financial performance and sickness

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Chapter VII

FINANCIAL PERFORMANCE AND SICKNESS OFSMALL SCALE INDUSTRIAL SECTOR IN

PUNJAB AND HARYANA

The changing global economic scenario has thrown up many opportunities

and challenges in front of the small scale industrial sector. Capital availability and

its formation is a necessary concomitant to enhance productivity and look for new

markets in other countries. Availability of sufficient funds is a pre-requisite for the

mobilisation of real resources for organising production. It would be imprudent to

plan for industrial development without ensuring the provision of adequate and

timely finance and credit facilities. The issue of credit dispensation is especially

important for small scale industrial units because of greater dependence on

borrowed capital in their day to day operations. Small scale industrial units

invariably rely on the friends, relatives or borrow from money lenders at

exorbitant rate of interest for initiating the enterprise and later on try to obtain loan

from banks and other financial institutions. Though, government of India has been

laying emphasis on providing financial and technological support to small scale

industrial sector through initiation of various measures, the most significant being

the setting up and promotion of Small Industries Development Bank of India, yet

lack of adequate and timely financing on competitive terms remains the single

most important constraint to the growth and development of this vital sector. The

demand for finance, implicit as well as explicit, from small scale industrial sector

will be substantial considering its size, structure, growth pattern, need for

restructuring and technology development (Bala Subrahmanya et. al., 2002).

Although small scale industrial sector of Punjab, Haryana and All India

experienced growth in terms of number of units over the period, yet these units


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suffer from paucity of funds and heavy overhead burden leading to severe resource

crunch. To fulfill the economys warranted growth rate and to successfully bear

upon both national and international competition in the wake of current reformedera and accelerated pace of deregulation of financial sector, it becomes imperative

to examine the performance of small scale industrial sector from the financial

perspective. In this context, present chapter endeavours to analyse the financial

performance and sickness in small scale industrial sector of Punjab, Haryana vis-a-

vis All India alongwith the assessment of working capital requirements in the

reformed era. To present the analysis, in a lucid way the chapter has been divided

into four distinct sections. Section-I focuses on financial infrastructure alongwith

various policy measures undertaken by the Government for the development of

small scale industrial sector. Section- II provides the definition of sick units along

with magnitude of sickness in the small scale industrial sector of Punjab, Haryana

vis-a-visAll India, whereas, Section-III examines the estimates of working capital

gap in small scale industrial sector of Punjab, Haryana vis-a-visAll India during

the period 1981-82 to 2006-07.The growth rate of working capital gap have also

been calculated for the aggregate period (1981-82 to 2006-07) as well as for the

two sub-periods, viz. pre reforms period (1981-82 to 1990-91) and post reforms

period (1991-92 to 2006-07) and the last section concludes the discussion

alongwith policy implications.

Section-I

The institutional credit acts as a catalyst and lubricates in the process for

vigorous growth of the small scale industrial sector so as to accelerate the

countrys economic growth. Availability of credit would contribute to the

modernisation of the sector and enhance its productivity and competitiveness.

*The comparable data regarding sick small scale industrial units in Punjab, Haryana and All India was

available since 1986-87.


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Indian credit system, as it has emerged, is a product of evolution as well as

intervention. The broad objectives of the policy have been to (i) institutionalise

credit (ii) enlarge its coverage and (iii) ensure the provision of timely and adequate

credit at reasonable interest rates to large segment of the population as far as

possible. In this context, the objective of the present section is to discuss in detail

the financial infrastructure and various support measures undertaken by the

government for the development of this sector.

Institutional Structure of Small Scale Industrial Sector

In order to give more impetus to small scale industrial sector, a number of

central and state level institutions have been set up to look after different aspects

of the development programmes government also established the Ministry of

Small Scale Industries and Agro and Rural Industries (SSI and ARI) in 1999, as

the nodal Ministry for formulation of policies and central sector programmes/

schemes, their implementation and related co-ordination, to supplement the efforts

of the states for promotion and development of these industries in India. The

ministry of small scale industrial sector and ARI was bifurcated into two separate

ministries, namely, ministry of small scale industries and Ministry of Agro and

Rural Industries in 2001. The role of the Ministry of Small Scale Industries is thus

to mainly assist the States in their efforts to promote growth and development of

the small scale industrial sector, enhance their competitiveness in an increasingly

market-led economy and generate additional employment opportunities. The

specific programmes undertaken by the organisations of the Ministry seek to

provide one or more of the following: (i) Adequate credit from financial

institution/banks; (ii) Funds for technology upgradation and modernisation; (iii)

Integrated infrastructural facilities; (iv) Modern testing facilities and quality

certification laboratories; (v) Access to modern management practices,


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entrepreneurship development and skill upgradation through appropriate training

facilities; (vi) Assistance for better access to domestic and export markets; and

(vii) Cluster-wise measures to promote capacity-building and empowerment of the

units in addition to all or some of the above mentioned supports. The Ministry of

small scale industry is supported by a host of other Central/State Government

departments, promotional agencies, autonomous institutions, non-government

organisations etc. which provide for small scale industrial sector in different ways.

Central Level Organisations

Small Scale Industries Board (SSIB)

The government of India constituted a board, namely, Small Scale

Industries Board (SSIB) in 1954 to advice on development of small scale

industries in the country. The SSIB is also known as central small industries

board. The range of development work in small scale industries involves several

departments /ministries and several organs of the central/state governments.

Hence, to facilitate co-ordination and inter-institutional linkages, the small scale

industries board has been constituted. It is an apex advisory body constituted to

render advice to the government on all issues pertaining to the development of

small scale industries.

Small Industries Development Organisation (SIDO)

SIDO is created for development of various small scale units in different

areas and is a subordinate office of department of SSI and ARI. It is a nodal

agency for identifying the needs of small scale industrial units coordinating and

monitoring the policies and programmes for promotion of the small scale

industries. It undertakes various programmes of training, consultancy, evaluation

for needs of small scale industrial sector and development of industrial estates. All


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these functions are taken care with 27 offices, 31 SISI (Small Industries Service

Institute), 31 extension centers of SISI and 7 centers related to production and

process development.

National Small Industries Corporation (NSIC)

The National Small Industries Corporation (NSIC), an enterprise under the

Union Ministry of Industries was set up in 1955 in New Delhi to promote aid and

facilitate the growth of small scale industries in the country. National Small

Industries Corporation provides a wide range of services to the small scale

industrial sector in the fields of marketing, equipment financing, technology

upgradation, exports, training and common facilities. Over the years NSIC has

proved its strengths within the country and abroad by promoting modernisation,

quality consciousness, strengthening the linkage of the small with large and

medium enterprises and enhancing exports of the small scale industrial sector.

Small Industries Service Institutes (SISI)

The small industries service institutes have been set up in state capitals and

other places all over the country to provide consultancy and training to small

entrepreneurs both existing and prospective. The main functions of SISI include:

(i) To serve as interface between central and state government.

(ii) To render technical support services.

(iii) To conduct entrepreneurship development programmes.

(iv) To initiate promotional programmes.

State Level Organisations

The promotion and development of the small scale sector primarily rests

with the State government. The Directorate of Industries (DIs), District Industries


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Centre (DICs), the State Small Industries Development Corporations (SSIDCs)

and State Financial Corporations (SFCs) are the major state level institutions set

up by the government alongwith commercial banks to support the small scale

sector. The major thrust of the state government programmes is to provide a sound

infrastructure base and support to entrepreneurs of small and medium enterprises.

Directorate of Industries (DIs)

The directorate of Industries is the executive agency for the promotion and

development of the village and small scale sector. The functions of DIs are both

regulatory and development in nature. The DIs have a network of District

Industries Centres at the District Level, Industrial Offices at the sub-divisional

level and extension offices at the block level, functioning under its control.

