In the previous unit you learnt about Financing in large industries. In this unit you are going to learn about Small scale industries in India and their financial requirements. You are going to learn about the role played by DFIs in the growth of SSIs. In addition to that you are going to learn about regulatory requirements and the challenges of the small scale industries.
Small industries are vehicles of Economic Growth and contribute to a large extent to the economic growth of a nation. The big advantage in this sector is its low capital cost of employment. In India this sector comprises of the Micro Small and Medium enterprises (MSMEs).
Consequently in India, an exclusive Ministry of Micro, Small and Medium Enterprises was formed in the year 2007 to take care of their needs. (MMSME).
As per the 4th Census of MSME Sector which is the latest, the small industries in India employs an estimated number of 59.7 million persons who are spread over 26.1 million enterprises. And the estimation in terms of value,in MSME about 45% of the manufacturing output is accounted for in this sector and about 40% of the total value of the exports of the country.
Small-Scale industrial Sector gains its importance from the two basic premises of economic development policies namely 'balanced' development and 'sustainable' growth of the economy which calls for certain minimum level of diversification of the economy. In Indian economy where Agriculture in the predominant primary sector, which depends on monsoon, such a diversification has to be there in the direction of the growth of industries in general and small-scale industries in particular.
The need to diversify economic activities and shift the unemployment from agriculture to other sectors arises since agriculture is not able to provide enough employment oppurtunities. SSI sector or was one such sector which is labour intensive and hence provides a lot of scope to absorb such labours from agricultural sector to the allied activities like - the development of infrastructure and employing them in less technical jobs
Therefore unlike other sectors of the economy manufacturing is the only sector which has large number of productive, forward and backward linkage effects. Due to this a balanced approach will give a push to the economy and thus aid in achieving the sustained overall growth of the economy.
Objectives
After studying this unit, you should be able to:
describe small scale industries sector in India
explain the financial requirements of Small Industries sector
describe the role of DFIs in the growth of Small scale industries
explain the regulatory requirements in financing SSI
list the Challenges faced by DFIs in financing SSI
6.2 Small Scale Industries in India (SSI)
Industrialisation in India since independence has been predominantly based on the development of only large scale industries. The policy of the government during the early planning era was to develop import substituting heavy industries as the 'key stone' with traditional SSI as an adjunct to meet day to day demands. As per experts small industries must be encouraged to grow to achieve a stable Gross Domestic Product growth trajectory.
Mahatma Gandhi was among the earliest advocates of small industry in India. But his focus of was on the expansion of traditional and rural manufacturing industries and not on the creation of the modern, small, urban factory sector. Mahatma Gandhi advocated the setting up of Khadi and Village industries, which is a type of Small Industry whose most significant aspect in Indian Economy is that it created employment at a very low per capita investment.
Prof. Prasanta Chandra Mahalanobis, who set the pattern of the Second Five-Year Plan conceived small-scale sector as a supplier of consumer goods to support workers in the large scale sector of heavy industry. Industrial development becomes incomplete without the development of SSIs, since this sector provides opportunity to utilize the abundant manpower and unexploited resources. Accordingly in the process of reshaping and developing the Indian economy under the aegis of Five Year Plans, SSI Sector is rapidly coming into prominence.
Importance of the small scale sector can be gauged by the account given by the Small Industries Development Bank of India (SIDBI) formed to cater to the need of small industries sector which is follows:
The Small Scale Industries sector, over the years, has been steadily growing and has occupied an important place in the nation's economy. This sector has contributed in terms of employment generation and exports has been quite significant. The number of registered units in the SSI sector has increased from 0.42 million as at end-March 1974 to 26 million at end-March 2007 (which is the latest census) .This sector accounts for 45% of the total manufacturing output and 40% of total export output of the country.
Government has also reserved certain products exclusively to be manufactured by MSMEs.
In 2006 a new bill , 'The Micro, Small and Medium Enterprises Development Act,' was passed in which the following definition appears "a small enterprise is one , where the investment in plant and machinery is more than twenty five lakh rupees but does not exceed five crore rupees.".
Under the act it was envisaged to set up a National Board exclusively for Micro, Small and Medium Enterprises for the purpose of examining all the factors that affect the promotion and development of the MSME enterprises and also to review the policies and programmes of the Central Government regarding the facilitation of the promotion and development of MSMEs and enhancing of the competitiveness of such enterprises." These steps have made the Indian small industries sector to be a significant player in global market place.
This Board is also to make recommendations to the Government on the matter of the development of such enterprises and how to overcome their problems.
Further a Task Force was constituted in the year 2009 by the Prime Minister of India, which studied the MSME sector and made a lot of recommendations, most of which have been implemented by the Government. The gist of the recommendations of the high level task force is as follows: Share of micro enterprises in MSME lending should be increased to 60% in a phased manner and should be achieved in the year 2012-13. It would be mandatory for public sector bank to achieve this target and achieve a growth on the number of Micro enterprise by 10% each year.
Also, Planning Commission of India constituted a working Group on MSMEs growth in the 12th five year plan with Secretary of Ministry of MSME as its chairman and 46 members representing various Ministries /offices of Government of India. It also had representatives from state governments, industry associations and NGO's. The main job of this group is to study and carry forward the recommendations of the Prime Minister's task force and suggest specific action plan to achieve them within the 12th Five year plan period. Further the group will also study and formulate proposals and schemes for the unorganised sector of small industries.
