SVKM Narsee Monjee Institute of

the Management Studies

Mukesh Patel School of
Technology Management and
Engineering
FINAL REPORT
ON
MICRO, SMALL AND MEDIUM
ENTERPRISES
By
Surbhi Sejra
Roll Number: J075
SAP Number: 71208110030
Faculty Mentor
( Abhay Kumar )
Industry Mentor
( M P Gautam )

A REPORT
ON
(MICRO, SMALL AND MEDIUM
ENTERPRISES)
By
Surbhi Sejra
Roll Number: J075
SAP Number: 71208110030

A report submitted in partial fulfilment of the

requirements of 5 years Integrated MBA (Tech.)
Program of Mukesh Patel School of Technology
Management & Engineering, Narsee Monjee
Institute of Management Studies (NMIMS) (Deemed
to be University), Mumbai

Table of Contents
Acknowledgement.......................................................................................................... 5
List of Tables................................................................................................................... 6
List of Figures................................................................................................................. 6
Abstract:.......................................................................................................................... 7
UCO BANK........................................................................................................................ 7
Corporate Vision:........................................................................................................ 7
Corporate Mission:...................................................................................................... 7
Introduction..................................................................................................................... 8
Sources of data:.............................................................................................................. 8
Limitations:..................................................................................................................... 8
Literature Study............................................................................................................. 8
Main Text......................................................................................................................... 9
Priority Sector............................................................................................................. 9
(i) Agriculture (Direct and Indirect finance):........................................................10
(ii) Small Scale Industries (Direct and Indirect Finance):...................................10
(iii) Small Business / Service Enterprises..............................................................10
(iv) Micro Credit :...................................................................................................... 10
(v) Education loans:.................................................................................................. 10
(vi) Housing loans:.................................................................................................... 10
MICRO, SMALL AND MEDIUM ENTERPRISES SECTOR IN INDIA..............................11
Economic Contribution of MSME.............................................................................11
Differences in Ownership Structure.......................................................................12
Differences in Industry of Operation.....................................................................12
MSME Growth impacted by Multiple Constraints.................................................14
OVERALL DEMAND FOR FINANCE IN MSME SECTOR................................................15
Debt Demand............................................................................................................. 16
Equity Demand.......................................................................................................... 17
Working Capital Assessment......................................................................................17
Credit Facilities:............................................................................................................ 17
Fund Based................................................................................................................. 17
Term Loan............................................................................................................... 17
Cash Credit............................................................................................................. 18
Over Draft............................................................................................................... 18
Packing credit........................................................................................................ 18
Non-Fund Based........................................................................................................ 18
Letter Of Credit...................................................................................................... 18
Bank Guarantee..................................................................................................... 18
3

Methods of Lending:.................................................................................................... 19
Borrower Selection:..................................................................................................... 19
Computation of Maximum Permissible Bank Finance (MPBF):..............................20
RBI, Regulatory Monitoring on Priority Sector Lending:-......................................20
Sick Units:...................................................................................................................... 21
Classification of current assets & Current liabilities:.............................................21
Current assets: -........................................................................................................ 21
Current Liabilities:.................................................................................................... 22
Information/Data required for assessment of working capital:............................22
Check list for verification of the information/data:................................................23
Procedure for MSME Process......................................................................................24
PRE SANCTION PROCESS: -......................................................................................24
Proposal format for MSME.......................................................................................... 25
Executive Brief.......................................................................................................... 25
Ratios.......................................................................................................................... 32
Articles Based on MSME.............................................................................................. 33
Bibliography.................................................................................................................. 35
Reference....................................................................................................................... 35

Acknowledgement

I take this opportunity to express my profound gratitude and deep regards to my

guide
Mr M P Gautam, Deputy General Manager, UCO Bank &
Mr Abhay Kumar, Head of Department Finance, MPSTME for his exemplary
guidance, monitoring and constant encouragement throughout the course of this
Project. The blessing, help and guidance given by him time to time shall carry me
a long way in the journey of life on which I am about to embark.
I also take this opportunity to express a deep sense of gratitude to Mr. Lokesh
Agarwal, Senior Manager of Credit Department, and Ms. Sonal Bhandari , Officer
Credit Department, UCO Bank Zonal Office, for his/her cordial support, valuable
information and guidance, which helped me in completing this task through
various stages.
I am obliged to staff members of UCO Bank Zonal Office, for the valuable
information provided by them in their respective fields. I am grateful for their
cooperation during the period of my project.
Lastly, I thank almighty, my parents, brother, sisters and friends for their
constant encouragement without which this Project would not be possible.

