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“ROLE OF BANK IN DEVELOPMENT OF SMALL & MEDIUM SCALE ENTERPRISE” – Catch them young, watch them grow...
SMALL SCALE INDUSTRY
INTRODUCTION :
The definition for small-scale industrial undertakings has changed over
time. Initially they were classified into two categories- those using power with less
than 50 employees and those not using power with the employee strength being more
than 50 but less than 100. However the capital resources invested on plant and
machinery buildings have been the primary criteria to differentiate the small-scale
industries from the large and medium scale industries. An industrial unit can be
categorized as a small- scale unit if it fulfills the capital investment limit fixed by the
Government of India for the small-scale sector.
As per the latest definition which is effective since December 21, 1999,
for any industrial unit to be regarded as Small Scale Industrial unit the following
condition is to be satisfied: -
Investment in fixed assets like plants and equipments either held on
ownership terms on lease or on hire purchase should not be more than Rs 10 million.
However the unit in no way can be owned or controlled or ancillary of
any other industrial unit.
The traditional small-scale industries clearly differ from their modern
counterparts in many respects. The traditional units are highly labor consuming with
their age-old machineries and conventional techniques of production resulting in
poor productivity rate whereas the modern small-scale units are much more
productive with less manpower and more sophisticated equipments.
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Khadi and handloom, sericulture, handicrafts, village industries, coir,
Bell metal are some of the traditional small-scale industries in India. The modern
small industries offer a wide range of products starting from simple items like
hosiery products, garments, leather products, fishing hook etc to more sophisticated
items like television sets, electronics control system, various engineering products
especially as ancillaries to large industrial undertakings.
Nowadays Indian small-scale industries (SSIs) are mostly modern small-
scale industries. Modernization has widened the list of products offered by this
industry. Theitems manufactured in modern Small-scale service & Business
enterprises in India now include rubber products, plastic products, chemical
products, glass and ceramics, mechanical engineering items, hardware, electrical
items, transport equipment, electronic components and equipments, automobile
parts, bicycle parts, instruments, sports goods, stationery items and clocks and
watches.
A leading, industrially advanced developing country, India has large,
medium and small industrial units of production in almost all branches of the
industry. Since the time of the independence in 1947, a significant feature of the
Indian economy has been the rapid growth of the small industry sector. The small
industry sector is considered to have a major role in the Indian economy due to its 40
percent share in the national industrial output along with an 80 percent share in
industrial employment and nearly 35 percent share in exports. The small scale
industries sector has been assigned an important role in the industrialization of the
country by the previous and current governments of India.
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However, there is a clear distinction between the traditional and modern
small industries. The traditional small industries include Khadi and handloom,
village industries, handicrafts, sericulture, coir, etc. Modern small industries
manufacture a wide variety of goods from simple items to sophisticated items such
as television sets; electronics control system, various engineering products,
particularly as ancillaries to large industries. The traditional small industries are
highly labor-intensive, while the modern small industries use highly sophisticated
machinery and equipment. The term small-scale industries are mostly used to
represent modern small industries. The SSIs manufacture many items which include
rubber products, plastic products, chemical products, glass and ceramics, mechanical
engineering items, hardware, electrical items, transport equipment, electronic
components and equipments, automobile parts, bicycle parts, instruments, sports
goods, stationery items and clocks and watches.
Since Independence, the growth and development of the small-scale
sector has been favored by the GoI on the following grounds: (1) generation of
employment opportunities by SSIs, (2) mobilization of capital and entrepreneurship
skills, (3) regional dispersal of industries and (4) equitable distribution of national
income. The policies pursued by the GOI over the years have helped in the growth
of the SSIs to a considerable extent.
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HISTORY OF SMALL SCALE INDUSTRY :
Ministry of Agro and Land Rural Industries and Ministry of SSI have been
merged into a single namely, Ministry of Micro Small & Medium Enterprises.
The President under Notification 9th May 2007 has amended the
Government of India (Allocation of business) Rules 1961,Pursuant to this amended
Ministry of Agro and rural Industries (Krishi Evam Gramin Udyog Mantralay) and
ministry of SSI (Laghu Udoyag Mantralay) have been merged into a single Ministry,
namely, Ministry of Micro Small & Medium Enterprises ( Suksham Laghu Aur
Medium Udyam Mantralay )
CONCEPT & DEFINATION OF SSI :
In most parts of the world the nomenclature used is small and Medium
Enterprises (SMEs) and the criteria for defining include the number of employees
and /or the turnover. In India the Small Scale Industry evokes different meanings for
different agencies and the financial institution. For example for the purpose of excise
and sales Tax Exemption, the turnover alone is the determining criterion. However in
broder terms, currently, an SSI is defined in terms of investment ceiling on the
original value of installed plant and machinery.
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DEFINITION OF SSIs:
YEAR INVESTMENT LIMITS
1960 Upto Rs 5 lacs in Plant & Machinery
1966 Upto Rs 7.5 lacs in Plant & Machinery
1975 Upto Rs 10 lacs in Plant & Machinery
1980 Upto Rs 20 lacs in Plant & Machinery
1985 Upto Rs 35 lacs in Plant & Machinery
1991 Upto Rs 60 lacs in Plant & Machinery
1997 Upto Rs 100 lacs in Plant & Machinery
1999 Upto Rs 100 lacs in Plant & Machinery
The definition for small-scale industrial undertakings has changed over
time. Initially they were classified into two categories- those using power with less
than 50 employees and those not using power with the employee strength being more
than 50 but less than100capital investment limit fixed by the Government of India
for the small scale sector. As per the last definition which is effective since
December 21, 1999, for any industrial unit to be regarded as Small Scale Industrial
unit the following condition is to be satisfied: -
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CLASSIFICATION OF SSIs:
A common classification is between traditional small industries and modern
small industries.
Traditional small industries include Khadi and handloom, village industries,
handicrafts, sericulture, coir, etc. Modern SSIs produce wide range of goods from
comparatively simple items t sophisticated products such as television sets,
Electronics, control system, various engineering products, particularly as ancillaries
to the large industries...
The traditional small industries are highly labour-intensive while the modern
small-scale units make the use of highly sophisticated machinery and equipment. For
instance, during 1979-80, traditional small-scale industries accounted for only 135 of
the total output but their share in total employment was 56%. As against this, the
share of modern industries in the total output of this sector was 74% in
1979-80 but their share in employment was only 33%. That means these industrial
units have higher labour productivity.
One special characteristic of traditional small-scale industries is that they
cannot provide full time employment to workers, but instead can provide only
subsidiary or part time employment to agricultural laborers and artisans. Among
traditional village industries, handicrafts possess the highest labour productivity,
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besides handicrafts make a significant contribution to earning foreign exchange for
the country.
Nowadays Indian small-scale industries (SSIs) are mostly modern small-
scale industries. Modernization has widened the list of products offered by this
industry. The items manufactured in modern
Small-scale service & Business enterprises in India now include rubber products,
plastic products, chemical products, glass and ceramics, mechanical engineering
items, hardware, electrical items, transport equipment, electronic components and
equipments, automobile parts, bicycle parts, instruments, sports goods, stationery
items and clocks and watches.
Micro, Small and Medium Enterprises Development act
MSM E D A ct – 2006 and i t s I m pa c t
Clause Salient Features Impact
1. Establishment of National Small and Medium Enterprises Board– Maximum No. of members 47
Specific representation for Women Mandatory Quarterly Meeting.
Statutory Status, compact board and quarterly meetings will address problems of SMEs immediately to take corrective action.
2. Concept of Enterprises Clear-cut demarcation of manufacturing/production and rendering services.
Facilitates SMEs to enter into service enterprises aggressively.
3. Definition of Enterprises
Specific ceiling limit for manufacturing/production
Existing small units can graduate into
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and service enterprise definition for Medium enterprises.