District Industries Centres (DICs)

The scheme of District Industries Centres was introduced in 1978 with the

prime objective to provide a focal point for the development of small scale

industrial sector. These centres were charged with the responsibility of providing

all the services and support required at pre investment and post investment stages

to the small scale entrepreneurs and institutions setting up modern small scale

units and traditional cottage industries. The district industries centres provide and

arrange a package of assistance of facilities for credit guidance, raw materials,

training and marketing alongwith necessary help to unemployed educated young

entrepreneurs. These centres establish close links with Development Blocks on

one hand and with specialised institutions concerned with the development of

small industries on the other hand. The institutional support for the promotion of

small scale industrial sector is summarised in Table 7.1.


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TABLE 7.1

INSTITUTIONAL SUPPORT FOR PROMOTION OF SMALL

SCALE INDUSTRIAL SECTOR

Institutions Major Activity

A. Central Level

Small Industries Development Organisation

(SIDO)

Apex Body for SSI Promotion

1. Small Industries Service Institutes (SISIs)

(28), Branches (30), Extension centres (38),

Field Testing Centres (18), Productioncentres 94) and Foot wear training centres

(6) etc.

Training Manpower resources for

promotion of SSI

2. National Small Industries Corporation

(NSIC)

Marketing machinery on hire

purchase, import of raw materials,

exhibition etc.

3. National Institute of Small Industries

Extension Training (NISIET)

Research, Training, Consultancy,

etc.

4. National Institute for Entrepreneurship and

Small Business Development (NIESBUD)

Co-ordination of Entrepreneurship

Development Programmes (EDP)organised by various EDP

Institutions in the country

5. Small Industries Development Bank of

India (SIDBI)

Finance, direct and indirect

assistance.

B. State Level

1. Directorate of Industries State level apex body for SSI

promotion

2. Small Industries Development Corporation(SIDC) Promotion of SSI throughindustrial estate, etc.

3. Small Industries Marketing Corporation

(SIMC)

Long Term Finance

C. District Level

District Industries Centres

Provision of multiple services and

support under a single roof.

Source: Development Commissioner, SSI, New Delhi


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State Small Industries Development Corporations (SSIDC)

The State Small Industries Development Corporations were sets up in

various states under the companies act 1956, as state government undertakings to

cater to the primary developmental needs of the small tiny and village industries in

the state/ union territories under their jurisdiction. Incorporation under the

companies act has provided SSIDCs with greater operational flexibility and wider

scope for undertaking a variety of activities for the benefit of the small sector. The

important functions performed by the SSIDCs include:

(i) To procure and distribute scarce raw materials.

(ii) To supply machinery on hire purchase system.

(iii) To provide assistance for marketing of the products of small-scale industries.

(iv) To construct industrial estates/sheds, providing allied infrastructure facilities

and their maintenance.

(v) To extend seed capital assistance on behalf of the State government and

provide management assistance to production units.

State Financial Corporations (SFCs)

State Financial Corporations (SFCs) came into being under the provision of

the SFCs Act, 1951. These corporations were mandated to serve as regional

agencies for promoting balanced regional growth through the development of

small and medium enterprises by grant of term loan and participation in their

equity base in the country. Their main objectives are to provide financial

assistance to industries, catalyse investment, generate employment and widen the

industrial base. Moreover, these also operate scheme of refinance of Small

Industries Development Bank of India (SIDBI) and have tailor made financial

schemes for artisans and special target groups.


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Financial Institutions Providing Credit to SSI Sector

In providing credit to SSI sector multiagency approach has been adopted

so as to take advantage of the strength of different institutions comprising (i)

Scheduled Commercial Banks (SCBs) consisting of public and private sector

banks, and foreign banks (ii) Regional Rural Banks (RRBs) (iii) District Central

Cooperative Banks and Primary Agricultural Credit Societies (iv) Urban

Cooperative Banks (v) Small Industries Development Bank of India (SIDBI) (vi)

State Finance Corporations (SFCs) and (vii) Small Industries Development

Corporation (SIDCs)

Scheduled Commercial Banks (SCBs)

The SCBs extend credit to small scale industrial sector and other priority

sectors (service and business segment) under their mandated priority sector

lending. They also provide credit in the form of working capital, investment,

export etc to small scale industrial sector both at national and regional level.

Regional Rural Banks (RRBs)

These banks provide credit to micro/tiny and artisan-based units and village

industries and are actively involved in implementing most of the credit-based

development schemes of NABARD for non-farm unorganized enterprises.

Cooperative Banks

These banks finance those enterprises, which are formed on a cooperative

basis for production or marketing. Mostly, handlooms, power-looms, coir and

some village industries work on a cooperative basis and avail of cooperative loans.

NABARD uses this channel for extending credit to farm and non-farm enterprises.

Cooperativesbanks provide working capital funds to traditional industries, micro

industries, tiny industries and small scale enterprises.


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Small Industries Development Bank of India(SIDBI)

SIDBI is the apex bank and the principal development financial institution

committed to finance, promote and develop the small industries sector and to

coordinate the functions of other institutions engaged in similar activities. SIDBI

extends refinance as well as direct credit, however, it does not have a full

complement of services such as flexibility to offer working capital, fund based and

non-fund based guarantees, value added services, etc to its clients due to which it

is not able to capitalize on its competitive advantages in the market. SIDBI

provide loans for new ventures, diversification, technology upgradation,

industrialisation and expansion of well-run small scale industries. SIDBI channels

its finance through existing credit delivery system consisting of State level

institutions, commercial banks and regional rural banks. The assistance is also

available for (i) marketing of SSI products (ii) setting up of new ventures (iii)

working capital (iv) expansion (v) modernization (vi) human resource

development and (vii) diversification of existing units for all activities.

National Bank for Agriculture and Rural Development (NABARD)

It is specifically established to promote agriculture and agriculture-related

activities and rural development through Rural Entrepreneurship Development

Program, Training-cum-Production Program and action plan for Rural

Industrialization (District Rural Industries Project). Besides establishing

comprehensive infrastructure of financial institutions, the government of India

introduced innovative promotional measures to uplift the growth of small scale

industrial sector and the major ones being (i) widening the scope of national equity

fund to cover projects upto Rs. 10 lakh for equity support (upto 15 percent);

(ii) enlarging the single window loan scheme to cover projects upto 20 lakh to Rs.

1 crore in the year 2004-05; (iii) setting up a special monitoring agency to ensure

that the credit needs of the small-scale sector are fully met; (iv) announcement of


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interest rate concession of 2 per cent for micro, small and medium enterprise upto

March 2011; (v) reservation of 14 items for the small scale sector ; (vi) enactment

of Limited Liability Partnership Act in 2008, to enable flow of funds without

sharing of decision making from sleeping partners to small limits; (vii)

liberalisation of Laghu Udyami credit card (LUCC) scheme by enhancing the

credit limit from Rs. 2 lakh to Rs. 10 lakh, for borrowers having a satisfactory

track record; (viii) operationalisation of the small and medium enterprises (SME)

Fund of Rs. 10,000 crore by the SIDBI since 2004; (ix) extension of the Integrated

Infrastructure Development (IID) scheme to cover the entire country with

50 percent reservation for rural areas and (x) in addition, the commercial banks are

required to achieve 20 percent growth rate in credit and 15 percent annual growth

in the number of accounts of micro and small enterprises.

Concerned with the continuing problem and non-adherence of RBI

guidelines on credit to small scale sector, the RBI set up Kapur Committee to

review the working of credit delivery system for this sector in the year 1998. The

RBI also set up a working group on flow of credit to small sector under the

chairmanship of Ganguly which recommended; identification of new clusters and

adoption of cluster based approach for financing the small and medium enterprises

sector; sponsoring specific projects as well as widely publicising the successful

working models of NGOs; and exploring new instruments for promoting rural

industrialisation. The availability of financial infrastructure for small scale

industrial sector both at national and regional level is summarised in Table 7.2.