Due to all the steps taken by the government Small Industries sector in India has been growing steadily and plays a significant role in the economy of the country, both within India and also at global level.
Below table shows the Growth of MSME in India as of the latest census.
Table No.6.1
YEAR
MSME UNITS
ANNUAL INCREASE
% OF ANNUAL INCREASE
(LAKHS)
(LAKHS)
2003-04
113.95
4.06
4.07434
2004-05
118.59
4.64
4.07196
2005-06
123.42
4.83
4.07285
2006-07
128.44
5.02
4.06741
2007-08
132.44
3.96
3.0831
6.3 Financial Requirements of Small Scale Industries
SSI units require funds for various purposes. For starting their business, they require fixed assets which comprise of land and building, plant and machinery, furniture and fixture, etc.
Besides, these units also require funds to finance other fixed assets also, which include goodwill, trade mark, current and non-current assets. To feed machinery, raw materials and stores are required. To process raw materials into finished goods, certain manufacturing expenses have to be incurred. Every time, minimum stocks should also be maintained which comprise of raw materials, stores, stock in process and finished goods etc by the SSI unit. Similarly, goods are normally sold on credit basis and accordingly, certain cash is required until the collection is made from customers i.e. sundry debtors. Ancillary units face the problems like delayed payment by parent units, resulting in sundry debtors.
Thus, each unit requires funds to maintain current assets which include cash, raw materials, and stock in process, finished goods, sundry debtors and short term investment, and working capital
To finance all these fixed assets and current assets, each unit raises funds, which include long term finance and short-term finance.
The following are the modes of short-term finance:
1) working capital finance by banks
2) Sundry creditors,
3) Finance from friends, relatives and others in the form of Deposits/Borrowings, and
4) finance from customers in the form of deposit
The sources of long-term finance include:
1) Capital, in the form of equity,
2) Contribution by owners of the business in the form of deposit or loans to the firm,
3) loans financial institutions in the form of Term Loans
4) facility provided by National Small Industries Corporation or similar organisations supporting Small industries in the form of Hire purchase loans/ Leasing finanace,
5) Loans offered by commercial banks,
6) Machinery acquired under Bill Rediscounting Scheme, of IDBI and
7) facilities provided by Government/Financial Institutions, etc. in the form of financial subsidy, seed capital, margin money and soft loans,
What is mentioned .above are the external sources of funds.
Owner's capital and deposits/loans are internal sources of finance. Funds can be generated internally by the entrepreneur through Capital. In the case of medium size enterprises raising of equity capital can be one of the sources. In small enterprises run by proprietorship or partnership firms the capital contribution is done by the proprietor or the partners. Part of the profits generated can also be ploughed back in to the business.
Venture capital is also one of the sources of finance. In Venture Capital Funds which are many in number financing a project is done only after studying its feasibility and profitability.
Now we shall briefly see how these financial needs are fulfilled by the various agencies engaged in this task.
Self-Assesment Questions
State true/false
An important problem faced by small scale industries in the country is that of finance. (T)
Credit will never be an input for sustained growth of small scale sector and its availability continues to be a matter of concern. (F)
Industrial development becomes incomplete without the development of MSMEs, since this sector utilize the minimum manpower and resources. (T)
Small scale industrial system is recognised as an instrument in bringing about a balanced regional growth by setting up small scale industries in under developed areas and employment to the local people.
Prospective Term Loans are provided by NSIC-are for acquiring Land and Building, machinery, equipments and working capital.
6.4 Role of DFIs in the Growth of SSI
The role of Small industries in the development process of a nation continues to interest the rulers of the nation and hence play an important role in their policy making.
Small industries' formidable and very common problem is finance. Small scale industries have a weak capital base of their own since they are mostly proprietary or partnership concerns. Further the size of SSI unitsis basically small and hence making investments on their own in infrastructure requirements like power, communication or pollution control measures is difficult.
Various development financial institutions have been set up with a view to ensure adequate finance to small industries sector, as per the lines envisaged in the industrial policy of the government.
"Development Financial Institutions" are characterised by the following functions.
They are engaged in financing of sectors of economy where the risks involved are beyond the acceptance limits of commercial banks.
Also, DFIs are mainly engaged in providing long-term assistance.
DFIs generally meet the credit needs of riskier but socially and economically desirable objectives of the nation's policy.
We shall see how the various Development Finance Institutions (DFI) which plays a vital role in the industrial development of a nation supports the needs of Small industries.
6.4.1 Small Industries Development Bank of India (SIDBI)
First and foremost of the development financial institutions set up in India exclusively for the benefit of Small industries is SIDBI. SIDBI, is an Apex Financial Institution. SIDBI was set as a wholly owned subsidiary of IDBI under an Act of the Parliament in 1989. That was set-up as a principal development financial institution for the purpose of promoting , financing and developing Small scale industries in the Country.
Providing of finance, directly to MSMEs and indirectly through financial intermediaries, namely commercial as well as co-operative Banks, State Financial Corporation's (SFC), Non-banking Finance Companies (NBFC), etc., Proactively SIDBI has taken a lot of measures for the benefit of MSMEs which included setting up subsidiaries / associate concerns for the enterprises besides providing services like Venture Capital, Guarantee of credit as well as loans, Rating, Technical Services etc. which have immensely benefited the MSME sector.
