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Iob Project PPT 100221030155 Phpapp02
Iob Project PPT 100221030155 Phpapp02
Iob Project PPT 100221030155 Phpapp02
PROJECT REPORT ON STUDY OF LENDING PROCESS AND CREDIT SERVICES OFFERED TO SMALL AND MEDIUM ENTERPRISES WITH IOB
INTRODUCTION
SMEs a part of PRIORITY sector GOVT. support has been started from 1967 -68 but attention given from 1971. RBI issued guide line modified All advances has been increasing year by year and contributes 40% of gross mfg. to the Indian economy. Employment generates by SMEs in A.P is 7.5% (approx) of total employments.
PANKAJ KUMAR(PGDM-FINANCE) ICBMSBE,HYDERABAD(2008-10)
DIFINIATION OF SME
Under the MSME act 2006,Enterprises has been classified into two categories, namely enterprises engaged in the mfg./production of goods pertaining to any industry, & enterprises engaged in providing of services.
Enterprise have been defined in term of investment in plant and machinery/equipment(excluding land and building)
DIFINIATION
Investing in plant and machinery / equipment (excluding land and building)
MANUFACTURING ENTERPRISES MICRO- Upto RS 25 lakhs SERVICES ENTERPRISES Upto RS10lakhs
SMALL-More than RS 25L and upto RS 5 More than 10 lakhs and upto RS 2 crores crores MEDIUM- More than RS 5 crore and upto More than 2 crores and upto 5 crores RS 10 crores
REVIEW OF LITERATURE
BRAHMANANDAM, G, N., RAI, H.L., DAKSHINA MURTHY, Financing Small Scale Sector. The Role of Banks INDIAN BANKING TODAY AND TOMORROW, MAY 1981-the above article was prepared on the role of banks in financing the SMEs in the year 1981. At those times the Indian banking was not all interested in financing the SMEs, because of their credit worthiness. Later due to changes in the industrial policy of India, the commercial banks come forward made immense help to the growth of SMEs. This article was written before the economic reforms taken place. Here is a gap for more analysis about the role of the banks in the post economic reforms. BRAHMANANDAM, G, N., RAI, H.L., DAKSHINA MURTHY, has focused on role of banks in financing SMEs. He also focused on how economic reforms have changed the bank role in extending credit to SMEs. They also focused on the credit facilities available to the SMEs in the wake of MSME act 2006.
JAILAL SAAW, Growth of small scale industries in India JOURNAL OF INDUSTRY AND TRADE, April -2005- The growth of small and medium industries in India was discussed in the above article. The expected growth was not there because of lot of root causes to sickness and under development in the SME sector. This article discussed about the slow growth rate of SMEs, dues to several problems. This article is focusing on the one problem that is financial problems faced by the SME segment.
PROBLEMS
SME is one of the growing sectors of the country even though they are facing so many problems which restrict the growth
1.Under-utilization of Capacities. 2.Inadequate and Untimely Credit Flows. 3.Inability in Technology up gradation. 4.Inefficient raw material procurement. 5.Poor financial situations and low levels of R&D 6.Inability to Market Finished Goods. 7.Ineffective monitoring and feedback mechanism. 8.Shortage of power 9.Lack of awareness of credit facilities available 10.Lack of knowledge about various credit schemes 11.Overdependence on purchases by government etc
PRODUCTION GROWTH
The above dig. says that in FY 07 growth in production is by 18% against 15.8% in the previous year
PANKAJ KUMAR(PGDM-FINANCE) ICBMSBE,HYDERABAD(2008-10)
COMPANY PROFILE
Chairman and Managing Director : Shri S.A.Bhat Established in 1937 in Chennai by Shri M..CT.M. Chidambaram Chettyar. 1847 branches in INDIA and 6 branches overseas and 500 ATMs all over AN ISO certified Rating for IOB AA+/ stable (Based on the services offered and market performance) Recent happening-Take over, Shree Suvarna Sahakari Bank LTD in May 2009.