Inspite of well established infrastructure and various initiatives taken by the

government, the small scale industrial sector still remains plagued with the

problem of sparse finances. A plethora of conditionalities and eligibility criteria

insisted upon by the promotional agencies especially financial institutions restrict


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TABLE 7.2

AVAILABILITY OF FINANCIAL INFRASTRUCTURE FORSMALL SCALE INDUSTRIAL SECTOR

Bank/Institution Area of Assistance

1. Commercial Banks-exclusive Small

Industry Branches

Finance-working Capital + Term

Loans

2. State Financial Corporations (SFCs) Finance-Term Loans, Soft Loans for

Technology Upgradation and

Modernisation, Rehabilitation and

Sick Units

3. National Bank for Agriculture and

Rural Development (NABARD)

Refinance Facilities for Rural

Artisans, Village and Cottage

Industries

4. Regional Rural Banks and Co-

operative Banks

Credit Support to Small Industry,

Particularly Village Industries and

tiny Units5. National Small Industries

Corporation (NSIC) and State Small

Industries Development

Corporations (SSIDCs)

Supply of Machinery on hire

purchase basis and provision of

technical and consultancy services

among others.

6. Venture Capital Funds Companies Risk capital to small Industries

7. Small Industries Development Bank

of India (SIDBI)-State Level

Branches and Small Industry Cluster

Branches

All round support: Direct and

Indirect Finance, Technology

Upgradation and Modernisation,

Quality Improvement, Marketing

Support through exhibitions etc.

Source: Reserve Bank of India Report of the Committee to Examine the Adequacy of

Institutional Credit to the SSI Sector and Related Aspects, Mumbai, 2005.


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the small enterprises to avail requisite assistance (Chatterji, 1997). In many cases,

a handful of units get concessional credit particularly bigger units of the small

scale sector (Chhikara, 1996). Either the bulk of small producers do not get any support because of cumbersome procedures or they do not have any knowledge of

incentives and assistance schemes at all (Panda, 1996). In addition, the lending

policies of the banks and financial institutions are based on the security-oriented

approach (Chadha, 1995). The banks and financial institutions generally follow a

conservative approach by insisting on collateral security especially in form of

housing premises before sanctioning the loan to small entrepreneurs (Vasal,

1996). Moreover, the small enterprises neither have corporate image nor brand

image and without these they cannot float capital issues in the market (Narain,

1997) and so they have to solely depend on banking industry for finance.

The banking sector reforms (on the basis of recommendations of

Narasimham Committee-I) have put credit support to small enterprises under great

pressure. Although the regulations for priority sector lending continue, subsidised

interest rates are now available to small units only for loans less than Rs. 2 lakhs.All other loans are now to be given at commercial interest rates. With higher unit

transaction costs and the absence of good credit assessment capabilities, the

consequence in this scenario has been a significant jump in interest rates

applicable to small scale industrial units. Thus, small units have moved from lower

than commercial interest rates in the earlier regime to higher than large industry

interest rates in the 1990s (Mohan, 2001). Moreover, a harsh and discriminatory

treatment is meted out to the small players by the banks.

The above discussion reveals that though, government of India framed an

elaborate financial infrastructure comprising of banking and non-banking financial

institutions to meet the credit requirements of small scale industrial sector but over

the years, the organisational framework failed to render the desired services to


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improve the efficiency of small scale industrial sector. This is because of an

overlapping in the functioning of several government organisations and virtual

absence of inter-institutional coordination in the working of these agencies. Hence,the government organisations need to clearly ear mark the areas of their

functioning alongwith an improvement in coordination of activities for successful

implementation of policies designed for small scale industrial sector both at

national and regional level.

Section II

The sickness in small scale industrial sector has been defined differently by

different organisations and agencies. Small Industries Development Organisation

(SIDO) defined a sick unit as one which operates below 20 percent of its installed

capacity. In 1972, the State Bank of Indias Committee on Rationalisation of

Returns in respect of small scale industrial sector advances classified sick units as

those whose accounts are chronically irregular and sticky. In 1975, the State Bank

of Indias study team on SSI advances redefined the sick unit as a unit which fails

to generate internal surpluses on a continuing basis to meet its current obligations

and depends for its survival on frequent infusion of external funds.

In 1977, a working group constituted by the members of Small Industries

Development Organisation (SIDO) and National Institute of Small Industry

Extension Training (NISIET) described a sick unit in the small scale industrial

sector as an unit which did not fulfill minimum standards of productivity and

profitability over a reasonable period due to internal shortcomings or external

definition. It can be gathered that a unit may be considered sick when it does not

perform its primary functions such as production, sales, collection of debts, dues

and repayment of debts in the normal way, for reasons beyond the control of the

management. According to Sick Industrial Companies Act (SICA), 1985, A small


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scale industrial unit is considered as sick when (i) Any of its borrowed accounts

has become doubtful advance i.e. principal or interest in respect of any of its

borrowed accounts has remained overdue for a period exceeding two and half

year; and (ii) There is erosion in the net worth due to accumulated cash losses to

the extent of 50 percent or more of its peak net worth during the preceding two

accounting years.

In 1987, Reserve Bank of India (RBI) issued a set of guidelines for

incipient sickness and small scale industrial unit considered sick if it has (a)

incurred cash loss in the previous accounting year and is likely to incur such loss

in the current accounting year and has an erosion, on account of cumulative cash

losses, to the extent of 50 percent or more of its net worth and/or (b) continuously

defaulted in meeting four consecutive quarterly instalments of interest or two half

yearly instalments of principal on term loans and there are persistent irregularities

in the operation of its credit limits with the bank. While both (a) and (b) should be

satisfied in the case of larger small scale industrial sector, it would be suffice if

either (a) or (b) is satisfied in the case of tiny and decentralised sector.

Reserve Bank of India (RBI) modified the definition of a sick small scale

industrial unit in 1989 as, A small scale industrial unit should be considered sick

if, it has at the end of any accounting year, accumulated losses equal to or

exceeding 50 percent of its peak net worth in the immediately preceding five

accounting years. However, if it is difficult to get financial particulars, a unit may

be considered as sick if it defaults continuously, for a period of one year, in the

payment of interest or instalment of principal and there are persistent irregularities

in the operation of its credit limit with the bank. RBI in 1991 set up a committee

under the chairmanship of Nayak, to examine the adequacy of institutional credit


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to small scale industrial sector. The committee recommended several measures to

deals with sickness. So based on the recommendation of the Nayak committee,

RBI modified the definition of sick SSI units as, A SSI may be classified as sick

(i) Any of its borrowal accounts has a doubtful advance i.e. principal or interest in

respect of any of its borrowal accounts has remained outstanding for a period

exceeding 2 to 5 years. (ii) There is erosion in the net worth due to the

accumulated cash losses to the extent of 50 percent or more of its peak net worth

during the preceding two accounting years.

The latest definition of sickness given by the working group of

rehabilitation of sick unit set up by the RBI (Kohli committee) as A small

enterprise should be considered sick if (a) any of the borrowal accounts of the unit

remains substandard for more than six months; (b) there is erosion in the net worth

due to accumulated cash losses to the extent of 50 per cent of its net worth during

the previous accounting year; and (c) the unit has been in commercial production

for at least two years.

As per the third census following criteria were adopted to identify sick/

incipient sick units:

(i)

Continuous decline in gross output compared to the previous two financial

years;

(ii)

Delay by more than 12 months in repayment of loan taken from

institutional sources; and

(iii)

Erosion in the net worth to the extent of 50 percent of the net worth during

the previous accounting year.


