REPORT ON SMEs-GROWTH ENGINES FOR INDIAN ECONOMY

PREPARED FORBANK OF BARODA

(BANK OF BARODA TOWER,AHMEDABAD)

Guided ByMr. P.K.SHARMA

Chief Manager (Risk Management)

Prepared ByParmar Dinesh G.

Shri Chimanbhai Patel Institute of Management & Research.

MBA (SEM-II)Ahmedabad.

Date: - 15th July 2008

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ACKNOWLEDGEMENT

I am very glad to have the vocational training in Bank of Baroda. I am very thankful to Mr.K.N.Suvarna (General manager EM & HRM), Mr.J.J.Joshi (General Manager, Gujarat operations) & Mr.V.D. Vashi (Chief Manager,HRM) who have granted me the permission for doing summer training in The Bank of Baroda.

I am also very grateful to Mr. P.K.Sharma who is a chief manager of risk management department who has guided me through out my training period. With all the necessities being fulfilled by the department and I am again thankful to all the employees of finance and HR department who had given me support for the work to be done during training.

Last but not least I am also grateful to my Institute Shri Chimanbhai Patel Institute of Management and Research and Director sir Mr. Vidyut Joshi and also all the faculty members who had inspired me for doing the summer training.

Thanking You,

Yours faithfully,

(Parmar Dinesh G.)

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TABLE OF CONTENTS

Sr.No. Topic Pg. No.

01. Executive Summary. 0402. Introduction to the Topic. 0503. Introduction of the Organization. 06

I. History 07II. Nature of the company 08III. Mission of the company 09IV. Management Profile. 10V. Organizational Structure 11VI. Product Profile 12VII. Bank of Baroda & its Subsidiaries 24

04. Industry Analysis 2505. Company Analysis

I. Financial position of Bank of Baroda 38II. Profit & Loss Account of Bank of Baroda 39III. Balance sheet of Bank of Baroda 40IV. Statement of Cash Flow of Bank of Baroda 41

06. Ratio Analysis 43I. Importance of Ratio Analysis. 46

07. Introduction to the small-scale enterprises 4908. Significance of SMEs in Indian Economy 5109. Reasons for Smes Promotions 5210. Smes parameters regarding the performance 5411. The Growth Story Of Indian SMEs 5512. the growth of small-scale industries since 1975-76 5813. Drawbacks and barriers 5914. Assistances and promotions to SMEs by Government 61

15. Frame-work for Cluster Development 6416. About MSMED Act 2006 6817. ConclusionsConclusions 7013. Bibliography 71

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EXECUTIVE SUMMARY

Bank of Baroda’s principal activities are to provide banking and related services through 2,853 branches in India and 40 overseas branches. The services include accepting deposits, commercial and institutional credit, project finance, treasury, forex, investment and risk management and other related financial services. As a part of my M.B.A curriculum I have taken my summer training in Bank Of Baroda (Bank of Baroda tower, Ahmedabad). As per the topic SMEs-Growth engines for Indian economy, I have analyzed SSI Sector of India with the help of various web sites related to this sector and other related sources like journals, magazines etc.

Here, the overall project is based on analysis of Small Scale sector and it’s contribution and impacts on Indian economy. On the investment front, Indian small businesses are acting on their positive economic outlook with increased capital investment in the first half of 2008. A majority of the SMEs in the country are planning to hire more workers while none intended to cut jobs.

The insight of the project report shows the capital structure of the organization, financial position of the organization, cash flow, and ratio analysis. The overview of the report reveals that the SME segment is the growth engine of India economy. IT is a key strategic tool, which can help India SMEs get a competitive advantage in the global market place. However, there is a limited understanding of this segment in the industry SMEs throughout India are expanding rapidly – both in terms of hiring and additional branch offices. “No. 1 challenge for SMEs is increasing competition followed by pricing-pressure in the market and managing customer expectations”

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INTRODUCTION TO THE TOPIC

The topic is all about the Small scale enterprises as a growth engines for Indian economy. Small scale sector has remained high on agenda of all political parties, intelligentsia and policy makers since independence as a legacy of Gandhian philosophy. The special thrust to this sector has been with the multiple objectives of employment generation, regional dispersal of industries and as a seedbed for entrepreneurship. The contribution of small scale industries (SSIs) has been remarkable in the industrial development for the country.1

Small scale enterprises are getting more importance than other sectors. Government of India has opened a special financial bodies like Small Industries Development Bank Of India (SIDBI),State Financial Corporation (SFCs) & other training institutes like Centre for Entrepreneurship Development (CEDs), Institute Of Entrepreneurship Development (IEDs),Technical Consultancy Organizations (TCOs) for the purpose of providing assistance to this sector.

Small industry sector is a major employment provider after agriculture. Overall, the small industry sector has done quite well and has enabled the country to achieve considerable industrial growth and diversification.Being generally low capital intensive, SSIs suit the Indian economic environment with scarce financial resources and large population base. In addition, it is highly labor intensive and has a scope for building upon the traditional skills and knowledge.

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INTRODUCTION TO THE ORGANIZATION

Bank Of Baroda, is a Body Corporate (Nationalised Bank) constituted under The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, with its Head Office at Mandvi, Baroda and Corporate Office at Mumbai.

Bank of Baroda, a leading global Bank of Indian origin has been expanding its international presence with footprints in 25 countries and a Pan India network of 2853 branches is a fifth largest bank in India. Bank of Baroda is one of the oldest banking institutions in India, having been established in 1908 from a small building in Baroda, Gujarat State. B.O.B has a core set of values and culture that it adhere to & at all times seeks to be trustworthy, international, courageous, determined and responsive. Today the bank employs 39,529 people. It also has four subsidiaries, BOB Housing Finance Ltd., BOB Asset Management Co. Ltd., BOBCARDS Ltd. and BOB Capital Markets Ltd.

For financial year ending 31 March 2008, the bank reported a net profit of Rs.1436 crore. The bank had a total business of Rs.2,59,000 crore, as on March 31, 2008, and is eyeing 22 per cent growth toRs.3,10,000 crore by the end of this financial year. It is looking at a growth of 20 per cent in deposits and 23 per cent in advances. Bank of Baroda sanctions loans/credit assistance to Small Scale Industries for acquisition of fixed assets (factory land/buildings & machinery) and working capital requirements at very competitive interest rates and against soft margins Rate of interests effective from 01.06.2003

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History

Bank of Baroda was founded on July 20, 1908 with a paid up capital of Rs.10 lakhs by Maharaja Sayajirao Gaekwad III of Baroda, one man who made a difference, rooted in Indian values. Yet Global in vision, rock solid in fundamentals. Nurture a culture where success does not come in the way of the need to keep learning a fresh, to keep innovating, to keep experimenting. It has now come a long way to becoming the strong trustworthy financial institution. It is growing day by day. The emblem of Bank of Baroda represents wealth, safety, industrial development and an inclination to better and promote the company’s agrarian economy. It is a coin with an unpraised arm indicating wealth that indicated that the depositor’s money is in the safe hands.

Since then bank has traversed an eventful and successful journey of almost 100 years. Today, Bank of Baroda has a network of 2853 branches. In mid-eighties, the Bank of Baroda diversified into areas of merchant banking, housing finance, credit cards and mutual funds. In 1995 the Bank raised Rs.300 crores through a Bond issue. In 1996 the Bank tapped the capital market with an IPO of Rs.850 crores.

Bank of Baroda took the lead in shifting from manual operating systems to a computerized work environment. Today, the Bank has 1918 computerized branches, covering 70% of its network and 91.64% of its business.

Bank of Baroda gives high priority to quality service. In its quest for quality, the Bank has secured the ISO 9001:2000 certifications for 15 branches by end of the 2005-06.

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Nature

The nature of the business that decide the company belongs to which industry and it helps the many stakeholders and parties like government, NGO, etc, to decide the parameter and other concerned issue binding to the organization, for e.g. environmental protection, tax rate, incentives, and rules and regulations.

The Bank of baroda belongs to the service sector, which provides various types of financial solution related to banking industry.

As Indian economy is emerging as a major services provider in the world, which can be seen by it’s contribution in GDP of India which is closed to 55%.

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Mission

“To be a top ranking National Bank of International Standards committed to augmenting stake holders' value through concern, care and competence”

About logo

“Bank’s new logo is a unique representation of a universal symbol. It comprises dual ‘B’ letterforms that hold the rays of the rising sun. Bank of baroda calls this the Baroda Sun”

The sun is an excellent representation of what bank stands for. It is the single most powerful source of light and energy – its far reaching rays dispel darkness to illuminate everything they touch. At Bank of Baroda, it seeks to be the source that will help all its stakeholders realise their goals. To bank’s customers, it seeks to be a one-stop, reliable partner who will help them address different financial needs. To its employees, it offers rewarding careers and to its investors and business partners, maximum return on their investment.

The single-colour, compelling vermillion palette has been carefully chosen, for its distinctivenes as it stands for hope and energy.

It also recognize that bank is characterised by diversity. Its network of branches spans geographical and cultural boundaries and rural-urban divides. Its customers come from a wide spectrum of industries and backgrounds. The Baroda Sun is a fitting face for its brand because it is a universal symbol of dynamism and optimism – it is meaningful for its many audiences and easily decoded by all.