PANKAJ KUMAR(PGDM-FINANCE) ICBMSBE,HYDERABAD(2008-10)
RESEARCH METHODOLOGY
RESEARCH DESIGN: 1. Study is all about the research & analysis of credit services offered to small and medium enterprises 2. Study is being made for the purpose of analysis of credit services and relief to the borrowers by the bank (IOB) that predicts the future growth of the bank by providing better services by bank can earns more profit 3. Study will be carried out at Hyderabad. 4. Secondary data is required for analysis of report. 5. Period of the study is limited to 45 days.
LIMITATIONS
1. The study is limited to the period of 45 days. Due to time constraints we covered only limited no. of SMEs 2. Since banks have some confidential reports which cannot be handover to the outsiders, so in-depth research and analysis is not possible. 3. There is lots of no. of SMEs which is unregistered; due to this proper datas are not covered. 4. The financials of the firms, were not available, as most of the firms are worried about disclosing their financials, thus for the industry analysis and other qualitative research, we had to rely on the secondary data sources.
GOVT. SUPPORT
The way forward would be to create an environment of risk -taking by the government for providing a start-up capital to SMEs and to facilitate technology transfers and training in skill development. The Micro, Small and Medium Enterprises Act, 2006 is a legal framework for more capital investment in the SME sector.
Under this Act -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 scheme was formally launched on August 30, 2000 and is operational with effect from 1st January 2000. The corpus (principle sum) of CGTMSE is being contributed by the Government and SIDBI in the ratio of 4:1 respectively and has contributed Rs.1346.54 crore till 2007, After it is raised to RS2500 crores, which is provided by SIDBI and other specialized Govt. banks.
Most of these programmes of the Central Government are implemented through two principal organizations are as followes:
1. SMALL INDUSTRIES DEVELOPMENT ORGANIZATION (SIDO) is an apex body for promotion and development of small scale industries in the country. SIDO promotes axillaries units to public sectors enterprise ,acts like model agencies for coordinating, monitoring policy and programme. 2. NATIONAL SMALL INDUSTRIES CORPORATION LTD (NSIC), has been established with the objective of promoting, aiding and fostering the growth of small scale industries in the country. It has been assisting small enterprises through a set of specially tailored schemes which facilitate marketing support, credit support, (Equipment financing , Financing for procurement of raw material , Financing for marketing activities , Financing through syndication with banks ) , technology support etc.
IOB CREDIT FACILITIES FOR ELIGIBLE SMEs In this regard they need to submit some documents are as follows:
1.SSI Registration Certificate 2.Partnership Deed / Memorandum & Article of Association 3.Authority letter to sign the application 4.List of all partners / directors with their age, address, certified Net Worth / Income Tax returns, qualifications and experience
5.Copy of the audited accounts for the last three years (where accounts for the last year have not been audited, provisional accounts duly certified by a Chartered Accountant, along with two years audited accounts, are to be submitted) 6.In case of new project/expansion, copy of the project report containing a brief project profile, cost of project, source/means of finance 7.Brief write-up about the products manufactured, end users, marketing tie-up and orders in hand 8.Details of subsidy, tax concession available to the applicant 9.Quality certificates, export awards won, membership of any associations
10.Any other information that would enable us to understand your business better 11.Details about group companies (names, constitution, net worth, turnover etc.) 12.Contact details of Bankers, key suppliers & key customers
(1) Gross working capital: The gross working capital refers to investment in all the current assets taken together. The total of investments in all the current assets is known as gross working. (2) Net working capital: The term net working capital refers to excess of total current assets over total current liabilities. It may be noted that the current liabilities refers to these liabilities which are payable with in a period of 1 year.
And also there are two types of working capital are as follows :
Any amount over and above the permanent Working Capital is known as the Temporary or seasonal Working Capital requirement. It is also known as variable working capital.
The Operating Cycle creates the need for Current Assets or Working Capital. The Working Capital need of a Company does not come to an end once an Operating Cycle is completed. As it is a cyclical process, the need continues to exist even after the Company has realised cash against its credit sales. Thus, there should be continuous supply of Working Capital for the Company to carry on its business activity.
