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A

Project report

On

ROLE OF PUBLIC SECTOR BANKS IN SME FINANCING

CHAPTER - 1

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INTRODUCTION

1.1 INTRODUCTION TO SMEs

Small and Medium Enterprises (SMEs) have played a significant role world over in the

economic development of various countries. Over a period of time, it has been proved

that SMEs are dynamic, innovative and most importantly, the employer of first resort to

millions of people in the country. The sector is a breeding ground for entrepreneurship.

The importance of SME sector is well-recognized world over owing to its significant

contribution in achieving various socio-economic objectives, such as employment

generation, contribution to national output and exports, fostering new entrepreneurship

and to provide depth to the industrial base of the economy.

Small and medium-sized enterprises (SMEs) are the backbone of all economies and are a

key source of economic growth, dynamism and flexibility in advanced industrialized

countries, as well as in emerging and developing economies. SMEs constitute the

dominant form of business organization, accounting for over 95% and up to 99% of

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enterprises depending on the country. They are responsible for between 60-70% net job

creations in Developing countries. Small businesses are particularly important for

bringing innovative products or techniques to the market. Microsoft may be a software

giant today, but it started off in typical SME fashion, as a dream developed by a young

student with the help of family and friends. Only when Bill Gates and his colleagues had

a saleable product were they able to take it to the marketplace and look for investment

from more traditional sources. SMEs are vital for economic growth and development in

both industrialized and developing countries, by playing a key role in creating new

jobs. Financing is necessary to help them set up and expand their operations, develop

new products, and invest in new staff or production facilities. Many small businesses start

out as an idea from one or two people, who invest their own money and probably turn to

family and friends for financial help in return for a share in the business. But if

they are successful, there comes a time for all developing SMEs when they need new

investment to expand or innovate further. That is where they often run into

problems, because they find it much harder than larger businesses to obtain

financing from banks, capital markets or other suppliers of credit.

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

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

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SMEs have lower overheads. This translates to lower cost of production, 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 up to 80%. Jobs SMEs

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

investment, compared to their bigger counterparts.

(g) 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.

SMEs in India

India has a vibrant SME sector that plays an important role in sustaining economic

growth, increasing trade, generating employment and creating new entrepreneurship in

India. In keeping in view its importance, the promotion and development of SMEs has

been an important plank in our policy for industrial development and a well-structured

programme of support has been pursued in successive five-year plans for. SMEs in India

have recorded a sustained growth during last five decades. The number of SMEs in India

is estimated to be around 13 million while the estimated employment provided by this

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sector is over 31 million. The SME sector accounts for about 45 per cent of the

manufacturing output and over40 per cent of the national exports of the country.

Figure 1.1

SMEs In India

India embarked on the path of opening up its economy and integrating it with the globaleconomy in 1991. The liberalization of economy, while offering tremendous

opportunities for the growth and development of Indian industry including SMEs, has

also thrown up new challenges in terms of fierce competition. The very rules which

provide increased access for our products in the global markets also put domestic

industry under increased competition from other countries. In todays world, access on a

global basis to modern technology, capital resources and markets have become the most

critical determinants of international competitiveness.

Defining SMEs

In India, the enterprises have been classified broadly into two categories:

(i) Manufacturing; and

(ii) Those engaged in providing/rendering of services.

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Both categories of enterprises have been further classified into micro, small and medium

enterprises based on their investment in plant and machinery (for manufacturing

enterprises) or on equipments (in case of enterprises providing or rendering services).

The classification on basis of investment is as under:

Table 1.1

Classification Of Micro, Small And Medium Enterprises

Classification Investment Ceiling for Plant, Machinery or Equipments

Manufacturing Enterprises Service Enterprises

Micro Upto Rs.25 lakh Upto Rs.10 lakh

Small Above Rs.25 lakh & upto Rs.5

crore

Above Rs.10 lakh & upto Rs.2

crore

Medium Above Rs.5 crore & upto

Rs.10 crore

Above Rs.2 crore & upto Rs.5

crore

Table 1.2

Classification Of Micro, Small And Medium Enterprises Before 2nd October, 2006

Classification Investment Ceiling For Plant, Machinery Or Equipments*@

Manufacturing Enterprises Service Enterprises

Micro Upto Rs.25 lakh Upto Rs.10 lakh

Small Above Rs.25 lakh & upto Rs.1

crore

Not defined

Medium Not defined Not defined

(http://www.dcmsme.gov.in/ssiindia/MSME_OVERVIEW09.pdflast accessed on 26

Nov, 2009)

While calculating the investment in plant and machinery/equipment referred to above, the

original price thereof shall be taken into account, irrespective of whether the plant and

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machinery/equipment are new or second hand. In case of imported machinery/equipment,

the following duty/charges/costs shall be included in calculating their value:

Import Duty (not to include miscellaneous expenses such as transportation from

the port to the site of the factory, demurrage paid at the port);

Shipping Charges;

Customs Clearance charges; and Sales Tax or Value-added Tax. Cost of the

following plant & machinery/equipments etc would be excluded:;

Equipments such as tools, jigs, dies, moulds, and spare parts for maintenance and

the cost of consumable stores;

Installation of plant &machinery;

Research and development and pollution control equipments; Power generation set and extra transformer installed by the enterprises as per the

Regulations of the State Electricity Board;

Bank charges and Service Charges paid to the National Small Industries

Corporation or the State Small Industries Corporation;

Procurement or Installation of cables, wiring bus bars, electrical control panels

(not mounted on individual machines)

Oil circuit breakers or miniature circuit breakers which are necessarily to be used

for providing electrical power to the plant and machinery or for safety measures;

Gas producer plants;

Transportation charges (other than sales tax or value-added tax and excise duty)

for indigenous machinery from the place of their manufacture to the site of the

enterprise);

Charges paid for technical know-how for erection of plant machinery;

Such storage tanks which store raw materials and finished products only and are

not linked with the manufacturing process;

Fire-fighting equipment; and

Such other items as may be specified, by notification from time to time.

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In case of Service Enterprises, the original cost to exclude furniture, fittings and other

items not directly related to the services rendered. Land and Building would also not be

included while computing the machinery/equipments cost.

SME would be meant to include Micro Small and Medium Enterprises (MSMEs). The

above definitions of Micro, Small and Medium Enterprises would be in place of the

existing definitions of Small & Medium Industries and SSSBEs/Tiny Enterprises.

Micro Enterprises would include Tiny Industries also.

Small Enterprises (Manufacturing) would mean Small Scale Industries (SSIs).

Medium Enterprises (Manufacturing) would mean Medium Industries (MIs).

Small Enterprises (Services) and Medium Enterprises (Services) would mean

other Small & Medium Enterprises. Thus, SME Advances would be categorisedas under:

All advances to segments viz. Micro, Small and Medium Enterprises in the

Manufacturing sector irrespective of sanctioned limits, (including advances

against TDRs/Govt. Securities etc for business purposes to these categories of

Borrowers), and

Advances to Services Sectors such as Professional & Self-Employed, Small

Business Enterprises, and Small Road/Water Transport Operators and other

enterprises, engaged in providing/rendering of services, conforming to the above

investment criteria and enjoying borrowing/non-borrowing facilities with the

Bank (including advances against TDRs/Govt. Securities etc for business

purposes to these categories of Borrowers).

Those enterprises exceeding the investment ceilings would be categorized as

Large Enterprises and be outside the purview of SME.

The sanctioned limits would no longer be the criteria determining the status as

micro or small or medium enterprises in these cases.