Medium units and avail facilities under the act.
4. Filing of memoranda optional for Micro and Small enterprises in manufacturing and service sector Medium enterprises in Service Sector but mandatory for Medium enterprises in manufacturing sector.
Replacement of registration with memorandum.
Facilitates SMEs to avail the benefits of the act immediately after setting up of the unit.
5. Procurement Policies Notification of preference policies by central or State Governments for goods and services provided by Micro& Small enterprises.
Facilitates opportunityfor supply of
goods/services without any hassles. Public Procurement Policy under Section 11 of MSME Act, yet to be notified.
6. Delayed Payment Penalty & dispute resolution
• Period of payment by the procuring organizations – 45 days• Penal interest 200% of PLR
SMEs can plan their cash flow/financial requirement.
7. Dispute Resolution Establishment of MSE facilitation Council; 90 days framework for dispute resolution.
Easy financial planning and no waste of human resources for chasing/follow up.
8. Delayed Payment: allowable deduction under IT Act 1961
Deduction disallowed This will encourage procurement agencies to ensure timely
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payment to SMEs.
9. Closure of Business Statutory notification of scheme for closure
Facilitates expedition of liquidation.
10. Notification of guidelines or instructions for promotion of SMEs Wrt. To Funds appropriation and release
Statutory Mandatory on all facilitating development of SMEs ensuring fast growth.
11. Facilitating Credit Statutory Mandatory on all providing Guidelines for credit for 20% year on year growth.
Statistics on SSIs:
The total number of SSI units increased from 2.082 million units in 1991-
92 to 2.724 million units in 1995-96. During the same period, at constant prices, the
production increased from nearly $1.6 billion to approximately $2.2 billion. The total
number of persons employed in SSIs increased from 12.9 million to 15.2 million.
According to Second All-India Census of Registered SSI units, 42 percent of the
units were functioning in rural areas, 48 percent in urban areas and 10 percent in
metropolitan areas. 62.2 percent of the units were located in backward areas. The rate
of growth of this sector has been higher as compared to the whole industrial sector.
In terms of the abovementioned development, the progress of the SSI
sector is considered impressive by experts. But the SSIs are mostly affected by a
number of problems that have hampered its absolute growth. According to the
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Seventh Five Year Plan (1985-90) the growth of the SSIs has been constrained by
various factors ``including technological obsolescence, inadequate and irregular
supply of raw materials, lack of organized market channels, imperfect knowledge of
market conditions, unorganized nature of operations, inadequate availability of
credit, constraint of infrastructure facilities including power etc. and deficient
managerial and technical skills.''
For SMEs, sky is the limit:
Small and medium enterprises (SMEs), particularly in developing
countries, are the backbone of the nation's economy. They constitute the bulk of the
industrial base and also contribute significantly to their exports as well as to their
Gross Domestic Product (GDP) or Gross National Product (GNP).
INDIA'S SME SCENARIO:
India has nearly three million SMEs, which account for almost 50 percent of
industrial output and 42 percent of India’s total exports.
A special role for SMEs was earmarked in the Indian economy with the
advent of planned economy from 1951 and the subsequent industrial policy followed
by government. By and large, SMEs developed in a manner, which made it possible
for them to achieve the objectives of:
1. High contribution to domestic production
2. Significant export earnings
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3. Low investment requirements
4. Operational flexibility
5. Low intensive imports
6. Capacity to develop appropriate indigenous technology
7. Import substitution
8. Technology-oriented industries
9. Competitiveness in domestic and export markets
However, as a result of globalization and liberalization, coupled with WTO
regime, SMEs have been passing through a transitional period. With enhanced
competition from China and a few low cost centers of production from abroad many
units have of late been facing a tough time.
However, those SMEs who had a strong technological base, international
business outlook, competitive spirit and willingness to restructure themselves
withstood the current challenges and came out successful to make their own
contribution to the Indian economy.
It is the most important employment-generating sector and is an effective
tool for promotion of balanced regional development. These account for 50 percent
of private sector employment and 30 to 40 percent of value-addition in
manufacturing. It produces a diverse range of products (about 8000 odd items),
including consumer items, capital and intermediate goods.
However, the SMEs in India, which constitute more than 80 percent of the
total number of industrial enterprises and form the backbone of industrial
development, are as yet, in technological backwaters vis-á-vis advances in science
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and technology. These suffer from problems of suboptimal scales of operations and
technological obsolescence.
While most of the large companies, even in developing countries, have
financial as well as technical capacity to identify technological sources and evaluate
alternate technologies that would suit their requirements, unfortunately, this capacity
is conspicuously missing in most SMEs.
It is these features of SMEs that make them an ideal target for
technological up gradation through technological cooperation with foreign and local
enterprises, with R&D institutions and centre’s of technology development.
So, what these SMEs need today is primarily access to new technology.
Poor financial situations and low levels of R&D, poor adaptability to changing trade
trends, non-availability of technically trained human resources, lack of management
skills, and lack of access to technological information and consultancy
services and isolation from technology hubs, etc. are some of the reasons why these
SMEs are not being able to surge ahead.
Small and Medium enterprises are the backbone of India's economy. They
have to now work hard to get out of this impending scenario. There has to be a major
change in policy on how they are operating. SMEs have to put in more effort on
research and development (R&D) and on ways to use technology at par with the
international standards.
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PROMBLES FACED BY SME SECTOR:
Indian governments have proclaimed many policies and also implemented
several initiatives and programs. Most of the policies before the 1990s were aimed at
protecting the small sector rather than making it competitive. Some of the major
issues that these policies did not address are as follows:
Problems in obtaining credit One of the serious problems affecting the
small scale sector is the hardship of obtaining credits from the banking sector.
Although this has been a problem for past several years and though the issue has
been mentioned in budget speeches by government, none of the policies seem to
solve it. Many entrepreneurs who had been drawn into industrial activities hoping to
receive financial assistance have subsequently found that working capital is not
forthcoming. The internal financial resources of the SSIs are held to be so small that
have no surplus money in times of business strain. This along with the situation of
unstable profits prevents the banks from issuing them unsecured loans. As a result,
many of these SSIs are still dependent for funds on money-lenders who charge high
interest rates. And those who have tried to obtain loans from the various financial
institutions have only faced corruption associated with grant of loans and long delays
in delivery.
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In a 1996 survey of small entrepreneurs by the Confederation of the Indian
Industry (CII), a large proportion of the respondents attributed their problems to
delayed payments, high cost of borrowing and inadequate credit.
Sickness in the SSIs As of September 1992, about 233 thousand small-scale units
were sick. Many of the sick units ultimately close down due to finance and
marketing problems. Poor management has also been identified as a major cause of
sickness. Therefore a need exists to continuously provide help in terms of training
for the small enterprises to manage themselves. The recent policies and programs
providing management training by the SIDBI is hopefully a step towards solving this
problem.
Negative impacts of reservation policy The previous and current small-
scale industries policies have followed the policy of reserving certain items to be
manufactured only by the SSIs. Many of the items that are reserved are in the
mechanical engineering, chemical products and auto-ancillary industry groups.
Though the policy was mainly aimed at protecting the small firms from competition
from the large firms, the lack of any licensing to identify SSIs has resulted in the
entry by large firms into those areas. There is no enforceable penalty for moving into
reserved areas. It is also held by many authors that the policy is actually
counterproductive as those producing non-reserved items have performed better than
those in reserved areas. Hence the reservation policy tends to become large
redundant.
The Equity policy The New Small Industry Policy allows the large firms to
have equity in SSIs. This policy is contended to be a bad one as it only encourages
the small units to continue to act as dependent on the large firm. A fear that the large
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firms might at a later stage takeover the small units is also expressed by some
industry experts.