INTERNAL:a) Paid up capital: Ordinary share, Preference share, deferred shares, and Forfeited shares. b) Reserve surplus: Capital reserve, Development rebate reserve, Other sources c) Provisions: Taxation (Net on advances on income tax), Depreciation, Bad debts
EXTERNAL:a) Borrowings: From Banks, from term lending institutions like IDBI, IFCI, SIDBI, ICICI, INDUSTRIAL DEVELOPMENT CORPORATION, etc.
5. TIME TAKEN BY BANKS TO CLEAR LOAN APPLICATION: Due to some verifications banks are taking time in clearing the loan. This time constraints are big obstacles for them in production parts which restrict the 42% SMEs growth. 6. DELAYED PAYMENT: 38% growth is less because of delayed payment from the market which affect the whole process of the SMEs like production to interest and till loan payment.
Liquidity Ratios: Current Ratio=(current Assets / current liabilities) Acid Test Ratio (quick ratio) = (Current Assets- Inventory / Current Liabilities) According to this ratio bank is testing the liquidity position of the client by the liquidity ratio because that they are able to pay or not their short term liabilities.
2.
Activity ratios: Average Collection Period= (A/c Receivable/ Daily Average Sales) Capital turnover ratio= (Sales/ Capital Employed) Fixed Assets turnover Ratio= (Sales/ Capital Assets) Activity ratios are also called Turnover ratios or performance ratios. These ratios are to evaluate the efficiency with which firm manages and utilizes its assets. These ratios usually indicate the frequency of sales. It is helpful for the bank that they can estimate the paying capacity of the borrowers.
For the cash cycling banks wants to know about the collection and credit policies of the firm. The speed with which credit receivables are collected affects the liquidity position of the firm. 6.Return On Investment: (ROi)= (Net Profit/ Total Assets) It measures the profitability or the operational efficiency of the firm. This is very essential for the banks. 7.Dividend Per Share =(Total profits available to Equity Share Holders/ No. of Equity Shares) This ratio indicates the amount of profit distributed to shareholders per share.
RATE OF INTEREST CHARGED ON AMOUNT SANCTIONED BY IOB FOR SMEs FOR MICRO AND SMALL ENTERPRISES: For credit limits up- to RS 2 lakhs - 9.50% Above RS2 lakhs and up- to RS 25 lakhs -10.50% Above RS 25 lakhs and below RS 1 crore-11.00%
1 crore and above up-to RS 10 crore:
For mfg. units (depending on ratings)-11.00% to 13.50% Other then mfg.(depending on ratings)-12.25% to 15.50%
MEDIUM ENTERPRISES For credit limits up-to RS 25,000/- --9.50% Above RS 25,000/- and up-to RS 2 lakhs--11.00% Above Rs2 lakhs and upto Rs25 lakhs(based on ratings)--11.75% to 15% Above Rs25lakhs and below Rs1crore(based on ratings)-12.25% to 15.50%
3.
BILLS FINANCE: The bank extend assistance to the borrowers against the bills. The finance against bills is meant to finance, the actual sale transactions. The finance against bills can take three forms. Purchase of bills by the bank if these are payable on demand. Discounting of bills by bank if these are usance bills (or time) bills. Advance against bills under collection from the drawees, whether sent for realization through the bank or sent directly by the drawer to the drawees. WORKING CAPITAL DEMAND LOAN: In compliance of RBI directions , banks presently grant only a small part of the fund- based working capital facilities to a borrower by the way of running case credit account ; a major portion is in the form of working capital demand loan. This arrangement is presently applicable to borrowers having working capital facilities of RS. 10crores or above. The minimum period of working capital demand loan which is basically non- operable account keep on changing. The working capital demand loan is granted for a fixed term on the carrying of which it has to be liquidated, renewed of rolled over.
4.
5. OVERDRAFT FACILITY: Under this arrangement the borrower is allowed to withdraw the amount upto a certain limit from this current account over and above his actual credit balance. Within the stipulated limits any numbers of withdrawals are permitted by the bank.