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Management Profile

Name Designation

Shri M.D.Mallya Chairman & M.D

Shri V.Santhanaraman Executive Director

Shri Satish.C.Gupta Executive Director

Shri C.G.Chaturvedi (I.A.S, Additional Secretary, Govt. of India, Ministry of Wealth & Family Walfare)

Shri A.Somasundaram Nominee of R.B.I

Shri Milind N.Nadkarni Director

Shri Ranjit kumar Chetterjee Director

Shri Amarjit Chopra Director

Smt Masarrat Shahid Director

Shri Maulin A.Vaisnav Director

Dr. Atul Agarwal Director

Dr. Dharmendra Bhandari Director

Shri Mahesh Prabhulal Mehta Director

Dr.Deepak Bhaskar phatak Director

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Organizational Structure

Organizational structure is one of the most important decision mode by top management before starting the business, as it generally depend on the nature and size of the company, it has lot to do with the job description and job specification. The organizational structure is nothing but hierarchical and departmental process.

Every organization differ in structure. There is a well defined system in the Bank regarding decision making process. Lending and administrative decisions are taken at various levels from JMGS I to Top Executive grade Scale VII and also by Executive Director and Chairman & Managing Director depending upon their positions as per the discretionary lending powers delegated to them by the Board. Branches receive applications for credit facilities and recommend to the appropriate sanctioning authority. In the case of major retail loan products applications are processed at branches and Centralised Credit Processing Cells at select centers.

There is a well defined organizational structure and clear system of accountability based on RBI / CVC guidelines. All credit decisions approved by any sanctioning authority are reported to the next higher authority for control purpose. The system of exercising proper delegation of power and submission of control reports is in place and they are monitored by control officers and through internal inspection.By observing the following is a common structure as per company guidance.

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Product Profile

Followings are the main products of The Bank of baroda.

Deposits Gen-next Loans Credit Cards Debit Cards Services Lockers

(1)Deposits: Bank of Baroda offers various deposit plans that you can choose from depending on the term period, nature of deposit and its unique saving and withdrawal features.

Apart from competitive interest rates and convenient withdrawal options, our deposit plans offer other features such as overdraft facility, outstation cheque collections, safe deposit lockers, ATM's etc.

Fixed deposits are categorised into deposits with a term period of less than 12 months, more than 12 months and recurring deposits. These deposit plans offer convenient solutions to both working individuals as well as senior citizens.

Current and saving deposits are ideal for individuals who wish to take advantage of multiple benefits within the same plan and even be eligible to opt for overdrafts.

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(2)Gen-next:

2.1: Gen-Next Junior (Saving Account)

Product Nature:

This is a Special kind of Savings Bank Deposit product for children to be made available in Gen-Next Pune branch.

Target Group:

Children upto 18 years of age.

Minimum Amount & Balance:

QAB: Rs 500/- Charges for non-maintenance of QAB is Rs 50/ per quarter

only.

Maximum Amount:

In case of joint accounts with parent and minors (with sole account) above 14 years, there is no ceiling on the maximum amount.

An account in the sole name of minor above 10 years and below 14 years, maximum limit is Rs 1 lakh.

Single / Joint Accounts:

In case of minor below 10 years the account shall be opened jointly with parents / guardian.

Minors above 10 years (below 18 years) can open the account in their sole name subject to :

Minor is able to read and write any of the recognized languages, and

Capable in the opinion of the Bank officials of understanding the what he / she is doing and SB account rules and regulations

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2.2: Gen-Next Lifestyle

Type Of Facility:

Term Loan (Combo Pack)

Purpose :

Purchase of Home Furnishings / Consumer Durable goods (includes color T.V., video camera / refrigerator / washing machine / music system / air-conditioners / cooking system etc).

Purchase of vehicle i.e. two-wheeler / four-wheeler. Purchase of Laptop / PC. Purchase of any new electronic gadgets like Mobile, i-Pod,

Handycam etc.

Target Group :

Working executives / professionals.

Eligibility:

Should be an Indian National Permanent Employees of State / Central Government, Public

Sector Undertakings, Semi government Organization, State / Central Govt. Corporations, Urban Development Authorities, Educational Institutions, Universities. Regular Employees of MNCs, Public Ltd Companies with minimum two years experience out of which minimum one year service with the present organization.

Employees of Private Limited Companies, Regional head will permit on case-to-case basis.

Present gross annual emoluments / income of the applicant should not be less than Rs. 2.50 lacs.

Age:

Minimum – 21 years Maximum – 45 years

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Maximum Loan Amount:

Subject to maximum of:

Furniture & Fixture / New Consumer Durables : Rs. 2 lacs New Vehicle (Four Wheeler) : Rs. 6 lacs (Two Wheeler) : Rs. 1

lac Old Four Wheeler (Not more than 3 years old) : Rs. 4 lacs New modern gadget/s : Rs. 1 lac

Aggregate loan amount should not be more than Rs. 8.00 lacs.

Subject to:

24 times gross Monthly income. Total deductions including EMI of proposed loan should not

exceed 60% of the gross income.

Margin:

Furniture & Fixture / New Consumer Durables : 20% New Vehicle (Two wheeler / Four wheeler) : 15% Old Vehicle (Four wheeler only) : 40% New Modern Gadgets (Including Laptop / PC) : 20%

2.3 Gen-Next Power (OD Facility):

Product Nature :

This is a special Savings Deposit product having an in built feature of overdraft facility to be available at Gen-Next Pune branch. Target Group

The product is targeted to working executives and other working professionals.Our Bank’s Staff members are not eligible to avail the product. Minimum Amount & Balance

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There is no minimum balance requirement in the account and as such no service charges shall be levied towards this. Maximum Amount

There shall be no ceiling on the amount to be deposited and credit balance in the account. Eligibility Criteria:

Permanent Employees of State / Central Government, Public Sector Undertakings, Semi government Organization, State / Central Govt. Corporations, Urban Development Authorities, Educational Institutions, Universities. Regular Employees of MNCs, Public Ltd Companies with minimum two years experience out of which minimum one year service with the present organization.

Employees of Private Limited Companies, Regional head will permit on case-to-case basis.

Minimum age of 21 years. Minimum take home Salary should not be less than Rs.

10,000/-. Maintaining satisfactorily conducted salary account with the

Bank at least for three months.

Special Feature:

The branch SHALL offer Overdraft facility (Clean/unsecured) to employees who fulfill the eligibility criteria mentioned above to meet out their regular short-term personal / family needs.

Overdraft Facility:

Maximum Age: 45 years. (This product is meant for youth)

Amount: 5 times of net take home monthly salary subject to:

Min Rs. 50,000/- Max Rs. 2.00 lacs, subject to condition: Risk Rating Category “A” & “B” Rs. 2.00 lac Category “C” Rs. 1.00 lac Category “D” NIL.

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For credit rating purpose, model meant for personal loan will be taken into consideration.

PROCESSING & DOCUMENTATION CHARGES:0.50% of limit sanctioned / reviewed subject to minimum of Rs. 250/- + service tax as applicable.

Security Documents:

D.P. Note. Letter of continuing security. A stamped undertaking from the employee authorizing the

employer to remit the salary every month to the bank for credit of specified SB / Current Account during the currency of the OD facility and also to deduct from the retirement / terminal benefits, the outstanding overdraft amount with the interest in case of retirement / resignation / cessation of employment for any reason. A copy of the undertaking duly acknowledged by the employer has to be kept on branch.

Third party guarantee having adequate net worth. Cross guarantee may be accepted.

Rate of Interest:

1.5% above BPLR i.e. 14% p.a. with monthly rests. A Minimum interest of Rs. 10/- shall be charged during a month if OD is availed. Period: 12 months, subject to annual review.

Other Conditions:

The account is to be brought into credit once in a year.

Interest Rate On Credit Balance In The A/C:

Interest shall be payable on credit balance in the account as per savings bank account rules viz. relating to periodicity, rate and system of application of interest, computation of eligible balances etc.

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2.4: Gen Next Suvidha:

Product Nature:

This is a Recurring Deposit product enabling the customer to make regular savings on monthly basis and earn higher interest.

Customer Segment:

Individuals in their single / joint names. Minors of age 10 years and above jointly with their parents /

natural guardians. Minors below 10 years age through their parents.

Minimum / Maximum Amount:

There is no minimum balance requirement in the account and as such no service charges shall be levied towards this.

Maximum Amount:

“Gen-next Suvidha” Account can be opened with monthly installments of Rs.100/- or above & in multiples thereof with a maximum of Rs.10, 000/- per month.

The number of installments can range from 12 to 36 months (In multiples of 3 months).

The depositor shall, at the time of opening the account, stipulate the amount of core monthly installment and the number of installments payable by him which shall not subsequently alter.

The depositor is given an option to deposit higher monthly installment in the account as and when available and the maximum amount should not exceed Rs. 10,000/- per month. However, monthly installments paid during the time gap of less than 24/12 months (depending upon the period chosen) at the ending stage of the account’s tenure, shall not exceed in any

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month three times the core monthly installment or Rs. 10,000/- whichever is less.

Rate Of Interest:

As decided by bank from time to time for Term Deposits of same tenure.

Loan Against Deposit:

Loan can be considered against the deposit in the account in accordance to normal guidelines for advances against Recurring Deposit.