Refinance by SIDBI
Under the Charter of SIDBI , the bank has been, asked to be the main provider of term funding to the small scale industrial sector in the country. Term loans that are extended by financial institutions to small scale industries irrespective of where it is located and its organisational form. are eligible for refinance assistance from SIDBI. Similarly, finanace is is available for modernisation and rehabilitation of small scale industries. . Refinance at concessional rates of interest is provided by SIDBI for loans provided to certain special category of borrowers in the MSME sector..
The purpose of Refinance scheme is to enable the flow of funds to MSME through various Primary Lending Institutions (PLIs), comprising of scheduled banks, State Financial Corporation's (SFCs) State Industrial Development Corporations (SIDCs), etc., SIDBI grants refinance to the eligible PLIs against term loans given to to those MSME industrial undertakings who are found fir for the pupose for setting up of industrial projects in the MSME sector and for their expansion/modernisation/diversification.
Other important schemes of the SIDBI are discussed below:.
Composite Loans: Loans granted to the artisans, and for industries in rurual areas , cottage industries and small scale industries in the tiny sector by eligible up to an amount of Rs.50000 of composite in nature are covered under this. Primary lending institutions are covered in this scheme. Further equipment finance or working capital or both are covered in this. The eligible financial institutions should not to insist the small scale industry to provide collateral security as advised by SIDBI and also since these loans Credit Guarantee Scheme of DICGC covers these loans.
National Equity Fund Scheme: SIDBI is providing THE National Equity Fund Scheme with the objective of providing equity type of support to small entrepreneurs in tiny/small scale sector and for rehabilitation of viable sick units in the SSI sector. During the year 2000-01 the loan limit was raised from Rs. 6.25 lakhs to Rs. 10 lakhs and the cost limit of the project was also raised from Rs. 25 lakhs to Rs. 50 lakhs.
Debt restructuring mechanism:
With a view to improve flow of credit and to ensure restructuring of viable and potentially viable debts of MSMEs, the Reserve Bank of India has issued guidelines for implementation of Debt Restructuring of MSME's. Prudential Guidelines on MSME Debt Restructuring by banks have been formulated and advised to all commercial banks by Department of Banking Operations & Development of Reserve Bank of India.
Setting up/Development of Industrial Estates
Another scheme handled by SIDBI is the setting up and development of industrial estates. This includes the projects which are eligible under KVIC model. This scheme comprises of strengthening of the existing industrial clusters /industrial estates by provision of increased amenities and for the smooth functioning of the industrial units, Further this also includes providing warehousing facilities for the MSME units for storage of their products. Support services like provision of common utility centres which includes convention halls, trade centres, storage facilities for raw materials, warehousing for finished products, tool rooms / testing facilities, construction of housing colonies for industrial workers, etc. are provided by SIDBI. Other infrastructural facilities to the benefit of predominantly MSME units / entrepreneurs are also provided by SIDBI.
SIDBI Venture Capital Limited (SVCL)
SVCL was formed as a wholly owned subsidiary of SIDBI, in July 1999. It was formed to act as an umbrella organisation for the purpose of overseeing the operation of Venture Capital of SIDBI. SVCL .The various Venture Capital Funds launched/ being launched by SIDBI has a common mission to encourage entrepreneurs by providing finance for the capital and other necessary inputs for building businesses which surrounds growth opportunities and maximisation of the return on investment.
Technology Development & Modernisation Fund (TDMF) scheme is set up by SIDBI for providing direct assistance to small scale industrial sector and for encouraging the existing industrial units in the sector. Also modernisation of their production facilities and adoption of improved and modern technology with the aim to strengthen their capabilities to export their products . Finanacial assistance is also provided under this scheme to meet the expenditure on purchase of capital items (machinery/equipment) cost of technical know-how, modernisation of process technology and products with an emphasis on the quality , reduction of packaging cost and cost of tools for quality assurance and for obtaining the certification under ISO-9000.
4.2 State Financial Corporation's (SFCs) :-
A Central Industrial Finance Corporation was set up with an aim to provide medium and long term credit to industrial undertakings which fall outside the ambit of Commercial Banks, under the Industrial Finance Corporation Act, 1948 (XV of 1948). Various State Governments wanted that similar Industrial Finance Corporations should be set up at the State level supplementing the work of the central Industrial Finance Corporation. The formation of
State Level corporations were to confine their financing activities to medium and small scale industrial units and to the extent possible to consider only such cases that fall outside the scope of the Central Industrial Finance Corporation.
A very crucial role of development of MSME is played by the State Level financial corporations of the concerned States. State financial corporations set up at State Level to cater the needs of industries in the State also provide funds required by Small Scale Industries sector. They are either set up by a particular state government or jointly by two or more state governments Financial assistance is provided by them are in various forms like term loans, direct subscription to equity/debentures, issuance of guarantees, bills discounting and provision of capital, etc.
The objective with which the SFC have been set is to catalyse higher investment, improve employment opportunities and broadening of the ownership base in thses industries. Assistance for new types of businesses like floriculture/ tissue culture, poultry/ cattle farming, building of commercial complexes and engineering/marketing services etc. The Corporation will be further authorised to underwrite the issue of stocks, shares, bonds or debentures by industrial concerns.
