-PROBLEMS AND PROSPECTS

FINANCING MICRO AND SMALL ENTERPRISES

Made By:Group 18

Anshal ChaturvediRiya ChhabriaApurva Kulkarni

IntroductionMSME stands for Micro, Small and Medium

Enterprises also known as ‘Town and Village’ Enterprises.

SME’s are mainly skill oriented.

This sector contains an element of “Welfare of Masses”.

Different parameters in Different countries, like Man power, Turn over, Working Hours….etc.

Definition of MSMEs

Type Manufacturing Enterprise

Service Enterprise

Micro Upto Rs. 25 Lakhs

Up to Rs. 10 Lakhs

Small Rs 25 Lakhs to 5 Crore

Rs. 10 Lakhs to Rs. 2 Crores

Medium Rs. 5 Crores to Rs. 10 Crores

Rs 2 Crores to Rs 5 Crores

Classification Of MSME Within The Priority Sector

The Micro and Small Enterprises (manufacturing and service) will be Classified under Priority Sector.

The Micro and Small (Service) enterprises shall include Small Road and Water Transport Operator, Small Business, Professional and Self-employed Persons and all other service enterprises. Retail Trade will not be classified under Micro and Small enterprises (service sector).

Classification Of MSME Within The Priority SectorSmall Road and Water Transport Operator

(SRWTO), Small Business, Professional and Self Employed Persons (PSEP) will be classified as per the original cost of equipments either under Micro or Small Enterprises (service) sector instead of earlier classification/ definition of 10 vehicles in case of SRWTO and working capital and /or Term loan limits in case of SmallBusiness/ Professional and Self employed persons.

Classification Of MSME Within The Priority Sector

If the following Storage Units, registered as SSI Unit/Micro or Small Enterprises, the loans granted to such units may be classified as Small Enterprises Sector

“Loans for construction and running of storage facilities (warehouse, market yards, godowns and silos), including Cold Storage Units designed to store agriculture produce/ products, irrespective of location”.

Lending to Medium Enterprises will not be included under Priority Sector.

Manufacturing Activities Medical Equipment and Ayurvedic Product

Composite unit of Bacon Processing and Piggery Farm

Tobacco Processing

Beedi/Cigarette manufacturing and other tobacco Products

Extraction of Agave Spirit from Agave juice; (imported medicinal plant ) extraction of Agave

Manufacturing Activities

Manufacture of Bio-Fertilizer

Piggery Farm without bacon processing as this is a farming activity.

The activity of “Bee-Keeping” being

farming allied activity.

DIRECT FINANACE:

1. All loans granted to Small Enterprises includingMicro Enterprises (both Manufacturing and Services) will be classified under Direct Finance to Micro andSmall Enterprises Sector.

2. Khadi and Village Industries Sector (KVI):

All advances granted to units in the KVI sector, Irrespective of Sector their size of operation, locationand amount of original investment in Plant andMachinery, will be eligible forconsideration under the Sub Target (60 percent) of

theSmall Enterprises segment within the Priority Sector.

INDIRECT FINANCE

1. Indirect Finance to the Small (manufacturing as well as service) Enterprises sector will include credit to:-i. Persons involved in assisting the decentralized sector in the supply of inputs to and marketing of outputs of artisans, village and cottage industries.

ii. Advances to cooperatives of producers in the decentralized sector viz., artisans, village and cottage industries.

INDIRECT FINANCE3. Existing investments as on 31st March, 2007,

madeby banks in special bonds issued by NABARD with the objective of financing exclusively non-farm sector

maybe classified as Indirect fiancé to Small Enterprisesector till the date of maturity of such bonds of March31, 2010, whichever is earlier. Investment in such special bonds made subsequent to March 31, 2007 will, however, not be eligible for such classification .

4. Loans granted by banks to NBFCs for onlending to Small and Micro enterprises(manufacturing as well as service).

MSMED Act 2006

In India, the MSMED Act 2006 has come into force on 02nd Oct. 2006 which facilitates:

(i) Promotion and Development of SMEs(ii) Enhancing their competitiveness.(iii) Generation of Employment.(iv) Generation of income/profit to boost

GDP.(v) Increasing Exports.