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TABLE 7.3

YEAR WISE PERFORMANCE OF SICK SMALL SCALE

INDUSTRIAL UNITS IN INDIA

(Amount in Rs. Crores at current Prices)

Year Sick

SSI

Units

Amt O/S Potentially

viable

Units

%age of

Potentially

viable

Units

Amt O/S Non-

viable

Units

%age

of

non-

viable

Units

Amt O/S Viability

not

decided

1986-87 204259 1542 12256 6.00 406.19 185977 91.05 1269.97 6026

1987-88 217436 1980 12954 5.96 450.68 198635 91.35 1397.74 5847

1988-89 186441 2243 16042 8.60 568.27 168006 90.11 1576.54 2393

1989-90 218828 2427 16451 7.52 590.5 200092 91.44 1741.07 2285

1990-91 221472 2792 16140 7.29 693.12 202998 91.66 1997.16 2334

1991-92 245575 3101 19210 7.82 728.9 223336 90.94 2256.14 3029

1992-93 238176 3443 21649 9.09 798.79 213804 89.77 2506.94 2723

1993-94 256452 3680 16580 6.47 685.93 234265 91.35 2842.25 5607

1994-95 268815 3547 15539 5.78 597.93 249375 92.77 2842.40 3901

1995-96 262376 3722 16424 6.26 635.82 240168 91.54 2943.65 5784

1996-97 235032 3609 16220 6.90 479.31 213014 90.63 3031.59 5798

1997-98 221536 3857 18686 8.43 455.96 199634 90.11 3296.58 3216

1998-99 306221 4313 18692 6.10 376.96 271193 88.56 3746.07 16336

1999-00 304235 4608 14373 4.72 369.45 276643 90.93 4007.86 13219

2000-01 249630 4506 13076 5.24 399.17 225488 90.33 3943.2 11066

2001-02 177336 4819 4493 2.53 416.41 167574 94.50 4146.74 5269

2002-03 167980 5706 3626 2.16 624.71 162791 96.91 4868.62 1563

2003-04 143366 5773 2406 1.68 551 138081 96.31 4937.00 2938

2004-05 138041 5380 3922 2.84 435 132153 95.74 4884 1966

2005-06 126824 4981 4594 3.62 498.16 117148 92.37 4141.00 5082

2006-07 114132 5267 4287 3.76 427.46 109011 95.51 4757.00 834

GR (%)

(P-Value)

(-) 2.41

(0.012)

5.50

(0.000)

(-) 8.15

(0.000)

(-)5.74

(0.000)

(-) 1.37

(0.107)

(-) 2.17

(0.017)

0.24

(0.004)

6.65

(0.000)

(-) 1.30

(0.628)

Note: O/S stands for amount outstanding in Rs.crores; Figures in the parenthesis are the p-

values; GR represents average annual growth rates.

Source: Handbook of Statistics on Indian Economy, RBI, 2010


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Combining the three yardsticks used to measure sickness, viz. (i) delay in

repayment of institutional loan over one year, (ii) decline in net worth by 50

percent and (iii) decline in output during last three years, about 14.47 percent of

the units in the registered small scale industrial sector were identified to the either

sick or incipient sick, while this percentage was only 8.25 in case of unregistered

units (Third All India Census of Small Scale Industries, 2001-02).

The magnitude of sickness in the small scale industrial sector of India can

be accessed from visualisation of Table 7.3. The table shows that out of the total

sick small scale industrial units, numbers of non-viable units are more than 90

percent, in most of the years under study. Non-viable units are those units, which

have no chance of revival and rehabilitation. Further, the data shows that in the

small scale industrial sector, the figures of sickness were quite alarming as

114132 units at All India level were sick in 2006-07. Out of these sick units,

4287 units were potentially viable and 109011 units were potentially non viable

while 834 units are those, whose viability yet not decided. Moreover, the analysis

shows a negative annual growth rate of sick small scale industrial units to the tune

of (-) 2.41 percent during the time span of 1986-87 to 2006-07, yet the magnitude

of sickness in small scale industrial sector of India is quite high and non-ignorable

by all standards. Growth rates of potentially viable, non-viable and viability not

decided units are (-) 8.15 percent, (-) 2.17 percent and (-) 1.30 percent

respectively. Therefore, negative and highly significant growth rate of thepotentially viable units is a matter of serious concern in the reformed era. Further,

the growth rates of the amount outstanding for sick small scale industrial units is

5.50 percent per annum while for potential viable and non-viable units are (-) 1.37

percent and 6.65 percent, respectively. High indebtedness in small scale industrial


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units and non-viable units hampers the expansion capacity and ability to generate

employment in Indian small scale industrial sector.

Thus, the high percentage of sick units in Indian small scale sector reiterates the

necessity to reformulate the existing policies dealing with this sector in the

reformed era.

Table 7.4 shows the extent of sickness in the small scale industrial sector of

Punjab during 1986-87 to 2006-07. The table shows that out of the total sick units,

number of non-viable units is more than 92 percent in most of the years under

study. In 2006-07, the total number of sick small scale industrial units in Punjab

are 1146, out of this 127 and 1015 units are potentially viable and non-viable units

respectively while 4 units are those whose viability not decided. Further, data

shows that out of the total sick units, 11.08 percent were potentially viable units

and 88.57 percent non-viable units during 2006-07. Moreover, the analysis shows

a negative annual growth rate of sick small scale industrial units to the tune of

(-) 4.52 percent in Punjab during 1986-87 to 2006-07, whereas, growth rate of

potentially viable, non-viable and viability yet not decided units were

(-) 7.52 percent, (-) 4.40 percent and (-) 6.36 percent respectively. Thus, highly

significant and negative growth rate of the potentially viable units pose a serious

question for the policy makers and planners. However, it is also observed that the

annual growth rate of the amount outstanding against small scale industrial sector

in Punjab was 3.29 percent per annum, while for potentially viable units and

potentially non-viable units it were (-) 6.90 percent and 3.90 percent respectively.

Therefore, high indebtedness of small scale industrial units and potentially

non-viable units hampers the development of small scale industrial sector in

Punjab and increases the non performing assets of the financial institutions.


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TABLE 7.4


INDUSTRIAL UNITS IN PUNJAB


Year Sick

SSI

Units

Amt O/S Potentially

viable

Units

%age of

Potentially

viable

Units

Amt O/S non-

viable

Units

%age

of non-

viable

Units

Amt O/S viability

not

decided

1986-87 2434 44.97 116 4.77 6.92 2271 93.30 35.57 31

1987-88 2699 53.2 124 4.59 8.12 2538 94.03 41.87 37

1988-89 4467 71.31 247 5.53 14.61 4011 89.79 53.48 209

1989-90 5988 81.99 317 5.29 15.98 5423 90.56 63.16 193

1990-91 5288 91.79 337 6.37 14.16 4913 92.91 75.73 38

1991-92 5485 100.28 162 2.95 7.69 5306 96.74 91.1 17

1992-93 6362 111.68 223 3.51 11.59 6100 95.88 96.48 39

1993-94 2434 64.59 177 7.27 5.95 2258 92.77 58.12 -1

1994-95 2473 69.35 266 10.76 5.61 2203 89.08 61.66 4

1995-96 2362 64.16 145 6.14 4.36 2179 92.25 59.65 38

1996-97 2466 84.44 143 5.80 4.36 2322 94.16 79.98 1

1997-98 2376 91.7 75 3.16 5.22 2288 96.30 85.92 13

1998-99 3551 101.44 117 3.29 2.88 3413 96.11 94.1 211999-00 1897 97.06 117 6.17 5.46 1729 91.14 83.31 51

2000-01 1836 63.02 52 2.83 3.71 1774 96.62 59.16 10

2001-02 1902 144.26 68 3.58 4.25 1785 93.85 133.59 49

2002-03 3022 153.25 42 1.39 5.18 2964 98.08 136.43 16

2003-04 3025 157.96 26 0.86 4.97 2982 98.58 144.23 17

2004-05 2506 162.81 57 2.27 3.76 2376 94.81 123 73

2005-06 1695 101.37 85 5.01 2.98 1600 94.40 86.43 10

2006-07 1146 63.11 127 11.08 2.52 1015 88.57 60.56 4

GR (%)(P-Value)

(-) 4.52(0.003)

3.29(0.008)

(-) 7.52(0.000)

(-) 3.01(0.178)

(-) 6.90(0.000)

(-) 4.40(0.004)

(-) 0.12(0.306)

3.900.002

(-) 6.36(0.222)

Note: O/S stands for amount outstanding in Rs.crores; Figures in the parenthesis are the

p-values; GR represents average annual growth rates.

Source: Various Loksabha and Rajya Sabha Unstarred Question.