The objective of setting up of State Financial Corporations is to catalyse higher amount of investment, increase the employment opportunities and widen the ownership base of various industries. SFC have extended their assistance to new types of businesses which includes floriculture, tissue culture, poultry/cattle farming, construction of commercial/business complexes and for engineering, marketing, warehousing related services etc.
4.3 State Industrial Development Corporation (SIDC)
State Industrial Development Corporation (SIDC) which were set up under Companies Act as wholly owned subsidiary of the respective State Government operate at a higher level than SFC's and set up to take care of financial needs of large industries and also cater small industries. These SIDCs extend financial assistance in the form of rupee loans, underwriting subscriptions to shares/debentures, guarantees and also opens letters of credit on behalf of its borrowers.
State Industrial Development Corporation primarily work as development banks promoting industrial projects in small and medium scale sector.
4.4 National Small Industries Corporation (NSIC)
National Small Industries Corporation Ltd. (NSIC), was set up in 1955 is a I Government of India Enterprise set up under Ministry of Micro, Small and Medium Enterprises (MMSME).This has been certified under ISC-9001-2008. NSIC has been striving hard to fulfill its mission for promotion of, aiding and fostering the growth of small industries and industries in India and also the related MSME enterprises in the country. On its part NSIC is contributing towards the financing of MSMEs.
Their schemes are mainly as follows:
Bill Financing: Financing on bills drawn by Small Scale Industries for supplies made up to 90 days is provided.
Working Capital Finance: Finance is provided by NSIC working capital augmentation of selected, viable and well managed small industrial units, in case of emergency requirements for funds, for enabling them to meet the financial requirements for purchases of consumables of stores and spares and for the production related overheads particularly power consumption bills, statutory governmental dues, etc.
Export Development Finance: Finance is provided to meet the emergent requirements of Export oriented industrial units. Pre and post shipment financing is also done to such units at special terms and conditions.
Equipment Leasing Scheme: In order to assist SSI units to procure industrial equipments for modernisation, expansion and diversification of the industry, Equipment leasing scheme was introduced.
Refinance for Modernisation of MSME: Modernisation by industrial units is taken care by this scheme, with an objective to encourage industrial units to overcome the backlog of modernisation and for adopting improved and updated technology Implementation of new methods of production and prevention of obsolescence.in machinery or technology are also taken care of..
.
4.5 Commercial Banks
Besides SIDBI, SFCs and NSIC commercial banks play a vital role is taking care of the finance needs of Small industries. Separate departments are set up in each bank for this purpose.
Over the years there has been a significant increase in credit extended to this sector by the banks. As at the end of March 2011, the total outstanding credit provided by all Scheduled Commercial Banks (SCBs) to the MSE sector stood at Rs.4785.27 billion as against Rs. 3622.90 billion in March 2010 registering an increase of 32%.
In terms of the recommendations of the Prime Ministers Task Force on MSMEs set up under the Ministry of MSME, Government of India , advice has been given to banks for achieving 20% year-on-year growth in the finance provided to Small industries. By the year 2012-13, of the advances provided to Micro enterprises must be 60% of the MSE advances, and has to be achived in stages namely 50% by 2010-11, 55% in the year 2011-12 and 60% by 2012-13. There should also be a growth of 10% by this time in the number of micro-enterprise accounts. The achievements are being monitored closely by RBI on a quarterly basis. All these steps are aimed at ensuring enhanced credit flow to the small industries sector and especially to Micro-enterprises sector.
4.6 Loan re-construction pertaining to SSI Sector.
India MSME Asset Reconstruction Company Ltd (ISARC):
The country's first Asset Reconstruction Company is ISARC which was set up under the guidelines of RBI and SARFAESI Act, 2002. It was formed to l strive hard for speedier resolution of NPAs (Non-performing assets) especially in MSME sector .
ISARC is supported by a large number of public sector banks and undertakings The vision of ISARC is to become the leading Asset Reconstruction Company and would undertake to unlock the idle NPAs lying in the Financial Sector, , with a focus on the NPAs in the MMSME sector, The aim is to put NPAs of MSME sector to productive use by recovering funds from these NPAs by using innovative resolution mechanisms.
Asset reconstruction companies are formed to acquire, manage and recover illiquid and NPAs (non-performing assets) from banks and Financial institution
With the intention to realise the funds locked up in NPAs, ISARC was promoted by SIDBI which was in association with various Public Sector Banks, Life Insurance Corporation of India and State Financial Corporations specially focusing on NPAs of MSME sector.
ISARC will be basically adopting the well known business models of ARCs. They will do the purchase of NPAs from the Banks / Financial Institutions based on valuations and resolve the same by way of sale of the same to prospective buyers or / and use the restructuring method of the liabilities etc. ISARC will transact either through the mode of Security Receipt or by way of receipt of cash. ISARC will conduct all the businesses in a highly transparent manner and on pure commercial terms and according to the various provisions of the RBI guidelines and SARFAESI Act, 2002.
