FINANCING SMEs

Presented by

Dr.S.C.BihariDr.S.C.Bihari

M S M E M S M E

SHIVNADAR

Engineering graduate, worked as business trainee in DCM data systemsLaunched HCL in 1975 with 6 others out of a garageStarted with Calculators, Copiers & Computers

Now a $ 6 bn company

M S M E M S M E

Dr K ANJI REDDY

Came from a middle class family, agricultural backgroundInitially worked for a PSU – IDPLStarted with a cash of $ 40,000 and $ 120,000 loansA LANDMARK COMPANY IN PHARMA SECTOR NOW

M S M E M S M E

BABA KALYANI

A Mechanical Engineer

Now manufacturing facilities spread over eight locations

Asia’s largest forging unit already and still going strong

Micro, Small and Medium Micro, Small and Medium EnterprisesEnterprises (MSME) (MSME) Sector in IndiaSector in India

Total Total 13 mn13 mn SMEs which act for SMEs which act for 80 pc80 pc of the Indian of the Indian companies companies

manufactures about manufactures about 8000 items8000 items,, Contributes around Contributes around 40 % of gross manufacturing 40 % of gross manufacturing

outputoutput, almost , almost 34 % of India’s total exports 34 % of India’s total exports Share in GDPShare in GDP 8 to 9 pc 8 to 9 pc Contributes 33 mn employment in the country & Contributes 33 mn employment in the country & Offers the Offers the largest employment opportunity after largest employment opportunity after

agriculture sectoragriculture sector Mainly Mainly GarmentsGarments, Leather, , Leather, Auto componentsAuto components, ,

Gems/Jewellery, Gems/Jewellery, PharmaPharma

FROM FROM SSISSI TO TO MSMEMSME – – DEFINING DEFINING THE NEW THE NEW PARADIGMPARADIGM So far the Govt. policy and RBI’s credit So far the Govt. policy and RBI’s credit

policy have concentrated on policy have concentrated on manufacturing units under the small manufacturing units under the small scale sector.scale sector.

Worldwide, the micro and small Worldwide, the micro and small enterprises (MSME) have been enterprises (MSME) have been accepted as the accepted as the engine of engine of economic growth for promoting economic growth for promoting equitable developmentequitable development. .

Financing SMEs in IndiaFinancing SMEs in India

SME financing has been a part of directed lending of commercial banks.

In India multiple institutions operating in Public, Private and Cooperative sector cater to the credit needs of SMEs, both for long term as well as working capital.

Nayak Committee set up by RBI in 1991 to ensure adequate and timely credit to SSIs.

The Committee, in 1992, The Committee, in 1992, recommended commercial banks recommended commercial banks to provide working capital to SSI to provide working capital to SSI units units

@ 20% of their annual turnover @ 20% of their annual turnover subject to a limit of Rs. 1 crore.subject to a limit of Rs. 1 crore.

The limit of working capital The limit of working capital has since been raised to Rs. 5 has since been raised to Rs. 5 crores.crores.

CREDIT ASSESSMENT OF SSIs

The working capital needs of SSI units is assessed as per

1.1. Turnover method, Turnover method, 2.2. MPBF System or MPBF System or 3.3. Cash Budget System.Cash Budget System. The extent of finance is called as

Maximum Permissible Bank Finance or ‘MPBF’.

Limits to the various borrowers are assessed depending upon their

Requirements and their Line of activity

Maximum Permissible Bank Finance:

Under this method, The borrowers requirements are assessed based on the Past practice/holding levels.Past practice/holding levels. While the projections should Reasonably conform to the past trends, Deviations can be accepted subject to Satisfactory justification. This method is also called Tandon Committee Method of lending.

Cash Budget System: Under this method, the working capital Under this method, the working capital

requirements are determined on the requirements are determined on the basis of the ‘Cash Gap’ after taking into basis of the ‘Cash Gap’ after taking into account the monthly and quarterly account the monthly and quarterly projections of cash receipts and outflow. projections of cash receipts and outflow. 

Requirements of borrowers and the Requirements of borrowers and the strength of their balance sheet are taken strength of their balance sheet are taken into account. into account.

The borrower is required to submit the The borrower is required to submit the cash budget to the bank along with cash budget to the bank along with actual as well as projected financial actual as well as projected financial statementsstatements

Maladies of SSIs The incidence of sickness in The incidence of sickness in

the small-scale sector is the small-scale sector is alarmingalarming

While the industries may get registered at the entry point, there is no record of their exit.

Closure of such units’ leads to unemployment and locking up of capital deployed

Bottlenecks: The major problems faced by

the SSI sector relates to • Availability of loan Availability of loan

without collaterals, without collaterals, • Delay in getting the loan, Delay in getting the loan, • High cost of funds,High cost of funds,• Delayed payments, Delayed payments, • Marketing problems, Marketing problems, • Sickness etc.Sickness etc.