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TABLE 7.5


INDUSTRIAL UNITS IN HARYANA


Year Sick

SSI

Units

Amt O/S Potentially

viable

Units

%age of

Potentially

viable

Units

Amt O/S non-

viable

Units

%age

of non-

viable

Units

Amt O/S Viability

not

decided

1986-87 2096 43.81 76 3.63 3.5 2010 95.90 36.27 10

1987-88 2580 52.74 94 3.64 4.17 2475 95.93 42.64 11

1988-89 2179 55.92 77 3.53 9.68 2091 95.96 40.55 11

1989-90 3186 63.7 53 1.66 12.59 3097 97.21 44.22 36

1990-91 2720 64.53 86 3.16 17.23 2632 96.76 46.92 2

1991-92 3467 73.96 54 1.56 14.69 3402 98.13 57.31 11

1992-93 4563 92.33 73 1.60 5.79 4465 97.85 75.69 25

1993-94 1669 79.53 49 2.94 5.67 1596 95.63 73.19 24

1994-95 2339 82.99 63 2.69 3.7 2271 97.09 79.03 5

1995-96 2332 97.76 225 9.65 4.73 2083 89.32 92.64 24

1996-97 2574 63.95 33 1.28 1.89 2537 98.56 61.3 4

1997-98 2149 92.41 26 1.21 5.98 2038 94.83 83.11 85

1998-99 3180 87.33 39 1.23 1.17 3097 97.39 85.42 44

1999-00 2952 90.89 142 4.81 3.32 2797 94.75 87.18 13

2000-01 1285 34.88 14 1.09 0.21 1266 98.52 34.66 5

2001-02 889 50.25 7 0.79 6.22 882 99.21 44.02 0

2002-03 1515 57.02 10 0.66 2.32 1502 99.14 53.41 3

2003-04 1302 65.34 14 1.08 1.64 1281 98.39 58.67 7

2004-05 1000 84.97 12 1.20 2.27 981 98.10 78.33 7

2005-06 806 80.02 11 1.36 3.08 789 97.89 74.18 6

2006-07 650 75.36 10 1.54 3.85 630 96.92 71.46 10

GR(%)

(P-Value)

(-) 6.21

(0.000)

0.85

(0.400)

(-) 1.21

(0.000)

(-) 5.92

(0.009)

(-)7.91

(0.019)

(-)6.10

(0.000)

0.11

(0.207)

(-) 2.07

(0.066)

(-) 4.25

(0.277)

Note: O/S stands for amount outstanding in Rs.crores; Figures in the parenthesis are the

p-values; GR represents average annual growth rates.

Source: Various Loksabha and Rajya Sabha Unstarred Questions


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TABLE 7.6

REASONS FOR SICKNESS/INCIPIENT SICKNESS IN SMALL

SCALE INDUSTRIAL SECTOR OF INDIA

S.No. Reason for Sickness/

Incipient Sickness

% of Sick/ Incipient Sick Units*

Total SSI Regd. SSI Unregd.

SSI

1. Lack of Demand 66 58 69

2. Shortage of Working Capital 46 57 43

3. Non-availability of Raw

Material

12 12 12

4. Power Shortage 13 17 12

5. Labour Problems 5 6 4

6. Marketing Problems 36 37 36

7. Equipment Problems 11 9 12

8. Management Problems 4 5 3

Note: * The total will exceed 100 percent, as some units reported more than one reason.

Source: Third All India Census of Small Scale Industries, 2001-2002.


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Table 7.5 examines the sickness in small scale industrial sector of Haryana

during 1986-87 to 2006-07. The table shows that out of the total sick units the

numbers of non-viable units are more than 95 percent in most of the years understudy. It also shows that number of sick units in Haryana are 650 in 2006-07, out

of this, 10 and 630 units are potentially viable and non-viable units respectively

while 10 units are those whose viability yet not decided. Furthermore, it is also

observed that the annual growth rate of the sick units in small scale industrial

sector of Haryana turned out to be (-) 6.21 percent per annum, while for

potentially viable units, potentially non-viable units and viability yet not decided is

(-) 1.21 percent, (-) 6.10 percent and (-) 4.25 percent respectively but negative

growth rate of the potentially viable units is a matter of concern for policy makers

and planners in Haryana. Moreover, the growth rate of amount outstanding of sick

small scale industrial units in Haryana worked out to be 0.85 percent while for the

potential viable and non-viable units these are (-)7.91 percent and (-)2.07 percent

respectively, therefore, high indebtedness of small scale industrial unit in Haryana

hampers the expansion capacity, ability to generate employment and increase the

non-performing assets of the financial institutions.

Given the existence of a large number of sick small scale industrial units in

India, Punjab as well as in Haryana, it becomes imperative to analyse the reasons

of sickness for the effective formulation of policies for this sector. The reasons for

sickness are of varied nature and are highlighted in Table 7.6. The table shows that

lack of demand was quoted as a reason of sickness by 66 percent of sick small

scale industrial units. Similarly, shortage of working capital by 46 percent, non

availability of raw material by 12 percent, power shortage by 13 percent,

marketing problem by 36 percent and labour problem, management problem and

equipment problem collectively by 20 percent. In nutshell, lack of demand is the

largest contributor of sickness in small scale industrial units in India followed by

shortage of working capital and marketing problems. The paucity of knowledge


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about problems of small enterprises coupled with cumbersome and complicated

procedures generally create delay in getting financial support to meet working

capital requirements, which push many small scale industrial units in the categoryof sick units. Moreover, banks also insist on collateral, which the small scale

industrial units, with limited resources, are unable to furnish. Bank officials

frequently point out to the high level of non-performing assets and the poor culture

of repayments to justify their cautious lending policies. Therefore, shortage of

finance and credit creates a whole group of problems relating to size of the unit,

the quality of labour, market coverage, purchase of raw materials, machinery and

equipment and all these problems, in turn, lead to low and poor quality of

production.

In the present reformed era, any perspective policy for small scale industrial

sector must address itself to the need for developing and promoting economically

viable units. Therefore, emphasis of small scale industrial sector development

policy should be on the qualitative rather than quantitative growth of this sector

both at national and regional level.

Section-III

Finance is the life-blood of business in any productive sphere and its vital

need is more realised where it is lacking as in the small scale industrial sector of

Punjab, Haryana and All India. The importance of finance in this field is as

fundamental as elsewhere and every problem of the small scale industrial sector

concerning production, material, quality or marketing is in the ultimate analysis a

financial one. Adequate finance is a pre requisite for proper organization of

production and the purchase of raw materials. Therefore, credit is the prime input

for sustained growth of small scale industrial sector and its mobilisation for

meeting fixed and working capital needs poses the foremost problems. Credit

provided for creation of fixed assets like land, building, plant and machinery is

called long term credit and credit provided for running the industry for its day-to-


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day requirement for purchasing raw material and other inputs like electricity and

water etc. and for payment of wages and salaries is called short-term credit or

working capital. The shortage of working capital has been found to be one of the

prime reasons for the widespread sickness in the small scale industrial sector. In

India, the government has made a strong commitment to assist small scale

enterprises in obtaining financial resources but still the inadequacy of credit exists.

The small scale enterprises also face hurdles in getting support from government

agencies because of lack of technical competence of staff of these agencies to

understand the industry specific problems.

One of the universal problems that hinders and unhinges the small scale

industrial sector is the paucity and non-availability of adequate finance at right

time. In small scale industrial sector of Punjab, Haryana and All India, this sector

encompasses a diverse range from handicrafts to ancillaries and their financial

requirements also differ and hence their needs are to be met differently. Though

many other elements such as technology, management etc., are important but

adequate and timely finance is a necessary pre-condition for the promotion and

development of small scale industrial sector.