List of Tables
Table 1: Number of employees........................................................................................... 8
5

Table
Table
Table
Table
Table
Table
Table

2:
3:
4:
5:
6:
7:
8:

MSMED Act Definition of MSME...........................................................................11

Key Statistics on Economic Contribution of MSME...............................................11
Size of the MSME Sector in India (in Millions)......................................................12
Share of Top Ten Manufacturing Industries in MSME Sectors Gross Output........13
Share of Top Ten Services Industries in MSME Sectors Gross Output..................14
Number of Sick, Potentially Viable with amount (inr lakh)...................................21
Financial Indicators............................................................................................. 27

List of Figures
Figure
Figure
Figure
Figure

1:
2:
3:
4:

Differences in Ownership Structure...................................................................12

Differences in Industry of Operation..................................................................13
MSME Growth impacted by Multiple Constraints...............................................14
OVERALL DEMAND FOR FINANCE IN MSME SECTOR..........................................16

Abstract:

The credit department at UCO Bank is the focal point of its major
operation i.e. appraising credit to individuals and institutions. The whole process of
credit appraisal in MSME Scheme is very extensive and requires rigorous
training to effectively analyse and evaluate a loan proposal.
While appraising a term loan, the bank would focus on evaluating the credit
worthiness of the company and future expected stream of cash flow with the amount
6

of risk attached to them. It is assessed with parameters such as due diligence and
repayment capacity of the borrower.
The methodology used by Credit department incorporates both qualitative and
quantitative measures by weighing around 5 characteristics known as 5Cs of Credit
1. Character: It refers to a borrower's reputation which is evaluated by past records.
2. Capacity: It measures a borrower's ability to repay a loan by comparing income
against recurring debts. This is evaluated by various financial ratios.
3. Capital: The lender will consider any capital the borrower puts toward a potential
investment, because a large contribution by the borrower will lessen the chance of
default.
4. Collateral: It is often termed as secondary security which helps to secure the
loan.
5. Conditions: It is the interest rate and amount of principal which will influence the
lender's desire to finance the borrower and minimize losses.

UCO BANK
UCO Bank, formerly United Commercial Bank, established in 1943 in Kolkata, is a
major government-owned commercial bank of India. During FY 2013-14, its total
business was Rs. 4550 billion. Based on 2014 data, it is ranked 1860 on Forbes
Global 2000 List. UCO Bank was ranked 294th among India's most trusted
brands according to the Brand Trust Report 2014, a study conducted by Trust
Research Advisory. It was a rise of 796 ranks considering it was listed at the
1090th position among India's most trusted brands in the Brand trust
Report 2013. As of 6 January 2013 the bank had 3000 service units 44 Zonal
offices spread all over India. It also has two overseas branches, on each
in Singapore and Hong Kong. UCO Bank's headquarters is on B.T.M. Sarani,
Kolkata.
Corporate Vision: To emerge as the most trusted, admired and sought-after
world class financial institution and to be the most preferred destination for
every customer and investor and a place of pride for its employees.
Corporate Mission:
We will be prompt, polite and proactive with our customers.
We will speak the language of young India.
We will create products and services that help our customers achieve their
goals.
We will go beyond the call of duty to make our customers feel valued.
We will be of service even in the remotest part of our country.
We will offer excellence in services to those abroad as much as we do to
those in India.
We will imbibe state of the art technology to drive excellence.

Micro, Small and Medium Enterprises

Introduction
Worldwide, the Micro and Small Enterprises (MSEs) have been accepted as the
engine of economic growth and for promoting equitable development. In India
too, the MSEs play a pivotal role in the overall industrial economy of the country.
Further, in recent years the MSE sector has consistently registered higher growth
rate compared to the overall industrial sector.
The major advantage of the sector is its employment potential at low capital
cost. The Government of India has been making concerted efforts for the
promotion and development of MSE sector which enabled the MSE sector to grow
at a higher pace than the overall industrial sector. To facilitate the development
of this sector as also enhance their competitiveness, the Government has
enacted the Micro, Small and Medium Enterprises
Development (MSMED) Act, 2006, which is in force from 2nd October, 2006
which is a turning point for the development of Indian Industry, as it addresses
and streamlines entire frame work along with key governance & operational
issues being faced by the SMEs.
One of the major policy initiatives of the Government has been inclusion of the
MSE sector under priority sector lending. It has been done so because credit is
one of the critical inputs for the sustained growth of the MSE sector.

