“PROBLEM OF TIMELY AVAILABLILTY OF

WORKING CAPITAL TO SME’S”

EXECUTIVE SUMMARYSmall and Medium Enterprises (SMEs) are a key factor in the economic development and

innovation. The core of the political and economic transformation of any country is the

creation of the private sector, the development of entrepreneurship and creation of SMEs.

They are considered to be one of the principal driving forces in economic development.

SMEs stimulate private ownership and entrepreneurial skills, they are flexible and can

adapt quickly to changing market demand and supply situations, they generate

employment, help diversify economic activity and make a significant contribution to

exports and trade. SMEs also play an important role in innovation and the high-tech

business, due to their flexibility and creativity many of them became large businesses.

But despite their significant role in the development of an economy they face many

problems and one such problem is the timely availability of working capital. Funds

employed in current assets constitute working capital. It is infact referred to as life-blood’

or ‘controlling-nerve’ of the unit. The concept used for working capital may be gross

working capital or net working capital. Gross working capital constitutes current assets,

whereas net working capital means current asset minus current liabilities.

The above stated problem arises mainly due to delay in payments made by the debtors.

The funds of many SME industrial units are blocked in receivables. As a result, recycling

of funds is affected and production suffers. In a competitive environment, it must be

ensured that receivable dues are realized with utmost expedition. The SME units will

have to make special efforts for collection of their dues for their growth.

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Another concern for the SME’s is to minimize their dependence on fund-based credit. In

order to fulfill the working capital requirements of the business, the entrepreneurs

normally take up various types of fund-based credit facilities namely cash credit,

overdraft, demand loan, bill discount/purchase etc. from banks, but this sometimes

increases their operating cost and hence makes them less competitive. The funds lent to

the unit get paid on realization of sale proceeds towards the end of the production cycle,

but it creates a problem for the unit in case payments are delayed from the debtors. Thus

working capital facilities are intended to finance current assets.

Other important components of working capital are cash and inventory. Cash is one of the most

important components of the working capital. It allows a business to meet its day-to-day

expenses and inventory is a list for goods and materials, or those goods and materials

themselves, held available in stock by a business. Problems related to the aspects are

discussed in the report.

The report also discusses about some of the initiatives taken by the Government of India

in this regard like setting up of SIDBI, NABARD and other schemes.

Finally the report concludes with the suggestions and conclusions.

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TABLE OF CONTENTS

S.NO. PARTICULARS PAGE NO.

1 INTRODUCTION

I) NATURE OF THE STUDY 7

II) SIGNIFICANCE OF THE STUDY 7

III) SCOPE OF THE STUDY 7

2 SME’S

I) AN INTRODUCTION

II) COMMON CHARACTERISTICS OF SME’S

3 WORKING CAPITAL

I) AN INTRODUCTION

II) WORKING CAPITAL MANAGEMENT

4UNITMELY AVAILABILITY OF WORKING

CAPITAL: REASONS

I) DELAY IN PAYMENTS

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II) PROBLEMS WITH FUND-BASED CREDIT

III) PROBLEM WITH CASH MANAGEMENT

IV) PROBLEMS WITH INVENTORY MANAGEMENT

5SOME INITIATIVES TAKEN BY THE

GOVERNMENT OF INDIA

I) INFRASTRUCTURAL FACILITIES

II) VARIOUS CREDIT SCHEMES AVAILABLE

III) SMALL SCALE SERVICE & BUSINESS

ENTERPRISES

III) PRIORITY SECTOR LENDING

IV) NAYAK COMMITTEE (1991-92)

V) SEVEN POINT ACTION PLAN (1995-96)

VI) KAPUR COMMITTEE (1997-98)

VII) NABARD

IX) FINANCIAL INCLUSION

S.NO. PARTICULARS PAGE.NO.

X) NATIONAL EQUITY FUND SCHEME

IX) DIRECT CREDIT SCHEMES

X) TECHNOLOGY UPGRADATION FUND SCHEME FOR

TEXTILE INDUSTRIES

XI) DIRECT DISCOUNTING SCHEME-EQUIPMENT

XII) COMPOSITE LOAN SCHEME

XIII) SINGLE WINDOW SCEMES

XIV) NEED OF THE HOUR

6 LIST OF KEY FINANCIAL INSTITUTIONS

7 SUGGESTIONS

8 CONCLUSIONS

9 BIBLIOGRAPHY

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INTRODUCTION

NATURE OF THE STUDY: STATEMENT OF THE PROBLEM

The problem which is addressed in this study is one of the most talked about issue i.e. the

problem of timely availability of working capital to SME’s. The above mentioned problem

will be addressed in this study by a detailed literature review from various available sources

and through a case study of an SME facing this problem.

RATIONALE AND SIGNIFICANCE OF THE STUDY

SME’s form the back bone of any nation whether developing or developed. But the irony is

that the real issues and problems that SME’s have been facing are not addressed as they

should be. One such problem is the problem of timely availability of working capital.

Finance forms the life line of any business and if it not available when needed the most all

day to day operations are effected and this in turn leads to various other problems (the worst

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result due to non-timely availability of working capital could be the closure of the

enterprise). So it is significant to understand the business environment and how it creates a

problem like scarcity of working capital of an enterprise. The study undertaken is also

important so as to ascertain the impact of non-availability of working capital in time to

SME’s, on SME’s, large enterprises and the economy as a whole.

SCOPE OF THE STUDY

The scope of the study is confined to study the reasons for non-timely availability of working

capital to SME’s and resultant impact it has on SME’s, large enterprises and the Indian

economy as a whole. The study will be undertaken based on literature review from the

available resources like national daily newspapers, financial newspapers, websites of various

entities like SIDBI etc, certain magazines like the analyst (ICFAI press) and any other

resource available. The study will also cover a case study of an SME which is facing the

above mentioned problem. The limitation of the study is that the study is based on only

literature review and no survey or field study will be conducted, hence limiting the scope of

the study.

SME’S

AN INTRODUCTION

Small is beautiful but is it Powerful? Yes, say the SMEs. SMEs have been stories that

happened away from the public eye, not seen and hence, not known. But can one ignore

the silent march of a multitude, relentlessly servicing the behemoths. The Report Card of

the SSI Sector reads thus:

The growth recorded by SSI in India is 2% more than any other sector; it accounts for

40% of the country’s GDP, 35% of Direct exports, 15% of Indirect Exports (through

Merchant Exporters, Trading Houses & Export Houses) and employs more than 20

million people. The SSIs needs just Rs. 60, 000 – 70, 000 to generate employment for one

man, while for the same a whopping 5-6lakhs is required for other sectors.

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An investment of Rs.1 million in fixed assets can generate Rs.4.62 million of Goods or

Services with an approximate value addition of 10%, investment of Rs. 1Lakh can

provide employment to 4 people.

The exports from SSI sector has ridden on the performance of garments (readymade

garments, woollen garments and knitwear), leather and gems and jewellery, sports goods,

plastic products, processed food units from this sector. It is also pertinent to note that the

non-traditional products constitute a massive 95% of the SSI exports.