Interest shall be charged on such loan at the rates advised from time to time on Loan against Bank’s Own Deposits.

(3)Loans:

3.1: Retail Loans: Bank of Baroda offers a wide range of retail loans to meet your diverse needs. Whether the need is for a new house, child's education, purchase of a new car or home appliances, our unique and need specific loans will enable you to convert your dreams to realities.

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KEY PRODUCTS

Housing Loan Personal Loan

Housing Loans to NRIs / PIOsVaibhav Lakshmi Loan (For Working Women)

Home Improvement Loan Desh Videsh Yatra Loan

Loan Against Future Rent Receivables Marriage Loan

Advance Against Property Advance Against Securities

Advance Against Property to NRI Loan to Pensioners

Education LoanLoan to Defence Pensioners

Car Loan Professional Loan

Two Wheeler Loan Loan to Doctors

Consumer Durables Loan Traders Loan

Baroda Loan for Laptop & Personal Computer

Loan for financing Individuals for subscription to Public Issues /IPO

Baroda Ashray (Reverse Mortgage Loan)

Baroda Career Development Loan

(4)Credit Cards: Bank of Baroda offers following range of credit

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Cards.

SILVER EXCLUSIVE GENERAL

GOLDVISA /MASTER

EXCLUSIVEWOMAN /YOUTH

NEXTGEN GOLD CORPORATE GLOBAL

(5)Debit Cards:

The Bank of Baroda International Debit Card is accepted at over 10000 Visa Electron ATMs in India and 850000 ATMs worldwide. The card is also accepted at any 100000 merchant outlets in India and around 13 millions globally. The card enables you to enjoy the convenience of cash-less purchasing power without the fear of overdrawing your account.

Key Benefits:

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Take advantage of the most widely accepted card and be able to withdraw from any ATM displaying the VISA logo, in India and abroad.

At VISA Electron merchant shops, it can also serve as your electronic purse, and money gets debited instantly from your account, as you pay.

The Card allows you to get mini-statements from Bank of Baroda ATMs, or to check the balance in your account, avoiding visits to even our nearest branches.

(6)Services:

Apart from the Loans, Deposits, Credit and Debit Cards, Bank of Baroda offers other services to make financial dealings easy and convenient.

Key Services:

Demat BarodaHealth Remittances (Baroda Money Express) Collection Services ECS (Electronic Clearing Services) Government Business (PPF, DSRGE, Tax Collections and

Savings Bonds)

(7)Lockers:

Storing too much jewellery and valuables in the house at times becomes a security issue and an impediment in case of natural calamities.

Bank of Baroda offers you, a safe, trustworthy space to store your valuables, jewellery, documents and other things dear to you.

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Key Benefits:

State-of-the-art Lockers, the safe deposit vaults with fully equipped, latest burglar alarm systems.

For additional safety, the Locker holder assigns a code word which further increases security.

Available in different sizes as per your requirement. These Lockers and their contents can be nominated to people

near and dear to you

Terms & Conditions:

For obtaining a Locker at the Bank of Baroda, you must be an account holder with our Bank.

Lockers can be allotted both individually as well as jointly. NRIs do not require any prior permission from the RBI to hire a

Locker with the Bank of Baroda. A minimum-security deposit of Rs. 5000/- is required when the

annual rent is Rs. 1000; this deposit is raised to Rs. 10000 if the Locker rent is above Rs. 1000/-.

Security deposit will be accepted under a fixed deposit of 3 years under the banker's lien.

An acknowledgement will be issued by the bank for fixed deposit to be kept as security deposit.

The Locker holder is permitted to add or delete names from the list of persons who can operate the Locker and can have access to it.

:Bank of Baroda & its Subsidiaries:

Domestic Overseas

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Subsidiary Subsidiary

BOB Asset Management Co. Ltd. BANK OF BARODA (Botswana) Ltd.

BOBCARDS Ltd. BANK OF BARODA (Kenya) Ltd.

BOB Capital Markets Ltd. BANK OF BARODA (Uganda) Ltd.

BANK OF BARODA (Guyana) Ltd.

BANK OF BARODA (UK) Ltd.

BANK OF BARODA (Tanzania) Ltd

BANK OF BARODA (Trinidad & Tobago) Ltd.BANK OF BARODA (Ghana) Ltd.

Representative Offices

BANK OF BARODA (Thailand)

BANK OF BARODA (China)

BANK OF BARODA (Australia)

BANK OF BARODA (Malaysia)

Associate Bank Joint Venture

Nainital Bank Ltd. Indo-Zambia Bank Ltd. (Lusaka)

:Banking Industry Analysis:

The analysis consists of 82 scheduled commercial banks, comprising of 28 Public Sector Banks, 25 Private Sector Banks and 29 Foreign

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Banks, as defined by the RBI. The group of Public Sector Banks (PSBs) includes nationalised banks, SBI & its Associates and IDBI Ltd .*

With the purpose of gaining a deeper understanding of the Indian banking industry, an overall profiling of the industry has been attempted in this section. This study considers only the 82 banks profiled in this analysis. The data for the study was collated from sources in the public domain like annual reports, the RBI documents and the bank websites. Various parameters like efficiency, growth, productivity, etc., have been examined for gaining insights.

Total Assets

Total assets for the 82 scheduled commercial banks combined stood at Rs 27,785,739 mn in FY06, of which Public Sector Banks had the largest share of 72.5%, followed by Private Sector Banks of 20.2% and Foreign Banks at 7.3%.

* During the year FY06, two domestic banks were amalgamated - Ganesh Bank of Kurundwad with Federal Bank Ltd and Bank of Punjab Ltd with Centurion Bank Ltd to become Centurion Bank of Punjab Ltd, while one foreign bank, UFJ Bank Ltd merged with Bank of Tokyo-Mitsubishi Ltd. ING Bank NV closed its business in India. In Sept, 06, The United Western Bank Ltd was placed under moratorium, leading to its amalgamation with Industrial Development

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Bank of India Ltd. in Oct, 2006, Sangli Bank, another Private Sector Bank was merged with ICICI Bank. Ganesh Bank of Kurundwad, Sangli Bank and The United Western Bank have therefore been excluded of the publication.

The assets for all the profiled banks have grown at a rate of 22.6% over the previous year. It was observed that the asset base of Private Sector Banks was growing more rapidly compared to the other bank groups. Total assets of private banks grew by 16% in FY05 and 33% in FY06, over the previous year. The asset base of Foreign Banks grew by 13% in FY05 and by 30% in FY06 mainly driven by the growth in advances of four banks in this group. The Public Sector Banks maintained a decent year-on-year growth of 15% and 19% in the respective years. However, it should be noted that the growth of Public Sector Banks is on a very high base.

Total Income

The total income for the 82 banks stood at Rs 2,215,280 mn in FY06, of which the Public Sector Banks held the highest share of 72.7%, Private Sector Banks at 19.5% followed by 7.8% for the Foreign Banks.

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The top ten banks classified on the basis of their respective total income accounted for nearly 56% of the total income of the 82 banks. Of these top ten banks, 8 banks were Public Sector Banks while the remaining two were Private Sector Banks.

Non-Interest Income/Total Income

The non-interest income for all the 82 banks profiled in this publication on an average stood at 22.1% of the total income. Among the bank groups, non-interest income was the highest for Foreign Banks at 31%, followed by Private Sector Banks at 19.8%; indicative of the value-added services these banks offer. For Public Sector Banks, non-interest income was just 15.3% while interest income was a high 84.7%. Non-interest income includes fee income components such as commission, brokerage and exchange transactions, sale of investments, corporate finance transactions, M&A deals; and any other income other than the interest income generated by the bank.

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Net Profit

The net profit for the profiled banks together stood at Rs 248,281.5 mn for FY06. The top ten banks, based on the net profit classification, accounted for nearly 58.5% of the total net profit of all the 82 banks. These top ten banks included 6 Public Sector Banks, two Private Sector Banks and two Foreign Banks. Interestingly, of these top 10 banks, four banks that managed to make it to the top ten on the basis of net profit do not feature among the top ten on the basis of total income.

Bank group-wise, Public Sector Banks continued to dominate with a 66.6% share in the net profit. The share of Private Sector Banks in the total net profit stood at 21%, followed by Foreign Banks having a 12.4% share in the total net profit. Within the Public Sector Banks, There are 5 banks, 4 foreign and one private, out of the profiled 82 banks, which made losses in FY06.

Infrastructure

Banks across all three groups have been rapidly increasing their infrastructure to tap the under served markets, though Public Sector Banks are dominant all across in all regions. As of Mar 06, the total number of branches of the profiled banks operating in the country was 54,346, of which 88% of the branches belonged to the Public Sector Banks (PSBs), indicative of the extent of penetration these banks have in the country. Another 11% of the branches belonged to Private Sector Banks and the rest were of Foreign Banks.

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Region-wise, the concentration of branches was highest in the rural areas, accounting for almost 35% of the total. The rural segment is entirely dominated by Public Sector Banks with 95% of the total rural branches belonging to PSBs. 23% of the branches of PSBs are located in semi urban area, while 19% branches are in the metropolitan regions. The immense reach of PSBs can be seen by the fact that almost 62% of total PSB branches are in rural & semi-urban areas.

Group-wise, the presence of Private Sector Banks was largely in urban areas with almost 30% of their branches in this region.