NBFCs( Non-banking finance Companies)
We can see the emergence of NBFC's as an important segment of Indian financial scenario in recent times. It is an heterogeneous group of financial institutions (comprising institutions other than commercial and co-operative banks) which performs financial intermediation in a various ways, like accepting of deposits, making loans and advances out of these deposits providing leasing finance,and hire purchase finance.
NBFC's have a critical role to play in the developing economy of India, in which financial inclusion remains a distant goal. Those areas where commercial banks think are either uncompetitive to handle or where the banks do not find the returns worthwhile their inputs,, NBFCs generally lay their focus on them.. By this act , NBFC's have consistently proved their superior ability of innovation and reaching out to unbanked areas.
It is not a surprise that, NBFCs flourish in the medium to long term financial sector to the to MSME's in India and they are the future key to the country's economic growth in the coming years.
Regulations of Reserve Bank of India (RBI) within the framework of the Reserve Bank of India Act, 1934 (Chapter III B) and also the various directions issued by RBIunder the Act. are applicable to NBFCs.
When we talk of financing we should also talk of Credit Guarantee schemes which we will discuss later in this material.
Refinance Scheme for Getting ISO Certification: SIDBI provides refinance for obtaining ISO Certification, consultancy expenses, documentation expenses ; audit fee , certification fees, equipment and calibrating instruments that will be required would be taken into account for determining the loan requirement of the enterprise Micro and small enterprises having a good record of past performance and which possess sound financial position in the sector are eligible for the loan
4.6 NABARD:
In case of Small and Micro Enterprise Sector, NABARD will provide refinance for such activities in rural areas / other areas to NBFC's financing the Small and Micro Enterprises. The small and micro (service) enterprises shall include small road & water transport operators, small business, professional & self-employed persons, and all other service enterprises.
NABARD provides refinance assistance to the NBFCs under two windows namely,
Automatic Refinance Facility (ARF): without going through the detailed procedure of
Pre-sanction formalities. The NBFCs are expected to appraise the proposals at their own level, be satisfied about the technical feasibility, financial viability etc. and finance the borrowers.
Pre-Sanction Procedure. : The refinance assistance to NBFCs above the ARF cut off
level will be provided under Pre-Sanction procedure. NBFC is required to forward the project proposal for sanction to the concerned Regional Office after appraising the project and being satisfied about it's technical feasibility, financial viability and bankability.
4.7 Small Scale Industries Infrastructure Development Fund (SIIDF)
Some Small industries have failed due to inadequate infrastructural support like insufficient Power supply, improper communication facilities, pollution control problems etc. along with inadequate finance. Adequecy of nfrastructural facilities is a must even for the SSIs to absorb and use existing credit provided to them.
Inadequate infrastructural support like Power, communication, pollution control etc. along with required financial support at the right time credit are the major reasons for the failure of the SSIs.. Adequate infrastructure is required Even to permit the SSIs to absorb and use existing financial credit basic infrastructural support is required.
The Study Group for Small-Scale Industries has recommended setting up of an Rs 2,000-crore Infrastructure Development Fund for small-scale units. The fund will be utilised in creating, revamping and upgrading the industrial infrastructure for SSIs, including upgrading the infrastructure in the existing industrial estates. The members of the Study Group consist of representatives of the Small Industries Development Bank of India (SIDBI), the National Small Industries Corporation, non-government organisations and the Development Commissioner of SSIs apart from academics.
Self-Assesment Questions
Fill in the blanks:
6. ________ _____ face the problems like delayed payment by parent units, resulting in sundry debtors.
7. SSI units being small in size, they cannot make investments on their own in __________ like power, communication or pollution control measures.
8. The financial assistance by SIDBI to SSI is __________ through the existing credit delivery system comprising NSIC, SFCs, SIDCs, SSIDCs, commercial banks, co-operative banks and RRBs.
6.5 Regulatory Requirements
We shall discuss the regulatory aspects with regard to financing of the Small Scale Industries sector by studying the various acts and regulations applicable to financing the Small Scale industries sector.
SIDBI Act 1989
SIDBI was established as an apex body on April 2, 1990 under the SIDBI Act,1989, was formed with a mission to empower the Micro, Small and Medium Enterprises (MSME) sector. The provisions of this act are applicable for all financial support schemes of SIDBI.
The following is the definition provided in the preamble to the Small Industries Development Bank of India Act, 1989:
"the principal financial institution for the promotion, financing and development of industry in the small scale sector and to co-ordinate the functions of the institutions engaged in the promotion and financing or developing the industry in the small scale sector and for the matters connected therewith or incidental thereto."
The SIDBI's vision envisaged in the Act is its emerge as a single window to meet the financial needs and development needs of the MSME sector in order to make it strong and vibrant and make it globally competitive. also The vision also wanted SIDBI to create a brand as the preferred and customer-friendly institution and stand for enhancing the share - holder's wealth and also the highest corporate values using modern technology platform. Apart from providing finance, directly to MSMEs and it also finances indirectly through financial intermediaries, viz., Banks, SFCs, NBFCs, etc.