Reserve Bank of India has since reviewed the definition on Priority Sector and

have issued revised guidelines on lending to Priority Sector vide their Master

Circular dated 2nd July, 2007. As per this circular Retail Trade is excluded from

the activities classified as SME.

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(http://www.bankofindia.com/smepol.aspx last accessed on 26 Nov, 2009)

Development of SMEs In India

Making the best use of the material resources by employing higher order of skill and

artistic talents through traditional handicrafts, India has occupied a permanent place

of pride in the world before industrial resolution. However, the advent of modern large

scale mechanized industry, the imposition of restrictions on Indian trade by the British

rulers and deteriorating socio-economic conditions lead to the decline of Small Scale

Industry. But with the provisions of permanent place in the nation's policy of

economic development after the attainment of the Independence, it has staged a grand

recovery and is now well entrenched on the path of progress towards great expansion.

SME has emerged into prominent sector in Indian economy in general and industry in

particular. SSI sector in India has posted impressive growth in 1990's from 15% in

1991-92 to 55% in 2001-02.The growth in employment generation has been equally

impressive from 3% to 45% during the same period. Employment in SME touched 19

million, just behind agriculture. Share of SSI exports crosses 40% of total exports.

Growth by itself in SME sector is impressive enough indicating a positive

response to the Economic Reform process initiated in the country since 1991.

--- Development of infrastructure

--- Assured supply of Raw Materials

--- Availability of Cheap Credit

--- Concessionary Taxes and Tariffs.

--- Financial subsidies

--- Equity contributions are all the protective measures for the sector

Table 1.3

Progress Of SMEs In India

Year Total SME Units (Lakhs) Fixed Investment (Rs Crores)

1990-91 67.87 93555

1991-92 70.63 100351

1992-93 73.51 109623

1993-94 76.49 115795

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1994-95 79.60 123790

1995-96 82.84 125750

1996-97 86.21 130560

1997-98 89.71 133242

1998-99 93.36 135482

1999-00 97.15 1399822000-01 101.1 146845

2001-02 105.21 154349

2002-03 109.49 162317

2003-04 113.95 170219

2004-05 118.59 178699

2005-06 123.42 188113

Small and Medium Enterprises - Industrial policy:

The small and Medium industries have a specific role to play by the Industrial policy

1948 which stated that cottage and small scale industries are particularly suited for

better utilization of local resources and for the achievement of local self-

sufficiency in respect of certain type of essential goods. A Small and Medium

Industries Board was constituted in 1954 and a number of helping schemes such as

supply of machinery on hire purchase, liberal and wider grants.

The Government announced its second Industrial policy in 1956 which replaced the

Industrial policy resolution of 1948.While such measures continue to be taken wherever

necessary, the aim of the state policy is to ensure that the decentralized sector acquires

sufficient vitality to be self supporting and its development is integrated with

that of large scale industry. Besides, the Government intended to strengthen the

existing arrangements to finance small scale units and make changes if necessary to ease

the credit problems of the sector. The system of reservation of items for exclusive

production by small scale units would continue in future.

The Industrial policy statement of 1985 was also accorded importance to small scale

sector and made some suitable policy changes. The definition of small scale unit was

revised to include all manufacturing units having investment in Plant and Machinery

unto Rs.35 Lakhs. In case of ancillary units, the investment ceiling was Rs.45 Lakhs.

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In the policy statements of 1991, the state followed a policy of supporting

small enterprises in the country. Small and Medium enterprises account for 55% of

industrial production, 40% of exports and above 88% of manufacturing employment.

Hence, this sector is considered as dynamic and vibrant sector of the country. The

relative importance tends to vary inversely with the level of development and

their contribution. Small and Medium enterprises have emerged as the leaders in the

industrial sector. In recognition of their significance and stature, the then government

announced policy measures on August 6, 1991 for the first time in the post independence

period. This was to promote and strengthen small, tiny and village enterprises. This is

almost a U-turn in policy stimulants and structure of micro and small enterprises in the

country.

Role of SME sector in Nation Development

The Small and Medium sector plays an important role in the Indian economy in terms

of employment and growth has recorded a high rate of growth after independence. SMEs

play a vital role for the growth of Indian economy by contributing 45% of the industrial

output, 40% of exports, 42 million in employment, create one million jobs every year and

produces more than 8000 quality products for the Indian and international markets. As a

result, SMEs are today exposed to greater opportunities for expansion and diversification

across the sectors.

Table 1.4

Data Of SMEs In India

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The root cause for unemployment in India is the over growing population

which has outpaced the development of industry and agriculture. For a country like ours,

with limited financial resources and huge reservoir of human resources, Small and

Medium industry is the only means for solving the unemployment problem. Small and

Medium industry is providing employment at an increased rate which is evident from

the table above.

The Indian market is growing rapidly and Indian industry is making remarkable progress

in various Industries like Manufacturing, Precision Engineering, Food Processing,

Pharmaceuticals, Textile & Garments, Retail, IT, Agro and Service sectors. SMEs are

finding increasing opportunities to enhance their business activities in core sectors. The

good performance of the small scale units is evident from their number, production,

employment and foreign exchange earnings.

Problems of SMEs

Despite its commendable contribution to the Nation's economy, SME Sector does not get

the required support from the concerned Government Departments, Banking Sector,

Financial Institutions and Corporate Sector, which is a handicap in becoming more

Year Total SME

Units

(Lakhs)

Fixed

Investment

(Rs Crore)

Production

(Rs Crore)

Employment

(lakh persons)

Export

(Rs. Crore)

1990-91 67.87 93555 63518 158.34 96641991-92 70.63 100351 73072 165.99 13883

1992-93 73.51 109623 85581 174.84 17784

1993-94 76.49 115795 98804 182.64 25307

1994-95 79.60 123790 122210 191.40 29068

1995-96 82.84 125750 148290 197.93 36470

1996-97 86.21 130560 168413 205.16 39248

1997-98 89.71 133242 189178 213.16 44442

1998-99 93.36 135482 212901 220.55 48979

1999-00 97.15 139982 234255 229.10 54200

2000-01 101.1 146845 261289 239.09 69797

2001-02 105.21 154349 282270 249.09 712442002-03 109.49 162317 311993 260.13 86013

2003-04 113.95 170219 351427 271.36 95510

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competitive in the National and International Markets and which needs to be taken up for

immediate and proper redressal. SME sector faces a number of problems - absence of

adequate and timely banking finance, limited knowledge and non-availability of suitable

technology, low production capacity, follow up with various agencies in solving regular

activities and lack of interaction with government agencies on various matters.