As of Mar 06, the total numbers of ATMs installed by profiled banks were 21,047. Public sector banks once again accounted for the largest share of installed ATMs with 12,608 machines, followed by the Private Sector Banks with 7,584 ATM’s. Foreign Banks have installed 855 ATMs around the country.

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Growth in Deposits, Advances & Retail Credit

Deposits

The overall deposit growth for the profiled banks was at 18.2% for FY06. Group-wise, deposits of Private Sector Banks witnessed a robust growth of 39.2%, closely followed by Foreign Banks at 31.7%. For Public Sector Banks the deposits grew at about 13% for the same time period. The share of Private Sector Banks in total deposits has been rising gradually, while that of Public Sector Banks has been declining over the years.

Growth in Deposits, Advances & Retail Credit

* The above figures are represented as an average % growth over FY05

Advances

Advances for all the profiled banks have grown at about 32% YoY and that made by Private Sector Banks grew at the highest rate of 44% for FY06 followed by a growth of 30.7% for Public Sector Banks and 30% for Foreign Banks. Among the major components of total advances, there was no relative change in the percentage share of

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Bills Purchased and Discounted, over the last three years. Cash Credits, Overdrafts and Loans have shown a yearly decline of 4% in FY05 as a part of total advances. Correspondingly, Term Loans have been growing and constitute a large component of advances. In FY04, Term Loans constituted 49.4% of Total Advances, which increased to 54.2% in FY05, and further to 55.7% in FY06.

 

Group-wise Average Growth in Term Loans

*All figures in %age

In FY06, Term Loans across the profiled banks grew on an average of 35.9%. Term Loans provided by the public sector banks showed robust growth of 59.8% in FY05 which almost reduced to half and stood at 32.2% in FY06. The growth shown by Private Sector Banks has varied too, with 38.7% growth in FY05 and 48.9% in FY06. Foreign Banks, however, have shown a lower growth in term loans in FY06 as compared to FY05, which grew by 30.2% in FY06 as against a growth of 37.2% in FY05. This growth in all three bank-groups can largely be attributed to the growth in retail credit and the overall economy, among other factors.

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Retail Credit

Retail credit for the Public Sector scheduled commercial banks increased by 35%, which was significantly higher than the profiled banks’ overall credit growth of 32%. The retail advances by the Private Banks grew by 48.3%, which too was well above the overall growth.

Credit Deposit Ratio

The Credit-Deposit ratio (C-D ratio) is the proportion of loan-assets created by the bank from the deposits received. Among the 82 banks profiled, the aggregate C-D ratio stood at 70.1% in FY06 as compared to 62.7% in FY05. Among the profiled bank-groups, foreign banks had the highest C-D ratio of 85.8% in FY06, which was slightly lower than that of FY05. An opposite trend was seen with private banks, where in their C-D ratio stood at 73.4% in FY06, higher than 70.9% for FY05. Public sector banks too showed a growth in their C-D ratio at 68.2% as compared to 59.5% in FY05. As seen earlier, the high rate of bank credit growth during the last two years has resulted in this unique behaviour of credit-deposit (C-D) ratio.

Priority Sector Advances / Total Advances

As instructed by the RBI, a target of 40% of net bank credit was stipulated for priority sector lending by domestic scheduled commercial banks, both in the public and private sectors. Within this, sub-targets of 18% and 10% of net bank credit had been stipulated for lending to agriculture and weaker sections, respectively.

In FY06, the average credit to the priority sector by the profiled Public Sector Banks accounted for 41.6% of their total credit, a little above the stipulated target level of 40%. In FY05, the profiled private banks lending to the priority sector constituted 39.6% of their total advances.

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The Public Sector Banks contributed 15.6% of their total credit to the agriculture sector and private banks contributed 11.9% for the same, both falling short of the stipulated sub-targets of 18%.

Operating Efficiency

Net NPAs to Net Advances (Net NPAs/Net Advances)

On an average, the net NPA/Net Advances ratio for the 82 banks was 1.4% in FY06. Of this, the net NPAs to net advances ratio for the Public Sector Banks was estimated to be 1.4%, closely followed by Private Sector Banks at 1.8%. For Foreign Banks, the ratio was much lower at 0.9%.

The graph below depicts that the asset quality of all the banks has been improving for the past couple of years. It is evident that there has been a sharp decline in non-performing loans of Public Sector Banks and Private Sector Banks.

Operating Expenses

The operating expenses are those expenses that cover the day-to-day functioning of the bank like employee costs and charges for normal running of business. Among the profiled 82 banks, the ratio of operating expense to total expense for the Public Sector Banks was 26.5%, Private Sector Banks was 28.4%, while for Foreign Banks the ratio was nearly one-third of their total expenses and stands a little higher compared to their peers.

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Intermediation cost is the ratio of operating expense to total assets, and when seen in conjunction with non-interest income explains how much is the non-interest income able to cover up the operating expenses of the banks. This gap (the excess of operating expenditure over non-interest income as a percentage to total assets) has been narrowing considerably over the past few years. Among the profiled banks, for Public Sector Banks this gap was 0.9%, for private banks 0.4% and for Foreign Banks it stood at 0.2% for the year ending Mar 06.

Capital Adequacy Ratio

The Capital Adequacy Ratio is a measure of the amount of a bank’s capital expressed as a percentage of its risk weighted credit exposures. The RBI guidelines require a capital adequacy ratio of 9%. All the banks profiled in this publication have a capital adequacy ratio of above 9%; with most of the banks placed well above the 9% mark.

Return on Assets

In the list of 82 banks profiled, the return on assets for Foreign Banks was highest at 1.5%, followed by Private Sector Banks at 0.9%; and Public Sector Banks at 0.6%. The graph depicts that the return on assets bounced back smartly for Foreign Banks after the slight decline it witnessed in FY05. The return on assets for the Private Sector Banks has more or less remained the same with just a slight

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decline in it. While the return on assets for Public Sector Banks shows a very sharp decline.

Return on Equity

Of the 82 banks profiled in the publication, the Return on Equity for Public Sector Banks was estimated to be the highest amongst its peers at 16%, closely followed by Private Sector Banks at 11.1% and 9.2% for Foreign Banks. Bank of Baroda has achieved 15% return on equity for the financial year 2007-08.

As shown in the graph depicting the trend in Return on Equity over the last four years, it is observed that the Return on Equity for Private Sector Banks fell drastically from 21.1% in the year 2003 to 11.1% in the year 2006. The Return on Equity for Public Sector Banks too showed a sharp decline from 21.8% in 2003 to 16% in 2006. As for Foreign Banks, the return on equity showed a marginal decline from 11% in 2003 to 9.2% in 2006.

One of the reasons for the declining RoE could be the large amount of resources raised from primary capital market to strengthen the capital base. As per RBI data ,the equity capital for public sector banks jumped close to five times from Rs 11040 mn in 2003-04 to a whopping Rs. 54130 mn in the year 2005-06. The private sector banks which had a low capital base in 2003- 04, also witnessed a huge jump in equity capital and ended the year with an equity capital of Rs. 56540 mn in 2005-06.

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Net Interest Margin

It is defined as the excess of interest income over interest expense, as an percentage to total bank assets. Broadly speaking, this ratio reflects the allocative efficiency of financial intermediation, a lower ratio being indicative of upper efficiency. The net interest margin in FY06 stood at 3.5% for Foreign Banks its due to the fact that tradionally, the Foreign Banks can mobilise low-cost deposits. ; followed by 3.4% for Private Sector Banks and 3.13% for Public Sector Banks.

Productivity

Business per employee is the total revenue generated on a per employee basis where as Net Profit per employee gives an indication of the ability of labour to generate profit. However, both can be used as tools for measuring the efficiency of an organisation with respect to its human assets.

In FY06, the Foreign Banks on an average generated business worth Rs 101.27 mn per employee, which was the highest among the various bank groups. The business generated per employee by public sector and private banks stood at Rs 41.64 mn and Rs 49.54 mn respectively.

Correspondingly, the profitability per employee for Foreign Banks was highest at Rs 2.20 mn per employee, followed by private banks with Rs 1.87 mn per employee. Public sector banks showed an aggregate

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Rs 0.21 mn profitability on per employee basis. This indicates that profit generation with respect to its human resource is highest in Foreign Banks followed by private banks, and lowest in Public Sector Banks.