Small and Medium Enterprises (SME) sector in India is the key driver of the nation's

economic growth with a contribution of over 40 per cent to the country's industrial output

and around 35 per cent to direct exports. It accounts for over 90 per cent of the industrial

units in the country. In terms of employment, this sector plays a very crucial role, being

the second largest employer after agriculture. The impressive performance has been in

spite of the inadequacies in capital, technology and marketing. In the current economic

slowdown, SME sector has been hit very hard due to rising interest rates and financial

crunch.

As a result of this economic slowdown and global markets collapsing there is a decline in

the cash reserve and the working capital becomes more difficult and has resulted in cut

down on orders and piling up of pending payments. The severely affected sectors are

Gems & Jewellery, textiles, auto parts and handicrafts. SMEs in the country are facing

numerous problems relating to basic infrastructure facilities like uninterrupted power

supply, efficient rail-road connectivity, etc. This vital sector needs Government support

in terms of financial, regulatory, procedural reforms for sustaining its growth in the

current economic slowdown. Although SME’S can be defined in a number of ways but in

accordance with the provision of Micro, Small & Medium Enterprises Development

(MSMED) Act, 2006 the Micro, Small and Medium Enterprises   (MSME) are classified

as:

   (a) Manufacturing Enterprises- The enterprises engaged in the manufacture or

production of goods pertaining to any industry specified in the first schedule to the

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industries (Development and regulation) Act, 1951). The Manufacturing Enterprise is

defined in terms of   investment in Plant & Machinery.

   (b) Service Enterprises:  The enterprises engaged in providing or rendering of services

and are defined in terms of investment in equipment.

The limit for investment in plant and machinery / equipment for manufacturing / service

enterprises, as stated as under:

MANUFACTURING SECTOR

Enterprises Investment in plant & machinery

    Micro Enterprises Does not exceed twenty five lakh rupees

    Small Enterprises More than twenty five lakh rupees but does not exceed five crore rupees

    Medium Enterprises  More than five crore rupees but does not exceed ten  crore rupees

TABLE 1.1 CLASSIFICATION OF SME’S IN MANUFACTURING SECTOR

SERVICE SECTOR

    Enterprises  Investment in equipments

    Micro Enterprises Does not exceed ten lakh rupees:

    Small Enterprises  More than  ten lakh rupees but does not exceed two crore rupees

    Medium Enterprises  More than two crore rupees but does not exceed five core rupees

TABLE 1.2 CLASSIFICATION OF SME’S IN SERVICE SECTOR

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The Industries Development And Regulation Act, 1951, defines SMEs according to

limits in Investment in Plant & Machinery. The small-scale sector, in India, comprises of:

The abstractness in defining a SME presents difficulty in identifying them , formulate &

implement suitable policies for them.

The limit on investment in Plant & Machinery and a plethora of laws governing (58 laws

in 7 different categories) them, some of the SSIs seek refuge in remaining small inspite of

opportunities to grow. The small size, opacity of the firms and their lack of awareness

have bred the following hindrances to their growth:

1. Under-utilization of Capacities.

2. Inadequate and Untimely Credit Flows.

3. Inability in Technology upgradation.

4. Inefficient raw material procurement.

5. Inability to Market Finished Goods.

6. Ineffective monitoring and feedback mechanism.

COMMON CHARACTERISTICS OF SMEs:

(a) Born out of individual initiatives & skills

SME startups tend to evolve along a single entrepreneur or a small group of

entrepreneurs; in many cases; leveraging on a skill set. There are other SMEs being set up

purely as a means of earning livelihood. These includes many trading and retail

establishments while most countries continue SMEs to manufacturing services, others

adopt a broader definition and include retailing as well.

(b) Greater operational flexibility

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The direct involvement of owner(s), coupled with flat hierarchical structures and less

number of people ensure that there is greater operational flexibility. Decision making

such as changes in price mix or product mix in response to market conditions is faster.

(c) Low cost of production

SMEs have lower overheads. This translates to lower cost of production, at least upto

limited volumes.

(d) High propensity to adopt technology

Traditionally SMEs have shown a propensity of being able to adopt and internalize the

technology being used by them.

(e) High capacity to innovate export:

SMEs skill in innovation, improvisation and reverse engineering are legendary. By being

able to meet niche requirements, they are also able to capture export markets where

volumes are not huge.

(f) High employment orientation:

SMEs are usually the prime drives of jobs, in some cases creating upto 80%. Jobs SMEs

tend to be labor intensive per se and are able to generate more jobs for every unit of

investment, compared to their bigger counterparts.

(g) Utilization of locally available human & material resources

SMEs provide jobs locally and hence utilise manpower available locally. Since it is

available for them to transport materials over long distances, they often improvise with

materials which are available locally.

(h) Reduction of regional imbalances

Unlike large industries where divisibility of operations is more difficult, SMEs enjoy the

flexibility of location. Thus, any country, SMEs can be found spread virtually right

across, even through some specific location s emerge as ‘clusters’ for units of a similar

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kind. Nevertheless, the spread of SMEs is a fact which enhances their attraction from a

national or regional policy.

WORKING CAPITAL

AN INTRODUCTION

Any industrial establishment requires broadly two kinds of funds. The first one is long-

term funds which are required for the purchase of fixed assets such as land, building,

machineries, electrical installations, start up expenses, development expenses, purchase

of goodwill, purchase of furniture, purchase of vehicles and other items to bring the

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establishment into operation. The second kind is short-term funds. These are required to

meet the needs of day-to-day expenses such as raw-materials, stores, power and fuel,

salaries, wages, administrative expenses, interest, sales and distribution expenses and

other expenses to produce the saleable goods, upto the realization of the sale proceeds.

Till the sale proceeds are realized, the inventory is built up to facilitate smooth

production and outstanding bills i.e. debtors are also financed by the short-term funds. In

due course the establishment also gets some credit from their supplier which is indirect

financing of the short-term funds.

Funds employed in current assets constitute working capital. It is infact the life-blood’

and ‘controlling-nerve’ of the unit. The concept used for working capital may be gross

working capital or net working capital. Gross working capital constitute current assets,

whereas net working capital means current asset minus current liabilities. Working

capital, also known as net working capital, is a financial metric which represents

operating liquidity available to a business. Along with fixed assets such as plant and

equipment, working capital is considered a part of operating capital. It is calculated as

current assets minus current liabilities. If current assets are less than current liabilities, an

entity has a working capital deficiency, also called a working capital deficit. A

company can be endowed with assets and profitability but short of liquidity if its assets

cannot readily be converted into cash. Positive working capital is required to ensure that a

firm is able to continue its operations and that it has sufficient funds to satisfy both

maturing short-term debt and upcoming operational expenses.

The management of working capital involves managing inventories, accounts receivable

and payable and cash. How much working capital will be required by a particular

industrial undertaking will depend upon the production cycle i.e. from the time raw

material is purchased to the time goods are sold and cash is realized (operating cycle).

Therefore, the working capital for a unit would mean the total current assets it has to

hold.

Operating cycle depends upon the following actions:

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Seasonality Stock cut/safety Economy of purchases Bunched receipts Production process Disturbance in production process Disturbance in sales due to transport problems Disturbance in sales due to depression in market Terms of sale and Slow billing (slow collection etc.)