Apart from the abovementioned critical issues, there are several other
issues such as non-classification of a separate medium enterprise under the Indian
industrial sector, regional imbalances in the concentration of small scale industries
and survey data showing that government institutions were the ``least important
sources of technological information.'' More information on these issues could not be
obtained.
Another concern is the lack of coordination between the various support
organizations set up by the government. It would also be interesting to know if any
evaluation systems are in place for these institutes and their programs. Information
on this aspect could not be gathered.
An article by Ira Gang mentions that policies intended to support the small
industry such the reservation, financial incentives, etc. are ``neither promoting
employment nor improving the competitive base of small firms. Rather, they are
working as strong disincentives for growth of small firms.''
Though all the previous efforts at helping the SSIs to grow and modernize
seem to have had very little effect, the recent modernization efforts such as the
setting up of the Technology Development Board, the Technology Development and
Modernization Fund, greater emphasis on providing management skills and in
obtaining ISO 9000 certification seem more focused and promising. Since these have
very new, no specific conclusions as to their success or impact can be drawn at this
time. Hopefully, some systematic methods to ensure that SSIs are actually receiving
benefits and necessary assistance will be put in place.
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FINANCING OF SSI:
`Government has recognized the important role of entrepreneurs in the
industrial development of the economy, especially through the small-scale industries
(SSIs). SSI is essential for Indian economy in terms of employment generation,
foreign exchange earnings, and its share in industrial output, and contribution to
national income. The government of India and state governments provides a number
of special facilities and incentives.
The incentives not only motivate entrepreneurs to set up industries in the
small scale sector, but also strengthen the entrepreneur’s base in the economy. Of all
the elements that go into a business, credit is the perhaps the most crucial. The best
plans can come to naught if adequate finance is not available at right time. SSIs need
credit support not only for running the enterprise & operational requirements but also
for diversification, modernization / up gradation of facilities, capacity expansion etc.
In respect of SSIs, the problem of credit becomes all the more critical whenever any
episodic event occurs such as a large order, rejection of consignment, inordinate
delay in payment etc. In general, SSIs operate on tight budgets, often financed
through owner’s own contribution, loans from friends and relatives and some bank
credit. Government of India recognized the need for a focused credit policy for SSI
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in the early days of promotion of SSIs and RBI has been instrumental in devising a
multi-stage approach / financial system for credit dispensation to different sectors of
the economy, for example, agriculture, industry, exports, SSIs etc. This section
focuses on the role of SIDBI, SFCs and commercial banks in granting credit to small
scale and tiny sector.
ROLE OF BANKS IN DEVELOPMENT OF SME’s:
Many of the banks in India is providing loan to SME Sector. Such as
SIDBI, PNB, SBI, etc. Maharashtra Small Scale Industries Development
Corporation was established in 1962.The basic objective was to help the small scale
Industries to develop and grow to the fullest extent enabling them to play their role
towards realization of the national objective of accelerating the place of Industrial
Development, generation of employment and income.
The main objective of assisting Small and Medium scale industries (SME)
Units in the State. The Company failed to achieve fully its main objective of
assisting SSI units, as there was continuous decline in number of SSI units assisted
during 1997-2002.
(i) Aid, counsel, assist, finance, protect and promote the interests of SSI to enable
them to develop and improve their methods of manufacture, management, marketing
and techniques of production.
(ii) Enter into contracts for fabrication, manufacture, assembly and supply of goods,
materials, articles and equipment and to arrange for the performance of such
contracts by sub-contracting with small scale units.
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(iii) effect co-ordination between large industries with a view to procure orders for
SSI and to enable them to manufacture parts, accessories, ancillaries, components
and other articles required by large industries. Pursuant to its objectives, the
Company undertook the following major Activities
a) Procurement and distribution of raw materials
b) Assistance in marketing of products
c) Commercial warehousing
d) Assistance in import of raw materials and export of products
e) Running of emporia for handicrafts and production centre.
Recent modernization scenario:
In spite of the existence of all the aforementioned organizations to help the
development of the SSI, an increasing spread of sickness is reported in the sector.
Acknowledging this fact, the DCSSI set up a working group in 1985 to make
recommendations for a suitable action. The suggestions made by this group included
the following:
Establish a well-equipped design and technology development cell in the
office of the DCSSI to coordinate programs of modernization in the small
small-scale sector.
Special cells called ``Product-cum-Process Development Centers'' will be
necessary for undertaking research, locating sources of modern technology,
identifying suitable technology for transfer and help the small-scale industries
in obtaining inputs.
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Liberal imports of technology and equipment should be allowed to modernize
the small-scale sector.
Incentives should be provided to enterprises with modern technologies to
transfer them to the SSIs.
In August 1991, the GoI announced its new policy towards the small scale
sector. The government announced that a Technology Development Cell would be
set up in the Small Industries Development Organization (SIDO). This Cell would
provide technology inputs ``to improve productivity and competitiveness of the
products of the small scale sector''. The Technology Development Cell would
coordinate with other industrial research and development organizations to achieve
its objectives. Information on whether such a Cell had been set up was not available.
Under its scheme of direct assistance, the SIDBI had launched the
Technology Development and Modernization Fund. The main objective of this fund
is ``to encourage existing industrial units in the small scale sector to modernize their
production facilities and adopt improved and updated technology so as to strengthen
their export capabilities''. Through this fund, its helps the SSIs meet the costs of
purchasing capital equipment, acquisition of land, expenditure incurred in obtaining
ISO 9000 series certification and also the costs for improvements in packaging. The
SSIs have to meet some criteria before they can apply for financial assistance under
this scheme, for e.g. units must be in operation for at least three years. It is also
working towards prospects of marketing the products of SSIs in the internal and
international markets.
One of Development and Support Services extended by the SIDBI is the
Enterprise Strengthening service. Under this service, there are specific programs
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including technology transfer, technology up gradation in indentified industry
clusters and management development.
In the 1996-97 Union Budget, the government announced the setting up of
a Technology Development Board and this has been instituted under the Department
of Science and Technology. During the presentation of the budget, the Union
Minister for Finance proposed that the unutilized corpus of $1.75 billion under the
Technology Development and Modernization Fund Scheme of the SIDBI should be
provided to the State Financial Corporations and commercial banks. These banks
will in turn be able to make it available for the SSIs for modernization projects.
In addition, the SIDO and SISIs have introduced a program for promoting
technological modernization of the SSIs. Under this initiative, the small production
units are provided information, advice and training. Reports are distributed among
them for spreading modernization information. The SSIs can register for these
programs for a fee. As of March 1986, there were 570 enterprises registered under
the modernization scheme of the SIDO. However only 24 of these have been
provided with modernization guides.
A recent change in the small-scale industrial policy allows the large firms
to hold up to 26 percent of equity in small enterprises without the requirement of
consolidation of accounts. This is considered as a good way to induce the transfer of
technology and skills from large industrial units to SSIs. Industry experts are
however skeptical about this. Most large units use the small-scale sector as sub-
contractors. Doubts have been expressed whether these large units would allow for
transfers of technology to SSIs and enable them to grow and become independent
units in their own right.
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POSITIVE IMPACT OF SME:
The importance and potential contribution of the SME sector are supported
by both theoretical and empirical arguments and evidence. We turn first to the
former. Part of the contribution of the SME sector both to the overall total factor
productivity (efficiency, as usually defined) of an economy and to employment
generation and distributional equality comes by virtue of its pattern of technology
choice. SME technology tends to be intermediate between the highly labour
intensive technologies of micro enterprise, which as a result achieve only low
average labour productivity, and the highly capital intensive technologies of large
firms which thereby achieve high labour productivity, but use more capital per
worker than is available for the economy as a whole. A larger SME sector is best
thought of as the alternative to a highly dualistic economy with most of the capital in
the large scale sector and most of the workers in the very small-scale sector. An
economy which is dominated by SMEs, as Taiwan’s has been, can generate a low
level of inequality in the distribution of primary income (before tax and transfer)
whereas the dualistic economy characterized by the combination of much large
enterprise and much micro enterprise typically generates a high level of primary
inequality.
