Financial discipline, lack of Forward planning resulting in unforeseen situations, lack of
cognizance to even appreciate that there is a better way to manage the projects, lack of
inadequate internal systems, inability to attract & retain highly trained manpower in this
segment since there is lot of poaching from larger units / MNCs etc.
This sector needs special attention as it contributes to around 9% to the GDP and above
that employs around 31 million people.
This research study on financing of SMEs have highlighted the need to link availability
of finance to SMEs to the delivery of business development to improve its viability. It is
therefore necessary to evolve a model that shall provide for a partnership in between SMEs
56
and banks. The partnership concept takes care of sharing of risk in business proportionate to
their respective financial involvement. Moreover, if we extend the partnership concept
further, it would also help borrower to get more acceptable rate of interest. In fact, such
partnership concept may lead to sharing of earnings instead of charging interest on loan as is
prevalent in Islamic sharing of earnings instead of charging interest on loan as is prevalent in
Islamic banking which of late is growing in importance due to present rise in oil prices.
Moreover, it is necessary to build reliable information on SMEs to help assess market
opportunities and risk management There is also an urgent need to develop equity market for
SMEs. This may be done by spreading success stories of SMEs in India. It has been the 71
findings of many research studies that SMEs mostly depend upon external capital and this
should not be only loans from banks but should be partly equity raised from the market
besides the nominal equity held by the promoter. In this the supportive role of mutual funds
and venture capitals could be of great help in developing capital market for SMEs. Further,
securitization is another area to be developed to take care of nonperforming assets (NPAs)
that are blocking regular flow of funds to credit institutions catering to SMEs. It is obvious
that in India gradually banks should adopt relationship lending technology and treat
transaction lending technology as a complimentary and not a substitute strategy.
SMEs are becoming an important segment of our economy and one can no more neglect
such needs any more. However the challenge is to decide where do we start and what is the
way to promote such thinking for this vital sector.
But not to forget that every problem has a solution, the problems faced by SMEs can
definitely be overcome. As recently Pranab Mukherjee, the Finance Minister has announced a
grant of Rs 5000 cr to SIDBI for the development of this sector. Moreover the Government
has also entered into collaboration with its US counterparts for higher value added services.
We all need to change our ways of thinking and think for the long term to protect our
own interest for all such units & start soon. SMEs definitely need special attention from
everyone of us.
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ANNEXURE
1.NAME OF THE ORGANISATION-
2.TYPE OF THE ORGANISATION-
3.ACTIVITY ENGAGED IN-
3.TURNOVER OF THE PREVIOUS YEAR-
4.NAME OF THE PERSON INTERVIEWED-
5.GENDER: MALE FEMALE
6.DESIGNATION OF THE PERSON INTERVIEWED-
7.DEALING WITH PNB SINCE-
8.HOW HAS YOUR RELATIONSHIP WITH PNB BEEN OVER THE YEARS?-
a.GOOD b.SATISFACTORY c.UNSATISFACTORY
9.DO YOU HAVE ANY ASSOCIATION WITH ANY OTHER BANK? YES/NO
A.IF YES,PLEASE SPECIFY-
B.WHERE DO YOU RANK PNB AMONG OTHER BANKS?
10.DO YOU HAVE ANY FUTURE PLANS OF EXPANSION OR DIVERSIFICATION?
YES/NO
A.IF YES,PLEASE SPECIFY-
11.WHAT ARE YOUR FINANCIAL REQUIREMENTS 5 YEARS HENCE?
12.WHAT ARE THE PRESENT FACILITIES AVAILED FROM PNB?
58
13.WHAT WAS THE LAST SANCTION?
14.HAVE THE FACILITIES PROVIDED BEEN ADEQUATE? YES/NO
15.GUIDANCE RECEIVED FROM BANK,IF ANY? YES/NO
A.IF YES,PLEASE SPECIFY-
17.ARE THERE ANY SHORTCOMINGS/DEFICIENCIES IN BANKING SERVICES?
YES/NO
A.IF YES,PLEASE SPECIFY-
18.DOES THE BANK ACCESS YOUR REQUIREMENTS OBJECTIVELY? YES/NO
19.YOUR BANK IS A........................
(PARTNER, FRIEND, NECESSARY EVIL)
59
BIBLIOGRAPHY
1. WEBSITES
a) www.ministryoffinance.co.in
b) www.investopedia.com
c) www.pnb.co.in
2. BOOKS AND JOURNALS
a) PNB Books Of Instructions
b) Pathak B, “Indian Financial System”, 2008, Pearson Publications
c) Nayak, P., “Problems and Prospects of SMEs in Pune – A Case Study”, Journal of Mumbai
University.
d) General Review Study of Small and Medium Enterprise (SME) in India.