Many newly started units become sick or run into fatal problems due to defective

financial plan. The plan adopted may fail to provide adequate capital to meet the needs of

both fixed and working capital, particularly the later. There are instances where units

have been able to obtain sufficient funds to buy a plant but failed to equip the same and

conduct production operations successfully because of faulty assessment of working

capital needs.

As far as the requirement of purchase of fixed assets is concerned, it is almost certain

what items are to be purchased and how much amount will be involved and usually the

decision for this expenditure is taken in the very beginning. If a borrower approaches for

funds for this purpose, bankers examine the technical feasibility, economic validity and

managerial competency before deciding to sanction the loan. There is not much problem

to sanction it, provided the banker is satisfied about the earning capacity and the

repayment schedule. Both the bankers as well as borrower have to decide about it only

once.

On the other hand, amount of working capital required by the concerned unit may vary

from time to time, depending upon various factors such as cost of raw material,

utilization capacity, marketing arrangements etc. It is on account of this fact that

entrepreneurs usually spend most of their time to manage working capital requirements.

Prior to nationalization, banks largely financed medium and large-scale industries and

traders. There was inequitable distribution of credit amongst different sector and

geographical areas. The security oriented-approach of banks resulted in credit being

available only to the well-to-do, thus leading to concentration of economic power in their

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hands. Even upto 1973, industries did not have to plan their credits since it was easily

available against collaterals. Banks on their part did not think of credit planning because

banks were flush with funds.

WORKING CAPITAL MANAGEMENT

Decisions relating to working capital and short term financing are referred to as working

capital management. These involve managing the relationship between a firm's short-

term assets and its short-term liabilities. The goal of working capital management is to

ensure that the firm is able to continue its operations and that it has sufficient cash flow to

satisfy both maturing short-term debt and upcoming operational expenses. By definition,

working capital management entails short term decisions - generally, relating to the next

one year periods, which are "reversible". These decisions are therefore not taken on the

same basis as Capital Investment Decisions rather they will be based on cash flows and /

or profitability. One measure of cash flow is provided by the cash conversion cycle -

the net number of days from the outlay of cash for raw material to receiving payment

from the customer. As a management tool, this metric makes explicit the inter-relatedness

of decisions relating to inventories, accounts receivable and payable, and cash. Because

this number effectively corresponds to the time that the firm's cash is tied up in

operations and unavailable for other activities, management generally aims at a low net

count.

Guided by the above criteria, management will use a combination of policies and

techniques for the management of working capital. These policies aim at managing the

current assets (generally cash and cash equivalents, inventories and debtors) and the

short term financing, such that cash flows and returns are acceptable.

Cash management . Identify the cash balance which allows for the business to

meet day to day expenses, but reduces cash holding costs.

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Inventory management. Identify the level of inventory which allows for

uninterrupted production but reduces the investment in raw materials - and

minimizes reordering costs - and hence increases cash flow.

Debtor’s management. Identify the appropriate credit policy, i.e. credit terms

which will attract customers, such that any impact on cash flows and the cash

conversion cycle will be offset by increased revenue and hence Return on Capital

(or vice versa).

Short term financing. Identify the appropriate source of financing, given the

cash conversion cycle: the inventory is ideally financed by credit granted by the

supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to

"convert debtors to cash" through "factoring".

UNTIMELY AVAILABILITY OF WORKING CAPITAL : COMMON REASONS

DELAY IN PAYMENTS BY DEBTORS

The funds of many SME industrial units are blocked in receivables. As a result, recycling

of funds is affected and production suffers. In a competitive environment, it must be

15

ensured that receivable dues are realized with utmost expedition. The SME units will

have to make special efforts for collection of their dues for their growth.

As India’s economy begins to slow after expanding by at least 9% for the past three

years, some large companies are delaying payments to suppliers, resulting in some of

these suppliers going out of business or laying off jobs, according to associations that

represent so-called small and medium enterprises, or SMEs. Even in normal course of

business and a stable economic environment, large enterprises always try to take

advantage of SME’s by delaying their payment. In fact they use this money to meet their

current working capital/finance needs in order to run their business.

Such defaults also highlight the violation of a law passed in 2006 to protect small

enterprises. According to the Micro, Small and Medium Enterprises Development Act,

large companies that source products or services from small enterprises have to pay them

within 45 days. While the law says SMEs can complain to centres in their respective

states in case of non-payment and that such complaints will be addressed within 90 days

of being filed, the associations claim that this is rarely the case as a matter of fact, most

entrepreneurs do not seem to have any information about the above stated law.

Few states like Tamil Nadu even have a complaints body. The complaints body in Tamil

Nadu received 500-600 complaints in the past year, mostly against companies in the

automobile, heavy equipment and power equipment businesses.

According to Gandhi Kumar, president, Tamil Nadu Small and Tiny Industries

Association, thus far, only 42-45 complaints have been addressed.

Maharashtra, which has at least 1,400 industrial estates out of which SMEs operate, is yet

to set up a complaints body. Such bodies exist in Uttar Pradesh, Andhra Pradesh, Gujarat

and the north-eastern states but they’re barely functional.

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It is an established fact that in most cases payments are made after six months, and

sometimes after a year, exceeding the 45-day credit period stipulated by law. Large

companies are also required to mention payments to small enterprises according to the

Companies Act. A random survey of seven large companies based out of Uttar Pradesh

showed that this wasn’t being done, said Praveen Saldana, president of Indian Industries

Association, which has 45,000 direct and indirect members with representations from

handicraft, leather and glass manufacturers.

Such buyers conveniently blame quality, he added. “After receiving their material, many

big companies withhold payment saying the material is under inspection.” “If you want to

delay payment, you can have many reasons,” said Prithvi Raj, who runs a small

packaging firm, Bharat Printing and Packaging in Bangalore. “(Big) companies have

always delayed payments by 90-180 days. Such unjustified delay in payments can be

cited as one of the reasons for drying up the working capital of the SME’s. The economic

slowdown has now put them in a even tighter spot as the priorities of this sector are

pushed too far below the ladder.” India’s industrial landscape is dotted with SMEs. They

account for 40% of the country’s manufacturing output and almost half its exports. In

Maharashtra, for instance, SMEs produce around 8,500 products from plastic to scientific

appliances. They contributed 80%, or Rs30,000 crore, to the state’s tax revenue.

“Because the units do not get credit and payment on time, about 1.82 lakh units have

closed down in Maharashtra in the past eight years,” said Rakshpal Abrol, president,

Bombay Small Scale Industries Association, which has 4,600 individual members and 40

factory associations as its members.

“Since there is no council set up yet, we have nowhere to go to file complaints,” he

added. And the law is silent on several important aspects, said Damodar Avanoor, vice-

president, Kerala State Small Industries Association. “The Act explains how a respondent

can go on appeal but lacks clarity on how an award can be executed.” Almost all SME

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associations agree to the fact that while cases of non-payment are rising, many people are

hesitant to go on record for fear of being boycotted by companies.

But a more serious problem, they maintain, is the lack of awareness about the law itself.