 

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Company Analysis

Followings are included for the purpose of company analysis

Capital structure of the Bank of Baroda:

From (Rs crore) Authorized Issued Paid Up Paid Up Paid Up

Year To Year capital Capital Shares(Nos) Face Value Capital(rs.in crore)

2006 2007 1,500.00 367 364266000 10 364.27

2005 2006 1,500.00 367 364265500 10 364.27

2004 2005 1,500.00 296 293265400 10 293.27

2003 2004 1,500.00 296 293261700 10 293.26

2002 2003 1,500.00 296 296000000 10 296

2001 2002 1,500.00 296 296000000 10 296

2000 2001 1,500.00 296 296000000 10 296

1999 2000 1,500.00 296 296000000 10 296

1998 1999 1,500.00 296 296000000 10 296

1997 1998 1,500.00 296 296000000 10 296

1996 1997 1,500.00 388.46 203537400 10 203.54

1996 1997 1,500.00 388.46 92462600 6 55.48

1995 1996 1,500.00 740.94 740935900 10 740.94

Financial position of Bank of Baroda:

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Profit & Loss Account for the Year ended 31st March, 2007Amount in Rupees

(000's Omitted)

As on 31st March, 2007 As on 31st March, 2006I. Income

Interest Earned 9212,63,72 7049,95,39 Other Income 1173,24,10 1127,39,03

Total 10385,87,82 8177,34,42 II. Expenditure

Interest Expended 5426,55,70 3875,08,73 Operating Expenses 2544,31,34 2384,75,27

Provisions and Contingencies

1388,54,33 1090,54,45

Total 9359,41,37 7350,38,45 III. Profit

Net. Profit for the year 1026,46,45 826,95,97

Available for Appropriation 1026,46,45 826,95,97 Appropriation

Transfer to :

a) Statutory Reserve 256,61,61 206,73,99 b) Capital Reserve 14,31,65 7,61

c) Revenue and Other

    Reserves

I) Investment Fluctuation

- -1042,54,43    ReserveII) General Reserve 502,50,35 1448,04,53

II) Statutory Reserve (Foreign) 57,00 503,07,35 6,96,58 412,46,68

d) Dividend (including Dividend Tax)

I) Interim Dividend 124,60,65 - II) Proposed Dividend 127,85,19 252,45,84 207,67,69 207,67,69

TOTAL 1026,46,45 826,95,97

Basic & Diluted Earnings per Share Rs..28.18 Rs.27.10

Balance Sheet as on 31st March, 2007

Amount in Rupees

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(000's Omitted)

 

As on 31.3.2007 As on 31.3.2006

Capital & Liabilities  Capital 365,52,76 365,52,74

Reserves & Surplus 8284,41,00 7478,90,72

Deposits 124915,97,93 93661,99,16

Borrowings 1142,56,16 4802,20,07

Other Liabilities & Provisions 8437,69,61 7083,90,04

Total143146,17,46 113392,52,73

AssetsCash and balances with Reserve Bank of India 6413,52,02 3333,43,34

Balances with Banks and Money at Call and Short Notice 11866,84,51 10121,20,60

Investments 34943,62,75 35114,21,87

Advances 83620,86,98 59911,77,84

Fixed Assets 1088,80,75 920,72,69

Other Assets 5212,50,45 3991,16,39

Total143146,17,46 113392,52,73

Statement of Cash Flow for the year ended 31st March, 2007

(000's omitted)

  Year ended 31.03.2007

Year ended 31.03.2006

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A. Cash flow from operating activities:

Net Profit before taxes 16542587 8920074

Adjustments for :

Depreciation on fixed assets 1942849 1111313

Depreciation on investments (including on Matured debentures)

5442072 6096190

Bad debts written-off/Provision in respect of non-performing assets

2190869 3200090

Provision for Standard Assets 1760349 47400

Provision for Other items(Net) 299718 1836215

Profit/(loss) on sale of fixed assets(Net) -128475 3020

Payment/provision for interest on subordinated debt(treated separately)

2172062 1969417

Dividend received from subsidiaries/others (treated separately)

-318721 -127566

Sub total 29903310 23056153

Adjustments for :

(Increase)/Decrease in investments -3927008 13506034

(Increase)/Decrease in advances -239281783 -168314035

(Increase)/Decrease in other assets -17024574 -2649422

Increase/(Decrease)in borrowings -36596391 31613670

Increase/(Decrease) in deposits 312539877 123285273

Increase/(Decrease) in other liabilities and provisions 10320723 3717501

Direct taxes paid(Net of refund) -4833814 -3536105

Increase in Capital Reserve on a/c of merger of BOBHFL 439034 —

Net cash from operating activities (A) 51539374 20679069

B. Cash flow from investing activities :

Purchase of fixed assets -3914373 -2014206

Sale of fixed assets 328321 186730

Changes in Trade related investments (Subsidiaries & others) 190848 3310300

Dividend received from subsidiaries/others 318721 127566

Net cash from investing activities (B) -3076483 1610390

C. Cash flow from financing activities :

Share capital 2 710000

Share premium 12 15351111

Unsecured Subordinated Bonds 4491000 7700000

Dividend paid including dividend tax -2524584 -2076769

Interest paid / payable on unsecured subordinated bonds -2172062 -1969417

Net cash from financing activities (C) -205632 19714925

Net increase in cash & cash equivalents (A)+(B)+(C) 48257259 42004384

Cash and cash equivalents as at the beginning of the year 134546394 92542010

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Cash and cash equivalents as at end of the year 182803653 134546394

Ratio Analysis

Financial statement analysis may be done for a variety of purposes, which may range from a simple analysis of the short-term liquidity position of the firm to a comprehensive assessment of the strengths

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and weaknesses of the firm in various areas. It is helpful in assessing corporate excellence, judging creditworthiness, valuing equity shares, forecasting bond ratings, predicting bankruptcy, and assessing market risk.

If we want to compare the financial statement of one company with that of the other company it is difficult, as there would be a problem of differences in size of these companies. One way to avoid this problem is to calculate and compare financial ratios of the both the companies.

A ratio is the arithmetical relationship between two figures. Financial ratio analysis is a study of ratios between various items or groups of items in financial statements. Financial ratio has been classified in several ways. They are as follows,

o Liquidity Ratios.

Liquidity ratios to measures the ability to pay interest regularly , finance structure ratios to measure the solvency thus the ability of the company to return the principal amount on maturity. Liquidity refers to the ability of a firm to meet its obligations in the short-run, usually one year. Liquidity ratios are generally based on the relationship between current assets and current liabilities. The important liquidity ratios are, Current Ratio, Acid Test Ratio

o Profitability Ratios.

Liquidity ratios to measures the ability to pay interest regularly , finance structure ratios to measure the solvency thus the ability of the company to return the principal amount on maturity. Liquidity refers to the ability of a firm to meet its obligations in

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the short-run, usually one year. Liquidity ratios are generally based on the relationship between current assets and current liabilities. The important liquidity ratios are, Current Ratio, Acid Test Ratio

o Assets Turnover Ratios.

Asset turnover ratios are basically Productivity ratios which measure the output produced from the given inputs deployed. Assets are the inputs which are deployed to generate production or sales. The same set of assets when used intensively produces more output or sales. If the assets turnover ratio is high, it shows efficient or productive use of inputs or assets. These ratios are based on the relationship between the level of activity, represented by sales or cost of goods sold, and levels of various assets. The important assets turnover ratios are total assets turnover, net fixed assets turnover, inventory turnover, and debtor’s turnover.

o Finance Structure Ratios.

Finance structure ratios indicate the relative mix or blending of owners’ funds and outsiders’ debt funds in the total capital employed in the business. It should be noted that equity funds are the prime fund which increase progressively through reinvestment of profits, while outside debt funds are supplementary funds and are added at the discretion of the management. Management prefers to choose debt only when it helps in enhancing the earnings of equity

o Valuation Ratios.

The valuation ratios are the result of the management of the above four categories of the functional ratios. Valuation ratios are generally presented on the per share basis and thus are more useful to the share holders and the other interested parties may be external.

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It includes the following ratios(1) earning per share(2) dividend per share(3) book value per share(4) earning yield(5) Dividend yield etc.

Valuation ratios indicate how the equity stock of the company is assessed in the capital market. Since the market value of equity reflects the combined influence of risk and return, valuation ratios are the most comprehensive measures of a firm’s performance. Valuation ratios are the result of the management of above categories of the functional ratios. Valuation ratios are generally presented on a per share basis and thus are more useful to the equity investors.

IMPORTANCE OF RATIO ANALYSIS.

Ratios are the relative information which is amenable for comparison. Business units are interested in assessing whether they have progressed or digressed over the period. Ratios transform the absolute rupee data of the financial statements into the pure relative

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unit less information. Following type of comparison can be made with the help of ratios.

1). Intracompany comparison.

Under the intracompany comparison, the relative data of the same company are made with the preceding period. There are two ways through which this can be done,

~ Current year with preceding year. ~ Time series and trend series.

2). Intercompany comparison.

Under this type of comparison, the relative data of company is compared with the other company, industry average, and national average of international standards.

3). Strategic comparison.

Ratios represent the quotient relationships between two relevant variables of the financial statements an individual item to individual item, an individual item to group item or a group item to group item, which develop the meaningful relationships between these two sets of variables. It is necessary to dig out the facts behind the figures.

~ To compare the actual ratios with the budged ratios. ~ It helps in planning the future activities. ~ The comparison of company ratios with competitive company ratios. ~ The comparison with national ratios.

Key Financial Ratios: 2007-08Key Financial Ratios: 2007-08

Return on Average Assets (ROAA)= EBIT___ x 100 Total Assets

=0.89%

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As per the calculation the return on average assets improved from 0.80% to 0.89% on year-to-year basis which shows 11.25% increases than previous financial year. It shows efficient utilization of the total assets of the Bank of Baroda.

Earning per share = Net Profit - Preference Dividend Total Number of Equity Shares

= Rs.39.41 (Rs.28.18 last year)

It shows significant increase in the earning per share by 39.85% compare to other banking companies’ the bank of baroda holds a bulwark over increasing the value of share holders.

