small and medium en terprise-an overview-libvolume3.xyz/civil/btech/semester5/management...tandon...
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SMALL AND MEDIUM EN
TERPRISE-AN OVERVIEW-
PRESENTED BY
T.P.MISRA
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DEFINITIONS
• Micro Enterprise: Investment in P&M25
lacs manufacturing & upto Rs 10 lacs in
equipment in service sector
• S.S.I-Investment in p&m does not exceed
Rs500lacs in P&M and Rs10 to 200 lacs in
equipment in service sector
• Medium Enterprise: Above 500 lacs and
upto Rs1000lacs in P&M in manufacturing
and Above rs 200 lacs upto Rs500 lacs in
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DEFINITIONS
• Equipment in service sectorncillary units-
proposes to supply 50% of its production or
services
• Tiny units-Investment in p&m does not
exceed Rs25lacs
• Village & cottage industry.--population not
exceeding 50000.
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DEFINITION CONTD.
• Women enterprises--SSI related related
service where share of the women as partner
shareholders,directors not less than 51%.
• Export oriented units--exports at least 30%
of its production.
• SSSBE--An industry related service
business enterprises with investment in
fixed assets upto 5lacs except land&bldg
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Importance of S.S.I.
• Provides employment next to Agri.
• Accounts 40% of the total export of the
country
• Plays crucial role in the economy.
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Inherent advantage of S.S.I
• 1-Shorter gestation period
• 2-Low cost of establishment
• 3-Widely dispersed building wider
industrial base.
• 4-Low capital intensive.
• 5-Potential for employment
• 6-Effective mobilisation rural resource
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Why S.S.I fails
• Inordinate delay in sanction of credit limit
• Need based lending not extended
• Big units deleberately promote ancillaries
• Placed order in large nos of small ones
• Gets payment on the whims & fancies of
big units
• Disadvantageous position of raising funds
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Inherent weakness of S.S.I.
• Lacking basic infrastructure
• Old/outdated technology
• Poorly placed in market situation
• Promoters lack specialisation
• Weak capital base &lesser access to capital
market
• Lacking managerial&professional skills
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Inherent weakness of SSI contd.
• Face resource crunch
• Poor accounting system
• No planning budgeting or monitoring
• Short term fund are deployed for long term
uses
• Pre operative expenses are not considered in
project appraisal
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Role of Govt.of India& R.B.I
• Banks should convey timely sanction
• Loan applications to be timely disposed
• Need based & timely credit to be extended
• Simplified & uniform application form
• Rejection of application form should be
done with approval of higher authorities
• Collaterals upto 1lac not to be insisted
•
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Role of GoI & R.B.I. Contd.
• Financial assistance for meetig T/L&W/C
be given
• Interest on delayed payment to SSI and
ancillary undertaking act 1993.
• Target for financing priority secctor where
SSI is a constituent
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Bankers approach to SSI
financing
• Anxiety to secure banks fund at any cost
• Stop discounting bills of SSI units
• Discourage to draw against book debts
• Current ratio is lowered due to high
receivables
• Branches are not equiped nor trained
• Borrowers are not educated.
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Activities not covered under SSI
• SSI units set up by state/central govts.
• Hotels,Tourism,Cinema house
• Tea processing blending ,Diagonistic center
• Pharmaceutical companies working on loan
licencing policy
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Structured approach in SSI
financig
• DEHEJIA COMMITTEE RECOM.