A sample survey of 250 small entrepreneurs conducted by Milagrow, a Noida-based firm

that assists small businesses, shows that between 62% and 80% of the respondents didn’t

know that a law exists to protect payment rights.

“The facilitation council (the complaints body) exists only in name, lacking both

competence and manpower. Big companies have the clout of purchasing power. On the

other hand, small players depend on their large customers, who constitute 60-70% of

their revenue base so they rarely want to lodge a complaint,” said Rajeev Karwal,

Milagrow’s chief executive officer.

In states such as Kerala, about half the defaulters are government-owned companies; in

Tamil Nadu, government firms account for 15% of defaulters. The number is a high 80%

in the north-eastern states, said Ram Swaroop Joshi, chairman of Federation of Industries

and Commerce of the North East Region.

Government-owned companies can get away with this, said Bhardwaj, because “the

executive machinery in states, including the development commissioner, district

magistrate and police, hesitate to take action against their fellow officers in public sector

undertakings, even after judgements by facilitation councils”.

SMEs that are brave enough to take on state-owned firms suffer the consequences. A.V.

Johnson, owner of an SME in Kerala, was forced to shut shop when several customers

delayed payments. He was able to restart operations last year when the Kerala Road

Transport Corp., one of the defaulters, paid a claim of Rs22 lakh. Since then, the

stateowned firm has blacklisted him.

Rama Devi Kanneganti’s battle with a state-owned firm is far from over. The managing

partner of Hyderabad-based Shivani Engineering Industries, which assembles buses, filed

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a case against the Andhra Pradesh State Road Transport Corp. over non-payment of dues

running into a few crores of rupees.

Even before her complaint could be addressed, the corporation struck Shivani

Engineering’s name off a list of authorized suppliers. Subsequently, Kanneganti, who

also heads the Association of Lady Entrepreneurs of Andhra Pradesh, managed to get a

favourable order from a state court allowing her to continue supplies to the corporation.

“It’s a vicious cycle,” said Kanneganti over the phone from Hyderabad. “The government

wants to encourage this sector through various schemes, but the implementation of the

law is very poor. We need a mechanism where our grievances are addressed

immediately.”

As discussed in the above sections, debtors form a sizeable portion of the working capital

of a company but delay in payments by debtors of the firm, make the task of managing

working capital for a firm very difficult, as the money is not there when needed. This

results in a sudden requirement of funds for the company and hence leads to a mismatch

between demand and supply.

FUND BASED CREDIT FACILITIES

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In order to fulfill the working capital requirements of the business, the entrepreneurs

normally take up various types of fund-based credit facilities namely cash credit,

overdraft, demand loan, bill discount/purchase etc. from banks. The working capital

requirements relate to the processing, production and sale of goods/services and are

granted for bridging the financial gaps in the production cycle of the borrower unit. The

funds lent to the unit get paid on realization of sale proceeds towards the end of the

production cycle. Thus working capital facilities are intended to finance current assets.

These facilities are granted for a short period, generally up to one year, and renewed or

rolled over from year to year depending upon fresh assessment of working capital

requirements of the unit.

Working capital loan funds provide a business the cash it needs to keep growing until it

can cover all operating expenses out of revenue. Without a working capital loan most

businesses are unable to generate enough revenue to stay afloat. These funds provide

access to cash which can be used to pay rent or mortgage payments, utilities, marketing

expenses, inventory, employees, etc. Obtaining capital through this method can be

difficult for many businesses, so it is essential to have good business credit scores

established.

Building solid business credit scores are the key to obtaining substantial working capital

loan funds that can be used to grow a business. Not all types of working capital require

business credit history, but it is important to have that in place. Lenders use the business

credit scores just like they use personal credit scores when evaluating whether the

businessman is worthy of receiving capital. Making sure that the lines of credit help build

one’s credit will put him in the right direction to getting the loans that a business needs to

succeed.

There are five common types of a working capital loan. They include:

Equity: Obtained from personal resources like equity in your house, funds from friends

or family members, or from angel investors.

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Trade Creditor:  A trade creditor will extend a loan to the buyer so that he can purchase

a large quantity from the creditor’s place of business. They will often check your

business credit history before extending credit to you.

Factoring/Advances:  You can sell future credit card receipts for instant capital if your

business accepts credit cards. Another option is to sell your accounts receivable to a

factoring company who handles the collection.

Line of Credit: Your business can apply for a bank line of credit, giving you the ability

to borrow for short term needs. Good business credit scores will assist with your approval

for a line of credit.

Short term loan: A bank can also extend credit to allow you to purchase inventory for a

season. This note will typically be less than a year. Again, good established business

credit scores will nearly guarantee access to this kind of funding.

Some of the fund-based loans provided by banks to the needy SME’s in order to

fulfill their working capital requirements are:

Overdraft: Overdraft means drawing from the current account, over and above the credit

balance therein. A limit for overdraft is sanctioned for a specific purpose and period.

Overdraft facility may be secured (against government securities, company shares/bonds,

banks own fixed deposits etc.) or unsecured. Drawings can be made upto the sanctioned

limit and interest is charged at a mutually agreed rate on the daily debit balance in the

account.

Cash credit: It is a running account for drawing within a specified credit limit sanctioned

by the bank against the security of stocks (raw material, stock-in-progress, finished

goods, stores) and book debts which are pledged/hypothecated by the borrower. The

borrower submits the statements of charged assets at periodic intervals (mostly monthly)

and the bank permits the borrower to draw cash/cheques within the drawing power (value

of the charged assets less stipulated margin) that the cash credit account can sustain. The

borrowing unit uses the cash credit account for meeting the working capital requirements

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and also deposits his sale proceeds in the account. Interest at an agreed rate is charged on

the daily debit balances, which varies from day to day as per withdrawals and deposits of

funds in the cash credit account.

Demand loan: A fixed amount is advanced to the borrower initially for a specific

purpose for a short period. No subsequent withdrawals are allowed to the borrower as the

loan is a one time facility subject to periodic or lump-sum repayment along with the

interest applied to the account monthly or quarterly. Another loan may be granted by

opening a fresh account and obtaining fresh documentation.

Bills purchase/Discount: Bills of exchange are drawn by a seller upon the purchaser, as

per the credit terms agreed upon. Following are the typical features of bills

purchase/discounting facility:

The seller submits the bills alongwith the transportation receipts

(railway/lorry/air/bill of lading) to his bank.

The bank sends the documents to the drawee through the banking channel for

presentment for payment (demand bill) or presentment for acceptance (usance

bill).

The seller’s bank purchases the demand bills and discounts the usance bills by

crediting the seller’s account with the amount of the bills minus the interest

discount and handling charges.

Advances against bills are adjusted on recipt of the proceeds of the relative bills.

In case of non-payment of the bills on the due date additional interest is charged

to the seller and the amount of the bill is also recovered if it remains unpaid.

The bank ensures that bills purchased or discounted are genuine and represent

actual movement of goods from the seller to the purchasers.

Accommodation bills are the bills that are drawn without any movement of goods

from the drawer to the drawee, with a view to obtain bank finance fro non-trading

22

purpose. Banks do not fianance such bills and also take care extreme care in

financing clean bills which are not accompanied by documents of title to goods

and transport receipts evidencing movement of goods.