Micro, Small & Medium Enterprises Development (MMSMED) Act, 2006
The Government of India has enacted the Micro, Small and Medium Enterprises Development (MMSMED) Act, 2006 on June 16, 2006 which was notified on October 2, 2006. With the enactment of MMSMED Act 2006, the paradigm shift that has taken place is the inclusion of the services sector in the definition of Micro, Small & Medium enterprises, apart from extending the scope to medium enterprises. The MMSMED Act, 2006 has modified the definition of micro, small and medium enterprises engaged in manufacturing or production and providing or rendering of services. The Reserve Bank has notified the changes to all scheduled commercial banks. Further, the definition, as per the Act, has been adopted for purposes of bank credit as per the RBI circular.
RBI Regulations
RBI has made comprehensive regulation- with regard to the requirements in financing Small Scale units in India - since financing Small enterprises was done by commercial and co-operative banks.
As per RBI policy, certain targets have been prescribed for banks for lending to the Micro and Small enterprise (MSE) sector.
In terms of guidelines and circulars issued by Reserve Bank of India, banks have been mandated to grant collateral free loans up to Rs.10 lakh to all MSE borrowers. Banks have been further advised that they may, on the basis of good track record and financial position of the SSI (Now MSME) units, increase the limit of dispensation of collateral loans from the existing level of Rs.15 lakh to Rs.25 lakh with the approval of the appropriate authority.
In order to ensure that sufficient credit is available to micro enterprises within the MSE sector, RBI regulation states that banks should ensure that:(a) 40 per cent of the total advances to MSE sector should go to micro (manufacturing) enterprises having investment in plant and machinery up to Rs. 5 lakh and micro (service) enterprises having investment in equipment up to Rs. 2 lakh ;(b) 20 per cent of the total advances to MSE sector should go to micro (manufacturing) enterprises with investment in plant and machinery above Rs. 5 lakh and up to Rs. 25 lakh, and micro (service) enterprises with investment in equipment above Rs. 2 lakh and up to Rs. 10 lakh. Thus, 60 per cent of MSE advances should go to the micro enterprises.
RBI regulation covering financial intermediaries is premised on two primary factors - protecting depositors' interest, in case public deposits are accepted, and the systemic stability considerations. The responsibility and associated regulatory and supervisory powers are conferred upon RBI under the Banking Regulations Act, 1949 in regard to banks and in RBI Act, 1934 in regard to non-banking institutions.
At present RBI regulates and supervises nine select DFIs, viz., IDBI, IFCI Ltd. TFCI Ltd., IDFC Ltd., IIBI Ltd., EXIM Bank, NABARD, NHB and SIDBI. Of these, IFCI Ltd. TFCI Ltd., IDFC Ltd. and IIBI Ltd., being companies, and are, by definition, NBFCs
IDRA ACT (Industries (Development & Regulation) Act, 1951 (IDRA Act.)
The Industries (Development and Regulation) Act 1951 provides the conceptual and legal framework for industrial development and industries in India. It is briefly known as the IDR Act. The licensing policy for industries is determined under this act. Power of Central Government to specify the requirements which shall be complied with by small scale industrial undertakings is prescribed under this act.
IDR Act also provides for statutory reservation of items/products for exclusive production in the small-scale sector. Such products therefore are reserved for manufacture only in the small-scale sector.
6.6 Challenges in Financing SSI
According to the report of All India Census of small scale industries 35% of the Small scale industries were closed due to financial problems.
The followings are some of the challenges faced by the Development Financial Institutions/ Banks with respect to financing in Small Scale sector.
Preparation of Project Proposal: Entrepreneurs experience many difficulties in formulating the project proposal which is required first for raising financial assistance from the banks/the government. Data/information requirements are too many and the same are not available at one place. It is also a time taking process in collecting the required information. NSIC is now assisting Small Industries in successfully achieving this first step.
Quantum of loan sanctioned: Both borrowers and bankers agree that the quantum of loan sanctioned is found to be inadequate in terms of the requirements of the MSMEs. as per the current norms. This was confirmed in every survey. This issue is also confirmed from the analysis of the secondary data. Further banks discriminate the MSME borrowers by their set-up, they prefer corporate borrowers to proprietor or partnership firms.
End use of borrowed funds: One of the main reasons for the units to become non-performing is due to the diversion of funds, calling for the present system of follow up and supervision to be strengthened. This suggests a need to introduce the concept of credit monitoring.
Annual review: The working capital limits are expected to be renewed on yearly basis. As part of the annual review, the performance of the unit is reviewed. But in the absence of proper review, the problems of the MSMEs are not understood, and the enterprise faces lack of proper working capital.
Rehabilitation of sick units: From the survey of sick units, it is observed that success rate in rehabilitation is unsatisfactory. Involvement of banks can be enhanced when their role is specified. Procedures to be followed in banks should be spelt out.
The problems of co-ordination of rehabilitation of sick small industries is taken care by SLIICS (State Level Inter Institutional Committee) which have been set up in all states by RBI. This provides a useful forum for interfacing between State government, state level institutions and term lending institutions to discuss various issues pertaining to financing of small scale industries.
Loan recovery: Recovery of loans granted to Small Industries is a challenging task of managers of financial institutions. Managers look for a check-list of recovery measures which are many in number. Such measures relate to non-legal and legal categories. Such checklist helps branch managers to choose an appropriate measure for a given case. Similarly, MSME borrowers look for Factoring and Forfeiting services and Export financing in a big way.