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Its intermediate technology characteristic is what gives the SME sector a
special role (together with small-scale agriculture) in the generation of adequate or
decent employment. When most jobs are in the micro enterprise sector, too many of
them are destined to be low productivity and hence low income in character. SME
firms can be substantially more productive, so in terms of the potential to generate
“decent” jobs this sector competes with large private firms and the government, but
it has the advantage of being able to generate many more such jobs for a modest
input of capital. The key mechanism in generating decent employment in most
developing countries involves the expansion of this sector fast enough to absorb
people previously unemployed (a few) or engaged in low productivity informal
sector jobs (the bulk).
Developing countries without substantial SME sectors (hence often
described as having a “missing middle” in their firm size structure) tend not only to
have capital and the income from it concentrated in the larger firms but also to have a
“labour elite” in that sector, able to bargain for wages much higher than elsewhere in
the economy. With the economy’s capital stock almost completely used up by the
large firms (usually a result of capital market imperfections), there is little remaining
capital to be distributed among the many workers not hired by large firms; this
produces a large micro enterprise sector with the SME sector squeezed out for lack
of capital. The equilibrium wage in the micro enterprise sector is very low and
capital incomes are low there as well. In short, income is very unequally distributed.
When the SME sector is large, these extremes in the distribution of both capital
income and labour income are avoided.
Apart from being the sector to which one would like to see a high share of
resources allocated at a given point of time, for the above reasons, the SME sector
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also plays a key dynamic role in generating growth, especially pro-poor growth.
Nearly all developing economies have large micro enterprise sectors that, like the
SME sector itself, are highly heterogeneous in many respects--the goods or services
produced the entrepreneurial capacity of the owner, and the potential for growth, etc.
Many are survivalist in character but others have dynamic potential. In most
countries for which such data are available it appears that most small firms (of say 6-
25 workers) began their lives as microenterprises and then grew
SIDBI
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VARIOUS BANKS POLICIES IN RESPECT OF SME SECTOR
SIDBI
Direct Finance:
Objective
SIDBI had been providing refinance to State Level Finance Corporations /
State Industrial Development Corporations / Banks etc., against their loans granted to
small scale units.
Since the formation of SIDBI in April, 1990 a need was felt/ representations
were made that SIDBI being the principal financial institution for the small sector,
should take up the financing of SSI projects directly on a selective basis.
So it was decided to introduce direct assistance schemes to supplement the
other available channels of credit flow to the small industries sector. Since then, SIDBI
has evolved itself into a supplier of a range of products and services to the Small &
Medium Enterprises [SME] sector.
1. Direct Credit Schemes
SSIs
Service sector units
with project cost
Upto Rs.25 crore
Medium Sector Enterprises
(MSE) and
Service sector units with
project cost above Rs.25 crore
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and Upto Rs.250 crore.
Eligible
BorrowersI] New or existing SSI units.
ii] SSI unit graduating to
medium scale, and
iii] Service sector units with
an overall project cost not
exceeding Rs.25 crore.
i] New or existing medium sector
enterprises, and
ii] Service sector units with an overall
project cost above Rs.25 crore and
Upto Rs.250 crore with Bank's
assistance not exceeding Rs. 50 crore.
Constitution The unit should generally be
a private limited / public
limited company. However,
partnership firms, sole
proprietorship concerns and
Societies and Trusts would
also be considered on a case
to case basis.
The unit should generally be a private
limited / public limited company
Nature of
assistanceTerm loan and other forms of
assistance such as Working
Capital Term Loan and bills
discounting (on selective
basis).
Term loan and other forms of
assistance such as Working Capital
Term Loan, suppliers' & purchasers'
bills discounting. Investment products
such as debentures, optionally
convertible cumulative preference
shares, zero coupon bonds, etc.
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Currency of
loan
In Rupee or foreign currency In Rupee or foreign currency
Purpose Assistance for purposes, such
as
Assistance for purposes, such as
Setting up of a new
SSI unit/ service sector
unit.
Expansion /
Diversification/
modernization/
technology up
gradation/ quality
certification.
Any other activity
considered relevant to
the project.
For undertaking
various marketing
related activities
Acquisition of
additional machinery /
equipment
Setting up of a new MSE unit/
service sector unit.
Expansion / Diversification/
modernization/ technology up
gradation/ quality certification.
Any other activity considered
relevant to the project.
For undertaking various
marketing related activities.
Acquisition of additional
machinery / equipment.
Meeting working capital
requirements including gap in
MPBF or margin on selective
basis.
Any other activity as per
guidelines (having linkages and
benefits accruing to MSE sector
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Meeting working
capital requirements
including gap in
MPBF or margin on
selective basis.
Any other activity as
per guidelines (having
linkages and benefits
accruing to SSI sector
from the proposed
assistance).
All activities covered
under erstwhile
marketing assistance
scheme for SSIs.
from the proposed assistance).
All activities covered under
erstwhile marketing assistance
scheme for SSIs.
Minimum
loan amount Generally Rs.50 lakh
for setting up new unit
and Rs.25 lakh for
other purposes.
In respect of well run
existing SSI units, the
minimum loan could
be Rs. 10 lakh.
Generally Rs.100 lakh for setting up
new unit and Rs.50 lakh for other
purposes.
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Rate of
interestAs applicable from time to
time.
As applicable from time to time.
Desirable Norms and parameters
Debt Equity
Ratio
Generally not exceeding 2:1
for the company as a whole.
Generally not exceeding 2:1 for the
company as a whole.
Minimum
Promoter's
contribution
(wherever
applicable)
New projects - 33%, lower
contribution [Upto 25%]
could be accepted in respect
of existing well performing
companies / firms. Others -
25% (minimum)
New projects - 33%, lower
contribution [Upto 25%] could be
accepted in respect of existing well
performing companies. Others - 25%
(minimum)
Period of
loan / limitMinimum 6 months to
maximum 8-10 years for
term loan (including
moratorium of not exceeding
18 months).
Minimum 6 months to maximum 8-10
years for term loan (including
moratorium of not exceeding up to 18
months).
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2.Technology Up gradation Fund Scheme for Textile Industries (TUFS)
Note: At present this scheme is suspended until further instructions from Govt. of
India.
Purpose The Scheme is operated by the Ministry of Textiles, Govt. of
India. Policy guidelines are issued by the office of Textile
Commissioner, Govt. of India.
TUFS has been launched with a view to sustaining as well as
improving the competitiveness and overall long term viability of
the textile sector. The scheme intends to provide timely and
adequate capital at internationally comparable rates of interest in
order to upgrade the textile industry's technology level.
Special
FeaturesSIDBI is the nodal agency for SSI textile sector and cotton
ginning and pressing sector.
For SSIs: The borrowers can avail of any one of the following
benefits: 5% interest reimbursement on the interest actually
charged in respect of rupee loan or coverage of exchange rate
fluctuation not exceeding 5% p.a. from the base rate or cost of
forward cover premium Upto 5% p.a. on the base rate of
exchange in respect of foreign currency
OR
15% Credit Linked Capital Subsidy on eligible investment made
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for modernization, for Small Scale Textile and Jute Industries in
respect of Rupee Loans; The units are permitted to make new
investment eligible under TUFS Upto Rs. One crore or till the
unit reaches SSI limit, whichever is higher.
OR
20% Credit linked Capital subsidy (CLCS @20%) on machinery
cost exclusively for power loom units in SSI sector. The cost of
modern weaving machinery admissible is Upto Rs. 60 lakh (i.e.
Subsidy ceiling is Rs. 12 lakh).
For textile processing units, 10% capital subsidy is being given
as an additional incentive since April 19,2005 apart from the 5 %
interest incentive.