PROBLEMS ENCOUNTERED WITH CREDIT FACILITIES

Although there are various options available to the entrepreneur as stated above to

finance the working capital requirements, it does not often help the entrepreneurs to

meet the working capital requirements in time because some of the following

reasons:

One of the most common reasons is that many entrepreneurs are not even aware

of the ongoing schemes and methods to finance the working capital requirements.

Secondly, it ultimately increases the cost of their products and thereby making

them less competitive.

Sometimes the businessman is unable to furnish one or more details required by

the banks in the form of documentation for the approval of the credit facility.

Most of the banks, want to have with them less number of productive customers

who are sufficient to give them more business volume rather than having a large

number of small customers. This approach of the banks also acts as a hindrance

for the entrepreneurs to obtain credit. Hence, the large enterprises are in win-win

situation as even the banks favor them.

One of the common reasons of untimely availability of credit is that when a

company is unable to satisfy the bank on its ability to repay, creditworthiness and

such related criterion.

Economic conditions such as prevalent now days coupled with high rates of

interest, create a problem even for creditworthy companies to obtain credit as

banks are over-cautious in lending to borrowers and this lack of confidence

23

among the borrowers and lenders makes it very difficult for the companies to

finance working capital requirements in time.

PROBLEMS RELATED TO CASH MANAGEMENT

Cash is one of the most important components of the working capital. It allows a business

to meet its day-to-day expenses. Companies cannot be entirely run on cash basis as credit

also forms an indispensable part of a business. But companies do not have enough cash

generation so that it becomes sufficient to meet their cash related working capital

requirements. Another point to note here is that cash has no substitute. SME’s mostly

operate on low volumes and thin margins and hence they require cash regularly and often

face cash related problems mainly because of the following reasons:

Cash is required on daily basis i.e. for day-to-day expenses like conveyance bills,

stationary, tea and snacks, payments made to various governmental agencies (for

obtaining license, permissions or for some other purpose), security deposits, fuel

expenses for DG sets, maintenance of vehicles and other assets, purchase of petty

items, making salary and wage payments etc. This makes cash management

extremely necessary as it has high probability to fall short of demand.

SME’s, especially new entrants or small companies generally do not get credit

from their supplier; also they are sometimes enticed by the additional cash

payment discounts offered by the suppliers. This means they generally have to

buy a majority of their raw material against cash payments. Even if they enjoy

some credit from the suppliers (i.e. only after a certain period of time or certain

number of transactions) it is far less than what SME’s have to provide to their

buyers.

24

SME’s generally operate on low profit margins, so they want to cash on every

opportunity to make/save money. Hence sometimes due to low volumes and thin

profit margins they are forced to take decisions like to stock surplus raw material,

which is consumed regularly, when the prices are low and are expected to rise in

the near future. Also most of the large enterprises are following the best of the

available techniques for their inventory management like JIT, hence it is the

supplier (SME’s) that have to bear the brunt by keeping adequate inventory to

adhere to the supply schedules provided to them. This activity consumes

cash/investments which create a shortage of funds for the company and it also

increases the holding cost for the company.

Labor is to be paid for their efforts on a monthly basis and it does not work on the

principle of credit. Wages are mostly paid in cash and in many cases even salary

is paid in cash as people employed do not usually have enough savings with them,

hence they want their wages/salary in time. This means additional pressure and

cash requirement every month. Where as in large enterprises people employed are

hardly paid in cash and in case of any eventuality they always have support from

the financial institutions/banks to finance their current needs.

Hence the above listed points make it imperative to have a regular cash flow for SME’s

as against large enterprises as otherwise it could mean extra cost for the company. The

aim should be to minimize the cost of financing the working capital requirements.

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PROBLEMS RELATED TO INVENTORY MANAGEMENT PRACTICES

Inventory is a list for goods and materials, or those goods and materials themselves, held

available in stock by a business.

THE REASONS FOR KEEPING STOCK

There are three basic reasons for keeping an inventory:

1. Time - The time lags present in the supply chain, from supplier to user at every

stage, requires that you maintain certain amount of inventory to use in this "lead

time"

2. Uncertainty - Inventories are maintained as buffers to meet uncertainties in

demand, supply and movements of goods.

3. Economies of scale - Ideal condition of "one unit at a time at a place where user

needs it, when he needs it" principle tends to incur lots of costs in terms of

logistics. So bulk buying, movement and storing brings in economies of scale,

thus inventory.

INVENTORY EXAMPLES

26

While accountants often discuss inventory in terms of goods for sale, organizations -

manufacturers, service-providers and not-for-profits also have inventories (fixtures,

furniture, supplies ...) that they do not intend to sell. Manufacturers', distributors’', and

wholesalers' inventory tends to cluster in warehouses. Retailers’ inventory may exist in a

warehouse or in a shop or store accessible to customers. Inventories not intended for sale

to customers or to clients may be held in any premises an organization uses. Stock ties up

cash and if uncontrolled it will be impossible to know the actual level of stocks and

therefore impossible to control them.

Whilst the reasons for holding stock are covered earlier, most manufacturing

organizations usually divide their "goods for sale" inventory into:

Raw materials - materials and components scheduled for use in making a

product.

Work in progress, WIP - materials and components that have begun their

transformation to finished goods.

Finished goods - goods ready for sale to customers.

Goods for resale - returned goods that are salable.

Spare parts

Inventory is one aspect which can absorb a large portion of funds, if left unplanned

or else save a substantial amount if properly planned and maintained. Most of the

SME’s have a majority of their working capital blocked in inventory because of the

following reasons:

Entrepreneurs are generally not aware about the ways and techniques to plan and

manage inventory. As a result they tend to block more than required money in

inventory.

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Large enterprises normally follow the latest techniques for inventory management

and as a result it is the SME’s which are forced to maintain inventory levels to

meet the supply targets, as if they are unable to meet the targets they are liable to

face penalty.

Sometimes to negotiate with the suppliers for better rates, they are forced to buy

more than required quantities of raw-material.

In a volatile economic condition like the one prevalent now, due to fluctuating

prices of raw-materials, the entrepreneurs tend to make wrong decisions regarding

buying of raw-materials as it be both beneficial and fatal for the company.

SOME OF THE INITIATIVES TAKEN BY THE

GOI FOR SME’S

The concept of SME’s is not new, nor is the problem faced by them. Since they are the

real backbone of an economy the GOI has taken various measures to promote this

category of industries, although not many have been benefited with the following

measures listed below:

INFRASTRUCTURAL FACILITIES

The GOI in consultation with various state governments took many steps to industrialize

various states with a good number of units engaged in different trades spread throughout

the state. The important measures that were taken in this regard are as follows:

Provision of outlays for the development of roads and Transportation facilities.

Establishment of Industrial Estates.

Establishment of several Industrial Promotion Corporations and Agencies.

Promotion of subsidies and incentives for the promotion of industries in the

specified backward areas of the states.

Development of Primary sector and there by to improve the resource Base to the

agro based units.28

Provision of consultancy in the production, marketing, financial and Managerial

areas through different state agencies.