Some of the major problems are briefly as follows:

a) Financial problems of SMEs:

The financial problem of SMEs is the Root Cause for all the other problems faced by the

SME sector. The small and medium industrialists are generally poor and there are no

facilities for cheap credit. They fall into the clutches of money lender who charges very

high rates of interest, or else they borrow from the dealers of their goods, who exploitthem by completing them to sell their products at very low price. After the

nationalization of 14 major Indian Banks in July, 1969, the Commercial banks were

providing only a small proportion of SMEs financial requirements. Credit to the SME

sector continues to be non-commensurate with its contribution to the total industrial

output. As against the share of the village and SME at 40% in the industrial output, its

share in total credit to the industrial sector is only about 30%.

b) Raw Material problem of SMEs:

This difficulty is experienced in a very pronounced form. The quantity, quality and

regularity of the supply of raw materials are not satisfactory. There are no

quantity discounts, since they are purchased in small quantities and hence

charged, higher prices by suppliers. Difficulty is also experienced in procuring semi-

manufactured materials. Financial weakness stands in the way of securing raw materials

in bulk in a competitive market.

c) Production problem of SMEs:

SME units suffer from inadequate work space, power, lighting and ventilation,

and safety measures etc. These short comings have tended to endanger the health of

workmen and have adversely affected the rate of production. Many units are

following primitive methods of production. Adoption of modern techniques is either

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disliked by the entrepreneurs is not feasible. Wage rates and service conditions of

small industries are not attractive to skilled labor.

d)Technological problem of SMEs:

Today technology is changing at a very fast phase; it becomes difficult for SMEs to cope

up with changing technology. Technology up gradation and the frequent need to renew

the equipment has emerged as a big problem.

d) Marketing problem of SMEs: As marketing is not properly organized, the

helpless artisans are completely at the mercy of middle man. The potential demand for

their goods remains under developed. The SMEs have to face the competitions from large

scale units in marketing their products. It causes damage to the growth and stability of

SMEs. SMEs cannot afford to spend lavishly for advertisement to promote their sales.

e) Managerial problem of SMEs:

Small scale industries in our country have suffered from the lack of entrepreneurial

ability to develop initiative and undertake risks in the unexplored industrial

fields. The in efficiency in management comes first among managerial problems.

The entrepreneurial ability of promoters of cottage industries and SMEs are

handicapped by technical know how in the areas of production, finance, accounting and

marketing management.

f) Sickness of SMEs:

A serious problem which is hampering small and medium sector has been sickness.

Many small units have fallen sick due to one problem or the other. Sickness is caused by

two sets of factors, Internal and external factors. From among the various internal

and external causes of sickness the important ones are bud management,

high rate of capital gearing, inadequacy of finance, short of raw materials, outdated

plant and machinery, low labor productivity etc.

(http://www.smechamberofindia.com/challenges_to_sme_sector.aspx last accessed on 27

Nov, 2009)

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Figure 1.2

Reasons For The Sickness Of SMEs

(http://milagrow.in/k-solutions/msme-planet/sickness-rehabilitation last accessed on 25

Jan, 2010)

The above figure shows that finance has been the major reason for the sickness of SME

units. The other major reasons are ineffective management and technology upgradation

according to the latest technological changes.

Need of the hour

The need of the hour for Indian SMEs is to upgrade their technology, quality and adopt

modern management techniques to keep pace with the changes that are taking place in the

global market. Investment would be a prerequisite in these areas to bring about

transformation. The availability of adequate credit at affordable cost, thus, becomes

critical for Indian SMEs. SIDBI is the national level principal financial institution for

promotion, financing and development of SMEs.

To empower the SME Sector to take its rightful place as the growth engine of Indian

economy, it is necessary to support the SMEs, educate and empower them to make

optimum utilization of the resources, both human and economic, to achieve success. The

SMEs need to be educated and informed of the latest developments taking place globally

and helped to acquire skills necessary to keep pace with the global developments.

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SME Chamber of India has decided to start various activities to empower and educate the

SME Sector by organising various trade promotional activities in India and abroad. Also

provide assistance and support for the promotion of domestic business as well as export

promotion of the SME sector.

(http://www.smechamberofindia.com/need_of_hour.aspx last accessed on 27 Nov, 2009)

To encourage the growth of small scale industries in India, Government has reserved

certain products for manufacture in the small scale sector in areas where there is techno-

economic justification for such an approach. Large/Medium units can, however,

manufacture such reserved items provided they undertake to export 50% or more of their

production. As on 10 October 2008, following items are reserved for exclusive

manufacture by micro and small enterprise sector:

Food and Allied Industries: Pickles & Chutneys, Bread, Mustard Oil (except

solvent extracted), Ground nut oil (except solvent extracted).

Wood and Wood Products: Wooden furniture and fixtures

Paper Products: Exercise books and registers

Injection Moulding Thermo Plastic Product: PVC Pipes, including conduits

upto 110 mm dia, Fittings for PVC pipes

Other Chemicals & Chemical Products: Wax candles, Laundry soap, Safety

matches, Fire works, Agarbatties

Glass & Ceramics: Glass Bangles

Mechanical Engg. Excluding Transport Equipment: Steel almirah, Rolling

shutters, Steel chairs all types, Steel tables all other types, Steel furniture all other

types, Padlocks, Stainless steel utensils, Domestic utensils Aluminium

(http://www.iloveindia.com/finance/doing-business-in-india/small-scale-

industries.html last accessed on 8 feb, 2010)

SME Policy Initiatives in 2009

A continuous attention to ongoing schemes to assist MSME has demonstrated success in

several areas. However, the Ministry of MSME and other government departments

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are still working hard to pull the sector out of the recession and overcome some inherent

problems. Several of the schemes started by the Ministry of Micro, Small and Medium

Enterprises (MSME) to promote the development of micro, small and medium enterprises

in the country saw success this year. Following are some progress areas in 2009 that have

made a positive impact on SMEs, especially during the painful process of recovering

from an economic recession.

Better Credit Flow: The Policy Package for Stepping up Credit to Small and Medium

Enterprises (SME) was set up by the government in August 2005 for doubling the credit

flow to the MSME sector within a period of five years. Credit flow from Public Sector

Banks (PSBs) to this sector has increased from Rs.67, 634 crore at the end of March 2005

to Rs.1, 91,307 crore at the end of March 2009.

Skill Development on priority: Various measures like enhancing the training

capabilities of the Tool Rooms, MSME Development Institutes and other organizations

under the Ministry of MSME have helped to train nearly 2.61 lakh trainees during 2008-

09. The target set for 2009-10 is to train 3.2 lakh persons, with several programs

organised free of cost for the weaker sections of society.

Improving Competitiveness: Six out of the ten components under the National

Manufacturing Competitiveness Programme (NMCP) for MSMEs are now operational.

These are (i) Quality Management Systems and Quality Technology Tools, (ii) Building

awareness on Intellectual Property Rights, (iii)Support for Entrepreneurial and

Managerial Development of MSMEs, and (iv)Marketing support/assistance to MSMEs

(v)Lean Manufacturing Competitiveness Scheme and (vi) Mini Tool Room Scheme.

Success of Credit Guarantee Scheme: MSMEs are often unable to provide collateral as

security to procure loans. The governments credit guarantee scheme has been rather

successful because of timely interventions to make the scheme more attractive to lenders

and borrowers. For instance, the loan limit was enhanced from Rs.25 lakh to Rs.100 lakh,

the one-time guarantee fee was reduced from 2.5% to 1.5%, etc. Success can be gauged

from the data on increased coverage. From about 40,000 proposals received (for loans of

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Rs.1000 crore) at the end of March 2004, more than 2.27 lakh proposals (for loans of

over Rs.8200 crore) at the end of November 2009.

Capital subsidy spreads coverage: Under the Credit Linked Capital Subsidy Scheme

for Micro and Small Enterprises (CLCSS), 15 per cent capital subsidy is provided on loan

amounts upto Rs. 100 lakh for technology upgradation. From the 47 products/sub-sectors

with nearly 1400 well-approved technologies/machines for subsidy under the scheme,

now 179 new technologies machines for pharma sectors have been added to this list.

Until October 2009, 7810 proposals of subsidy were approved and Rs. 338.68 crore was

released to the MSEs under the scheme.