Book Value per Share = Equity capital + Reserves – Misc. expenses No. of equity shares

= Rs 261.54 [Rs 231.59 at end-March, 2007]

Bank of baroda’s book value per share has decreased by more than 11%.

Return on Equity (ROE) = Net Profit x 100 Net Worth

=15.07% [12.17% Last year]

Return on equity has increased by 23.82% as compare to last year. It shows efficient utilization of available financial resources, which result in to less operating expenses and higher net profit.

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Cost-Income Ratio = Total operating expenses Net Profit

= 49.21% (51.30% last year)

The cost income ratio shows proportion between total expense incurred and net profit realized. The higher the ratio the less efficient utilization of resources, but here the ratio has shown the declination by more than 5% that means it has used its resources effectively and also shown improvement in cost control.

Introduction to the small-scale enterprises

Small (Manufacturing) enterprises: Enterprise engaged in the manufacture/production or preservation of goods and whose investment in plant and machinery ( Original cost excluding land and building and the items specified by the Ministry of small scale

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Industries vide its notification No.S.O.1722(E) dated October 5,2006.).does not exceed Rs.5 Crore.

Small (service) enterprises: Enterprise engaged in the providing/rendering of services and whose investment in equipment ( Original cost excluding land and building and furniture, fittings and other not directly related to the service rendered or as may be under the micro small and medium enterprises development (MSMED),Act 2006 )

does not exceed Rs.2 crore.

Micro (Manufacturing) enterprises: Enterprise engaged in the manufacture/production or preservation of goods and whose investment in plant and machinery ( Original cost excluding land and building and the items specified by the Ministry of small scale

Industries vide its notification No.S.O.1722(E) dated October 5,2006).does not exceed Rs.25 lakh, irrespective of the location of the unit.

Micro (service) enterprises: Enterprise engaged in the providing/rendering of services and whose investment in equipment ( Original cost excluding land and building and furniture, fittings and other not directly related to the service rendered or as may be under the micro small and medium enterprises development (MSMED),Act 2006 )

does not exceed Rs.10 lakh.

Medium (Manufacturing) enterprises: Enterprise engaged in the manufacture/production or preservation of goods and whose

49

investment in plant and machinery ( Original cost excluding land and building and the items specified by the Ministry of small scale

Industries vide its notification No.S.O.1722(E) dated October 5,2006.) is more than Rs.5 crore but does not exceed Rs.10 crore.

Medium (service) enterprises: Enterprise engaged in the providing/rendering of services and whose investment in equipment ( Original cost excluding land and building and furniture, fittings and other not directly related to the service rendered or as may be under the micro small and medium enterprises development (MSMED),Act 2006 ) is more thanRs.2 core but does not exceed Rs.5 crore.

Khadi and Village industries Sector (KVI): All advances granted to units in KVI sector, irrespective of their size of operations, location and amount of original investment in plant and machinery. Such advances will be eligible for consideration under the sub target (60 per cent) of the small enterprises segment within the priority sector.

:Significance of SMEs in Indian Economy :

The Indian industrial economy is characterized by a dynamic and versatile set of enterprise actors, who are small and medium in terms of scale of operations. This SME category has been leading a typical competitive advantage to Indian industry in terms of controlling sufficient markets globally. It is because of their ability to make available low-volume customized products, flexible response

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and lower fixed overhead costs. The other typical behavior of these SME’s is that in most of the cases depending upon their specialization, they have evolved as clusters.

The small scale sector produces a wide range of products, from simple consumer goods to highly precision and sophisticated end-products. As ancillaries, it produces a variety of parts andcomponents required by the large enterprises. The sector has emerged as a major supplier of mass consumption goods like leather articles, plastics and rubber goods, fabrics and ready-made garments, cosmetics, utensils, sheet metal components, soaps and detergents, processed food and vegetables, wooden and steel furniture and so on. More sophisticated items manufactured by thesmall scale sector now include television sets, electronic desk calculators, microwave components,air conditioning equipment, electric motors, auto-parts, drugs and pharmaceuticals.

The importance of SME’s as compared to Corporate Enterprises with regard to their contribution towards Indian economy can be best understood that they have a share of 40% in terms of volume, 80% in terms of employment, 60% in terms of exports and 92% in terms of number of enterprises. These figures are indicative of the economic significance of SME’s.

S No. Contribution to Indian Economy

Corporate Enterprises (%)

SME’s (%)

1 In terms of volume 60 402 In terms of employment 20 803 In terms of exports 40 604 In terms of no. of

enterprises7 to 8 92

: The following are the main reasons for the promotion of small-scale industrial units:

 1. It has proved to be a powerful instrument for a rapid and

decentralized growth of a developing economy like  India with a large army of unemployed labour and scarcity of capital resources.

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2. The small scale sector is considered as an important means for checking concentration of economic power in a few hands and bringing about economic dispersal and more equitable distribution of national income.

3. This sector is also considered very effective in promoting the industrial development of backward area.

4. It also helps in checking the unplanned migration from rural and semi-rural areas to the urban areas.

5. It greatly encourages the development of new entrepreneurial initiative and thereby injects competitiveness in our industrial economy.

6. Small scale sector also assumes great significance from India's stand point since this sector accounts for more than 35 percent of India's total exports.

:MSMEs and their role in socio economic development:

The importance of Micro, small and medium enterprises (MSME) for its contribution in the Indian economy growth is a matter of record and needs no further elaboration. However with the changing focus from economic growth to inclusive growth, MSMEs sector role in the socio economic development of India needs to be understood, explored and facilitated. What is so significant about MSMEs that makes them special in their relation to socio economic development of the country? Here are few facts which may give answer to this question.(1) Wide spread reach: There are around 12.34 million (1) MSMEs, including 1.9 million registered one which are spread out across the length and breadth of India. They may be touching the lives of 123.4 million directly or indirectly which is roughly 10% of India’s population.

(2) Major share in GDP: MSMEs combined output is roughly 7% of country’s Gross Domestic Production (GDP).(3) Big employment generator; MSME sector is the second largest manpower employer in the country next only to agriculture sector. It provides employment to more than 20 million people which is roughly 2 % of country’s population. Looked from social angle, it helps in

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solving the unemployment and under-employment problem in the society.(4) Facilitates balanced regional development: Dispersion of MSMEs in all parts of the country helps in removing regional imbalances by promoting decentralized development of industries. MSMEs can be found every where, which may be rural, urban, coastal, desert, mountains, forest, backward/ forward areas. This decentralized concept also helps in reducing the other problems like pollution, congestion, housing, sanitations etc.(5) Helps in equitable distribution of wealth/ income: When the entrepreneurial talent is allowed to grow in different regions and areas, the income is also distributed instead of being concentrated in the hands of few. This help in solving a big social issue of bridging the gap between rich and poor.(6) Act as nursery for entrepreneurship: MSMEs provide a natural habitat for entrepreneurs. Through this platform, the latent/ raw talent available locally can hone their skills and talents, to experiments, to innovate and transform their ideas into goods and services needed by the society.

The table below represents several parameters regarding the performance of the small scale sector in India from

1973-74 to 2001-02:

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Comparative performance of SSIs in terms of compound annual growth rate

Areas of performance

Compound annual growth rates (in  %)

From 1973-74 to 2001-02

From 1973-74 to 1990-91

From 1991-92 to 2001-02

No. of units 7.86 9.51 5.22

Production 17.70 19.80 14.47

Employment 5.80 6.99 4.01

Exports 20.4 20.73 17.77

:The Growth Story Of Indian SMEs:

The economic performance of India has often been equated with the slow growth rate of around 3.5 % never quite entering into the ‘take off’ stage of the Rostow's model. Some economists believed, as though the nation was destined for it. At the time of India's

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independence in the year 1947, the nation had a plethora of serious problems to face, viz. shortage of food-grains, poor infrastructure,lack of financial resources, high rate of illiteracy and poor industrial base. To build the nation's economy, following the socialist path of development an overwhelming importance was attached to the public sector units, which the first Prime Minister of India called them "Modern Temples of India.

The Industrial Policy Resolution of 1948, which marked the evolution of Indian Industrial Policy, outlined the broad contours of the policy and defined the role of the state in industrial development both as an entrepreneur and a regulatory authority. In order to optimize the utilization of scarce resources and reduce the threat of re-colonization by the multinationals, centralized planning was adopted with wide ranging controls on private trade, investment, land ownership and foreign exchange.

The foundations of the policy for the small-scale industry were laid in the Second Five Year Plan.

In 1956, the government announced its second industrial policy which unambiguously chose equity as the guiding principle for small industry development. The operative statement says: “small scale industries provide immediate large scale employment, offer a method of ensuing a more equitable distribution of national income and facilitate an effective mobilization of resources of capital and skill which might otherwise remain unutilised”.

1977 Policy Statement:

A high watermark in the evolution of the policy for small industry was the ‘Industrial Policy Statement’ of 1977. It was then that the protection of small industry touched its acme. The important planks of the 1977 industrial policy statement were:

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Whatever can be produced by small, cottage industries must only be so produced.

The number of products reserved for SSI was increased from 180 to 504 an further to 836 items in 1996.

Special attention to be given to the `Tiny Sector’ defined as enterprises with investment inplant and machinery of upto Rs. 1 lakh and situated in towns and in villages with population less than 50,000.