The approach to develop SME industries by govt. will depend on:

Building skills and promoting technological development.

Providing infrastructure and credit.

Reforming policy and simplifying procedure.

Providing assistance with marketing.

Encouraging the development of special categories of entrepreneurs (women,

scheduled castes and tribes, backward classes, etc).

THE VARIOUS CREDIT SCHEMES AVAILABLE TO SMEs

Credit Guarantee Fund Scheme for Small and Medium Industries:-

There are an estimated 128.44 lakh registered and unregistered micro and small

enterprises (MSEs) in the country at the end of March 2007, providing employment to an

estimated 309.11 lakh persons. The MSE sector contributes about 39% of the

manufacturing sector output and 33% of the nation’s exports. Of all the problems faced

by the MSEs, non-availability of timely and adequate credit at reasonable interest rate is

one of the most important. One of the major causes for low availability of bank finance to

this sector is the high risk perception of the banks in lending to MSEs and consequent

insistence on collaterals which are not easily available with these enterprises. The

problem is more serious for micro enterprises requiring small loans and the first

generation entrepreneurs.

The Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGMSE) was

launched by the Government of India to make available collateral-free credit to the micro

and small enterprise sector. Both the existing and the new enterprises are eligible to be

covered under the scheme. The Ministry of Micro, Small and Medium Enterprises and

Small Industries Development Bank of India (SIDBI), established a Trust named Credit

Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) to implement the

Credit Guarantee Fund Scheme for Micro and Small Enterprises. The scheme was

formally launched on August 30, 2000 and is operational with effect from 1st January 29

2000. The corpus of CGTMSE is being contributed by the Government and SIDBI in the

ratio of 4:1 respectively and has contributed Rs.1346.54 crore to the corpus of the Trust

up to September 30, 2007. Based on the future requirement, the corpus is likely to be

raised to Rs.2500 crore.

ELIGIBLE LENDING INSTITUTIONS

The institutions, which are eligible under the scheme, are scheduled commercial banks

(Public Sector Banks/Private Sector Banks/Foreign Banks) and select Regional Rural

Banks (which have been classified under ‘Sustainable Viable’ category by NABARD).

National Small Industries Corporation Ltd. (NSIC), North Eastern Development Finance

Corporation Ltd. (NEDFi) and SIDBI have also been made eligible institutions. As on

September 30, 2007, there are 62 Member Lending Institutions (MLIs) of the Trust,

comprising 28 Public Sector Banks, 13 Private Sector Banks, 18 Regional Rural Banks

and 3 other Institutions viz., NSIC, NEDFI and SIDBI.

ELIGIBLE CREDIT FACILITY

The credit facilities which are eligible to be covered under the scheme are both term

loans and working capital facility up to Rs.50 lakh per borrowing unit, extended without

any collateral security or third party guarantee, to a new or existing micro and small

enterprise. For those units covered under the guarantee scheme, which may become sick

owing to factors beyond the control of management, rehabilitation assistance extended by

the lender could also be covered under the guarantee scheme. It is noteworthy that if the

credit facility exceeds Rs.50 lakh, it may still be covered under the scheme but the

guarantee cover will be extended for credit assistance of Rs.50 lakh only.

Another important requirement under the scheme is that the credit facility should be

availed by the borrowing unit from a single lending institution. However, the unit already

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assisted by the State Level Institution/NSIC/NEDFi can be covered under the scheme for

the credit facility availed from member bank, subject to fulfillment of other eligibility

criteria. Any credit facility in respect of which risks are additionally covered under a

scheme, operated by Government or other agencies, will not be eligible for coverage

under the scheme.

SMALL SCALE SERVICE & BUSINESS ENTERPRISES (SSSBE’S):

SSSBE’s industry related service/ business enterprises with investment upto Rs 500,000

in fixed assets, excluding land and building, are called Small Scale Service/ Business

Enterprises (SSSBE’s). This limit has been raised to Rs.1 million w.e.f. September 2000

Credit - The Lifeline Of Smes of all the elements that go into a business, credit is

perhaps the most crucial. The best of plans can come to naught if adequate finance is not

available at the right time. MSEs need credit support not only for running the enterprise

& operational requirements but also for diversification, modernization/ up gradation of

facilities, capacity, expansion etc. In respect of MSEs, the problem of credit becomes all

the more critical when ever any episodic event occurs such as a large order, rejection of

consignment, inordinate delay in payment etc. In general, MSEs operate on tight budgets,

often financed through owner's own contribution, loans from friends and relatives and

some bank credit. Government of India recognized the need for a focused credit policy

for MSEs in the early days of promotion of MSEs. This in turn led to a credit policy with

the following components:-

PRIORITY SECTOR LENDING :

Credit to the small scale sector is ensured as part of the priority sector lending by banks.

Banks are required to compulsory ensure that defined percentage (currently 40%) of their

overall lending is made to priority sectors as classified by Government. These sectors

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include agriculture, small industries, export etc. The inclusion of small industries in this

list makes them eligible for this earmarked credit.

IMPROVING THE CREDIT FLOW: NAYAK COMMITTEE (1991-92)

Nayak Committee set up by the Reserve Bank of India in December 1991 (Report came

in September 1992) dealt with aspects of adequacy and timeliness of credit to SMEs.

Nayak Committee found that SMEs was getting working capital to the extent of 8.1% of

its annual output which was less than the normative requirement of 20%. Accordingly,

Nayak Committee recommended that the SSI sector should obtain 20% of its annual

projected turnover by way of working capital. Based on these, as well as other

recommendations of the Nayak Committee, RBI issued a number of guidelines advising

the banks to grant working capital to the extent of 20% of the projected annual turnover,

timely disposal of loan applications and setting up of specialized bank branches for SME

loaning in areas of higher SME concentration. This norm is applicable to units with

annual turnover up to Rs.5 crores.

SEVEN POINT ACTION PLAN (1995-96)

As a follow up of Nayak Committee recommendations, the Union Finance Minister in the

Budget Speech of 1995-96, announced a Seven Point Action Plan for improving the flow

of credit to SME sector. This included:-

Setting up of specialized SSI bank branches;

Adequate delegation of powers at branch and regional levels;32

Conducting sample surveys of their performing SME accounts by banks;

Sanction of composite loans as far as possible;

Regular meeting with SSI entrepreneurs;

Sensitization of bank managers towards working of SME Sector; and

Simplification of procedural formalities by banks.

Action has been taken by banks on the above action plan.

KAPUR COMMITTEE (1997-98)

Reserve Bank of India (RBI) had in December 1997 appointed a One Man Committee

headed by Shri S.L. Kapur, the then Member, Board for Industrial & Financial

Reconstruction (BIFR), to review inter-alia: the working of credit delivery system of

SME industries with a view to making the system more effective, simple and efficient to

administer; and to make suggestions for simplification and improvement in system and

procedures. The Committee submitted its Report to RBI on 30th June 1998, which

contains recommendations. Out of 126 recommendations, 103 have been examined by

RBI and decision taken thereon. Banks/ Financial Institutions and other agencies have

already implemented 86 recommendations. Some of the important measures taken

pursuant to the Recommendations of the

Committee include:-

Delinking of SIDBI from IDBI.