The small scale industrial sector also face hurdles in getting support from

government agencies because of lack of technical competence of staff of these

agencies to understand the industry specific problems. Thus, as a result, there exist

crucial gap between the requirements and availability of working capital to small

scale industrial sector. In this context, an attempt has been made to compute

working capital gap using the methodology suggested by the Nayak Committee

(1992). According to the assessment made by the Nayak Committee (1992), the

working capital accounted for 78 percent of the total bank credit to small scale

industrial sector, while the remaining 22 percent is accounted for by the term

loans. Therefore, the present study approximated actual working capital

availability to small scale sector as:


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Working Capital Availability (WCA) = 0.78 Total SSIs Advances by

Scheduled Commercial Banks

As per the recommendations of Nayak Committee (1992), the minimum

level of working capital credit to small scale industrial sector should be fixed at 20

percent of its annual turnover. Though, the credit requirement of different

industries vary due to the nature of the industry, production cycle and the

availability of credit from other sources, yet it may be used as suitable benchmark

for finding out an approximation of working capital requirements. Thus, the

working capital requirements for small scale industrial sector have been worked

out as:

Working Capital Requirements (WCR) = 0.20 Total Production of SSIs

After finding out the estimates of working capital availability (WCA) and

working capital requirement (WCR), the working capital gap has been computed

for each year from 1981-82 to 2006-07 for Punjab, Haryana and All India as

follows:

Working Capital Gap (WCG) = WCR WCA

Table 7.7 provides the estimates of working capital gap in Indian small

scale industrial sector during the period 1981-82 to 2006-07. If we compare the

minimum working capital requirement of small scale industrial sector, as

prescribed by the Nayak Committee, this is Rs. 141879.60 crore (20 percent of

SSIs production) in year 2006-07. The actual working capital credit given in the

year 2006-07 is Rs. 99311.94 crore (78 percent of bank credit to small scale

sector) and there is a short fall of working capital to the tune of Rs. 42567.66

crore in small scale industrial sector of India. Hence, there exists a huge gap

between the minimum credit requirement and the actual credit given to the small


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TABLE 7.7

WORKING CAPITAL GAP IN SMALL SCALE INDUSTRIAL

SECTOR OF INDIA

(Rs. Crore)

Year SSI

Product

ion

SSI

Advances

by SCBs

Advances as

percentage of

Production

Actual

Working

Capital*

Minimum

Credit

Requirement**

Working

Capital

Gap

1981-82 32600 4464 13.69 3481.92 6520.00 3038.08

1982-83 35000 5389 15.40 4203.42 7000.00 2796.58

1983-84 41600 6537 15.71 5098.86 8320.00 3221.14

1984-85 50500 7829 15.50 6106.62 10100.00 3993.38

1985-86 61200 9127 14.91 7119.06 12240.00 5120.94

1986-87 72300 10659 14.74 8314.02 14460.00 6145.981987-88 87300 12968 14.85 10115.04 17460.00 7344.96

1988-89 106400 14635 13.75 11415.30 21280.00 9864.70

1989-90 132300 15969 12.07 12455.82 26460.00 14004.18

1990-91 78802 17938 22.76 13991.64 15760.40 1768.76

1991-92 80615 18939 23.49 14772.42 16123.00 1350.58

1992-93 84413 20975 24.85 16360.50 16882.60 522.10

1993-94 98796 23978 24.27 18702.84 19759.20 1056.36

1994-95 122154 29175 23.88 22756.50 24430.80 1674.30

1995-96 147712 34246 23.18 26711.88 29542.40 2830.52

1996-97 167805 38196 22.76 29792.88 33561.00 3768.12

1997-98 187217 45771 24.45 35701.38 37443.40 1742.02

1998-99 210454 51679 24.56 40309.62 42090.80 1781.18

1999-00 233760 57035 24.40 44487.30 46752.00 2264.70

2000-01 261297 60141 23.02 46909.98 52259.40 5349.42

2001-02 282270 67107 23.77 52343.46 56454.00 4110.54

2002-03 314850 64707 20.55 50471.46 62970.00 12498.54

2003-04 364547 71209 19.53 55543.02 72909.40 17366.38

2004-05 429796 83498 19.43 65128.44 85959.20 20830.76

2005-06 497842 101285 20.34 79002.30 99568.40 20566.102006-07 709398 127323 17.95 99311.94 141879.60 42567.66

Note:* 78 Percent of Total Bank Credit to SSIs as per Nayak Committee (1992)

** 20 Percent of SSIs Production

Source: 1) Reserve Bank of India, Statistical Tables Relating to Banks in India

(Various Issues), Mumbai; and

2) Office of the Development Commissioner, Small Scale Industries, New Delhi.


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TABLE 7.8

GROWTH OF WORKING CAPITAL GAP IN SMALL SCALE

INDUSTRIAL SECTOR OF INDIA

Parameters Entire Period

(1981-82 to 2006-07)

Pre-Liberalisation

Period (1981-82 to

!990-91)

Post-Liberalisation

period (1991-92 to

2006-07)

7.65***

(0.000)

8.00***

(0.000)

3.77***

(0.000)

0.055**

(0.045)

0.085

(0.244)

0.247***

(0.000)

R2 16% 16.5% 86%

F 4.46

(0.045)

1.58

(0.244)

83.91

(0.000)

Note: Figures in the parenthesis are the p-values;

** Indicates that coefficient is significant at 5 percent level of significance.

*** Indicates that coefficient is significant at 1 percent level of significance.

Source: Authors calculations


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scale industrial sector. This reflects that there is a considerable shortfall in the

availability of credit to this sector from banks in the economy. It has been

estimated that bank credit to small scale industries comprises about 10 percent oftheir estimated total production (Mohan, 2001). Kapur Committee (1998)

bemoaned that despite the central banks instructions and guidelines from time to

time, banks have not been following the Nayak Committee (1992)

recommendations. According to the estimates of Kapur Committee (1998), only

15-20 percent of small units could access bank credit and others have to depend on

borrowing from private sources at exorbitant interest rates.

Further, it is essential to examine the growth rate of working capital gap

over a period of time. To find out growth rates of working capital gap, the whole

data has been divided into the entire period (1981-82 to 2006-07), pre-reforms

period (1981-82 to 2006-07) and post reforms period (1991-92 to 2006-07). The

following regression has been estimated to get annual growth rate.

tt tWCGLog ++=

It is evident from Table 7.8 that working capital gap (WCG) for the entire period

has increased at a statistically significant average annual growth rate of 5.5 percent

per annum. The comparison of growth rates of WCG over the two sub periods,

namely pre reforms and post reforms period shows that the growth rate of WCG

accelerated from 8.5 per cent during the period 1981-82 to 1990-91 and

statistically highly significant growth 24.7 per cent in the period 1991-92 to

2006-07. Thus, during the post reforms period, the gap of working capital has been

observed to be rising at a faster rate relative to the pre reforms period, therebyreflecting a considerable shortfall in the availability of credit to small scale

industrial sector from the banks in the reformed era.

Table 7.9 shows the estimates of working capital gap in small scale

industrial sector of Punjab during the period 1981-82 to 2006-07, the minimum

working capital requirement of small scale industrial sector in Punjab, as


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prescribed by the Nayak committee, this is Rs. 6654.63 crore (20 percent of SSIs

production) in year 2006-07, whereas, actual working capital credit given is Rs.

5946.72 crore (78 percent of bank credit to small scale sector) and there is a shortfall of working capital to the tune of Rs. 707.91 crore. Further, it is evident from

Table 7.10 that working capital gap (WCG) in Punjab for the entire period has

increased at a statistically significant average annual growth rate of 15 per cent per

annum, however, the comparison of growth rates of WCG over the two sub

periods, namely, pre reforms and post reforms period shows that the growth rate of

WCG accelerated from -13.1 per cent during the pre reforms period to statistically

significant growth rate of 10.3 percent, during the post reforms period. Thus,

during the post reforms period, the gap of working capital has been observed to be

rising at a faster rate, thereby reflecting a considerable shortfall in the availability

of credit to small scale industrial sector of Punjab from the banking institutions in

the reformed era.