Delays in credit sanctions: Delays are seen at every level lending operations due to complex formalities. Such levels include submission of the loan application form, project formulation, credit sanction, project implementation, annual review and renewal of limits and rehabilitation of sick units. In addition, banks take a substantial time in offering regular services which include collection, remittance and other fee based services.
Limited bank products: While MSME units are operating in the global environment, bank products in terms of number are found to be limited. The time has come for banks to devise schemes well suited to the changing needs of the Small Scale Sector.
Cost of loans: Despite liberalisation and financial sector reforms, the cost of loans is still high. Cost of loans and rating of units have to be correlated. Banks/ DFIs have to develop an internal rating system and charge interest rate accordingly.
Terms and conditions: The Reserve Bank of India has advised the banks not to insist on collateral securities for small loans when the amount outstanding is less than Rs.5 lakhs and Rs.25 lakhs (where a guarantee cover is available). But in reality, collateral securities are still insisted to avail of even small loans, which affect the sector.
Fair Practices Code: There are numerous complaints received by banks from the MSME borrowers regarding excess bank charges, delays in credit sanctions, stricter terms and conditions, etc. This calls for each bank to spell out its own Fair Practices Code for Small Industries sector.
Some of the measures taken by government towards tackling the various challenges faced in financing MSMEs are as follows.
Development through clustering
Government wants to help MMSMEs facing various challenges by the method of clustering.
Clusters can be defined as sectoral and geographical concentration of enterprises, particularly those Micro, Small and Medium Enterprises (MMSMEs) facing common opportunities and threats. Hence, a group of companies, which partners together for the purpose of improving performance through mutual learning and sharing, is a cluster.
Clusters have benefited from natural external economies. Clusters worldwide are being acknowledged as a strategic mechanism through which the regions and nations can attain higher level of industrial development. International experience has proven that solving common issues by clustering and networking of enterprises helps enhance economic growth and encourage technical and financial progress among MSMEs.
Debt restructuring
Corporate Debt Restructuring (CDR) or simply restructuring of loans and advances to Small Industries sector, with all its pros and cons, is an effective financial tool, especially during the times of crisis, for smoothening the adverse effects of economic downturns on the borrowers of credit as well as their lenders.
SFCs also assist small scale units for their modernisation and technology upgradation programmes by providing soft loans, besides restructuring the sick small scale units through rehabilitation schemes and through equity type assistance under SIDBI's seed capital scheme.
Further government of India had advised SIDBI to prepare guidelines for management / restructuring of stressed loans of MSME which is being provided to banks for implementation by them to revamp sick MSMEs.
Credit Linked Capital Subsidy Scheme for Technology up gradation -
This was launched in October, 2000 and revised with effect from 29.09.2005. The altered scheme is facilitating the upgrading of Technology of Medium, Small and Micro Enterprises by providing 15% Capital subsidy (it was 12% before 2005) on institutional finance availed by them for induction of well established and improved technology in approved sub-sectors/products.
Credit Guarantee Fund Scheme
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 2000. The corpus of CGTMSE is being contributed by the Government and SIDBI in the ratio of 4:1 respectively and has contributed Rs.1906.55 crore to the corpus of the Trust up to March 31,2010. As announced in the Package for MSEs, the corpus is to be raised to Rs.2500 crore by the end of 11th Plan.
From the above description of the government approach and measures, towards meeting the challenges it is clear that these are by and large on the right lines. If, however, the SSIs still suffer from various handicaps, it is obviously, because these measures are not implemented effectively. It is that the efforts are more in direction of "protection" of this sector, and there is very little by way of raising its efficiency and competitive strength. Unless this becomes the centre-theme of the policy, the SSIs will not become a dynamic sector.
Self-Assesment Questions
State true/false
9. A limited company running an SSI is considered to be more suitable by the banks than either a partnership or proprietorship firm. (T)
10. Entrepreneurs experience many difficulties in formulating the project proposal which is required for raising financial assistance from the financial institutions.(T)
11. The Reserve Bank of India has advised the banks not to insist on collateral securities for small loans when the amount outstanding is less than Rs.5 lakhs and Rs.25 lakhs if the same comes under Guarantee scheme. (T)
12. No complaints have been received by banks from the MSME borrowers regarding excess bank charges, delays in credit sanctions, stricter terms and conditions, etc.(F)
6.7 Summary
Let us recapitulate the important concepts discussed in this unit:
Small-Scale Sector acquires importance from two basic premises of economic development policies viz., 'balanced' and 'widespread' development and 'sustainable' growth of industry with employment potential with low capital cost.
Finance is the prime input for sustained growth of small scale sector and its availability continues to be a matter of concern.
Government of India has set up the Ministry for MSME which has set up a country-wide network of institutions and offices, through which it implements its schemes and programmes. It also acts in close partnership with State Governments and industry associations.
From time to time Government of India is formulating appropriate policies and programmes for the growth and development of the small industries.
Financial assistance is channeled through SIDBI and the existing credit delivery system comprising of NSIC, SFCs, and SIDCs, SSIDCs, commercial banks, co-operative banks and RRBs.
Various regulations have been made by Government of India and RBI, towards financing Small Industries sector to be followed by DFIs and banks for financing Small Scale Industries.
The challenges faced by financial institutions in financing MMSEs are tackled by various measures taken by Government through RBI and SIDBI.