Opening of more specialized branches.

Enhancement in the limits of Composite Loan from Rs. 2 lakhs to Rs. 5 lakhs.

Setting of DRTs.

Introduction of Credit Guarantee Scheme.

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THE CREDIT FACILITIES FROM NABARD

NABARD is set up as an apex Development Bank with a mandate for facilitating credit

flow for promotion and development of agriculture, smallscale industries, cottage and

village industries, handicrafts and other rural crafts. It also has the mandate to support all

other allied economic activities in rural areas, promote integrated and sustainable rural

development and secure prosperity of rural areas. In discharging its role as a facilitator

for rural prosperity NABARD is entrusted with:

Providing refinance to lending institutions in rural areas

Bringing about or promoting institutional development and

Evaluating, monitoring and inspecting the client banks

Besides this pivotal role, NABARD also:

Acts as a coordinator in the operations of rural credit institutions

Extends assistance to the government, the Reserve Bank of India and other

organizations in matters relating to rural development

Offers training and research facilities for banks, cooperatives and organizations

working in the field of rural development

Helps the state governments in reaching their targets of providing assistance to

eligible institutions in agriculture and rural development Acts as regulator for

cooperative banks and RRBs

SOME OF THE MILESTONES IN NABARD'S ACTIVITIES ARE:

District Rural Industries Project (DRIP) has generated employment for 23.34 lakh

persons with 10.95 lakh units in 105 districts.

Credit functions, involving preparation of potential-linked credit plans annually

for all districts of the country for identification of credit potential, monitoring the

flow of ground level rural credit, issuing policy and operational guidelines to rural

financing institutions and providing credit facilities to eligible institutions under

various programmes

Development functions, concerning reinforcement of the credit functions and

making credit more productive

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Supervisory functions, ensuring the proper functioning of cooperative banks and

regional rural banks

FINANCIAL INCLUSION

Indian economy in general and banking services in particular have made rapid strides in

the recent past. However, a sizeable section of the population, particularly the vulnerable

groups, such as weaker sections and low income groups, continue to remain excluded

from even the most basic opportunities and services provided by the financial sector. To

address the issue of such financial exclusion in a holistic manner, it is essential to ensure

that a range of financial services is available to every individual. These services are:

A no-frills banking account for making and receiving payments,

A savings product suited to the pattern of cash flows of a poor household,

Money transfer facilities,

Small loans and overdrafts for productive, personal and other purposes, &

Micro-insurance (life and non-life)

In order to address the issues of financial inclusion, the Government of India constituted

a “Committee on Financial Inclusion” under the Chairmanship of Dr. C. Rangarajan. The

Committee submitted its final report to Hon'ble Union Finance Minister on 04 January

2008.

NATIONAL EQUITY FUND SCHEME (NEF)

PURPOSE

35

To meet gap in prescribed minimum promoters' contribution and/or in equity.

ELIGIBLE BORROWERS

Small and Medium entrepreneurs for setting up new projects in tiny / small scale sector

and rehabilitation of potentially viable sick SME units irrespective of the location.

Existing tiny and SME industrial units and service enterprises [tiny enterprises would

include all industrial units and service industries (except Road Transport Operators)

satisfying the investment ceiling prescribed for tiny enterprises] undertaking expansion,

modernization, technology up gradation and diversification can also be considered

irrespective of the location.

NORMS

Scheme operated through SFCs / twin function SIDCs / Scheduled Commercial

Banks / Select Urban Co-operative Banks

Cost of project - Not to exceed Rs.5 million

Soft Loan limit - 25% of cost of project subject to a maximum of Rs.10, 00,000

per project.

Service Charges - 5% p.a. on soft loan

DIRECT CREDIT SCHEMES

SSIs

Service sector units with project cost upto Rs.25 crore

Medium Sector Enterprises (MSE) and

Service sector units with project cost above Rs.25 crore and upto Rs.250 crore.

ELIGIBLE BORROWERS

New or existing SSI units.

SSI unit graduating to medium scale, and

Service sector units with an overall project cost not exceeding Rs.25 crore.

New or existing medium sector enterprises, and

36

Service sector units with an overall project cost above Rs.25 crore and upto

Rs.250 crore with Bank's assistance not exceeding Rs. 50 crore.

CONSTITUTION

The unit should generally be a private limited / public limited company. However,

partnership firms, sole proprietorship concerns and Societies and Trusts would also be

considered on a case to case basis. The unit should generally be a private limited / public

limited company

NATURE OF ASSISTANCE

Term loan and other forms of assistance such as Working Capital Term Loan and bills

discounting (on selective basis). Term loan and other forms of assistance such as

Working Capital Term Loan, suppliers' & purchasers' bills discounting. Investment

products such as debentures, optionally convertible cumulative preference shares, zero

coupon bonds, etc.

CURRENCY OF LOAN

In Rupee or foreign currency

In Rupee or foreign currency

TECHNOLOGY UP GRADATION FUND SCHEME FOR TEXTILE

INDUSTRIES (TUFS)

PURPOSE

TUFS has been launched with a view to sustaining as well as improving the

competitiveness and overall long term viability of the textile sector. The scheme intends

to provide timely and adequate capital at internationally comparable rates of interest in

order to upgrade the textile industry's technology level.

SPECIAL FEATURES

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For SSIs: The borrowers can avail of any one of the following benefits: 5% interest

reimbursement on the interest actually charged in respect of rupee loan or coverage of

exchange rate fluctuation not exceeding 5% p.a. from the base rate or cost of forward

cover premium upto 5% p.a. on the base rate of exchange in respect of foreign currency

OR 12% Credit Linked Capital Subsidy on eligible investment made for modernization,

for SME Textile and Jute Industries in respect of Rupee Loans; The units are permitted to

make new investment eligible under TUGS upto Rs. One crore or till the unit reaches SSI

limit, whichever is higher. OR 20% Credit linked Capital subsidy (CLCS @20%) on

machinery cost exclusively for power loom units in SSI sector. The cost of modern

weaving machinery admissible is upto Rs. 60 lakh (i.e. Subsidy ceiling is Rs. 12 lakh).

For units’ graduating out of SSI and Medium Sector Enterprises (MSEs): The

borrowers can avail 5% interest reimbursement on the interest actually charged in respect

of rupee loan or coverage of exchange rate fluctuation not exceeding 5% p.a. from the

base rate or cost of forward cover premium upto 5% p.a. on the base rate of exchange in

respect of foreign currency loan.

ELIGIBLE BORROWERS

SME units, SME units graduating out of the sector after implementation of the scheme

and MSEs in the Textile sector and Cotton Ginning and Pressing sector can be covered.

Debt Equity Ratio Not to exceed 2:1 for the company/firm/concern as a whole

DIRECT DISCOUNTING SCHEME - EQUIPMENT (DDS-E)

PURPOSE

To enable manufacturers - sellers in SME sector / service sector including construction /

selling agents to offer deferred payment terms for credit sales and realize sale proceeds

by discounting bills of exchange / promissory notes arise out of such sales.