INTERPRETATION: From the above graph we observe that IOB rate of investment into Priority sectors is 40% according to the guide lines provided by the RBI, which also covers the advances to Agriculture, SHG, Education, housing and SSI. The basis of 40% is based on the bank credit capacity. ICBMAnd the other 60% is invested in PANKAJ manyKUMAR(PGDM-FINANCE) other areas.
SBE,HYDERABAD(2008-10)
INTERPRETATION:
In the above diagram it can be observed that only a small no. of SMEs are registered i.e. 2mn.Maximum no. of units are still unregistered i.e.10.80mn, because they have problem of financing and they are not able to maintain proper documentation. The reason for non registration of SMEs is the notion that the costs would be increased.
PANKAJ KUMAR(PGDM-FINANCE) ICBMSBE,HYDERABAD(2008-10)
INTERPRETATION: SME Sector plays a major role in India's present export performance. From the above fig. we can know about the contribution part of SMEs in the total export i.e. 35%.Whole sectors are contributing 65% and SME sectors alone are contributing 35%, which also helps in generating the foreign revenue
INTERPRETATION: From the above analysis we know that SMEs give 1st preference to the Govt. specialized bank for taking the loan because of easy process rather than the private sector banks. SMEs less prefers the private sector banks because of the heavy documentation work which is needed.
INTERPRETATION: The above analysis shows the loan sanctioned percentage area wise. This show that the banks are focusing more on urban area i.e. 60% and semi urban it is 39% .They have neglected the rural area .It is because that most of the SMEs are in urban area and it is easy for the bank to keep in touch with them. Lack of awareness among rural SMEs is the reason for non sanction of loans in this area.
INTERPRETATION:
Maximum no. of SMEs are aware about the facilities provided by the bank but no. of SMEs who are taking loan from the bank is quite very less only because of huge paper work from the bank side. They are not interested to maintain the maximum no. of paper work which is difficult for them and high interest rate will cost them, and cannot afford because it increases their product prices.
PANKAJ KUMAR(PGDM-FINANCE) ICBMSBE,HYDERABAD(2008-10)
74%
3%
BILL FINANCE
8%
3%
INTERPRETATION: Bank is offering 5 types of finances to SMEs working capital needs. From the above analysis it is observed that cash credit is very popular source for taking working capital loan. It is because in cash credit facilities there is interest charged by the bank only on the withdrawn amount by the person or borrower. The amounts are withdrawn only when it is required and the interest is paid only on enjoying part of the amount. Other facilities are only utilised by them along with the cash credit when they require the additional money for their business.
PANKAJ KUMAR(PGDM-FINANCE) ICBMSBE,HYDERABAD(2008-10)
TERM OF LOAN
90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Series1
PERCENTAGE
SMALL TERM 5%
INTERPRETATION: As discussed earlier that mostly less then5 crores or 5 crores amount loan is taken by most of the SMEs .This amount is used by them for working capital requirements. And the term for which the loan amount is taken by them is for long term. It can be renewed by them from time to time. Banks are providing the loan on long term credit based on the going concern concept of accounting i.e. that the firm will run for an indefinite period of time and also the firms past, present and future projection of their accounting procedures are taken into consideration for term of loan.
PANKAJ KUMAR(PGDM-FINANCE) ICBMSBE,HYDERABAD(2008-10)
90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Series1 YES 82% NO 18%
INTERPRETATION: From the above analysis we observe that 82% of SMEs are sanctioned the credit from IOB and rest 18% are not availing these facilities only because of not fulfilling the norms and the criteria of the bank as discussed earlier in list of documents required by the bank and other qualitative part which must be fulfilled by the borrowers.
INTERPRETATION: From the above analysis it can be observed that 49% of SMEs are sanctioned the loan within one month because of fulfilling all the requirements and norms of the bank in time. 26% are delayed due to failure in complying with the documentation, for which the sanction period takes more than one month. 7% are those who applied for the big amount for which sometimes it takes more than 2 months but not always.
PANKAJ KUMAR(PGDM-FINANCE) ICBMSBE,HYDERABAD(2008-10)
100%
80% 60% 40% 20% 0% MANUFACTURING SERVICE 15% 85%
INTERPRETATION:
IOB is sanctioning loans more to the manufacturing sectors for the investment as manufacturers approach the bank for their credit requirements i.e. 85% and only 15% of the loan is sanctioned to service sectors as per the requirements. As per the RBI guide line banks have taken care of the manufacturing units because it constitute the 35% of total export and also providing the maximum no. of employment in country. Service sectors are very less in number.