Quality improvement on priority : The ISO-9000/ISO-14001/HACCP Certification

Reimbursement Scheme is an incentive scheme to upgrade technology and improve

quality that provides for one time reimbursement of charges for acquiring ISO-

9000/14001/HACCP (or its equivalent) certification to the extent of 75% of the cost

subject to a maximum of Rs. 75,000/- in total. Decentralised in 2007, the scheme saw

growing popularity in 2009, with about 690 units amounting to Rs. 2.88 crore being

reimbursed uptil November 2009 during 2009-10.

Employment Generation: The Prime Ministers Employment Generation Programme(PMEGP) was launched in August 2008 with a total plan outlay of Rs. 4735 crore

including Rs. 250 crore for backward and forward linkages. Around 38 lakh additional

employment opportunities in the terminal four years (2008-09 to 2011-12) of XI Plan are

expected.The program provides financial assistance to set up microenterprises costing

upto Rs.10 lakh in service sector and Rs. 25 lakh in manufacturing sector in the form of

subsidy upto 25 per cent of the project cost in rural areas and 15 per cent for urban areas.

Until March 2009, 2,17,762 applications were received under PMEGP, of which 83,454

candidates were selected. About 36,444 projects were sanctioned financial assistance by

banks for generating an estimated 3.64 lakh additional employment. Loans were

disbursed in 25,507 cases by banks giving employment opportunities to about 2.55 lakh

persons until 31st August 2009. About 4.5 lakh additional employment will be generated

in2009-10.

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(http://www.businessworld.in/bw/2010_01_04_SME_policy_initiatives_in_2009.html

last accessed on 9 feb, 2010)

SME Financing

SME Finance is the funding of small and medium sized enterprises and represents a

major function of the general business finance market in which capital for firms of

types is supplied, acquired, and costed/priced. Capital is supplied through the business

finance market in the form of bank loans and overdrafts; leasing and hire-purchase

arrangements; equity/corporate bond issues; venture capital orprivate equity; and asset-

based finance such as factoring and invoice discounting

Importance The economic and social importance of the small and medium

enterprise (SME) sector is well recognized in academic and policy literature. It is also

recognized that these actors in the economy may be underserved, especially in terms of

finance. This has led to significant debate on the best methods to serve this sector. There

have been numerous schemes and programmes in markedly

different economic environments. However, there are a number of distinctive recurring

approaches to SME finance.

Collateralbased lending offered by traditional banks and finance companies is

usually made up of a combination ofasset-based finance, contribution based finance,

and factoring based finance, using reliable debtors or contracts.

Information based lending usually incorporates financial statement lending, credit

scoring, and relationship lending.

Viability based financing is especially associated with venture capital.

There is also a more favorable environment now with the Govt. committed to give fillip

to this sector through infrastructure development; skill set development/entrepreneurship

development, technology up gradation etc. With the deregulation of the financial sector,

the general ability of the banks to service the credit requirements of the SME sector

depends on the underlying transaction costs, efficient recovery processes and available

security. There is an immediate need for the banks generally to focus on credit and

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finance requirements of SMEs. Although the banks are allowed to fix their own targets

for funding SMEs in order to achieve a minimum 20% year-on-year growth, the

Governments objective is to double the flow of credit to the SME sector from Rs.67,600

crore in 2004-05 to Rs.1,35,200 crore by 2009-10 i.e. within a period of 5 years. Also,

Credit risk in the SME sector is widely dispersed and Banks get better yield from SME

advances as against the traditional advances where the spread is getting gradually

reduced. The SME clientele base could also be utilized by the Branches to step-up cross

selling of various other products including technology-enabled products.

SME Financing Gap

A substantial portion of the SME sector may not have the security required for

conventional collateral based bank lending, nor high enough returns to attract formal

venture capitalists and other risk investors. In addition, markets may be characterized by

deficient information (limiting the effectiveness of financial statement-based lending and

credit scoring). This has led to claims of an "SME finance gap. The SMEs that fall into

this category have been defined as Small Growing Businesses (SGBs) at a workshop in

Geneva in July 2008, hosted by The Network for Governance; Entrepreneurship &

Development (GE&D) There have been at least two distinctive approaches to try to

overcome the so-called SME finance gap. The first has been to broaden the collateralbased approach by encouraging bank lenders to finance SMEs with insufficient collateral.

This might be done through an external party providing the collateral or guarantees

required. Unfortunately, to the extent that the schemes concerned run counter to

basic free market principles they tend to be unsustainable. Thus, the second approach has

been to broaden the viability based approach. Since the viability based approach is

concerned with the business itself, the aim has been to provide better general business

development assistance to reduce risk and increase returns.

(http://en.wikipedia.org/wiki/SME_finance last accessed on 27 nov, 2009)

Sources of SME Finance: The most common sources of SME finance are as follows

Figure 1.3

Various ways of Financing SMEs

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Problems of SMEs Financing

The main problem faced by SMEs when trying to obtain funding is that of uncertainty:

SMEs rarely have a long history or successful track record that potential investors can

rely on in making an investment;

Larger companies (particularly those quoted on a stock exchange) are required to

prepare and publish much more detailed financial information which can actually assist

the finance-raising process;

Banks are particularly nervous of smaller businesses due to a perception that they

represent a greater credit risk.

Because the information is not available in other ways, SMEs will have to provide it

when they seek finance. They will need to give a business plan, list of the company

assets, details of the experience of directors and managers and demonstrate how they can

give providers of finance some security for amounts provided. Prospective lenders

usually banks will then make a decision based on the information provided. The terms

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of the loan (interest rate, term, security, and repayment details) will depend on the risk

involved and the lender will also want to monitor their investment. A common problem is

often that the banks will be unwilling to increase loan funding without an increase in the

security given (which the SME owners may be unable or unwilling to provide).A

particular problem of uncertainty relates to businesses with a low asset base. These are

companies without substantial tangible assets which can be use to provide security for

lenders. When an SME is not growing significantly, financing may not be a major

problem. However, the financing problem becomes very important when a company is

growing rapidly, for example when contemplating investment in capital equipment or an

acquisition. Few growing companies are able to finance their expansion plans from cash

flow alone. They will therefore need to consider raising finance from other external

sources. In addition, managers who are looking to buy-in to a business ("management

buy-in" or "MBI") or buy-out (management buy-out" or "MBO") a business from its

owners may not have the resources to acquire the company. They will need to raise

finance to achieve their objectives

1.2 ROLE OF PUBLIC SECTOR BANKS IN SME FINANCING

Banks are playing a major role in financing SMEs in India. Nearly 82% of the total SME

financing in year 2006-07 is through banks. And among them the major share is of public

sector banks i.e. 57%. Thus it is clear that the most common source of finance for SMEs

is Bank Financing. There is no. of banks that help in assisting the SMEs for financing.

The main channel used by the SMEs via Banks is Specialized loans by various

Banks. The Main reason for choosing bank loans by SMEs compared to other sources of

financing like venture capital, PE funding etc is that is only interest to be paid no stake

is to be diluted thus the whole command of the SME is with the owner only. There are

a number of Private as well as Public sector banks who assist SME in Financing

Figure 1.4

Sources Of SME Finance (2006-07)

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Public sector

banks

57%

Private sector

abnks

25%

Others

18%

The role of Banks, in general, has become very important in the above context The SMEsectors demands were comprehensively taken care of by the Public sector Banks through

several initiatives such as:

Single Window dispensation,

Quick decision with least Turnaround Time through specially constituted SME

Cells, and above all,

Better service.

Cluster-based Schemes are also on the list of the Banks initiatives.