Table 7.11 presents the estimates of working capital gap in small scale

industrial sector of Haryana during the period 1981-82 to 2006-07. If we compare

the minimum working capital requirement of small scale industrial sector, as

prescribed by the Nayak Committee, this is Rs. 1648.11 crore (20 percent of SSIs

production) in year 2006-07. The actual working capital credit given in the year

2006-07 is Rs. 3612.96 crore (78 percent of bank credit to small scale sector) and

there is sufficient availability of working capital to the tune of Rs. 1964.85 crore in

2006-07.

Further, it is essential to examine the growth rate of working capital gapover time. To find out growth rates of working capital gap we have trifurcated the

whole data into three time periods and these are; the entire period, pre-reforms

period and post-reforms period. The following regression has been estimated to

get annual growth rate.

tt tWCGLog ++=


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TABLE 7.9

WORKING CAPITAL GAP IN SMALL SCALE INDUSTRIAL

SECTOR OF PUNJAB

Year SSI

Production

SSI

Advances

by SCBs

Advances as

percentage of

Production

Actual

Working

Capital*

Minimum

Credit

Requirement**

Working

Capital

Gap

1981-82 1342.66 304 22.64 237.12 268.53 31.41

1982-83 1585.52 353 22.26 275.34 317.10 41.76

1983-84 1786.07 409 22.90 319.02 357.21 38.19

1984-85 1957.92 495 25.28 386.1 391.58 5.48

1985-86 2150.99 614 28.54 478.92 430.20 -48.72

1986-87 2358.64 688 29.17 536.64 471.73 -64.91

1987-88 2681.53 838 31.25 653.64 536.31 -117.33

1988-89 3108.59 870 27.99 678.6 621.72 -56.88

1989-90 3504.1 950 27.11 741 700.82 -40.18

1990-91 4049.84 1005 24.82 783.9 809.97 26.07

1991-92 4437.45 969 21.84 755.82 887.49 131.67

1992-93 5345.12 1092 20.43 851.76 1069.02 217.26

1993-94 7074.95 1289 18.22 1005.42 1414.99 409.57

1994-95 8737.82 1540 17.62 1201.2 1747.56 546.36

1995-96 9713.94 1947 20.04 1518.66 1942.79 424.13

1996-97 11106.22 2156 19.41 1681.68 2221.24 539.56

1997-98 13057.74 2689 20.59 2097.42 2611.55 514.13

1998-99 14444.48 3041 21.05 2371.98 2888.90 516.92

1999-00 16610.85 3238 19.49 2525.64 3322.17 796.53

2000-01 18324.5 3608 19.69 2814.24 3664.90 850.66

2001-02 20338.55 3914 19.24 3052.92 4067.71 1014.79

2002-03 22524.05 4093 18.17 3192.54 4504.81 1312.27

2003-04 24983.83 4668 18.68 3641.04 4996.77 1355.73

2004-05 28473.51 5018 17.62 3914.04 5694.70 1780.66

2005-06 30873.57 6032 19.54 4704.96 6174.71 1469.75

2006-07 33273.16 7624 22.91 5946.72 6654.63 707.91


** 20 Percent of SSIs ProductionSource: 1) Reserve Bank of India, Statistical Tables Relating to Banks in India (Various

Issues) Mumbai; and2) Office of the Development Commissioner, Small Scale Industries, New Delhi.


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TABLE 7.10


INDUSTRIAL SECTOR OF PUNJAB


(1981-82 to 2006-07)

Pre-Liberalisation

Period (1981-82 to

1990-91)

Post-Liberalisation

period (1991-92 to

2006-07)

3.76***

(0.000)

5.00***

(0.000)

4.76***

(0.000)

0.15***

(0.000)

-0.131

(0.362)

0.103***

(0.000)

R2 59.5% 10.47% 77.61%

F 35.27

(0.000)

0.94

(0.362)

48.52

(0.000)


***indicates that coefficient is significant at 1 percent level of significance.



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TABLE 7.11

WORKING CAPITAL GAP IN SMALL SCALE INDUSTRIAL SECTOR

OF HARYANA

Year SSI

Production

SSI

Advances

by SCBs

Advances as

percentage of

Production

Actual

Working

Capital*

Minimum

Credit

Requirement**

Working

Capital

Gap

1981-82 1310 186 14.20 145.08 262.00 116.92

1982-83 1396 214 15.33 166.92 279.20 112.28

1983-84 1585 248 15.65 193.44 317.00 123.56

1984-85 1943 288 14.82 224.64 388.60 163.96

1985-86 1959 330 16.85 257.40 391.80 134.40

1986-87 2223 311 13.99 242.58 444.60 202.021987-88 2403 399 16.60 311.22 480.60 169.38

1988-89 2583 451 17.46 351.78 516.60 164.82

1989-90 2772.15 472 17.03 368.16 554.43 186.27

1990-91 2969.88 537 18.08 418.86 593.98 175.12

1991-92 3180.33 553 17.39 431.34 636.07 204.73

1992-93 3374.43 601 17.81 468.78 674.89 206.11

1993-94 3573.84 695 19.45 542.10 714.77 172.67

1994-95 3773.25 929 24.62 724.62 754.65 30.03

1995-96 3948.54 1063 26.92 829.14 789.71 -39.431996-97 4113.33 1138 27.67 887.64 822.67 -64.97

1997-98 2775.03 1377 49.62 1074.06 555.01 -519.05

1998-99 2155.71 1800 83.50 1404.00 431.14 -972.86

1999-00 2195.7 1800 81.98 1404.00 439.14 -964.86

2000-01 2223.81 1989 89.44 1551.42 444.76 -1106.66

2001-02 3978.96 2095 52.65 1634.10 795.79 -838.31

2002-03 4562.42 2132 46.73 1662.96 912.48 -750.48

2003-04 5528.48 2360 42.69 1840.80 1105.70 -735.10

2004-05 6428.88 2845 44.25 2219.10 1285.78 -933.32

2005-06 6459.33 3691 57.14 2878.98 1291.87 -1587.11

2006-07 8240.53 4632 56.21 3612.96 1648.11 -1964.85


** 20 Percent of SSIs ProductionSource: 1) Reserve Bank of India, Statistical Tables Relating to Banks in India (Various Issues), Mumbai; and

2) Office of the Development Commissioner, Small Scale Industries, New Delhi.


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TABLE 7.12


INDUSTRIAL SECTOR OF HARYANA


(1981-82 to 2006-07)

Pre-Liberalisation

Period

(1981-82 to 1990-91)

Post-Liberalisation

period

(1991-92 to 2006-07)

8.23***

(0.000)

7.65***

(0.000)

9.79***

(0.000)

-0.073***

(0.000)

0.004

(0.007)

-0.152***

(0.002)

R2

42.34% 62.34% 50.65%

F 17.62***

(0.000)

13.24***

(0.007)

14.37***

(0.002)


***indicates that coefficient is significant at 1 percent level of significance.



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It is evident from table 7.12 that working capital gap (WCG) for the entire

period has increased at a statistically significant average annual growth rate

of (-) 7.3 per cent per annum. The comparison of growth rates of WCG over thepre reforms and post reforms period shows that the growth rate of WCG

accelerated from 0.04 per cent during the period 1981-82 to 1990-91 to (-) 15.2

per cent in the period 1991-92 to 2006-07. Thus, In Haryana, during the post

reforms period, the working capital gap observed to be declining relative to the pre

reforms period, thereby reflecting the availability of working capital to small scale

industrial sector of Haryana from the financial institutions.

For analysing the cause and effect relationship between working capital gap

and sickness in the small scale industrial sector of India, Granger causality test has

been applied. The following two variable Vector Auto Regressive (VAR) model

has been utilised to check the existence of Granger causality between the variables

of working capital gap (WCG) and number of sick units (SICK) under small scale

industrial sector.