Sickness:

A unit becomes sick when it fails to A unit becomes sick when it fails to generate internal surplus funds to generate internal surplus funds to honour its obligations towards honour its obligations towards its suppliers and creditors in time.its suppliers and creditors in time.

An industrial unit is said to be sick when the working conditions are so unsatisfactory that it threatens the viability of the undertaking

Definition of Sick SSI Unit An SSI unit should be considered ‘sick’

if: a. Any of the borrowal accounts of Any of the borrowal accounts of

the unit remains sub-standard for more the unit remains sub-standard for more than six months than six months

OrOr b.b. There is an erosion in the net There is an erosion in the net

worth due to accumulated losses to the worth due to accumulated losses to the extent of 50 percent of its net worth extent of 50 percent of its net worth during the previous accounting yearduring the previous accounting year..

RBI MEASURESRBI MEASURESTo address the incidence of growing sickness in the sector, In 2002, RBI issued A complete set of revised A complete set of revised guidelines guidelines on the basis of the on the basis of the Recommendations of a Working Recommendations of a Working Group chaired by SS Kohli. Group chaired by SS Kohli.

Rehabilitation Measures

Sickness can be classified into three categories. They are:

i.i. Sickness at birth - due to in-Sickness at birth - due to in-feasibility of the project   feasibility of the project  

ii.ii. Induced sickness - Induced sickness - incompetence of the management   incompetence of the management  

iii.iii. Genuine sickness - beyond the Genuine sickness - beyond the control of the promoters in spite of control of the promoters in spite of the sincere efforts.the sincere efforts.

Revival of sick unit requires diagnostic survey in order to identify four R’s: Reasons, Rationale, Risk and Requirements

Reasons includes proper diagnosis Reasons includes proper diagnosis to cure the disease of sickness,to cure the disease of sickness,

Rationale is justification for Rationale is justification for categorizing, rationale is followed categorizing, rationale is followed by risk, by risk,

Revival is the re-establishment of Revival is the re-establishment of the unit and the unit and

Requirements includes efficient management, updated technology, support from the government, etc.

INSTITUTIONAL SUPPORT TO SSIs The Ministry of SSI, Govt of India, has

been playing a major role in development of the SSIs.

The Department of SSI and Agro and Rural Industries, functioning under the Ministry of SSI, has formulated a citizen’s charter which, states its mission as

“To support the SSI by way of an advocacy role, provide services to support SSI growth and to organize programmes through Govt and NGOs for the benefit of small, medium and tiny industries.”.

Small Industries Development Bank of India

SIDBI was set up by an Act of SIDBI was set up by an Act of Parliament, as an apex institution for Parliament, as an apex institution for promotion, financing and development promotion, financing and development of industries in small-scale sector and of industries in small-scale sector and for coordinating the functions of other for coordinating the functions of other institutions engaged in similar activities.institutions engaged in similar activities.

It commenced operations on April 2, 1990. SIDBI extends direct/indirect financial assistance to SSIs, assisting the entire spectrum of small and tiny sector industries on All India basis.

Small Industries Service Institute (SISI)-since converted to MSMEDI

SISI with its network of 26 institutes and SISI with its network of 26 institutes and 30 branch institutes performs the 30 branch institutes performs the following functions:following functions:

i.i. Interface between state and central Interface between state and central governments governments

ii.ii. Technical support and consultancy Technical support and consultancy services services

iii.iii. Entrepreneurship development Entrepreneurship development programmes programmes

iv.iv. Developmental efforts Developmental efforts v.v. Export promotion and liaison activities Export promotion and liaison activities vi.vi. Ancillary development Ancillary development

Product-cum-Process Development Centers

Development Development of new processesof new processesAnd technologyAnd technology

Product design Product design and innovationand innovation

Manpower Manpower development development and trainingand training R & D supportR & D support

Technical Technical supportsupport

Six PPDCs established across the country provide Six PPDCs established across the country provide the following services:the following services:

Time Norms

Time norms are the schedule adopted Time norms are the schedule adopted for the disposal of the loan for the disposal of the loan applications. applications.

The time norms for SSIs are:The time norms for SSIs are: 1.1. For loan applications up to Rs For loan applications up to Rs

25,000 – 1 week25,000 – 1 week 2.2. For loan applications above Rs For loan applications above Rs

25,000 and up to Rs 2 lakh – 2weeks25,000 and up to Rs 2 lakh – 2weeks 3.3. For loan application above Rs 2 For loan application above Rs 2

lakh – 9 weekslakh – 9 weeks

Who will build IndiaWho will build India

If we all go globalIf we all go global A M Naik A M Naik L & TL & T

IN THE END

Thanks for your Thanks for your attentionattention

Dr. S. C. BihariDr. S. C. Bihari Tell:Tell:08417-236660 to 08417-236660 to

65(Extn: 6214) 65(Extn: 6214) Mail:drbihari@ibsindia.oMail:drbihari@ibsindia.o

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