The Bank prioritized the following more particularly:-

Provision of timely and adequate credit to the SMEs,

Encouraging Technology Up gradation, for better quality and competitiveness of

their product(s), and

Proactively detecting sick and viable units in time so as to nurse them back to

health through appropriate re-structuring.

Financing of Clusters with adequate and concessional Bank finance on liberal

terms in several pockets for specified activities concentrated in these pockets,

which would result in reducing transaction cost and greater economies of scale.

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Credit to SME sector from Public Sector Banks

The table below gives the status of credit flow to the micro and small enterprises

(SME) sector from the public sector banks since 2000:

Table 1.5

Credit to SME sector from Public Sector Banks

Year Net Bank Credit Credit to SMEs % of NBC

2000 316427 46045 14.6%

2001 341291 48400 14.2

2002 396954 49743 12.5

2003 477899 52988 11.1

2004 558849 58278 10.4

2005 718772 67634 9.4

2006 1017614 82492 8.1

2007 1317705 104703 8.0

(http://www.rbi.org.in/scripts/PublicationsView.aspx?id=11993 last accessed on 11 Jan,

2010)

Figure 1.5

Steps For SME Loans By Public SectorBanks

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The above figure shows the steps for availing finance through Public sector Banks

using loans. Here is the brief description of the above shown procedure:

First of all the SME who wants to avail loan has to visit the local branch office ofthe bank of their area, where by the loan application is been filled by the SME.

After that the executives of that branch check whether all the necessary

documents are provided by the SME or not, then if all necessary documents are

submitted the next step comes whereby the officials of that local branch go to

the premises of that SME and just have a brief survey of promoter as well as the

premises.

After they are satisfied they send the file of necessary documents to the

SMECC branch, which is a special branch for SME loans. Where by the credit

appraisal takes place, which consist of credit appraisal of promoter,

financial appraisal, determining cost of project, understanding various means of

finance used, profitability estimate, cash flow projections , marketing appraisal

Application for loan by SME to local branch of a particular bank in that area

. Inspection/Survey of SME by the Executives of that Local branch.

Sending the Documents of survey by Local branch to SMECC branch

Preparing credentials of Promoters and firm by SMECC branch and

investigating the same

Estimating the amount of loan to be sanctioned and forwarding the

documents for sanctioning.

If the loan is been sanctioned by the central authority then

disbursement of the loan amount into account of the SME.

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etc., which is explained in next section. This step brings out the clear picture

whether the loan should be given to the SME or not?

If the SMECC branch is satisfied with the details then it forward the request of

granting loan to the sanctioning authority.

And finally after the verification by sanctioning authority, the disbursement of

loan amount takes place in the account of that SME

This whole procedure right from application to disbursement of loan

amount takes approximately 20-25 days as the procedure involves analysis

of documents by various branches and thus the movement of documents amongst

them, if all this procedure would have taken place at single place then it would

take only 10-12 days for disbursement.

Some Public sector Banks offering SME financing schemes are as follows:

1) State bank of India and its subsidiaries 7) Central Bank of India

2) Allahabad Bank 8) Punjab National Bank

3) Oriental Bank of Commerce 9) IDBI Bank

4) Bank of Baroda 10) Indian Bank

5) Bank of India 11) Canada Bank

6) Punjab & Sind Bank 12) Corporation Bank

State Bank of India

State Bank of India has been playing a vital role in the development of small scale

industries since 1956.The Bank has financed over 8 lakhs SSI units in the country. It has

55 specialized SSI branches, 99 branches in industrial estates and more than 400 branches

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with SIB divisions. The Bank finances for Small Business activities which are of special

significance to a large number of people as many of these activities can be started with

relatively lower investment and with no special skills on the part of the entrepreneurs.

The following are the SME products offered by State Bank Of India:

Commodity Packed Warehouse Receipt Financing

Surabhi Deposit Scheme

Traders Easy Loan Scheme

SSI Loans

Business Current Accounts

Open Term Loan

Retail Trade

Doctor Plus

SBI Shoppe

Cyber Plus

SME Credit Plus

Small Business Credit Card

SME Petro Credit

Dal Mill Plus

Paryatan Plus

Auto Loans

Transport Operators

Rice Mills Plus

School Plus

IDBI Bank

IDBI Bank has been actively engaged in providing a major thrust to financing of SMEs.

With a view to improving the credit delivery mechanism and shorten the Turn around

Time (TAT), IDBI Bank has developed a special business model to serve the SMEs in

India. The Bank has set up 24 City SME Centres (CSCs) across India in Mumbai, Delhi,

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Kolkata, Chennai, Bangalore, Hyderabad, Pune to name a few. These CSCs are the

Bank's hubs while dedicated SME desks have been set up in several branches across these

cities. These branches serve as front offices for sales delivery and customer service.

IDBI Bank has a wide variety of products and services catering to the needs of different

segments within small business. Long years of experience in being the trusted partner of

large and mid corporates has translated into deeper understanding of needs of business

and industries. The Bank has parameterised products for transporters, dealers, traders,

and vendors. In addition, it has a separate Transaction Banking Group that has expertise

in products like cash management services, letter of credit, bank guarantees and treasury

products

IDBI Bank provides following SME products:

Sulabh Vyapar Loan

Dealer Finance

Funding Under CGFMSE

Direct Credit Scheme-SIDBI

Preferred Customer Scheme

Vendor Financing Programme

Lending against the security of future Credit Card Receivables

Working Capital Financing

Finance to Medical Practitioners

Loans to SRWOTs

SME Hosiery Special Current Account

(http://www.idbi.com/sme/ last accessed on 27 Nov, 2009)

Bank of Baroda

Bank of Baroda started its operation in the year 1908 in Baroda though its Corporate

Centre is in Mumbai now. Its mission is "to be a top ranking National Bank of

International Standards committed to augment stake holders' value through concern, care

and competence. Bank of Baroda offers following SME products and services:

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Baroda Vidyasthali Loan

Baroda Arogyadham Loan

Baroda Laghu Udhyami Credit Card

Baroda Artisans Credit Card Technology Upgradation scheme

SME short term loans

SME medium term loans

Composite Loans

(http://www.bankofbaroda.com/bbs/sme.asp last accessed on 26 Nov, 2009)

Union Bank of IndiaUnion Bank is committed to extend its best services to Micro, Small and Medium

enterprises and at a very competitive price. Union Bank of India has adopted a policy

package for stepping up credit to Small & Medium Enterprises.

Union Bank of India has adopted a policy package for stepping up credit to Small &

Medium Enterprises [SME] with the approval of the Board in its meeting held on 30th

September 2005 and subsequently following steps have been initiated in this direction.

Union High Pride

Union Procure

Union Supply

Union Cyber

Union SME Plus

Union Transport

Financing SMALL HOSIERY UNITS in Kolkata

(http://www.unionbankofindia.co.in/cb_sme.aspx last accessed on 27 Nov, 2009)Canara Bank

Canara Bank was founded by Shri Ammembal Subba Rao Pai, a great visionary and

philanthropist, in July 1906, at Mangalore, then a small port in Karnataka

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The Bank has adopted a Policy for lending to SME sector, in tune with Govt. of India

guidelines as per MSMED Act, 2006, which has come into force w.e.f. 2nd October,

2006.