Special Legislation will be introduced to give due recognition and adequate protection to the self-employed in cottage and household industries.

Special arrangements for marketing of the products of Small Scale Sector will be made by providing services such as product standardization, quality control, marketing surveys, etc.

1980 Policy Statement:

The recognition of the importance of ancillary industry found expression in the policy statement of 1980 which laid emphasis on ancillaries. Moreover, the program for the development of rural and backward areas was accelerated. The Industrial Policy Statement of 1985 made incremental changes and took into account the impact of inflation. The investment ceiling for SSI was raised to Rs.35lakh and for ancillaries to Rs.45lakh.

Leading to a liberal regime :

The Industrial Policy of July 1991 marks a conscious shift from the regulated and controlled policy to a liberal one. Most of the medium and large industrial units, with a few exceptions, would no longer need licenses. Full foreign ownership will henceforth be possible in export – oriented enterprises. Import of capital goods has been significantly made free from restrictions. Foreign equity participation is also encouraged. The openness that has come with the ongoing economic reform process during the last five years has hastened several changes and the debate has shifted from the 'whys' to 'hows' indicating high level of acceptability of the reform process. With the lifting of several trade and investment related restrictions, India is

56

witnessing a mini-revolution in its economic growth faced with the challenges of global market and competitiveness.

Impact is felt now :

The impact of these reforms that were started in the year 1991-92, is now becoming clear as per the Economic Survey for 1995-96. Salient features of the economic growth in the post-liberalization era are given as under:

Growth of GDP at factor cost during 1995-96 is estimated to be 6.2% in 1994-95 that has gone up from a level of 0.8% in the crisis year of 1991-92.

After a low employment growth during the crisis year of 1991-92, annual total employment growth has averaged at 6.3 million jobs per year over 1992-93 to 1994-95 and has reached 7.2 million during 1994-95. The Gross domestic savings rates touched a record high of 24.4%. Real gross and capital formation also reached a record of 22.2% in 1994-95.

After declining by 6.2% in the crisis year 1991-92, the growth of real wages of unskilled agricultural labor averaged 5.1% per annum in the following three years.

Provisional estimates by the Planning Commission indicate that in 1993-94, the incidence of poverty had declined to below 19% of India's population.

After registering a decline in the dollar value of exports in 1991-92, the country has witnessed a strong three year boom with annual export growth averaging 19% during the period 1993 to 1996.

The following table depicts the growth of small-scale industries since 1975-76.  It reveals that the growth of the small-scale industrial units has out paced the growth of total industrial sector:

 

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Comparative growth of small scale industries and industrial sector (in percentage)

Year SSI Sector Industrial Sector1975-76 17.9 6.71976-77 10.2 9.51977-78 12.7 4.21978-79 10.2 7.61979-80 14.0 (-1.6)1980-81 8.8 4.01981-82 8.5 9.31982-83 8.1 3.21983-84 10.3 6.71984-85 12.0 8.61985-86 12.8 8.71986-87 13.2 9.21987-88 12.7 7.31988-89 13.4 8.61989-90 NA NA1990-91 NA NA1991-92 3.1 0.61992-93 5.6 2.31993-94 7.1 6.01994-95 10.1 9.41995-96 11.4 12.11996-97 11.32 5.61997-98 8.43 6.71998-99 7.70 4.1

1999-2000 8.16 6.52000-2001 8.23 5.0

Drawbacks of Indian SMEs

Small and medium scale organisations are considered backbone of economic growth in all countries. Sinceeconomic reforms in 1991, Indian small and medium enterprises (SME) are facing a very different scenario compared with the protective environment of the

58

past. Due to global competition, technological advances and changing needs of consumers, competitive paradigms are continuously changing. These changes are driving firms to compete,simultaneously along several different dimensions such as design and development of product, manufacturing, distribution, communication and marketing.

:Barriers for Indian SMEs:

:Managerial barriers:

As the man behind the machine is the most important, I will take up the managerial barriers to innovation in the context of Indian SMEs, first. India, as you know, was a protected market economy before liberalization.The Indian industrial environment was traditionally identified by its regulative and protective characteristics. Till, 1990, the Indian economy was inward looking and protected from internal and external competition. In the absence of competition, firms did not develop the technological capability needed for penetrating the global market. This decades long protective environment also reduced the risk taking capacity of the SME manager and made him complacent and averse to risk. He chose to avoid risky situations. Earlier, Indian firms had quite often followed an opportunistic approach to growth, as opposed to capability driven approach that seeks to strengthen key aspects of manufacturing. Consequently, firms have paid very little strategic attention to their shop floors in the last few decades. Today Indian industry is facing tough competition from imports in the domestic markets also. This competition is in terms of new designs, new usages, reduced cost, improved quality, products with higher performance and variety, better services, all delivered simultaneously to enhance values to the customers.

:Financial barriers: The non-availability of institutional finance on affordable and easy terms is hindering access to new technologies. In India the situation is further complicated by the fact that the preferred mode of finance is either self or other sources

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:Technological barriers: Technology is the key to enhancing a company's competitive advantage in today's dynamic information age. SMEs need to develop and implement a technology strategy in addition to financial, marketing and operational strategies, and adopt the one that helps integrate their operations with their environment, customers and suppliers

:Assistances and promotions to SMEs by Government:

Institutional Support Structure for SMEs in India

(1)At Federal Level:

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Ministry of SSI Ministry of ARI Small Industries Development Organisation (SIDO) National Small Industries Corporation(NSIC) Khadi & Village Industries Commission(KVIC) Coir Board Entrepreneurship Development Institutions (EDIs)

(2) At State Level

Directorate of Industries District Industries Centres State Finance Corporation State Industrial Development Corporation Technical Consultancy Organisations Entrepreneurship Development Institutions (EDIs)

(3) Others

Industry Associations NGOs Banks/Financial Institutions

ABOUT NATIONAL SMALL INDUSTRIES CORPORATION

The Government of India through its Ministry of Commerce & Industry in Collaboration & deliberation with the National Planning Commission and International planning team (Ford Foundation) decided to set up NSIC in 1955 with mandate:

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“To aid, counsel , assist, finance, protect and promote the interest of Small Industries in India” VISION: To be a premier organisation in the country fostering the growth of small enterprises including Tiny and Service Enterprises

MISSION: To enhance the competitiveness of Small Enterprises by providing integrated support services under Marketing, Technology and Finance.

The Corporation is a fully owned entity of the Government of India.

:INTEGRATED SUPPORT PROVIDES BY NSIC: Marketing Support:

Single Point Registration Scheme under Govt. Stores Purchase Programme. Consortia & Tender Marketing Raw material Distribution Exhibitions & Buyer Seller Meets Export Facilitation

Technology Support:

Advise on application of new techniques Material testing facilities through accredited laboratories Product design including CAD Common facility support in machining, EDM, CNC, DNC etc. Energy and environment services at selected centres Classroom and practical training for skill upgradation

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Credit Support:

Finance for procurement of Raw Materials Finance for Marketing Credit facilitation through linkage with banks Limited Financing for Equipments

SUPPORT SERVICES:

Performance and Credit Rating Scheme Information Support Mentoring and Advisory Services Software Technology Park Technology Business Incubator International Consultancies & International Cooperation Display Centre & Exhibition Complex Marketing Development cum Business Park(Proposed)

Enables small enterprises to ascertain their strengths and weaknesses of their existing operations and take corrective measures to enhance their organizational strength.

An independent, trusted third party opinion on capabilities and credit worthiness of SSI units is taken.

Good rating enhances the acceptability of the SSI units with Banks, FIs, SSI’s customers and buyers.

Facilitate prompter credit decisions from Banks on proposals of SSI units.

Empanelled agencies: ICRA, ONICRA, Dun & Bradstreet, CRISIL, FITCH and CARE, SMERA

Performance and Credit Rating Scheme:Conceptual Frame-work for Development of a Cluster:

Definition of a cluster :

A cluster may be defined as a local agglomeration of enterprises (mainly SMEs, but often also including some large enterprises), which are producing and selling a range of related and complementary products and services. An example can be a localized leather

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industry which includes leather tanning units, leather finishing units, leather goods producers, leather garment manufacturers, designers, sub-contractors, merchant buyers and exporters etc. It must be, however, highlighted that a cluster is not merely ahardware, consisting of a group of industries located in a particular area .Its success and dynamism are highly dependent on the software i.e. the linkages and relationships that get established or are consciously established over a period of time. The precise definition of a cluster based on quantitative parameters may vary from country to country.

Typology reflects only a static view :

Clusters can be categorized in different ways. But before developing the typology, it is important to realize that such classifications may help to provide useful first static insight into the structure of a cluster, but need not present a dynamic picture of that. Therefore typology should not be used to generalize any policy prescriptions. Secondly, the categorization of a cluster into a specific type during the course of its evolution or later due to changes in the international scenario may change.This typology presented as under is therefore a first cut at taking stock and organizing the information on clusters in India and any further understanding of how the specific clusters function would require detailed analysis of each cluster.A total of 138 clusters have been chosen as a sample to understand the current scenario of clusters in India. These clusters have been chosen and categorized based upon the judgment of informed persons, available write-ups and studies, each one cross checked & reconfirmed from several possible sources to improve the reliability of information. Due to the scarcity of research studies available for most of these clusters, this improvised method of data collection is entirely the responsibility of the researcher with a few possible limitations or differences in view point. Typology based on stage of development : An important way of categorization has been developed by the researchers of this study which is based upon the stage of development of a cluster at a static period of time. Development of a cluster could conceptually be divided into four distinct phases : namely the 'Initial phase', 'Growth phase', 'Maturity phase' and 'Extinction phase'.