1.8 Glossary
BIFR : The Government of India, in order to tackle the problem of industrial sickness, had set up a Board for Industrial and Financial Reconstruction (BIFR),
ISARC : ISARC is the country's first ARC supported by a large number of public sector banks and undertakings. It will strive for speedier resolution of NPAs with a focus on MMSME sector
CGFSSI : Credit Guarantee Fund Trust for Small Industries (CGTSI), a Trust set up jointly by the Government of India and Small Industries Development Bank of India is administering the Credit Guarantee Fund Scheme for Small Industries
Adjunct : Complement
TQM : Total Quality Management approach.
SARFAESI Act :Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
DICGC : Deposit Insurance and Credit Guarantee Corporation
Paradigm : generally accepted perspective of a particular discipline at a given time
6.9 Terminal Questions
1. Explain about the role of Small scale industries in India
2. Describe financial requirements of SSI
3. Explain the role played by DFIs in the growth of SSI
4. Describe the regulations pertaining to financing Small Industries sector.
5. List out the major challenges faced by DFIs in financing SSI
6.10 Answers
Answers to Self-AssesMSMEnt Questions
1. True
2. False
3. True
4. True
5. True
6. Ancilliary Units
7. Infrastructure
8. Channelled
9. True
10. True
11. True
12. False
Answers to Terminal Questions
1. In a developing country like India, the role and importance of small-scale industries is very significant towards poverty eradication, employment generation, rural development and creating regional balance in promotion and growth of various development activities (Refer 6.2)
2. SSI units require funds for various purposes. For starting their business, they require fixed capital and for running their business working capital.(Refer 6.3)
3. Various devlopment finanacial institutions like SIDBI, State Financial Coporations, State Industrial Devlopment Corporations, NABARD and Commercial banks all play their role as DFIs in MSME sector.(Refer 6.4)
4. Various regulations of RBI and Acts like MSMED Act, SIDBI Act etc are applicable in financing of Small Industries Sector.
6.11 Case Study
Impact of Globalisation on Small Scale industries
Introduction:
The small scale industries sector has occupied a prominent place in the socio-economic development of India since independence. Its contribution to the overall growth of the Gross Domestic Product [GDP] of the nation as well as in the terms of employment generation in worth mentioning. In most of the developing countries, especially in India where most of the population is poor and uneducated Small industries hold a strategic role to play.. It provides more than 50% of industrial production and more than 80% of the employment in industrial sector. It accounts for about 35% of India's export earnings. The small scale industry produced wide and different range of products. It produced mass consumption goods. At present nearly 150 lakh SSI units are there in the country. The study is helping the entrepreneur to set up enterprises and create sustainable industries and increase socio-economic conditions. The significance is to improving the productivity, skills, training and marketing to create awareness among the future generation about the vast untapped opportunities available in the country. The study is based on a sample size of 50 small sized industrial units with an investment of minimum of Rs 10 lakhs. The units were selected at random. The units were located in Chakan M.I.D.C.(Maharashtra Industrial Development Corporation) area near Pune. A purposive sampling was done to select the respondents through the respective states financial corporations. The Organizations selected for the study were either proprietorship or partnership firms. Ten different kinds of industries were selected for the study viz., Electronics, Fabrication, Ceramics, Servicing, Packaging Material, Printing. There was no similarity in size, volume of business and life period of the enterprises selected for the study. However, all the enterprises selected for the study had a minimum life of ten years and were running units' i.e. in to commercial productions.
FINDINGS: The major findings of the study are summarized as below.
Nearly 84% respondents have agreed to availability of low cost of labour, availability of raw material, labour, marketing and transport facilities.
Due to globalization about 68% of the respondent units agreed that there is a cut-throat competition among the SSI units.
The 18% of the SSI units are operating to its fullest capacity, 29% are utilizing its 75% capacity and remaining units are utilizing only 60% capacity.
About 48% of SSI units provide training facilities to their workers.
Only 34% units are registered with MCCIA.
The 20% of the SSI units are satisfied with the productivity.
Only 38% units are providing welfare facilities.
Almost 90% of units give promotion to employee on the basis of seniority.
All the units are implementing the computerised system for accounting.
Nearly, 72% units face difficulty in opting credit facilities from financial institutions.
The 60% units are dependent on large scale units.
Only 3% units cover international market.
Nearly, 35% sales have decreased due to globalization.
About 66 % units agreed that globalization is not favourable for them
Conclusion:
Small scale industries in India are facing great threats and competition due to liberalized industrial policies. The robust and vibrant small scale industries sector (now MSME) can derive the benefits of the new opportunities provided by the supporting policies which aim not only to protect but also to promote this segment. The step towards de-reservation by the government is definitely a positive step as it has not proved to benefit much. The inclusion of service sector is indeed a good initiative to have new schemes to promote this sector.
Source: http://www.isrj.net/PublishArticles/395.pdf -retrieved on 25.08.2012
Discussion Questions:
1. What the State and Central Government have to do regarding cut throat competition?
2. What are the two factors which will take part in the survival and growth of SSI?
Hints:
1. The State as well as Central Government should provide necessary facilities to face cut throat competition by large industries by providing priority and facilities to MSME units.
2. The innovation, learning mechanism and up gradation of latest technology are important the two important factors in the SSI sector for its survival and growth