LOAN PRODUCTS

Schemes for Capital Investment

Term loan for acquisition of fixed assets

Standby credit for capital expenditure

Standby term loan scheme for Apparel Exporters

Loan scheme for reimbursement of investment made in fixed assets by SMEs

Soft loan scheme for Solar Water Heaters

Scheme for Energy Savings for SMEs

Technology Upgradation Fund scheme (TUFS) for textile & jute industries in

SME sector

Credit linked capital subsidy scheme (CLCSS)

Loans under Interest Subsidy Eligibility Certificate (ISEC) Scheme of Khadi &

Village Industries Commission (KVIC) to eligible institutions

Schemes for Working Capital

Simplified Open Cash Credit (SOCC)

Open Cash Credit (OCC)

Micro financing joint liability groups (Handloom weaver & Agarbathi

manufacturer groups)

Laghu Udhyami Credit Card (LUCC)

Bill of Exchange discounting facility to Small Enterpreneurs at concessional rate

of interest (BE-SE)

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CHAPTER 2REVIEW

OF

LITERATURE

REVIEW OF LITERATURE

A review of literature is a critical analysis of a segment of a published body of

knowledge. Various studies on a number of issues concerning small and medium

enterprises had been conducted in foreign countries. However, in Indian context, the

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number is quite few. A number of studies had been conducted related to SME Financing

schemes of Public sector banks. Due to shortage of time and inability to cover all these

past studies, some of these studies have been considered in this section that has provided

a base for this research.

Wtterwulghe and Jannsen(1997) conducted a research and analyzed the roleof banks

in financing medium enterprises in Belgium. It showsthat, like small firms, medium-

sized businesses have a preferencefor self-financing. As far as external funding is

concerned,debt is generally their main source. How ever, their low debt ratios indicate

that, as compared to the large firms, these enterprises take less recourse to banks and, as a

result, paylittle attention to their financial function. The banker doesnot play an

important role as an adviser either, except when the firm decides to raise funds through

the stock market. Thearticle calls for greater specialisation on the part of the banks so that

they can avoid conflicts of interest arising outof the mismatch between their service

priorities and the needsof their clientele

Kaura and Sharma (1999) made a research and analyzed the attitudes of the financial

institutions whether belong to Central Government or state Government or the

Governmental Agencies promoted for this purpose. In the wake of the MSME Act,

2006 passed in the interest of the small scale sector by the Government of India, the

attitude of the financial institutions towards SME sector is totally changing. New

innovations are being made for fulfilling the financial needs of SME units. The attitude of

the Employees of above said financial institutions is also changing.

Raju (2002) conducted a research by revisiting the Seoul and Bologna Charters on the

SMEs and clarifies that the SME definition centers roundthe small scale industries in the

absence of a clearly definedmedium industry sector in India. A review of the policy,

lawsand the regulatory and institutional framework has been donein sufficient detail with

a view to highlighting the fact thatthe SSIS in India require globally compatible

facilitation inorder to be competitive both domestically and internationally. The author

maintains that easy and adequate institutional financesupport is a necessary but not

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sufficient condition for thegrowth of this dynamic and vibrant sector. He envisages a

clearrole for the Small Industry Associations recognized on the basis of well-defined

criteria. He argues for a quick enactment ofa comprehensive enabling law for the sector

and for restructuringthe office of the DC-SSI, to attain the envisaged competitiveness

Nambiar (2007) conducted a research on financing for the priority sectors that paved the

way for thinking strategy for financing of small scale and medium scale industries by the

bank officers. The government of India through its industrial policy clearly stated

that the commercial banks should give priority treatment to the SMEs. The nature

of the banking officials was also discussed in the article. But that is not sufficient to

promote the SME sector because the sector was totally neglected for the last

several decades due to invention of the MNCs. By enacting the MSME act, 2006, the

government of India clearly indicated the signal to the banking people to provide the

credit facilities to the SMEs.

Raju (2008) conducted a study and analyzed that SMEs form the backbone of the Indian

manufacturing sector and have become engine of economic growth in India. It is

estimated that SMEs account for almost 90% of industrial units in India and 40% of

value addition in the manufacturing sector. This paper closely analyses the growth and

development of the Indian mall scale sector from opening of the economy in 1991. Third

part looks into the present scenario of SMEs and the problems they phases like lending,

marketing, license raj issues in detail. The Micro, Small and Medium Enterprises Act,

2006 is intended to boost the sector. The provisions of the Act are examined closely. The

final part provides some future policy framework for the sustainability of the sector.

Rani and Rao(2008) conducted a research that Small and Medium Enterprise sector is a

vibrant and dynamic one, and an engine of growth for the present millennium. Financing

of Micro and Small Enterprises (MSEs), which is part of the SME sector, has been given

special attention by banks and financial institutions, and is included in priority sector

lending. In spite of the special efforts, only 14.3% of registered small enterprises have

availed institutional credit, as per the 3rd All India Census of Small Scale Industries of

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2001-02. From 2000 to 2004, institutional credit for MSEs has shown disturbing trends,

despite the high level of liquidity in the banking system and the initiatives taken by the

Union Government and Reserve Bank of India (RBI). This paper examines the recent

trends in credit flow to MSEs, in particular, and medium enterprises, in a limited way,

from commercial banks and the Small Industries Development Bank of India (SIDBI),

and outlines the recommendations of A S Ganguly Working Group and Internal Group

chaired by C S Murthy. The Union Finance Ministry's directive to public sector banks is

to double the credit flow to SMEs during the five-year period 2005-10. The year, 2005-06

has shown good progress in this direction. The task is to be pursued vigorously in the

next four years, of which 2006-07 has been completed with encouraging performance.

Innovative approaches and directions for the future are presented in the paper. SMEs

need special treatment through devising special instruments of credit for strengthening

their competitiveness.

Torre et al (2008) made a research and investigated the conventional wisdom in

academic and policy circles argues that, while large and foreign banks are generally not

interested in serving SMEs , small and niche banks have an advantage in doing so

because they can overcome SME opaqueness through relationship lending. This paper

shows that there is a gap between this view and what banks actually do. Banks perceive

SMEs as a core and strategic business and seem well positioned to expand their links

with SMEs. The recent intensification of bank involvement with SMEs in various

emerging markets documented in this paper is neither led by small or niche banks nor

highly dependent on relationship lending. Rather, all types of banks are catering to

SMEs and larger, multiple-service banks have in fact a comparative advantage in offering

a wide range of products and services on a large scale, through the use of new

technologies, business models, and risk management systems.

Mercieca et al (2009) conducted a research and analyzed thathow the concentration and

competition in the European banking sector affects lending relationships between small

and medium sized enterprises (SMEs) and their banks. Recent empirical evidence

suggests that concentration and competition capture different characteristics of banking

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systems. Using a unique dataset on SMEs for selected European regions, we empirically

investigate the impact of increasing concentration and competition on the number of

lending relationships maintained by SMEs. They find that competition has a positive

effect on the number of lending relationships, weak evidence that concentration reduces

the number of banking relationships and weak persistent evidence that they tend to offset

each other.

Popli and Rao (2009) made a research that in banking sector, the quality of customer

service plays an important role, particularly in the context of growing competition and

sustained business growth. The study is an attempt to ascertain the service quality

provided by Public Sector Banks to Small & Medium Enterprises which play a key role

in Indias economy. The major findings of the study have been that 1. Modernization and

Communication affect the services to a large extent and there is a need of training to the

staff for improvement of service to the SMEs customers; 2. The service quality of private

banks is superior to that of Public sector banks; 3. Majority of the respondents revealed

that the credit flow to SMEs sector is not sufficient and the Government will have to

initiate necessary steps for making the required funds available easily on convenient

terms; 4. Majority of the respondents feel that the policies for SME Sector of other

countries are far better from the policies of India; 5. Delay in loan application processing

due to unhelpful nature of the staff members, as claimed by the majority of the

respondents. The banks usually provide finance against security and as high as 86% of

the respondents are of the view that the banks ask for collateral security/guarantee from a

third party even where the project has been assessed as viable and primary security is

adequate.

