Post on 10-Dec-2015
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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
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.
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
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.
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
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
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• Old/outdated technology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
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
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
•
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
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.
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
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
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
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
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
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
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.
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
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
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.
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
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.
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.
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..
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.
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
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
W/C assessment ---new units
• Manufacturing process details
• Closing stock of RM,SIP,FG,&receivable estimate
• Demand&supply &marketing arrangement
Factors determine W/C
• Policies for production
• Manufacturing process
• seasonality
• pace of turn over
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
Fixing quantum of W/C contd.
• --Receivables-----other competitors,credit period,credit policy,discount allowed, buyers financial soundness,
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.
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
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