For units graduation out of SSI and Medium Sector
Enterprises (MSEs): The borrowers can avail 5% interest
reimbursement on the interest actually charged in respect of
rupee loan or coverage of exchange rate fluctuation not
exceeding 5% p.a. from the base rate or cost of forward cover
premium Upto 5% p.a. on the base rate of exchange in respect of
foreign currency loan.
Eligible
BorrowersSSI units, SSI unit’s graduation out of the sector after
implementation of the scheme and MSEs in the Textile sector
and Cotton Ginning and Pressing sector can be covered.
Debt Equity
RatioNot to exceed 2:1 for the company/firm/concern as a whole
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Loan Limit Amount of term loan shall be need based but not below Rs. 10
lakh. For SSI units graduating out of the sector, the amount of
loan shall be decided on a case to case basis.
Rate of Interest As per the commercial lending rate of SIDBI. Presently , within
band of 9.5% to 13.5%
Minimum
Promoters'
Contribution
20 per cent of the project cost for rupee term loan.
33.33 per cent of the cost of project for foreign currency term
loan
Upfront fee 1% of the loan amount
Scheme period Till March 31, 2007
Period of
RepaymentNot exceeding 10 years, including moratorium Upto 2 years,
based on the merits of the individual case.
3. Scheme for Development of Industrial Infrastructure for SSI Sector (DII)
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Purpose Setting up of industrial estates / development of industrial areas
including such projects found eligible under KVIC model.
Strengthening of existing industrial clusters / estates by providing
increased amenities for smooth working of the industrial units. Setting
up of warehousing facilities for SSI products / units.
Providing support services viz., common utility centre’s such as
convention halls, trade centre’s, raw material depots, warehousing,
tool rooms / testing centre’s, housing for industrial workers, etc. Any
other infrastructural facilities which will benefit predominantly SSI
units / entrepreneurs.
Eligible
Borrowers
All forms of organizations such as Public / Pvt. Ltd. Companies;
Registered Societies / Trusts; Government Corporations; Corporate /
Co-operative entities / accredited NGOs approved by KVIC.
Norms Cost of Project: Not to exceed Rs.100 million.
Debt Equity Ratio: Not more than 3:1
Repayment Period - Not exceeding 10 years including initial
moratorium period of Upto 3 years.
4. Integrated Infrastructural Development (IID)
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Purpose For setting up of IID centre’s with facilities like water supply, power,
telecommunication, common services centre including for
technological back up services for small scale industries in rural
backward areas as envisaged under the policy for promoting and
strengthening small, tiny village enterprises announced by Govt. of
India (GOI) on August 6, 1991.
The cost of improving / upgrading the deficient infrastructural
facilities to increase the productivity and optimum utilization of the
existing centre’s / clusters in backward / rural areas may also be
covered under the scheme.
Eligible
Borrowers
Implementing agencies (a public sector corporation or a corporate
body or a good NGO having sound financial position) entrusted with
the task of implementing the scheme by the concerned State / Union
Territory (UT) Govt.
5. Credit Linked Capital Subsidy Scheme (CLCSS)
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Note: At present this scheme is suspended until further instructions from Govt. of
India.
Purpose The Scheme is operated by the Ministry of SSI, Govt. of India. Policy
guidelines are issued by the office of DC (SSI), Govt. of India. The
objective of the scheme is to facilitate technology up gradation of tiny
and SSI units in the specified products / sub-sectors as indicated
below by providing 15% capital subsidy for induction of proven
technologies approved under the scheme in 45 products/sub-sectors
viz., leather and leather products including footwear and garments;
food processing( including Ice-cream manufacturing);Information and
Technology (Hardware);drugs and pharmaceuticals; auto parts and
components; electronic industry particularly relating to design and
measuring; glass and ceramic items including tiles; dyes and
intermediaries; toys; tyres; hand tools; bicycle parts; foundries -
ferrous and cast iron; and stone industry(including Marble Mining
Industry).
Cap on amount of subsidy :
15% of the cost of eligible Plant & machinery or Rs. 15 lac
whichever is less. Ceiling on the Loan amount : Rs. 100 lakh
Eligible
Borrowers
Eligible
Primary
a) Existing SSI units registered with the State Directorate of
Industries which upgrade with the state-of-the-art technology, with or
without expansion.
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lending
institution
s
b) New SSI units which are registered with the State Directorate of
Industries and which set up their facilities only with the appropriate
eligible and proven technology duly approved by the GTAB.
Scheduled commercial banks and National Small Industries
Corporation (NSIC) and State Financial Corporation’s (SFCs).
Definition of Technology Up gradation
Technology up gradation would ordinarily mean induction of state-of-
art or near state-of-the-art technology. It would also include
installation of improved environmental conditions, including work
environment for the unit, installation of improved packaging
techniques, anti-pollution measures and energy conservation
machinery.
Duration of the Scheme
The scheme will be in operation for a period of five years from
October 1, 2000 to September 30, 2005 which has since been
extended Upto March 31,2007 or till the time sanctions of capital
subsidy by the nodal agency reach Rs.600 crore, whichever is earlier.
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7.SME-IT Loan Schemes
SIDBI for Business Enterprises
Introducing an easy-to-get, easy-to-pay finance bundle from SIDBI specially for
SMEs to computerise their business.
SIDBI and Intel have come together with a first-of-its kind initiative to help SMEs
set-up or step-up IT in their business. While Intel will deliver a range of world
class IT products and solutions, SIDBI will provide the financial assistance for
SMEs to buy them. Called SMEITLOANS, it provides an easy access for SMEs to
get both the finance and the technology to adopt IT, especially since the loan is
available for hardware, software, installations and services.
8. Bills Finance Schemes:
Objective
Bills Finance Scheme involves provision of medium and short-term
finance for the benefit of the small-scale sector. Bills Finance seeks to provide
finance, to manufacturers of indigenous machinery, capital equipment,
components sub-assemblies etc, based on compliance to the various eligibility
criteria, norms etc as applicable to the respective schemes.
To be eligible under the various bills schemes, one of the parties to
the transactions to the scheme has to be an industrial unit in the small-scale
sector within the meaning of Section 2(h) of the SIDBI Act, 1989.
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The various sub schemes that have been introduced are as listed on
the menu, on the left.
9.Receivable Finance Scheme
Purpose To enable SSI / SME / Eligible Service sector units (including
construction / small road transport operators) selling
components, parts, sub-assemblies, services, etc. to Medium &
Large scale units realise their sale proceeds quickly.
Eligible
BorrowersLimits are sanctioned by SIDBI to well established industrial
units using components / parts / sub-assemblies / accessories /
services manufactured / provided by by SSI / SME / Eligible
Service sector units. Either seller or Purchaser need to qualify
as SSI / SME / Service Sector unit
Norms Unexpired usance - Not more than 90 days
Others Facility without bills of exchange / LC backed receivables can
also be considered on the basis of merit.
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BANK OF BARODA
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Bank Of Baroda
Bank of Baroda participates in the Credit Linked Capital Subsidy
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Scheme launched by Government of India to facilitate Technology Up gradation of
Tiny and SSI units in the specified products/ sub-sectors. Bank of Baroda is one
of the Nodal Agencies appointed by Government of India.
OBJECTIVE
To facilitate Technology Up gradation of Tiny and SSI units in the
specified products/sub-sectors as notified by Govt. of India by providing 15%
capital subsidy for induction of proven technologies approved under the scheme,
viz. leather and leather products including footwear and garments; food processing
(including ice-cream manufacturing); Information and Technology (Hardware);
drugs and pharmaceuticals; auto parts and components; electronic industry
particularly relating to design and measuring; glass and ceramic items including
tiles, dyes and intermediaries, toys; tyres; hand tools; bicycle parts; foundries
ferrous and cast iron; and stone industry (including Marble Mining Industry).