Overview

The world over there has been a significant thrust for growth of Micro and Small Enterprises mainly due to sector’s ability to deliver quality products /services at cheaper and to provide large scale employment.

CALCULATION OF INVESTMENT FOR PLANT & MACHINERY

In case of MSME advances, if the branches are unable to assess original investment criteria, a certificate with regard to investment in plant and machinery / equipment should be obtained from a Chartered Accountant.

In calculating the value of plant and machinery for the purpose of calculating investment limit, the original price thereof, irrespective of whether the plant and machinery are new or second hand shall be taken into account. In case the Branch is unable to assess the original investment criteria, a certificate with regard to investment in plant/machinery/equipment etc. would be obtained from a Chartered Accountant.

The investment in establishing of wind mill/s to generate electricity for captive consumption or partly for captive consumption and remaining power to sell to Electricity Boards/others are to be included in the investment in plant and machinery.

Processing of Loan Application

Application Format: Revised Simplified Loan Application Form

prescribed by IBA alongwih check list and undertaking of the applicant, will be applicable for Micro and Small Enterprises (MSEs)

For loan beyond Rs.25Lacs, branches may obtain additional information from the borrower, as deemed necessary, as incorporated in the checklist enclosed to the loan application form.

Loan Application Form (ADV-Comm) and Checklist enclosed will be applicable for Medium Enterprises only.

Processing of Loan Application

Fair Practice Code for Lenders Liabilities

Before handing over the Application Forms to applicant, the modification / addition as applicable under guidelines on Fair Practice Code for Lender’s Liabilities will be complied as under: (a) Information regarding Processing Fee, Service Charges, and Refund etc. will be annexed as a part of application form.

(b) An undertaking to be obtained from the prospective borrower while accepting application that he has been briefed about and convinced about the charges, bank will levy on pre/post sanction of the loan.

Processing of Loan Application

Issue of Acknowledgement of Loan Applications : Each branch will issue an acknowledgement for loan applications received from the borrowers towards financing under this sector and maintain the record of the same.

Processing of Loan Application

Disposal of Applications: In case of Loans up to Rs.25000/- : Within 2 weeksIn case of Loans above Rs.25000/- : Within 4 Weeks(Provided the loan applications are complete in all respects and accompanied by a 'check list' enclosed to the application form)

Processing of Loan Application

Register of Receipt/Sanction/Rejection of Applications: a. A register should be maintained at branch wherein the date of receipt, sanction / disbursement ,rejection with reasons , should be recorded. The register should be made available to facilitate verification by the Bank’s officials including Zonal Manager during visit to the branch. b. Branch Manager may reject application (except in respect of SC/ST). In the case of proposals from SC/ST, rejection should be done at a level higher than Branch Manager. c. The reason for rejection will be communicated to the borrower in line with stipulation mentioned in the Fair Practice Lenders Code.

Processing of Loan Application

Photographs of Borrowers While there is no objection to take photographs of the borrowers, for the purpose of identification, branches themselves should make arrangements for the photographs and also bear the cost of photographs of borrowers falling in the category of Weaker Sections. It should also be ensured that the procedure does not involve any delay in loan disbursement.

TYPES OF CREDIT FACILITIESThe Bank may provide all types of funded

and non funded facilities to the borrower under this sector viz, Term Loan, Cash Credit, Letter of Credit, Bank guarantee, etc.

A Composite Loan with maximum limit upto Rs.1.00 crore may be considered by bank to enable the Micro and Small Enterprises {both for manufacturing and service sector} to avail of their working capital and Term loan requirement through Single Window.

ACTIVITIES OF SME’s

Any commercial activity permissible under law i.e. any type of manufacturing, processing or industrial activity or trading or allied operations.

Some of few are:

1. Servicing & repairing machinery and equipment, including agro service units

2. Village and cottage industries3. Computer software development and

computer services

Medical /Legal transcription activities Call Centers Event development and animation Video film making Marketing consultancy. Equipment rental & leasing. Laundry/X-rays/ pathology/

Tailoring/Studios/Cable TV network.