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Initial Phase :

In this stage of cluster formation, only a handful of units establish themselves and based on their success, several other units come up in the subsequent stages. The formation of cluster may be natural, based upon high demand potential and private initiative or may be induced due to policy incentives, infrastructure availability or a large buying public sector unit. The reason may also be the availability of critical raw material or specific skills, as in case of most traditional clusters. The example of natural cluster based on raw material resources would be 'marble cutting' cluster at Kishangarh in Rajasthan while a demand based cluster would be 'ready-made garments' at Indore and Mumbai. The examples of induced clusters would be automobile component industry at Gurgaon due to the setting up of the public sector car manufacturing unit of 'Maruti Udyog limited' and another example may be cited as of petro-chemical based industry at Vadodra due to setting up of 'Indian Petrochemical Industries Ltd', another public sector undertaking.The firms, in the initial stage, develop the man power and help setting up of ancillary or subcontracting firms. They also contribute to the development of support institutions and other enterprises with the rise of demand for them. The initial phase is likely to be characterized by slow growth and high costs. There are a few competitors in the cluster at this stage, so it is possible to pass on the cost to the consumer by charging higher than that in the later stages of development. An example of a cluster in the initial stage is floriculture industry at Bangalore, Pune and Gurgaon.

Growth Phase :

The second phase characterizes rapid development of the industry, intervention by support institutions including government institutions and consolidation of other raw material and service providers. New firms enter the market and thus the competition increases. This increased competition encourages technology development and expansion into new markets. The growth is usually fueled by the

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widening of national or international markets that the cluster caters to. Both in the spheres of marketing and management, innovative means are likely to be developed thus reducing the overall decline in the prices. Since the industries go through their cycles of recessionand growth, a cluster that is not currently in the growth stage may reach that stage later. An example of the industry currently in the growth stage is “automotive components industry” that was pushed back from maturity stage because of the industry for new cars and other automotive vehicles had been allowed to be set up first during the early 1980s in India and subsequently with the onset of liberalization several MNCs set up their base in India. From the sample of 138 clusters under study it was observed that 38 of them are in the Growth Phase.

Maturity Phase :

The third phase is characterized by the growth of the cluster slowing down due to over capacity generally created in the cluster and resultant very high competition amongst the units. The data seems to suggest that in the Indian context so far, the stage of maturity lasts longer than the previous two stages. During the maturity phase strong input of research & development may be needed to reduce costs, increase productivity and add new product features to stay ahead of the competition. As a natural outcome, weak units begin to wither away creating space for the healthier units to continue to survive. Several studies have shown how 'mature' clusters that were overwhelmed by technological change at one point of time, regenerated themselves back into the growth stage as aresult of choices made by local actors and groups. This represents the transformation and re-invention. The examples of the matured clusters would be “ the electric fans cluster ” in Calcutta, “sewing machines cluster “ in Ludhiana and 'stationery diesel engines cluster ' in Rajkot. Out of the 138 clusters, 100 of them seem to be in the category of mature clusters which represent 72.5 % of the clusters, reflecting the prevalence of a lengthy duration of this phase among the clusters.

.

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Extinction Phase :

If due to wide ranging technological changes that the cluster is unable to cope with or due to change in the life styles, a product is no longer in demand, the cluster may go to face extinction. Another reason may be the erosion of competitiveness because of increase in the labor costs in the cluster. However the same industry may find itself viable in a different location where favorable conditions exist for the survival and growth of the cluster. One example of such a cluster is related to shoddy yarn made from recycled wool which shifted itself from Prato in Italy to Panipat in India where not only the skills existed due to the presence of textile industry and the cheap labor but also thefavorable market for the shoddy yarn existed. During the last decade, Panipat has grown to be a cluster of 700 carding machines each on an investment of Rs. 7 million (USD 200,000). Now there is hardly any such unit in Prato in Italy. In the Indian case , tile industry cluster based in Mangalore with a history of 175 years has now gone into oblivion due to the stated reasons of scarcity of raw material and fire wood and accentuated with increased competition from China in the export market.

Exceptions may occur :

There may be exceptions to the above stages of development in some of the clusters. The growth and maturity phases may in certain cases be inseparable thus making it difficult to assign one of the two stages to such specific clusters. Secondly, the transition from one stage to another may not be smooth as reflected in the ‘S’ curve but could be quite jerky due to certain internal or external changes that may crop up.

Micro, Small & Medium Enterprises Development (MSMED) Act 2006

Central Govt. decided to bring into India, the concept of Small and Medium Enterprises in the place of small-scale sector, as per the suggestions by the western giants through WTO. The MNCs who had invested in India also favoured such a move, since the small scale of the foreign land would not fit into the small-scale definition in India

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and that they can not come into India and claim concessions from Govt.

This pressure from outside made Govt, of India propose SME Bill in 2003. When the draft bill came into the knowledge of the small scale NGOs, there was wide-spread denouncement of the same from the Associations all over India. The Govt. then constituted a Parliamentary Committee to travel through India and meet SSI stalwarts to know their views and to submit a report with remedial suggestions.

The MPs were all unanimous in accepting the objection of the SSI sector on the total neglect of the welfare of the Tiny sector in the proposed Bill, in which the sector was treated at par with Medium Scale Units with investment of Rs. 10 Crores. All clamoured that the Tiny sector should find a separate place in the Act with special benefits.

Based on the recommendations of the Parliamentary Committee, the old SME bill had been rechristened as MSMED Act. The first letter “M” here stands for “Micro”, which is same as the old “Tiny”.

The MSMED Act was passed in the Parliament in May 2006 and gazetted in July. The date of effectuation is yet to be notified

:The important clauses of the Act are renderd hereunder:

The maximum credit period permissible under agreement between the supplier and the buyer is 45 days (Sec 15)

For default beyond the permissible credit period or in the absence of any credit agreement, from the date of delivery of goods, a penal interest at 3 times the bank rate notified by RBI, shall be payable at compound rate calculated on monthly rests. (Sec 16)

One or more Micro and Small Enterprises Facilitation Councils will be constituted by the State Govts., comprising of minimum 3 members and maximum 5 members consisting of Director of Industries, MSE Associations, Banks and Persons with special knowledge in Industry, Finance etc. (Sec 20 & 21)

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The Council will first conciliate for amicable settlement. On failure, it shall arbitrate and give Award. [Sec 18 (2) & (3)]

The Council will have jurisdiction to act in a dispute between the supplier within its jurisdiction and a buyer located anywhere in India. [Sec 18(4)]

The petition filed shall be decided within 90 days by the Council. [Sec18(5)]

For appeal against the Award of the Council, appeal will lie before appropriate judicial Courts. It is mandatory to deposit 75% of the Award amount in the Court for preferring the appeal. Pending disposal of the appeal, the Court has discretion to release suitable part of the deposit to the supplier, depending on the dire financial need of the supplier. (Sec 19)

In the audited accounts of the buyer, details of defaulted amounts, penal interest paid or payable etc have to be furnished. Further under IT Act, the default-interest amounts shall not be allowed as deduction. (Sec 22)

The delayed payment provisions in the Act shall apply notwithstanding any contrary provisions existing under any other Law. (Sec 24)

:Conclusions:

Today organizations are knowledge based and their success and survival depend on creativity, innovation, discovery and inventiveness. An effective reaction to these demands lead to

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innovative change in the organization, to ensure their existence. The rate of changes is accelerating rapidly, as new knowledge idea generation and global diffusion are increasing. Creativity and innovation have a bigger role in this change process for survival.

SMEs have to learn and imbibe the process of innovation, in their day to day working, to remain competitive. Instead of looking for support from other agencies, they have to find their own ways of overcoming barriers. Despite all the barriers and gaps which I have stated before, Indian SMEs have continued on their path of progress. In fact, their rate of growth is higher than the rate of growth of the industry sector as a whole, their contribution to our GDP is almost 7%. In the past also, our SMEs have shown enough strength, vigour and resilience and in current situation they will not only survive but win also. By contributing higher than industrial sector for our economy , Smes have proved that they are growth engines for Indian economy.

BIBLIOGRAPHYBIBLIOGRAPHY

Sr. No. DetailsMagazines & Reports

01. Business World02. The Economic Times

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Books Author01. Accounting for Management D.R. Patel02. Financial Management Prasanna Chandra

Web-sites01. www.bankofbaroda.co.in02. www.chickmagalur.nic.in03. www.thehindubusinessline.com04. www.annualmeeting2005.insme.org05. www.mcciapune.com06. www.indcom.tn.gov.in07. www.unido.org08. www.wardha.nic.in09. www.maharastra.gov.in10. www.domainb.com11. www.ficci.com12. www.banknetindia.com13. www.smera.com14. www.expresstextile.com15. www.iiaonline.in16. www.partnershipsummit.com17. www.businessworldindia.com18. www.laghu-udhyog.com19. www.coirboard.nic.in20. www.sidbi.com

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