ELIGIBLE BORROWERS

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Limits are sanctioned by SIDBI to well established concerns / corporate bodies buying

machinery / capital equipment from SME units. Limits are also sanctioned to well

established SME manufacturers - sellers

NORMS

Usance of Bills - Normally 3-5 years

Minimum transaction value - Rs.1, 00,000

COMPOSITE LOAN SCHEME (CLS)

PURPOSE

Assistance for equipment and/or working capital as also for work sheds

ELIGIBLE BORROWERS

Artisans, village and cottage industries and small and medium industries

NORMS

Loan Limit - Not to exceed Rs.2.5 million

SINGLE WINDOW SCHEME (SWS)

PURPOSE

To provide both term loan for fixed assets and loan for working capital through the same

agency. The total working capital requirement of such units inclusive of all fund based

facilities may be taken into account for determining the working capital facility eligible

for refinance

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ELIGIBLE BORROWERS

Entrepreneurs setting up new projects in SSI / tiny sector, new promoters acquiring

unencumbered fixed assets of existing SSI concerns from PLIs, as also existing well run

units undertaking modernization / technology up gradation and potentially viable sick

units undertaking rehabilitation scheme

NORMS

Scheme operated through SFCs / twin function IDCs / scheduled commercial banks /

eligible state co-operative banks / scheduled urban cooperative banks Term Loan - Not to

exceed Rs.20 million

NEED OF THE HOUR

Most of the research studies on financing of SMEs have highlighted the need to link

availability of finance to SMEs to the delivery of business development to improve its

viability. It is therefore necessary to evolve a model that shall provide for a partnership in

between SMEs and banks. The partnership concept takes care of sharing of risk in

business proportionate to their respective financial involvement. Moreover, if we extend

the partnership concept further, it would also help borrower to get more acceptable rate of

interest. In fact, such partnership concept may lead to sharing of earnings instead of

charging interest on loan as is prevalent in Islamic sharing of earnings instead of charging

interest on loan as is prevalent in Islamic banking which of late is growing in importance

due to present rise in oil prices.

Moreover, it is necessary to build reliable information on SMEs to help assess market

opportunities and risk management. There is also an urgent need to develop equity

market for SMEs. This may be done by spreading success stories of SMEs in India. It has

been the findings of many research studies that SMEs mostly depend upon external

capital and this should not be only loans from banks but should be partly equity raised

40

from the market besides the nominal equity held by the promoter. In this the supportive

role of mutual funds and venture capitals could be of great help in developing capital

market for SMEs. Further, securitization is another area to be developed to take care of

non-performing assets (NPAs) that are blocking regular flow of funds to credit

institutions catering to SMEs.

It is obvious that in India gradually banks should adopt relationship lending technology

and treat transaction lending technology as a complimentary and not a substitute strategy.

Along with this risk cover and sharing of risk may help further improving SMEs

financing by banks in India. Also more needs to be done to spread awareness about the

various initiatives that are undertaken by the Government of India.

LIST OF KEY FINANCIAL INSTITUTIONS

INDUSTRIAL FINANCE CORPORATION OF INDIA (IFCI)

INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA

(ICICI)

INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)

EXPORT-IMPORT BANK OF INDIA (EXIM BANK)

INDUSTRIAL RECONSTRUCTION BANK OF INDIA (IRBI)

SHIPPING CREDIT AND INVESTMENT CORPORATION OF INDIA

(SCICI)

INFRASTRUCTURE LEASING AND FINANCIAL SERVICES LTD.

(IL&FS)

TECHNOLOGY DEVELOPMENT AND INFORMATION CORPORATION

OF INDIA LTD. (TDICI)

RISK CAPITAL AND TECHNOLOGY FINANCE CORPORATION LTD.

(RCTFC)

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TOURISM FINANCE CORPORATION OF INDIA (TFCI)

NATIONAL BANK FOR AGRICULTURAL AND RURAL DEVELOPMENT

(NABARD)

NATIONAL SMALL INDUSTRIES CORPRATION (NSIC)

STATE FINANCIAL CORPORATIONS (SFCs)

STATE INDUSTRIAL DEVELOPMENT CORPORATIONS

STATE INDUSTRIAL INVESTMENT CORPORATIONS (SIICs)

STATE SMALL INDUSTRIES DEVELOPMENT CORPORATIONS

(SSIDCs)

SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI)

NATIONAL CO-OPERATIVE DEV=ELOPMENT CORPORATION (NCDC)

SUGGESTIONS

The following suggestions are made to resolve the various issues of Small Scale Sector.

The industry promoting agencies should take care of the well being of small scale

sector and they should initiate such measures which would result in the further

promotion of small scale units in the country.

It is right time to adopt the idea of limited partnership with a view to boost up the

financial resources in small scale sector and to encourage small entrepreneurs to

bear the risk.

Timely finance should be made available to the small units keeping in view their

needs.

The borrowings should be made cheaper by lowering the rate of interest on

landings of commercial banks.

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The re-orientation program, workshops and seminars should be organized at

district level to provide latest information about various schemes to the small

entrepreneurs.

Banks should also provide consultancy services and professional guidance at the

time of setting up for considering the long-term and short-term financial

requirements of a small unit for lending purposes.

Small entrepreneurs should make feasibility studies before they finalize their

projects. They should undertake only such projects which are technically,

operationally and economically and financially viable.

The process followed by the government in sanctioning the loan is cumbersome;

hence it is suggested to make the process easier in sectioning the credit facilities

to the SMES.

The entrepreneurs are of the opinion that, the funding institutions are taking much

time in sanctioning the loan. Hence it is suggested that the funding institutions

should make the process easy required for offering credit to the entrepreneurs.

The Entrepreneurs are of the opinion that they are not getting proper assistance

from the Government employees in documentation to obtain the loan from the

funding institutions. Hence it is suggested that the government employees should

be very cooperative and help the entrepreneurs in documentation for obtaining the

credit.

The laws in place to safeguard the delayed payments of SME’s are weak at the

implementation stage. A lot needs to be done to really make it effective. Infact it

has been found that the government undertakings are also on the list of large

enterprises that delay payments on a regular basis. So some corrective actions

need to be taken by the GOI in this regard.

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CONCLUSIONS

From the above major findings of the study the following conclusions are drawn:

The growth of small and medium scale industries in the country has been

significant in the recent past.

Various backward/remote areas are moving towards industrialization through

Small and medium Scale Sector.

Industrial promoting agencies have made a mark in the development of state as

well as the district industrially.

Capital base of small units is very poor and they are facing several financial crisis.

Shortage of finance is the main problem responsible for a host of problems.

The SMEs are not aware of the credit schemes offered by the commercial banks

and nodal agencies.

44

The delays in sanctioning of the loan and the neglecting attitude of the bank

officials are the main causes behind the bad perception of SMEs towards the

banks.

The Central Government should take the initiative in propagating the credit

facilities for the SMEs through the channel of NGOs.

Financial problems are the root cause for all the problems faced by the SMEs. The

State Government should encourage this segment through its Finance

Corporation.

The entrepreneurs should be motivated to run successfully of their units by taking

the advantage of various credit facilities

BIBLIOGRAPHY

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