Popli and Rao (2009) conducted a study and analyzed that Small and Medium

Enterprises have been globally recognized as vital components of a domestic economy

and major contributors to employment generation in a country, regardless of global

barriers. SMEs form the lifeblood of any vibrant economy. In an emerging economy

like India, SMEs have a significant socio-economic role to ensure overall development of

the nation. Electronic Sector is an upcoming sector in India. The Indian Electronic

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Industry is undergoing transformation due to the new economic policy and business

environment in the post WTO regime. This paper examines the problems, strategies for

investments, competences development, technological up gradation, quality

improvement, Govt. Policies, Equity participation by MNCs and overall improvement of

this sector in the post WTO regime. The study has been done by using data acquired from

an extensive survey of Indian SMEs in the Textile Sector and from the experienced

Bankers/ Officials/Policy makers of Govt. of India. The key findings of the study are that

lack of quality consciousness, growth conducive environment, inadequate government

support and difficulties in raising funds from market. Further, the study highlights the

need to upgrade technology in the Indian Electronic SME Sector and also develop a

strong and supportive Financial System.

The perusal of literature reveals that Small and Medium enterprises face a lot of

problems, and inadequate financing is the major one. A rich literature house has been

developed over time, mostly in foreign countries, with regard to SME funding. A very

few studies has been conducted in India regarding the effectiveness of SME financing

schemes of the public sector banks. That is why a need was felt to conduct a study in

Indian context and that too in case of SME financing schemes of public sector banks and

their usage that has not been extensively researched.

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CHAPTER-3

NEED, SCOPE AND

OBJECTIVES OF

THE STUDY

NEED, SCOPE AND OBJECTIVES OF THE STUDY

3.1 Need of the study

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The researches that were conducted in past by the various professionals are in foreign

context and not in Indian context. Study relating to SMEs, their problems and source of

financing has been done but regarding the SME financing schemes of public sector banks

has not been done. This gap has been identified and it has led to the present research to be

undertaken. So, the need was felt to cover the areas neglected. Thus, here a study on SME

financing schemes of public sector banks was taken care of.

3.2 Scope of the study

The scope of this study was limited to Ludhiana city only.

3.3 Objectives of the study

Objectives are the guiding lights of a study. The present study was undertaken to achieve

the following objectives: -

To know about the various SME financing schemes of public sector banks and

their usage.

To know the effectiveness of various SME financing schemes of public sector

banks.

To know the problems faced by SMEs in getting credit from public sector banks.

To know the benefits of SME financing schemes of the public sector banks.

To check the satisfaction level of Small and Medium enterprises regarding SME

financing schemes of the public sector banks.

.

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CHAPTER - 4

RESEARCH

METHODOLOGY

RESEARCH METHODOLOGY

Research Methodology is a way to systematically solve the research problem. The

Research Methodology includes the various methods and techniques for conducting a

Research. Marketing Research is the systematic design, collection, analysis and

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reporting of data and finding relevant solution to a specific marketing situation or

problem. D. Slesinger and M.Stephenson in the encyclopedia of Social Sciences define

Research as the manipulation of things, concepts or symbols for the purpose of

generalizing to extend, correct or verify knowledge, whether that knowledge aids in

construction of theory or in the practice of an art.

Research is, thus, an original contribution to the existing stock of knowledge making for

its advancement. The purpose of Research is to discover answers to the Questions

through the application of scientific procedures. Our project has a specified framework

for collecting data in an effective manner. Such framework is called Research Design.

The research process followed by us consists of following steps:

4.1 RESEARCH DESIGNThis research was descriptive and conclusion oriented research.

Conclusion Oriented Research: -Research designed to assist the decision

maker in the situation. In other words it is a research when we give our own views

about the research.

Descriptive Research: -A type of conclusive research, which has as its major

objective the description of something-usually market characteristics or functions.In other words descriptive research is a research where in researcher has no

control over variable. It just presents the picture, which has already studied.

4.2 SAMPLING DESIGN

Sampling can be defined as the section of some part of an aggregate or totality on the

basis of which judgment or an inference about aggregate or totality is made. The

sampling design helps in decision making in the following areas: -

4.2.1 Universeof the study-The universe comprises of two parts as theoretical universe

and accessible universe

Theoretical universe- It includes all the SMEs throughout the universe.

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Accessible universe- It includes the SMEs in Ludhiana city.

4.2.2 Sample Frame-Sample frame was Small and Medium enterprises all over India.

4.2.3 Sample Unit- Sampling unit is the basic unit containing the elements of the

universe to be sampled. The sampling unit of the present study was SMEs located in

Ludhiana city in Punjab.

4.2.4 Sample Size- Sample size is the number of elements to be included in a study.

Keeping in mind all the constraints 100 respondents were selected.

4.2.5 Sampling Techniques- The sampling techniques used were convenience technique

and simple random sampling technique.

4.3 DATA COLLECTION AND ANALYSIS

4.3.1 Data Collection: Information has been collected from both Primary and Secondary

sources of data collection.

Secondary sources- Secondary data are those, which have already been collected

by someone else, which already had been passed through the statistical process.

Secondary data had been collected through websites, newspapers and journals.

Primary sources- Primary data are those, which are collected are fresh and for

the first time and thus happen to be original in character. Primary data had been

collected by conducting surveys through questionnaire, which include several

questions and personal and telephonic interview.

b) Tools of Analysis and Presentation:

To analyze the data obtained with the help of questionnaire, following tools were used:

Tools of Analysis: -

Summated Score: This tool was used for the analysis of questions based on

Likert scale.

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Weighted Average Score: This tool was used to calculate highest and lowest

rank.

Tools of Presentation: -

Tables: This tool was used to present the data in tabular form.

Bar Graphs and Pie Charts: These tools were used for analysis of data.

4.4 LIMITATIONS OF THE STUDY

Due to constraints of time and resources, the study is likely to suffer from certain

limitations. Some of these are mentioned here under so that the findings of the study may

be understood in a proper perspective.

The limitations of the study are:

The research was carried out in a short period. Therefore the sample size and the

parameters were selected accordingly so as to finish the work within the given

time frame.

The information given by the respondents might be biased as some of them might

not be interested to give correct information.

Some of the respondents could not answer the questions due to lack of

knowledge.

Some of the respondents of the survey were unwilling to share information.

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CHAPTER-V

DATA ANALYSIS AND

INTERPRETATION

DATA ANALYSIS AND INTERPETATION

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1. Demographic Profile of Respondents.

Table 5.1

Demographic Features

Demographics No. Of Respondents %Age Of

Respondents

Designation

Owner 73 73

Partner 19 19

Other 6 6

Total 100 100

Location

Ludhiana 100 100

Other 0 0Total 100 100

Gender

Male 95 95

Female 5 5

Total 100 100

Business

Hosiery 100 100

Other 0 0

Total 100 100

Analysis and Interpretation:

It had been analyzed from the table that 73% of the respondents were the owner, 19%

were co-partners and 6% were at some other designation.100% of the respondents were

from the Ludhiana city. 95% of the respondents were male and only 5% were female. All

the respondents i.e. 100% were from the hosiery business.

So it had been interpreted that maximum of the respondents were male, owner of the

business and from Ludhiana city. All the respondents were from hosiery business.