Baroda Vidyasthali Loan
Baroda Vidyasthali Loan is a special scheme for financing Educational
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Institutions.
Purpose:
To meet the financial requirements for setting up the institutions which includes
construction of building, purchase of equipment etc. for the new set up as also
renovation of the existing facilities, purchase of instruments for imparting
education training to the students.
Eligibility:
Educational institutions, Schools, Colleges and other education bodies running
education activities
Note: HUF are not eligible.
Limit:
Minimum Rs.25 lacs
Maximum Rs.10 Crores
Security:
Equitable mortgage of Land & Building (not agricultural land).
Hypothecation of Instruments & Equipment acquired out of the loan and other
assets of the Educational Institution.
Personal guarantees of the Promoters of the Institution.
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Margin:
25% of the cost of the project.
Rate of interest:
0.50% below Bank’s BPLR from time to time.
Repayment period:
Maximum 84 months including moratorium period of 1 year, depending upon the
projected cash flow.
Baroda Arogyadham Loan:
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Purpose:
To meet the financial requirements for setting up of new Nursing Home/Hospital
including Pathological Laboratory, Expansion/renovation/modernization of
existing Nursing Home/ Hospital including Pathological Laboratory, Purchase of
medical diagnostic equipments as also office equipments, viz. computers, air
conditioners, office furniture, Purchase of ambulance etc and to meet working
capital requirements.
Eligibility:
All entities, i.e. MSMEs, Enterprises other than individuals like Proprietorship,
Partnership firms, Private Limited Companies and Trusts engaged in providing
medical/pathological diagnostic services to the Society and with turnover Upto Rs.
150/- Crores.
Note: The Promoters should have requisite qualification in any branch of medical
science from a recognized University and should have minimum 2 years of work
experience.
Limit:
Rural Centre’s - Rs. 0.50 Crores
Semi-Urban Centre’s - Rs. 6.00 Crores
Urban & Metro Centre’s - Rs. 12.00 Crores
Notes :
Working Capital limits Upto 10% of the annual sale or gross income, subject
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to 20% of the above ceiling limits in case of borrowers requiring both Term
Loan and working capital facilities.
In case of borrowers requiring only working capital limit, 20% of the above
ceiling limit.
Security:
Equitable mortgage of Land & Building/premises of Nursing Home/Hospital
Hypothecation of medical equipment/office equipment acquired out of loan
amount.
Personal guarantee of Promoter Directors in case of Limited Companies and
Trustees in case of Trusts.
Hypothecation of medicines, receivables and other chargeable current assets.
Charge on unencumbered assets of Promoter Directors in case of Private
Limited Companies, or any other collateral by way of FDR, mortgage of
properties in the personal name of the relatives of Promoters, etc.
Margin:
25%. Higher margin if collaterals are inadequate
Rate of interest:
As per credit rating of the borrower.
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Baroda Laghu Udhyami Credit Card
Purpose:
To provide hassle free credit facilities to Small business units, retail traders,
artisans, village industries, small scale industrial units and tiny units,
professionals and self employed persons etc.
Eligible borrowers:
All existing customers in the categories of Small Business, Retail Trade,
Artisans, Village Industries, Small Scale and Tiny Units, Professional & Self
Employed persons etc. having satisfactory track record / dealing with the
bank for last 3 years.
Limit:
Maximum Upto Rs. 10/- Lakhs per borrower.
Period / validity:
The limit fixed under the scheme will be valid for a period of three years
subject to internal annual review based on the conduct / operations of the
account.
Security:
Hypothecation of stock in trade, receivables, machinery, office equipment
etc. as specified for existing limit.
Margin:
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25%.
Baroda Artisans Credit Card (BACC)
Purpose:
To provide adequate and timely assistance to the artisans to meet their credit
requirements - both investment needs as well as working capital - in a
flexible and cost effective manner. The scheme is implemented in rural and
urban areas.
Eligible borrowers:
All artisans involved in production / manufacturing process.
Preference given to artisans registered with Development Commissioner
(Handicrafts).
Beneficiaries of other Government Sponsored loan schemes will NOT be
eligible for coverage under BACC scheme.
Limit:
Maximum Rs. 2/- Lakhs per borrower.
Margin:
For limits Upto Rs. 25,000/- No margin
For limits above Rs. 25,000/- but Upto Rs. 2 Lakhs 15% to 25% margin.
Margin is subject to change as per RBI guidelines from time to time or the
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bank's policy in this regard.
Security:
Hypothecation of assets financed under the scheme..
Conditions apply. Credit Linked Capital Subsidy Scheme (CLCSS) For SSI
Units
SME Medium Term Loans
Purpose:
To augment enterprise’s working capital gap and to help in improvement of
current ratio and also for meeting genuine business requirements. The
facility will also be available for repayment of secured and unsecured Loans
of other banks or institutions, but not for any purpose, which is not related to
the enterprises activity.
Enterprises group:
Micro, Small & Medium Enterprises as per Regulatory definition and all
other entities with annual sales turnover of Rs. 1/- crore to Rs. 150/- crores.
Eligibility criteria:
Satisfactory credit rating for the last three years
Latest Balance Sheet etc. should be available.
Satisfactory financial performance in terms of Sales/turnover and profits.
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Negative variance, if any, should not be more than 10%.
Total Debt-equity ratio should not be higher than 4.5:1 and total Term
Liability and equity ratio should not be more than 3:1.
Average DSCR should not be less than 1.75:1
Satisfactory dealings with the Bank for at least Three years.
Loan amount:
Upto 25% of the existing fund based Working capital limits (depending on
the Credit Rating), subject to a minimum of Rs. 25 Lakhs and maximum of
Rs. 500 Lakhs.
Period:
Not exceeding –36- months, to be repaid in equal quarterly or half-yearly
installments.
Security:
First charge / Equitable mortgage of fixed assets of the Company / firm or
extension of existing first charge/ equitable mortgage of fixed assets,
ensuring that there is a minimum asset cover of 1.25
Rate of interest:
As per credit rating for the additional loan
Prepayment penalty of 1%, if loan is prepaid within -24- months of
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drawdown
Processing charges / upfront fee:
25% concession in applicable charges.
Baroda SME Loan Pack
Baroda SME Loan Pack provides single line of credit for meeting SME
borrowers’ working capital as well as long term requirements within the overall
limit approved by the bank.
Purpose :
To provide hassle free credit for working capital (fund based and non-fund
based) as also long term requirements, taking into account nature of
business, cyclical trends, cash flow projections, peak time requirements and
any eventuality of unforeseen spurt in the business.
Eligibility:
All Enterprises, i.e. Micro, Small & Medium Enterprises, as defined under
MSMED Act, 2006, and other entities with annual sales turnover of Rs. 1/-
crore to Rs. 150/- Crores exclusively banking with our bank/new borrowers
desirous of having sole banking arrangement with our bank.
Composite limit :
4.5 times of borrower’s tangible net worth as per last audited Balance Sheet,
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or, Rs. 5.00 Crores, whichever is lower.
Margin :
25%.
Rate of interest :
As per credit rating of the borrower.
Security :
1. Exclusive charge on the assets of the enterprise.
2. Personal Guarantees of all promoter Directors / Partners.
3. Charge on the unencumbered personal properties of the partners, promoter
Directors, wherever applicable.
4. Third party guarantee in case of credit line above Rs.100.00 lacs to Micro &
Small Enterprises as per Regulatory definition.
5. Any other collateral for the credit line above Rs. 25.00 lacs in case of other
Enterprises, i.e. Medium Enterprises and Enterprises based on the turnover
criteria to maintain asset coverage ratio above 1.25.
Other features :
Loans Upto Rs. 100/- lacs to Micro & Small Enterprises will be covered
under Credit Guarantee Fund Trust Scheme.