WCG = f(WCG (-1) WCG (-2) SICK (-1) SICK (-2))

SICK = f(WCG (-1) WCG (-2) SICK (-1) SICK (-2))

The following possibilities are expected:

If the coefficients of SICK (-1) and SICK (-2) are significant in first

equation and the remaining coefficients of the system are insignificant then

unidirectional causality from sickness to WCG exists;

If the coefficients of WCG (-1) and WCG (-2) are significant in second

equation and the remaining coefficients of the system are insignificant then

unidirectional causality from WCG to sickness exists; If the coefficients of SICK

(-1) and SICK (-2) are significant in first equation and coefficients of WCG (-1)

and WCG (-2) are significant in second equation then the bidirectional causality


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from WCG-sickness-WCG exists; If all coefficients of above two equations are

insignificant then the WCG and Sickness are independent. However, to check the

combined significance, F-statistics has been utilised.

Table 7.13 shows the results of pairwise Granger causality test of small

scale industrial sector in India which has been used to test the hypothesis of the

cause and effect relationship between the two aforementioned variables. The

analysis of the Table 7.11 reveals the hypothesis that Sickness in SSIs do not

Granger Cause WCG has not been rejected, whereas the hypothesis of WCG

does not Granger Cause sick has been completely rejected. It inferred from the

analysis that the rising WCG is a significant driver of sickness in small scale

industrial sector of India.

Table 7.14 shows the results of pairwise Granger causality test of small

scale industrial sector in Punjab which has been used to test the hypothesis of the

cause and effect relationship between Sickness in SSIs and WCG variables. The

analysis of the Table 7.14 shows that the hypothesis that Sickness in SSIs do not

Granger Cause WCG has not been rejected, whereas the hypothesis of WCG

does not Granger Cause SICK has been completely rejected. It can therefore, be

inferred from the analysis that in Punjab the rising WCG is also significant driver

of sickness in small scale industrial sector.

Table 7.15 presents cause and effect summary for small scale industrial

sector in Haryana. This analysis also shows that causality from sickness to WCG

is missing. Whereas, it do exit from WCG to sickness thus, a unidirectionalcausality has been observed in case of small scale sector of Haryana. From the

above analysis, it can be concluded that in case of India and Punjab, WCG is

significantly causality sickness in SSIs, whereas, in Haryana impact is not so

strong. The F-statistics in India and Punjab are statistically significant at 5 percent

level of significance, whereas, in Haryana value is significant at 10 percent level.


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TABLE 7.13

PAIRWISE GRANGER CAUSALITY TESTS OF INDIA

Sample: 1 21

Lags: 2

Null Hypothesis F-value P-value

SICK does not Granger Cause WCG 2.68476 0.1031

WCG does not Granger Cause SICK 4.22470**

0.0367

Note : **stands for significance at 5 percent level of significance.

Source: Authors Calculations

TABLE 7.14

PAIRWISE GRANGER CAUSALITY TESTS OF PUNJAB

Sample: 1 21

Lags: 2

Null Hypothesis F-value P-value

SICK does not Granger Cause WCG 0.08465 0.9193

WCG does not Granger Cause SICK 4.82748** 0.0254

Note : **stands for significance at 5 percent level of significance.

Source: Authors Calculations

TABLE 7.15

PAIRWISE GRANGER CAUSALITY TESTS OF HARYANA

Sample: 1 21

Lags: 2

Null Hypothesis F-value P-valueSICK does not Granger Cause WCG 2.48990 0.1188

WCG does not Granger Cause SICK 3.72400* 0.0505

Note : * stands for significance at 10 percent level of significance.Source: Authors Calculations


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On another site, causality from sickness to WCG is missing. Thus, a

unidirectional causality has been observed. Therefore, on the basis of the actual

availability and projected requirements of credit and the gap between the two, thesituation is critical and banks have still a long way to travel to meet genuine credit

requirements of the small scale industrial sector in post reformed era. Hence,

considering the needs of this sector, the volume and sources of industrial finance

are quite inadequate and unsatisfactory in case of Punjab and India. The

undergoing metamorphic changes in the Indian financial system must ensure less

burdensome and continuous flow of financial resources especially the working

capital for sustainable growth of small scale industrial sector both at national and

regional level.

Section IV

The analysis of financial performance and sickness of small scale industrial

sector in Punjab, Haryana vis-a-visAll India revealed that a large number of small

scale industrial units are afflicted with the problem of sickness and the prime

reason for this phenomenon is the shortage of working capital in this sector. The

data showed that in the small scale industrial sector, the figures of sickness were

quite alarming as 114132 units at All India level, 1146 units in Punjab and 650

units in Haryana were sick in 2006-07. Out of these sick units, 4287 were

potentially viable and 109011 were potentially non viable at All India level.

However, the corresponding figures for Punjab were 127 units and 1015 units and

for Haryana were 10 units and 630 units respectively. For the remaining units both

at State level and All India level the viability has not yet been decided. Further, theanalysis showed a negative annual growth rate of sick small scale industrial units

to the tune of (-) 4.52 percent in Punjab, (-) 6.21 percent in Haryana and

(-) 2.41 percent at All India level during 1986-87 to 2006-07, which is a cause of

serious concern for planners and policy makers to meet the challenges of

globalisation in the reformed era.


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Furthermore, it was also observed that the annual growth rate of the

amount outstanding against small scale industrial sector at All India level was 5.50

percent per annum, while for potentially viable units and potentially non-viableunits it were (-)1.37 percent and 6.65 percent respectively. In case of Punjab and

Haryana, the growth rate of the amount outstanding against this sector was 3.29

percent and 0.85 percent respectively. While for the potentially viable units it was

(-) 6.90 percent in Punjab and (-) 7.91 percent in Haryana and for potentially non-

viable units the growth rates was 3.90 percent and (-)2.07 percent respectively.

Therefore, high indebtedness of small scale industrial units and potentially non-

viable units hampers the development of this sector and increases the non

performing assets of the financial institutions.

To assess the working capital requirements and its availability in the small

scale industrial sector of Punjab, Haryana vis-a-vis All India during the period

1981-82 to 2006-07, the methodology suggested by the Nayak Committee (1992)

has been used to work out the working capital gap. A shortfall of the working

capital to the tune of Rs.42567.66 crore has been observed for the year 2006-07 in

small scale industrial sector of India, whereas in Punjab and Haryana it was Rs.

707.91crore and Rs. (-)1964.85 crore respectively. The comparison of growth rates

of working capital gap in Punjab, Haryana vis-a-visAll India, showed that at All

India level it grew at the rate of 5.5 percent per annum in comparison to 15 percent

per annum in Punjab and (-)7.3 per cent per annum in Haryana in the entire period.

Further, in the pre reforms period it grew by 8.5 percent at All India level (-)13.1

per cent and 0.4 per cent in Punjab and Haryana respectively. However, in the post

reforms period the working capital gap increased to 24.7 percent at All India level,

10.3 percent in Punjab and declined to (-)15.2 per cent in Haryana. Hence, during

the post reforms period, working capital gap has been observed to be rising in

Punjab and All India, thereby reflecting a shortfall in the availability of working

capital to small scale industrial sector from the financial institutions in the


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reformed era. In Haryana, during the post reforms period, the working capital gap

observed to be declining relative to the pre reforms period, thereby reflecting the

availability of working capital to small scale industrial sector of Haryana from thevarious financial institutions.

Furthermore, the application of Granger Causality Test and F-statistics

proved that in case of India and Punjab, working capital gap significantly caused

sickness in small scale industrial sector, whereas, the impact is not so strong in

Haryana. On the other hand, causality from sickness to working capital gap is

missing and a unidirectional causality has been observed, thereby showing that the

gap in working capital is a significant driver of sickness in small scale industrial

sector. Though, the government of India framed an elaborate financial

infrastructure comprising of banking and non-banking financial institutions to

meet the credit requirements of small scale industrial sector but over the years, the

organisational framework failed to render the desired financial services for small

scale industrial sector to meet the challenges of globalisation. Hence, on the basis

of the actual availability and projected requirements of credit, the situation is

critical as the financial institutions have still a long way to travel to meet the

genuine credit requirements of the small scale industrial sector. Therefore, Indian

financial system must ensure cheap availability and continuous flow of credit to

ensure the sustainable growth of small scale industrial sector both at national and

regional level in the reformed era.

***************

financial performance and sickness

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