• 1-Tendency to avail short term credit more
than requirement
• 2-Tendency to divert short term funds for
acquisition of non current assets
• 3-Approach of the bank is security oriented
• 4-Correct credit assessment is not done
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Dehejia committee
recommendation
• Appraisal of credit application based on
present & projected financial position
• Bank with one bank to avoid multiple
financing
• Cash credit requirement should be
segregated into hardcore &short term
component
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Puri Committee recommendation
• Uniformity & simplicity of loan application
• No viable scheme shall be turned down for
want of margin
• Largely be guided for viability not to insist
collaterals
• Repayment considered as per sustenance
• Loaning power,uniform appraisal
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Tandon committee
recomendations
• Norms for inventory & receivables
• Approach to lending
• Identification of excess borrwing
• No slip back in current ratio except
expansion, diversification,reduction of
public deposit ,payment of statutory
dues,full capacity utilisation
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Chore committee
recommendation
• Periodical review
• Quarterly information system QIS-I,II,III
• Peak nonpeak level limit
• Regulation of drawal of funds
• Ad hoc limits
• Enhancement of borrower”s contribution
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NAYAK COMMITTEE
RECOMMENDATION • Banks should step up the credit flow to meet the legitmate requirement
of SSI through preparing an annual budget for new units,functioning
units,&sick SSIunits
• Single financing agency to meet T/L,W/c, requirement
upto20lacs&10lacs respectively.The single window scheme of SIDIBI
enables the same agency to cater the need.
• Inventory norms &Ist method of lending not applicable to ssi units
upto 50lacs(raised to 100lacs).As such fudbased facility upto 10lacs
&10 to 50 lacs are subjected to inventory&receivable norms & ist
method of lending respectively
• The banks lend on the basis of 1st method of lending to those units
engaged in marketing&trading of SSI products.subjected to condition
that dealing with100% products &due settled in30days.
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Nayak committee (contd)
• Banks have been advised to give preferences to village industries,tiny
industries,& other SSI while extending finance to SSIs.
• IMPORTANT BANKING OPERATIONAL
CLARIFICATION ON NAYAK
COMMITTEE RECOMMENDATIONS • The assessment of credit limitsfor all borrwers enjoying credit limits
less than 1crores--(fund based)is to be granted on higher of the 2 limits
assessed on the basis of traditional &turn over methods
• Where the w/c cycle is shorter than 3months the w/c requirements
would be less than 25%of the PTO
• If the liquid surplus available is more than 5%of the T/Othe limit can
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Operational clearification on
Nayak commt. Contd. • fixed at a lower than 20% of the T/O
• The units having operating cycle more than 3monhs should be
provided proper limits since 20% T/O is the minimum
• In case of seasonal industries peak/nonpeak level should be considered
instead of annual turn over.
• Creditos & OCL are to be considered as source of funds for building
C/A & will be treated in the same manner as in traditional method
• The borrwer”s contribution should be 5%ofT/O except where the w/c
cycle is not taken as3 monthsThe margin will proportionately increase
with increase in period of operating cycle.Care to maintain 1:4 ratio
should be ensured. Higher liquidity surplus could be considered.
Dilution less than 5% could be considered except in sick units
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Operational clearification on
Nayak commt. Recomm. • The sub limits against various componets of stock,Receivables are
sanctioned based on norms of inventory & receivables .Banks should
adopt a flexible approach.
• Monitoring of borrowal account based on stock ,book debt
statements.actual turn over on monhly basis,Auditor”s certificate on
6”monhly basis.This would help in arriving effective operational
limits.
• In order to check the validity of projection of existing units actuals for
last 5 years ,esimates ,prjections including true analysis of industries to
which the borrowing unit belongs is useful.Other information like
modernisation, expansion,manufg.
Capacity,govt.policy,taxation,external&internal factors are relevent.
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Kapur committee
recommendation
• Delegation of sanctioning power
• To be delegated to sanction 20% of limit as
adhoc limit
• Banks to consider composite loan limit upto
5lacs (enhanced to 10lacs)
• Project requiring credit upto 25lacs should
be sannctioned by banks or sfc .For loans
>25las sidibi with banks to have MOU sign
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Kapur committ. Recm. contd
• sfc & selected public sector banks. The
securities shall be shared on pari pasu basis.
• Application forms used--2lacs-->10lacs, 15
lacs--->50lacs,upto 1crore--->50lacs to 2cr.