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SME sector comes into sharp focus
After several decades, the focus on the small and medium enterprises has
shifted from offering sops, to assessing their creditability and debt repayment
capabilities. The government and RBI have announced policy packages to this
effect and rating agencies have spurted to help banks and financial institutions
make SME lending a profitable venture.
The small and medium enterprise (SME) sector has come into sharp focus
with a policy package announced by the government recently, envisaging public
sector banks to fix their own targets for funding this sector in order to achieve a
minimum 20 per cent year-on-year growth in credit to the sector. In addition, these
banks are required to follow a transparent rating system with cost of credit linked
to the credit rating of the enterprise. Further, the package requires commercial
banks to make concerted efforts to provide credit cover on an average to at least
five new tiny, small and medium enterprises per year.
Though it appears to be a tall order for the banking sector, the guidelines
have been embraced with enthusiasm. Several banks, including foreign banks like
Citibank and Standard Chartered Bank have set up special cells and branches
dedicated to SME lending.
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The SME sectors preferred by bankers for lending include bulk drugs,
knitwear and auto-ancillary goods. Textiles, pharmaceutical companies, chemicals
and dyes sectors also continue to find favour with banks as these businesses are
thriving.
Enterprises like gems and jewellery, seafood processing, sports good etc are
not preferred, as banks have suffered huge non-performing assets on account of
lending to these sectors over the past few years.
However, the new government package is accompanied by reworked
guidelines from the Reserve Bank of India on the debt restructuring mechanism for
SMEs with outstanding of up to Rs 10 crore. This can help banks assess the SMEs,
which they now perceive as untouchable.
According to the RBI guidelines, banks could decide the acceptable viability
benchmark, consistent with the unit becoming viable in seven years and the
repayment period for restructured debt not exceeding 10 years.
Accounts classified by banks as “loss assets” would not be eligible for
restructuring. Additional finance would be treated as a ‘standard asset’ in all
accounts up to a period of one year after the date when first payment of interest or
of principal, whichever is earlier, was due. RBI has also asked banks to formulate a
debt-restructuring scheme for SMEs. These guidelines are geared to help banks
renew their focus on this sector.
CRISIL has stepped in to provide a rating service for the SME sector.
According to this rating programme, SMEs would be rated on a scale of one to
eight, with scale one indicating the highest credit quality and the scale eight,
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hinting at default possibilities. The ratings assigned to SMEs would also function
as a self-improvement tool for them.
To top all initiatives, SBI, ICICI Bank and Standard Chartered Bank, have
agreed to join hands with the Small Industries Development Bank of India (Sidbi)
to float a rating agency for the SME segment. The rating agency, Small and
Medium Enterprises Rating Agency (SMERA), inaugurated recently, will rate the
company’s overall strength; unlike most rating agencies whose core business are to
rate debt instruments.
While SIDBI will have largest share of 22 per cent followed by SBI, ICICI
Bank and international credit information company Dun & Bradstreet, which
would be at 10-13 per cent. Five other public sector banks hold about 28 per cent.
These are Punjab National Bank, Bank of Baroda, Bank of India, Canara Bank and
Union Bank of India. Credit Information Bureau of India (CIBIL) is also likely to
join the company shortly.
Most small and medium companies rely on extremely expensive funds
sourced from the unorganized financial sector. Part reason why bank credit is
denied to many small units, despite repayment capacity not being suspect, is that
lenders often do not have the capability to assess their risk. Rating agencies are a
step in this direction.
With a brand new government package, reworked guidelines for lending by
the RBI and the facility of rating enterprises not just for their creditability and debt
repayments, banks can now refocus on the SME sector.
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SME AS CREATOR OF THE JOBS
Small Scale Industries (SSIs) have always been regarded for their high
employment intensity. SSIs today employ over 192 lakh persons and this is
targeted to grow at 4% per annum during the 10th Plan period of 2002-2007.
Though often described as ideal vehicles for promotion creation of jobs in the
economy, at the same time, it is also true that the nature of employment in the
sector is undergoing change. Employment generation figure declined from 6.3
persons per SSI in 1987-88 (2nd Census) to 3.6 persons per SSI in 1999-2000
(Sample Survey). Expert committees which have looked at this issue have also
come up with different sets of recommendations. The Task Force on
Employment Opportunities under Shri Montek Singh Ahluwalia had
identified SSIs as an important source of employment and as an important
incubator for entrepreneurship. The Task Force however called for a shift in policy
from protection to promotion. The Task Force felt that almost 70% of the total
employment opportunities generated over the next 10 years were likely to be in the
services sector. On the other hand, a Special Group on15
Employment for creation of 10 million employment opportunities per year
over the 10th Plan under Dr. S.P. Gupta has recommended that since more than
92% of employment generation in the economy is coming from small and medium
enterprises, including agriculture - commonly defined as the unorganized sector,
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there is need to give special focused attention for meeting the requirements of
small and medium enterprises to enable them to create more jobs in the future.
During the 1990s, jobs in the organized sector grew at less than 1% per annum
While jobs in the SSI sector increased by 3.5% every year. In the changing
scenario, on account of globalization and liberalization, what shall be the impact
on the creation of new jobs by SSIs? Does increase in capital intensity of SSIs, as
they go in for technological up gradation; imply that lesser jobs will be available?
You may perhaps like to pose such questions to the Hon'ble Minister of State
(SSI), Smt. Vasundhara Raje, who shall be joining us for an online chat session.
Avail of this opportunity to address your queries to the Minister and seek
clarifications on various issues.Topic for discussion:
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The Importance of SMEs in the Economy
1. Introduction.
SMEs are important to almost all economies in the world, but especially to
those in developing countries and, within that broad category, especially to those
with major employment and income distribution challenges. On what we may call
the “static” front, SMEs contribute to output and to the creation of “decent” jobs1;
on the dynamic front they are a nursery for the larger firms of the future, are the
next (and important) step up for expanding micro enterprises, they contribute
directly and often significantly to aggregate savings and investment, and they are
involved in the development of appropriate technology. In asking ourselves how
“important” the SME sector is we must of course go beyond simply looking at its
share of output, employment or any other aggregate variable to the key question
“how much difference does it make to overall economic performance whether the
SME sector is large or small, or whether it grows rapidly or slowly?”
A sector might have considerable weight in GDP, say, but be easily
substituted by other sectors, in which case its share of GDP could greatly overstate
its true importance; in other cases the opposite might be true.
It is a fact of life, at any level of a country’s development, that some needed
activities involve few or no economies of scale while others involve considerable
economies of that sort. The size distribution of firms within a country, and the
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associated combination of technologies--from the very labour intensive to the very
capital intensive is of course influenced by these “givens”. That distribution can
also be influenced by international trade. An important challenge in many
countries is to assure that a significant share of output takes place outside the
overly capital intensive large scale sector. Achievement of this goal is more
difficult if SME activity in general is discouraged by policy or setting. It can be
facilitated when large firms (whose size may be necessary because some parts of
the process leading to their final goods have economies of scale) subcontract other
parts of that process to smaller more labour intensive firms. It can also be
facilitated by the phenomenon referred to as "clusters" in which small firms
collaborate together to handle those aspects of the business that are indeed
characterized by economies of scale. The ideal setting within which SMEs can
play their positive contribution to the maximum thus includes these structures and
their advantages.
In developing countries with large informal or micro enterprise sectors,
SMEs constitute the middle of the size range, a fact that explains much of their
strategic importance. In terms of organizational structure, SMEs are, on average,
considerably more complicated than microenterprise, which involve largely the
self-employed, sometimes accompanied on the job by a few family workers and
hence usually having fewer than 5 workers. On the other hand SMEs are, on
average, a good deal less complicated structurally than are corporations and other
large firms, with their layers of management, high division of labour, etc. In the
past the weight of the non-agricultural SME sector in output and employment has
traditionally reached its peak in the upper income tier of developing countries,
where agriculture no longer constitutes a large part of the economy. At still higher
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levels of development its share tended to wane in favour of larger firms (and the
public sector), but the last 2-3 decades appear to have seen an alteration in this
pattern, at least as far as employment is concerned associated partly with an at
times dramatic fall in the share of total employment found in the manufacturing
sector (Palma, 2005) in both industrial and (nearly all) developing countries.