2. What are the sources of finance used by your enterprise?

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Table 5.2

To Know The Sources Of Finance Used By SMEs

Sources of Finance No. Of Respondents %Age Of Respondents

Owners Financing 80 29

Private financial institutions 46 16Equity finance 12 4

Bank financing 75 27

Venture capital 14 5

Hire purchase and leasing 24 9

Business angel financing 29 10

Total 280 100

Figure 5.1

To Know The Sources Of Finance Used By SMEs

No. Of Respondents

29%

16%

4%

27%

5%

9%

10%

Owners Financing

Private financial

institutions

Equity finance

Bank financing

Venture capital

Hire purchase and

leasing

Business angel

financing

Analysis and Interpretation:-

The number of respondents had increased from 100 to 280, as this is a multiple-choice

question. From the survey it was found that respondents use multiple sources for

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financing their enterprises. The figure shows that 29% respondents rely on their own

funds for financing SMEs.28% respondents use bank financing and 16% take credit from

private financial institutions. Equity finance and venture capital are the least used.

3. Rank the obstacles that are faced by your enterprise in its growth from 1 to 5; 1

being the biggest obstacle.

Table 5.3

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Obstacles In The Growth Of Enterprise

Obstacles Rank1 Rank2 Rank3 Rank4 Rank5 Weighted

Average

Score

The frequent need torenew the equipment

12 19 28 24 17 315

Instability of demand for

product or service

7 16 16 28 33 364

Obtaining adequate

financing

40 27 17 8 8 217

Low profitability of the

sector

11 12 21 29 27 349

Taxation levels 30 26 18 11 15 255

Analysis and Interpretation: -

In this above table weighted average score method is used where 1 rank is given to the

biggest obstacle in the growth and 5 is the least important rank.

As in the above table various obstacles faced by the enterprises in their growth are being

ranked. The obstacle of obtaining adequate finance is ranked first with summated score of

217. Second rank is given to the taxation levels charged by the government and third rank

to the frequent need to renew the equipment. The Fourth rank is given to the low

profitability of the sector and fifth to the instability of demand of product or service.

From the above table it can be concluded that obtaining adequate finance is the biggest

obstacle faced by SMEs in their growth followed by burden of heavy taxes on them. Easy

financing schemes should be provided. Rates of taxes should also be decreased; it will

help in the growth of SMEs in India.

4. Have you ever raised finance from public sector banks?

Table 5.4

To Know Whether SMEs Raise Finance From Public sector Banks

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Raised Finance No. Of Respondents %Age Of Respondents

Yes 100 100

No 0 0

Total 100 100

Figure 5.2

To Know Whether SMEs Raise Finance From Public sector Banks

No. Of Respondents

100%

0%

Yes

No

Analysis and Interpretation:-

The above figure shows that 100% of the respondents have raised finance from the public

sector banks .This shows that public sector banks are the most popular source of SME

financing. The reason is low rates of interest which gives them capital at low cost. The

service fees and bank charges are also less which results in low cost of financing than the

other sources.

5. What type of loan is taken by you?

Table 5.5

Type Of Loan

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Figure 5.3

Type Of Loan

No. Of Respondents

28%

10%

23%

16%

23%

Sulabh Vyapar loan

Transport loan

Paryatan plus loan

Open term loan

Working capital loan

Analysis and Interpretation:

The number of respondents has increased from 100 to 280, as this is a multiple-choice

question The above graph shows that 28% of the respondents have taken Sulabh Vyapar

loan.23% of the respondents have taken Paryatan plus and working capital loan. So

Sulabh Vyapar loan is the most popular scheme of public sector banks for financing

SMEs.

6. For what purpose, your enterprise has taken loan?

Table 5.6

Purpose Of Taking Loan

Type of Loan No. Of Respondents %Age Of Respondents

Sulabh Vyapar loan 67 28

Transport loan 25 10

Paryatan plus loan 56 23

Open term loan 38 16

Working capital loan 54 23Total 240 100

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Purpose Of Taking Loan No. Of Respondents %Age Of Respondents

Real estate acquisition to

house the business

40 15

To increase the production 63 24

Construction, renovation or

leasehold improvements

33 12

For the flooring of inventoryand for working capital

71 27

For modernization and

upgradation of technology

58 22

Total 265 100

Figure 5.4

Purpose Of Taking Loan

No. Of Respondents

15%

24%

12%

27%

22%

Real estate

acquisition to house the

business

To increase the

production

Construction, renovation

or leasehold

improvements

For the flooring of

inventory and for working

capital

For modernization andupgradation of

technology

Analysis and Interpretation:-

The number of respondents has increased from 100 to 265, as this is a multiple-choice

question.27% of respondents have taken loan for the flooring of inventory and working

capital and 24% to increase the size of production. Most of the firms are taking loans for

fulfilling their frequent needs for the capital. For technological upgradation and

modernization, 22% of the respondents have taken loan showing that SMEs require

capital to upgrade their technologies which is changing at a very fast phase.

7. Rank the benefits of these schemes on the scale of 1-5; 1 being the most important

and 5 being the least important.

Table 5.7

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Benefits Of SME Financing Schemes

Benefits Rank1 Rank2 Rank3 Rank4 Rank5 Weighted

Average

Score

Better Service 8 12 12 30 38 378

Single Window

Dispensation

8 12 22 30 28 358

Attractive financing

conditions

40 28 20 4 8 212

Easy access 4 12 32 30 22 354

Low rates of Interest 40 36 14 6 4 198

Analysis and Interpretation: -

In this above table weighted average score method was used where 1 rank is the most

important rank and 5 is the least important rank.

As in the above table various benefits of SME financing schemes were being ranked. The

benefit ranked first with summated score of 198 was low rates of interest. This shows that

public sector banks financing schemes provide finance at cheap rates. Second rank is with

summated score of 212 was given to the attractive financing conditions of these schemes.

The schemes are designed in such a way that makes financing easier for SMEs.

The third rank was given to easy access. The fourth rank was given to Single window

dispensation and fifth to Better service, being least preferred by the respondents. This

shows that respondents were not satisfied by the service provided by these banks.

From the above table it can be concluded that Low rates of interest was most preferred of

all other benefits. Attractive financing conditions and easy access were next in the

preference order. Single window dispensation was the next preferred benefit. Better

service was the least preferred benefit by the respondents.

8.What were the problems faced by your enterprise in raising finance from public

sector banks?

Table 5.8

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Problems Faced By SMEs In Raising Finance

Problems Faced No. Of Respondents %Age Of Respondents

Insufficient collateral 68 22

Poor documentation 39 13

Delay in the sanction of loan 80 26

Cost involved is high 25 8

Biasness 76 25

High rate of interest 20 6

Total 308 100

Figure 5.5

Problems Faced By SMEs In Raising Finance

No. Of Respondents

22%

13%

26%

8%

25%

6%

Insufficient collateral

Poor documentation

Delay in the sanction of

loan

Cost involved is high

Biasness

High rate of interest

Analysis and Interpretation:-

The number of respondents has increased from 100 to 308, as this is a multiple-choice

question. The most common problem faced by SMEs in raising finance is the delay made

in sanctioning the loan with 26%.The public sector bank employees work very slowly

and usually an application takes a lot of time for approval.25% respondents say biasness

was one another problem faced by them.22% respondents find the inability to provide

sufficient collateral as a problem.

9. What are the most common reasons given to your enterprise by the public sector

bank for rejecting an application for Loan?

Table 5.9

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Reasons For Rejecting An Application For Loan