Sources of data:
The various sources of data at different stages include company financials, data
from external agencies such as rating agencies, valuation reports, audit reports
etc.

Limitations:

The actual financials could not be revealed due to confidentiality reasons and
hence failing to give the real picture of the final outcome.
The duration of internship is less to learn all aspects of banking sector.

Literature Study
There exists several definitions of the term small and medium enterprises
(SMEs), varying from country to country and varying between the sources
reporting SME statistics. The commonly used criteria at the international level to
define SMEs are the number of employees, total net assets, sales and investment
level. If employment is the criterion to define, then there exists variation in
defining the upper and lower size limit of a SME.
The European Union makes a general distinction between self-employment,
micro, small and medium sized businesses based on the following criteria:
Number of employees
TABLE 1: NUMBER

OF EMPLOYEES

0
2-9

Self Employed
Micro Business
8

10-49
49-249

Small Business
Medium-Size Business

In the Indian context, micro, small and medium enterprises as per the MSME
Development Act, 2006 are defined based on their investment in plant and
machinery (for manufacturing enterprise) and on equipments for enterprises
providing or rendering services. According to the Micro, Small and Medium
Enterprises (MSME) Development Act of 2006, (India) a micro enterprise is where
the investment in plant and machinery does not exceed twenty five lakh rupees..
A small enterprise is where the investment in plant and machinery is more than
twenty five lakh rupees but does not exceed five crore rupees. A medium
enterprise is where the investment in plant and machinery is more than five
crore rupees but does not exceed ten crore rupees.
In the case of the enterprises engaged in providing or rendering of services, as
(a) A Micro enterprise is where the investment in equipment does not exceed ten
lakh rupees.
(b) A Small enterprise is where the investment in equipment is more than ten
lakh rupees but does not exceed two crore rupees.
(c) A Medium enterprise is where the investment in equipment is more than two
crore rupees but does not exceed five crore rupees.

Main Text
Priority Sector
Priority Sector is an important role given by the Reserve Bank of India (RBI) to
the banks for providing a specified portion of the bank lending to few specific
sectors like agriculture or small scale industries. This is essentially meant for an
all-round development of the economy as opposed to focusing only on the
financial sector.
At a meeting of the Union Finance Minister with the Chief Executive Officers of
public sector banks held in March 1980, it was agreed that banks should aim at
raising the proportion of their advances to priority sectors to 40 per cent by
March 1985. Subsequently, on the basis of the recommendations of the Working
Group on the Modalities of Implementation of Priority Sector Lending and the
Twenty Point Economic Programme by Banks, all commercial banks were advised
to achieve the target of priority sector lending at 40 per cent of aggregate bank
advances by 1985. Sub-targets were also specified for lending to agriculture and
the weaker sections within the priority sector. Since then, there have been
several changes in the scope of priority sector lending and the targets and subtargets applicable to various bank groups.
On the basis of the recommendations of the Internal Working Group, set up in
Reserve Bank to examine, review and recommend changes, if any, in the existing
policy on priority sector lending including the segments constituting the priority
sector, targets and sub-targets, etc. and the comments/suggestions received
9

thereon from banks, financial institutions, public and the Indian Banks
Association (IBA), it has been decided to include only those sectors that impact
large segments of population & the weaker sections, and which are employmentintensive, as part of the priority sector.