FINDINGS
1. IOB is offering loan to priority sectors like housing, education, working capital loan, etc. 2. By whole study it is clearly state that cash is vital component for the firms operating cycle. If cash is not generating properly in the firm it will be harmful for the firm i.e. they should maintain the appropriate liquidity. 3. It is observed that SMEs are suffering from many other problems which hamper their growth. 4. Time of peak season small industry have to keep their inventory at the optimum level for making good profit by maintaining the demand level. Which also need more working capital 5. At the same time of sanctioning loans bank need huge no. of documents for safety of their bank.
6.Bank is taking maximum no. of days for sanctioning the loan. 7.IOB is strictly followed the rules and regulations for sanctioning. 8.Bank employees are using their exceptional powers regarding loan sanctioning. 9.Bank mostly providing the loan to their well known customers. 10.The entrepreneurs are lack of knowledge regarding the credit facilities. 11.For promoting SMEs govt. also supporting them by providing schemes. 12.The capital base of SMEs is very poor. 13.The growth of SMEs in A.P. has been significant. 14.IOB is encouraging the SME finance because they feel that they are able to repay their loan. 15.A big no. of SME units are still unregistered Which is showing loss of Indian economy. But on the other part SMEs are big source of employments. 16.At last shortage of finance is considered to be most important problem responsible for a host (maximum) of problems in SMEs.
SUGGESTIONS
1. The bank should take care of the well being of SMEs and they should initiate such measures which would result in further promotion of SMEs. 2. Timely finance should be provided to units keeping in view their needs. 3. The borrowing should be made cheaper by lowering the rate of interest on lending of banks, which help the SMEs for coping with the high risk and costs to compete with their competitors. 4. Bank should also provide consultancy services and professional guidance at the time of setting up for considering the long term and short term financial requirements of a small unit for lending purpose. 5. Bank has to increase their credit limit and also decrease the installment amount.
6.SMEs are big source of revenue for banks, so bank should encourage also the unregistered units by providing more facilities like less paper work. 7. The best way to encourage lending to SMEs is to improve the ability of existing institution to construct profitable and efficient lending programmes. 8.Building awareness among small business people about the financial sources offering by bank. Especially in the case of SMEs is must. So there is mutual benefits are possible. 9.While granting the loans the bank does not adhere with the margin. 10. The process followed by the bank in sanctioning the loan is cumbersome (unmanageable), hence it is suggested to make the process easier in sanctioning the credit facilities to the SMEs.
PANKAJ KUMAR(PGDM-FINANCE) ICBMSBE,HYDERABAD(2008-10)
CONCLUSION
In recent years some initiatives have been taken by both govt. and banks of India to make more acceptable for funding by banks. My project report mainly involved the problems, opportunity, credit facilities to SMEs by the bank. The main purpose of the analysis is to know that how bank is providing loan to SMEs. We know that today SMEs are growing and profitable sectors for banks in terms of money investment. And IOB system of loan sanctioning is quite good. But it is very true, in terms of the paper work that most of the SMEs are enable to submit proper documents for approval of loan. It is also found that after sanctioning the credit facilities bank has maximum no. of paper works, which is creating problems for SMEs to maintain all of them.
In regard to rate of interest industrial owners feel that the rate of interest for working capital is high. It is manageable at the time of pick season but not at all time.
It also found that some SME owners are not educated, so they are not aware about the benefits of the registration. Due to this they are not eligible for the financing, and lack of finance they cannot grow. Nower days credit guaranty and rating institutions have floated to support banks to assume risk unhesitatingly in financing SMEs. And also more appropriate credit instruments have been developed to help SMEs to have easy credit with less cost and collaterals. SMEs have other problems like underutilization of capacity which is happening of improper training and also less market share of their products. The reason for less market share is competition with the big firms in the market which also cuts their profit margin.
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