ACTIVITIES OF SME’s

SME’s Financing Features

Involvement of lesser amount of financial resources.

Lower gestation period.Wide scope of marketing.They are mostly run by promoters /Owners.They are operated mainly in Rural and

Semi Urban areas showing their national presence.

Importance of SME’s

Large-scale generation of wage employment.

Growth in GDP. MSME’s not only account for 80% of the total number of Industrial Enterprises in the country but are also the second largest employment providing sectors in the country after agriculture.

This sector is a growth-driver in the economy.

It is possible to set up SMEs in large numbers in a country in order to usher in rapid progress and growth.

40/50% of output/services originated from this sector.

30% of Indian Exports are on account of SMEs.

Importance of SME’s

Ganguly Committee

The “Ganguly Committee’ has thoroughlyexamined the issues confronting SMEs andsuggested the following:

Institutional Finance should be made available on suitable terms.

Units having linkages with large corporate as vendors/suppliers should be extended credit, with an appropriate tie up to facilitate recovery.

Cluster of SMES based on Trade record.

SIDBI/Banks to promote national level SME development fund.

SIDBI to provide technical support.

To promote a specific SME Rating Agency to provide comfort to the banks financing SMES

Setting up of Micro Finance Intermediaries to accelerate the growth of SMEs.

Govt. InitiativesGovernment of India has initiated the

following steps for the speedy growth of SMEs.

Ministry of Finance has announced a policy for doubling of outstanding credit to Micro and Small Enterprise Sector by the year 2009-10.

A minimum of year-to-year growth of 20% is to be achieved under outstanding in this sector.

Introduced credit linked capital subsidy scheme for SME sector

In lines with SME sector introduced various employment generation schemes to cater to the needy people from Rural and Urban.

A Technology bureau for SMEs has been set up as a starting process for promoting SMEs.

Provision for composite Loan limit.

Ensuring that banks extend loan at a lower rate of interest as against Benchmark rate.

Opening of specialized SME Branches.

Introduced LUCC (Laghu Udyami Credit Card)

A credit guarantee fund trust (CGFT) has been promoted

Concessions to SME’sDelayed payments to micro and small

enterprises:

Where MSME supply goods or render services, the buyer shall make payment on or before the date agreed upon between them in writing (where not agreed in writing with in 45 days), else should pay compound interest with monthly rests from the due date at 3 times the Bank rate.

Where the buyer contravenes the provision, he shall be punishable with a fine of not less than Rs.10,000/-

PNB Schemes for SME’s

In PNB there is 20% discount in processing/upfront fee in case of applications received on-line in respect of SME borrowers.

Introduced simplified common loan application forms

PNB SME Sahayog Scheme

SME borrowers – Employees accounts.

Under PNB Mahila Sashtikaran Yojana, bank is providing loans to women for their upliftment.

PNB Green Card Facility.Small Road Transport Operations Scheme

(SRTO).Credit Linked Capital Subsidy Scheme for

Technology Up-Gradations (CLCSS).Prime Minister Rural Employment

Generation Programme (PMEGP).

BCSBI (Banking Codes and Standards Board of India) has introduced ‘Code of Bank’s Commitment to SME in short as SME Code.

Bank has adopted SME code to give a positive trust to the SME sector by providing easy access to banking services; promote good and fair banking practices by setting minimum standards and increase transparency.

Besides the above promoters of MSMEs may be provided necessary training or awareness programmes on business measurement on an ongoing basis at industrial training institute of the government or at the training centres of public sector banks.

Problem for SME SectorLow capital base and inadequate

availability of institutional funds.Low technology base.Absence / Inadequacy of quality control

assessmentWeak/ ineffective management.Unable to cope with contemporary business

requirements.Higher NPA’s of Banks in SME sector

creates risk aversion in lending.Competition from large sized units.Unable to providing documents required for

bank finance due to lack of awareness.

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