Depending on the case, the output share of SMEs may be greater or smaller
than its employment share. Labour productivity rises monotonically with size
across broad groups of firms, so whether the SME sector has above or below
average labor productivity depends, among other things, on the relative size of the
large firm and micro enterprise sectors.
As with any other component of an economy, the size and importance of the
SME sector varies from country to country; the last few decades have seen an
increasing recognition of the role it plays in industrial countries, something already
more obvious for developing nations from the 1970s or so. The SME sector, of
course, includes firms in all of the major types of economic activity outside
agriculture, from manufacturing to services. Despite the natural differences
associated with the nature of the final product, SMES across these activities still
share quite a few features.
Policy, including tax policy, can make a considerable difference to how well
the SME sector fulfils its potential role in contributing to a healthy economy
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SMEs IN INDIA: WILL THEY BE ABLE
TO JOIN “GLOBAL CHAINS”?
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Small & Medium Enterprises:
(SMEs) play a major role in global economic growth in terms of their
contribution to industrial employment, output and exports. SMEs occupy a place of
strategic importance in the Indian economy as well. However, since the early 1990s,
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Indian SMEs have been exposed to intense competition due to the accelerated
process of globalization. Therefore, the survival as well as growth of SMEs is under
strain. However, globalization has also brought, in its wake, newer opportunities for
SMEs.
Importance of SMEs to Indian economy:
SMEs are officially defined and exclusively identified for promotion in the
manufacturing sector of most national economies. The most important justification
for the exclusive promotion of SMEs is their potential for employment intensity. In
general, a SME generates more jobs per unit of capital investment than a large
enterprise. A SME has much other benefit: it can be started with relatively less
capital; it facilitates nurturing of entrepreneurship, which could emerge from within;
it can be used as an instrument for alleviating regional disparities in development etc.
Further, a SME is flexible in production, has the potential to be a training ground for
managerial skills, promotes individual initiatives, and encourages rich personal
relations. Therefore, it is often promoted as a source of technological innovations in
industrialized economies. However, there is no uniform definition of a SME in the
global economy. Different countries have defined SMEs in different ways. In Japan,
a SME in the manufacturing sector is defined in terms of upper limit of paid-up
capital of 300 million Yen or 300 employees (Small & Medium Enterprise Agency,
2004). In South Korea, SMEs are defined as firms, which are independently owned
and employ less than 300 persons in the manufacturing, mining, transportation and
construction sectors (Back, 2002). In the European Union, SMEs are defined in
terms of employment and turnover/balance sheet total (Table 1). To be classified as a
SME, an enterprise must satisfy the criteria for the number of employees and one of
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the two financial criteria, that is, either the turnover total or the balance sheet total. In
addition, it must be independent. There is no official definition of a SME in India.
Future Importance of SMEs?
What do present trends in the world and in developing countries suggest about
the future role of SMEs? There are several reasons to think that this role will not
wane in most developing countries, at least in the short and medium term. These
include:
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i) The end, at least in some parts of the world, of the observed upward trend in the
share of employment found in large private firms plus the government in
those countries achieving healthy GDP growth; (such increase has rarely
occurred in slow growing countries). For reasons still in need of further
research, it appears that this gradual increase, once thought of as a stylized
aspect of the development process and a process by which the employment
structure of developing countries would gradually approach that of
developed ones, may no longer be present. When this is the case, we know
that the share of employment found either in the informal or the SME
sector is not falling, so unless the SME employment share is rising, that of
the informal sector cannot be falling, though that decline is an important
goal if employment quality is to rise in a country. To illustrate the problem,
in Latin America, even after the return to modest growth in the 1990s, the
informal sector’s share of employment had not fallen as of about 2003, nor
that of the large scale sector risen. Probably the reasons for the levelling off
or decline of the large firm employment share include the near worldwide
trend towards more flexible labour contracts and towards subcontracting
out of some auxiliary functions previously carried out within the large firm.
The falling role of manufacturing employment probably also plays a role
since the large firms account for a higher share of manufacturing
employment than that in most other sectors of the economy. Globalization
may be playing a role by inducing increases in labour productivity in large
firms operating in international markets or having access to very low cost
capital in the international market; that increase in labour productivity
accounts for the cases in which this sector’s output has grown at a good
clip but employment has stagnated or fallen. Chilean manufacturing was a
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notable case of this during its 1990s boom as has been the non-maquiladora
part of Mexican manufacturing.
ii) The information revolution may increase the relative competitiveness of
smaller firms. Informational monopolies often underpin large size and
monopoly. Some, of course, are based on patents. We know that the
accoutrements of information technology have diffused first among larger,
more sophisticated firms, then among SMEs. What we cannot yet judge is
how this revolution will have affected relative competitive positions after
the dust has settled and the diffusion is more nearly complete.
iii) More generally, it may be that small firms will play a larger role in
technological advance in the context of the information revolution and the
rising role of services than was earlier the case under the dominance of
manufacturing.
iv) Most developing countries have achieved large increases in the share of the
population completing primary education and in the share with a
considerable amount of secondary as well. This, together with the large
microenterprise sectors that server as a training ground in business
management for some of those located there, suggests a widening of the
pool of entrepreneurial talent. Healthy SME sectors require such a pool (for
which Taiwan, for example, has always been noted).
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Conclusion
Thus I would conclude that banks are playing major role in development of
small and medium scale Enterprise. Thus various benefits are arising from financing
of SME. From the view point of the national economy, the benefits arising from
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higher order focus of SME financing may be classify as : Increasing the contribution
of the SME sector in the GDP of the country, Entrepreneurial interest would be
encouraged and growth in the number of SME may be possible. New product ,
services would be increasingly available for consumer. Competitiveness in business
will increase. The government of India has taken many measure for growth and
development of the SME sector.
Globalization has been affecting every economic activity in almost every
country across the world. Indian SMEs are no exception. The performance of SMEs
has a determining significance for Indian economic growth due to their substantial
share of enterprises, employment, production and gross value added in the industrial
sector. However, in general, Indian SMEs lack technological strength to access and
exploit the benefits emerging from the intensifying process of globalization.
Therefore, technological transformation of SMEs should attract the focus of
attention of policymakers. In addition, FDI and TNC entry should be used to
promote inter-firm linkages for the benefit of SMEs. They need to be “consciously
guided” to enter the ever expanding global value chains of TNCs, both in the
manufacturing and retail sectors. Further, technological innovation and orientation
of SMEs should be promoted and information access be made easy. On the whole,
SMEs should be enabled to achieve self-sustainable competitiveness and reap the
fruits of globalization for their own growth and the growth of the Indian.
SIDBI has also floated several other entities foe related activities. Credit
guarantee fund trust for micro and small enterprise provides guarantee to banks for
collateral free loan extended to SME. SME rating agency of India Ltd (SMERA)
provides composite rating to SME.
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STATE BANK OF INDIA
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Date: 1/10/2010
To whomsoever it my concern
This is to certify that Miss. Foram Navin Dedhia student of N.E.S Ratnam
College of Arts, Science & Commerce, Bhandup (West), Mumbai-78, visited our
Bank in relation to project work of Semester V, Third Year, Banking & Insurance,
Mumbai University (“ROLE OF BANK IN DEVELOPMENT OF SMALL &
MEDIUM SCALE ENTERPRISE” – Catch them young, watch them grow...)
We found her very Sincere & dedicated towards her project work. We wish
her luck in her future Endeavour.
Signature
(Chief Manager)
R. B. Khare
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