I. CATEGORIES OF PRIORITY SECTOR

The broad categories of priority sector for all scheduled commercial banks are as
under:
(i) Agriculture (Direct and Indirect finance): Direct finance to agriculture
shall include short, medium and long term loans given for agriculture and allied
activities directly to individual farmers, Self-Help Groups (SHGs) or Joint Liability
Groups (JLGs) of individual farmers without limit and to others (such as
corporates, partnership firms and institutions) up to Rs. 20 lakh, for taking up
agriculture/allied activities.
(ii) Small Scale Industries (Direct and Indirect Finance): Direct finance to
small scale industries (SSI) shall include all loans given to SSI units which are
engaged in manufacture, processing or preservation of goods and whose
investment in plant and machinery (original cost) excluding land and building
does not exceed the amounts.
Indirect finance to SSI shall include finance to any person providing inputs to or
marketing the output of artisans, village and cottage industries, handlooms and
to cooperatives of producers in this sector.
(iii) Small Business / Service Enterprises shall include small business, retail
trade, professional & self-employed persons, small road & water transport
operators and other service enterprises that are engaged in providing or
rendering of services, and whose investment in equipment does not exceed the
amount.
(iv) Micro Credit : Provision of credit and other financial services and products
of very small amounts not exceeding Rs. 50,000 per borrower to the poor in
rural, semi-urban and urban areas, either directly or through a group mechanism,
for enabling them to improve their living standards, will constitute micro credit.
(v) Education loans: Education loans include loans and advances granted to
only individuals for educational purposes up to Rs. 10 lakh for studies in India
and Rs. 20 lakh for studies abroad, and do not include those granted to
institutions.
(vi) Housing loans: Loans up to Rs. 15 lakh for construction of houses by
individuals, (excluding loans granted by banks to their own employees) and loans
given for repairs to the damaged houses of individuals up to Rs.1 lakh in rural
and semi-urban areas and up to Rs.2 lakh in urban areas.
(2) Investments by banks in securitised assets, representing loans to agriculture
(direct or indirect), small scale industries (direct or indirect) and housing, shall be
eligible for classification under respective categories of priority sector (direct or
10

indirect) depending on the underlying assets, provided the securitised assets are
originated by banks and financial institutions and fulfil the Reserve Bank of India
guidelines on securitisation.
(3) The targets and sub-targets under priority sector lending would be linked to
Adjusted Net Bank Credit (Net Bank Credit plus investments made by banks in
non-SLR bonds held in HTM category) or Credit Equivalent of Off-Balance Sheet
Exposures, whichever is higher.

MICRO, SMALL AND MEDIUM ENTERPRISES

SECTOR IN INDIA
The MSME sector plays a significant role in the Indian economy. The term MSME
is widely used to describe small businesses in the private sector. Regulators and
financial institutions across the world use parameters such as employee
strength, annual sales, value of fixed assets, and loan size proxies to define the
sector in the context of finance.
The MSMED Act broadly segments the MSME sector in the following manner:
TABLE 2: MSMED A CT DEFINITION OF MSME
Initial Investment in Plant and Machinery (in INR Million)
Category/ Enterprise
Micro
Small
Medium
Size
Manufacturing

<2.5
(<50,000)

2.5 50 (50,000
1 Million)

50 100 (1 Million
2 Million)

Services

<1 (<20,000)

1 20 (20,000
0.4 Million)

20 50 (0.4 Million
1 Million)

Although investments in plant and machinery are tangible and measurable, the
current definition provides limited information on the financial appetite and
financial performance of an enterprise. As a result, many financial institutions
prefer using annual sales/revenue (turnover) to segment and target MSMEs, and
as a key parameter for product development and risk management.
Economic Contribution of MSME
It is important to note that in addition to helping catalyse the growth of the
economy, MSMEs feed large local and international value chains as well as local
consumer markets as suppliers, manufacturers, contractors, distributors,
retailers and service providers.
TABLE 3: KEY STATISTICS ON ECONOMIC CONTRIBUTION OF MSME
Key Metrics
Share of

Value
11

Industrial units
Industrial output
Exports (in value)
Gross Domestic Product (GDP)
Employment (in Millions)

95%
45%
40%
Approx. 8%
69

MSMEs are also effective vehicles for employment generation. Indias cities have
been experiencing the burden of a consistently growing population, comprising
an ever increasing proportion of migrants in search of employment and
livelihood. City infrastructure is already stretched, and policy makers are seeking
solutions to mitigate issues arising from migrant population growth. Rural MSMEs
and those based outside of the large cities, offer a viable alternative for
employment to local labour, hence presenting an opportunity for people to
participate in productive, non-farm activities, without needing to migrate to
urban areas.
With adequate financial and non-financial resources, as well as capacity-building,
the MSME sector can grow and contribute to economic development considerably
higher than it is doing currently.
TABLE 4: SIZE OF THE MSME S ECTOR IN INDIA (IN M ILLIONS)
Year
2006-07
2009-10