• For considering applications acommittee
approach should be considered & disposed
of with in1month.
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Kapur committ.recm. Contd.
• One field officer in specialised branch
should handle at least 50ssi accounts
• A charter of credit entitlements hae to be
displayed at the banking hall.Selective
specialised banks have to experiments with
new products such as Factoring services.
• The loan application should be examined by
an officer with adequate experience.
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Kapur committ. Rcom. Contd.
• Refer-april1998,co/br/84/71 dated4-6-1992
• Where banks have first charge on fixed
assets ,they should not ask cash margins
from ssi borrowers for non-fundedfacilities
provided there is adequate surplus to cover .
• Special term loans be granted to meet pre-
operativeexp.,technicalfee,collaborationcost
, invst.inR&D,marketingexp..
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Kapur committ.recom.contd.
• Exemption of collaterals upto 1lac
• Upto 10lacs the collaterals plus netmeans of
3rd party guarentee should not exceed
50%of fund & non fund based business.
Banks should at least should finance 10% of
its accounts without collaterals.
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Working capital requirement of
SSI units • EXISTNG UNITS
• Balance sheet,profit&loss accounts.
• Cash & credit sales
• Cash& credit purchases of raw materials
• Basis for manufacturing cost&overheads
• basis for administration expenses
• liquid surplus available
• opening&closing stock balance
• manufacturing process details&marketing
arrangements
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W/C requirement--new units
• Projected balancesheet
• Projected profit&loss account
• Basis for projecting manuf.exp.&admn.exp.
• Period involved in various stage of
operating cycle
• Prportion of cash&credit sales
• Liquid surplus presently available
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W/C assessment ---new units
• Manufacturing process details
• Closing stock of RM,SIP,FG,&receivable
estimate
• Demand&supply &marketing arrangement
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Factors determine W/C
• Policies for production
• Manufacturing process
• seasonality
• pace of turn over
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Fixing the quantum of W/C
• RM--place of availability,mode of
availability,minimum quantity stipulation,
seasonality,price variation,lead time,
• S.I.P.---Technology used,no. of processes,
• Finished Goods--market for sale,Selling
arrangements, product quality
• Receivables--Demand &supply position
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Fixing quantum of W/C contd.
• --Receivables-----other competitors,credit
period,credit policy,discount allowed,
buyers financial soundness,
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Fixed assets financing through
Term Loan • The appraisal of the term loan covers 4 broad aspects of the project
such as TECHNICAL, FINANCIAL,ECONOMIC.MANAGERIAL
• FINANCIAL--COST OF THE PROJECT
• Land&site development,Building,Plant&Machinery,Techinical Know
how&other misc related charges,expenses on training,misc.fixed assets
• preliminary exp.,preoperative expenses,provision for contigencies,
margin for working capital.
• MEANS OF FINANCE
• Share capital,reserve&surplus,retained earnings,long term
borrowings,deferred payments,other sources.
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PRESENTING A CREDIT
PROPOSAL • Documentation of creation of entity
• Names,address,brief biodata &details of assets &liabilities
• Particulars of securities other than primary
• Copies of assessment orders of income-tax,wealth tax,sales
tax,excise duty assessment order .
• Documents authorising the approval of---SSI registration
certificate,power sanction letter,NOC from muncipal
/pollution control board etc.
• Details of borrwings
• Audited balance sheet/profit &loss account
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Presenting a credit proposal
• Details of associates
• Loan application form
• In case of term loan a project report covering -
projected balance sheet,profit &loss a/c,cash/fund
flow,DSCR chart,break even
chart,depriciation,int.rate chart,copy of tittle of
land,estmate of construction,quotation,list of
existing plant&machinery,copy of import licence
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Post sanction monitoring of SSI
advances
• A.Getting the sanction accepted
• B.Documentation
• C.Flow of information
• Dperiodical inspection
• E.Insurance
• F.Periodical review/renewal of credit limits