Registered
1.5 (~6%)
1.8 (~6%)

Unregistered
24.6 (approx. 94%)
28.0 (approx. 94%)

Total units
26.1
29.8

Differences in Ownership Structure

The type of ownership structure of enterprises determines the form of capital
(equity or debt) these enterprises can access and absorb from external sources.
For instance, proprietorship and partnership enterprises cannot accept any form
of external equity other than owner contributions. This can significantly impact
growth potential both at start-up stage as well as when the enterprise is in need
of growth capital.
Proprietorship is the most commonly adopted ownership structure (94.5 percent
of all MSMEs), primarily because this structure requires lower legal overheads.
The other ownership structures adopted by enterprises include partnership,
cooperative, private limited company and public limited company. Mature small,
medium and new knowledge-based enterprises in the sector are mostly
structured as private limited or public limited companies.

12

FIGURE 1: D IFFERENCES

IN

O WNERSHIP S TRUCTURE

Differences in Industry of Operation

Enterprises in the sector can be further classified into manufacturing and
services. With more than 8000 products ranging from hand-made products to
high precision machine parts, and numerous services catering to both industrial
and consumer markets offered by MSMEs, there is clearly a huge The
manufacturing sector accounts for an estimated 29 percent of total enterprises
in the MSME sector, while the services sector accounts for the balance 71
percent.

Manufacturing MSMEs feed supply chains of local large enterprises, global

large enterprises or local consumer markets. Food processing is the key
manufacturing industry. Further, a large number of small and medium
enterprises in the food and textile industries are export-oriented and serve
large global supply chains or global consumer markets.
Service MSMEs operate in traditional transaction-based industries such as
retail trade, small transport operations and knowledge-based industries
such as information technology, human resource consulting among others.

Manufacturing
Enterprises
8.5 Million (27%)
Top 10 Industries
5.3 Trillion (75%)

Service
Enterprises
21.3 Milllion
(71%)
Top 10 Industries

Local Supply
Chain
Global Supply
Chain
Consumer Market

Services
Traditional
Knowledge Based

0.4 Trillion

F IGURE 2: D IFFERENCES

Manufacturi
ng

IN

INDUSTRY

OF

O PERATION
13

Although the services sector accounts for a larger number of enterprises, it is the
top ten industries in manufacturing that account for 75 percent of the sectors
total output.
TABLE 5: SHARE OF TOP TEN M ANUFACTURING INDUSTRIES IN MSME S ECTOR S
G ROSS OUTPUT
Industry
Food Products & Beverages

Share of Gross Output of the

MSME Sector
19%

Textiles

10%

Basic Metals

10%

Chemical and Chemical Products

8%

Fabricated Metal Products

7%

Machinery and Equipment

6%

Wearing Apparel

5%

Rubber and Plastic Products

4%

Transport Equipment

3%

Non-metallic Mineral Products

3%

Total

75%

The top ten services industries account for a total of 5 percent of the gross
output by the MSME sector output
The services sector is dominated by retail trade, repair and maintenance
shops, small transport operators among others, most of which typically
contribute far lower compared to manufacturing sector enterprises.
However, the services sector is witnessing a gradual increase in the
number of knowledge-based enterprises, which tend to have a higher
output per enterprise as compared to the traditional service enterprises.

TABLE 6: SHARE OF TOP TEN SERVICES INDUSTRIES IN MSME S ECTOR S GROSS

O UTPUT
Industry

Share of Gross Output of

the MSME Sector
1.3%
1.1%

Agriculture-based Activities
Repair and Maintenance of Motor
Vehicles
Retail
Professional Business Activities
Computers and Information
Technology
Transport and Travel Agents
Forestry and Logging Activities

0.7%
0.6%
0.3%
0.3%
0.3%
14

Other Service Activities

Utilities Supply
Post and Telecommunication
Total

0.2%
0.2%
0.1%
5%

MSME Growth impacted by Multiple Constraints

Although the MSME sector has been growing at a faster rate than the overall
industrial sector, MSMEs experience multiple constraints that threaten to derail
the sectors growth trajectory.

FIGURE 3: MSME G ROWTH

IMPACTED BY

MULTIPLE CONSTRAINTS

Inadequate market linkages: Except in the case of cluster-linked and

ancillary MSMEs that have natural linkages with large enterprises, MSMEs
tend to have poor market access. The non-cluster MSMEs are fragmented,
and as a result, are unable to organize themselves in order to reduce
procurement cost from large enterprises or streamline the output supply
chain. What is worse, in the absence of adequate market linkages, any
demand disruption in the supply chain can severely impact operations
because the enterprise capital of these businesses tends to be locked in
illiquid inventory and receivables.
Lack of infrastructure: Limited access to infrastructure such as power,
water and roads increases operational costs for MSMEs and makes their
businesses uncompetitive. Inadequate access to support infrastructure
discourages these units from adopting newer technologies, where
available. In addition, poor infrastructure forces small and medium
businesses to operate in select geographies, increasing the demand for
natural resources in that region.
Inadequate finance: MSMEs consider challenges in access to finance as
one of the biggest constraints in growth. The Report of Working Group on
Rehabilitation of Sick MSMEs by RBI also finds lack of adequate and timely

15

access to working capital finance is one of the key reasons for sickness in
the sector.
Lack of managerial competence: Micro and small enterprises in
particular largely comprise first-generation entrepreneurs, who have had a
limited structured training on resource planning, capital management and
labour management. As a result, lack of managerial competence often
shows in poor book-keeping and a limited knowledge of formal financial
institutions, which further inhibits the growth of these enterprises.
Obsolete technology: While industries such as automotive, forging,
software development sector require advanced technologies in operations,
the majority of the small and medium enterprises do not have that kind of
technological edge. A low technology base results in low productivity,
which makes these enterprises uncompetitive. Financial institutions
associate lack of technology with uncompetitive businesses and therefore
are wary of financing enterprises which are not technologically up-to-date
in operations. These enterprises too have limited awareness about new
technologies, or the technology financing schemes.

OVERALL DEMAND FOR FINANCE IN MSME

SECTOR

The overall demand for finance in the MSME sector is estimated to be INR 32.5
trillion ($650 billion). The majority of finance demand from these enterprises is in
the form of debt, estimated at approximately INR 26 trillion ($520 billion). Total
demand for equity in the MSME sector is INR 6.5 trillion ($130 billion), which
makes up 20 percent of the overall demand. The sector has high leverage ratios
with average debt-equity ratio of approx. 4:1. But these leverage ratios are not
even across the sector and variations exist based on the size of the enterprise.
For instance medium-scale enterprises exhibit a more balanced debt-equity ratio
of approx. 2:1.
The unregistered enterprises, which comprise approx. 94 percent of the MSMEs,
account for INR 30 trillion ($600 billion) of the finance demand. This demand
estimate does not take into account the demand for finance by unorganized
enterprises.

16

FIGURE 4: OVERALL DEMAND FOR FINANCE IN MSME SECTOR

Debt Demand
Financial institutions have traditionally limited their exposure to the sector due to
the perception that these businesses carry high risk and high cost of delivery,
and have limited access to immovable collateral. Although the overall debt
demand in the sector is estimated to be INR 26 trillion ($520 billion)
It is clear from the above that almost 38 percent of the overall debt demand is
not viable and addressable as it comprises enterprises that are sick, or with
limited operational history, or suffer from poor financial health. A large number of
micro services enterprises such as small retail trade and repair shops account for
25 percent of the debt demand. These enterprises prefer informal sources to the
formal financial institutions due to the ease of access, speed of disbursal and
need for negligible documentation. Additionally, the urgency of demand for
finance often outscores the cost differential between the two sources. Based on
the above exclusions, it is estimated that of the total debt demand of INR 26
trillion ($520 billion), at least 38 percent or INR 9.9 trillion ($198 billion) is the
size of the viable demand that can be addressed by the formal financial sector in
the near term.
Type of enterprises
Sick enterprises in default
New enterprises with less than one
year of operations
Portion of enterprises rejected by
formal financial institutions
Voluntary exclusions of micro
services sector enterprise segment
Total

Share of debt demand (in percentage)

13%
23%
1%

25%
62%

17

Equity Demand
The overall equity demand in the sector is estimated to be INR 6.5 trillion ($130
billion), with short-term equity requirement accounting for INR 4 trillion ($80
billion), and long-term equity making up a demand of INR 2.5 trillion ($50 billion).
Analysis of financing patterns in the MSME sector suggests that enterprises use
internal accruals and informal sources to finance the short-term equity demand
(INR 4 trillion; $80 billion) and 25 percent of the long-term equity demand (INR
0.6 trillion or $12 billion).
Excluding entrepreneurs equity contribution (internal accruals and informal
sources), the equity demand from external sources is estimated to be INR 1.9
trillion ($38 billion). However, all the equity demand may not be viable and
addressable as 95.7 percent of enterprises are structured as either
proprietorships or partnerships that are not amenable to external equity infusion.
Excluding the equity demand totalling INR 1.23 trillion ($24.6 billion) from
proprietorship and partnership enterprises, the viable and addressable equity
demand is estimated to be INR 0.67 trillion ($13.4 billion).

Working Capital Assessment

Credit Facilities:

An Indian Corporate can avail different credit facilities. These are classified into
two major types.
Fund Based
It is any credit facility which involves direct outflow of the banks funds to the
borrower. Different types of FB facilities are Term Loan, Cash Credit, Overdraft
and Packing Credit.
Term Loan
It is a credit facility that allows the borrower to draw a lump sum of capital
(although occasionally drawings may be made in several tranches) during a short
period after execution of the loan agreement. Such a loan is usually taken out for
a specified purpose, creating fixed assets such as setting up a business/ factory
or funding an acquisition.
The term loan is usually a committed facility, which means that the bank is
obliged to advance money at the borrowers request, and is not usually on
demand. The repayment of the loan is structured in accordance with an agreed
repayment schedule, the most common methods being by way of amortization,
which means that the loan is repaid in equal amounts at regular intervals over
the term of the loan. Once repaid, an amount cannot then be re-borrowed.
Term loans are further classified in three categories depending upon the period
of repayment as under:

Short term repayable in less than 3 years.

Medium term loans repayable in a period ranging from 3 years to 7 years.
Long term loans repayable in a period over 7 years.
18

Cash Credit
It refers to credit facility in which borrower can borrow any time with in the
agreed limit for certain period for their working capital need and allows for
flexible drawdown of funds as and when required. It secured by way of
Hypothecation of stock (primary security) and Debtors and all other current
assets of the business generated during the course of business. Cash credit can
also be secured by way of mortgage of immovable properties (collateral security)
It is different from a conventional loan, in that the debtor does not have to
receive the entire amount of the loan at one time. It's also different from a line of
credit, as the amount of resources extended are pre-approved and the
repayment schedule is the same whether the debtor is actively using the cash or
not.
Over Draft
An overdraft allows a current account holder to withdraw in excess of their credit
balance up to a sanctioned limit. It is a type of revolving loan where deposits
(credits) are available for re-borrowing, and interest is charged only on the daily
overdraft (debit) balance. It secured by way of Mortgage of immovable properties
and pledge of F.D., Bonds, shares securities, Gold & silver and any physical asset
and Hypothecation of Stock and Debtors and all other current Assets of the
business generated during the course of business.
Packing credit
It is a credit facility which sanctioned to an exporter in the Pre-Shipment stage.
Such credit facilitates the exporter to purchase raw materials at competitive
rates and manufacture or produce goods according to the requirement of the
buyer and organize to have it packed for onward export. It secured by way of
Hypothecation of Stock of goods and Debtors and all other current Assets of the
business generated during the course of business.
Non-Fund Based
Credit facilities that do not involve any actual deployment of funds by bank but
help the obligation to obtain certain facilities from third parties, are as termed as
non-fund based facilities. These facilities include issuance of letter of credit,
issuance of guarantees, which can be performance guarantee/financial
guarantee.
Letter Of Credit
When a buyer or importer wants to purchase goods from an unknown seller or
exporter. He can take assistance of bank in such buying or importing
transactions. It is a letter from a bank guaranteeing that a buyer's payment to a
seller will be received on time and for the correct amount. In the event that the
buyer is unable to make payment on the purchase, the bank will be required to
cover the full or remaining amount of the purchase.
Letters of credit have become a very important aspect of international trade due
to the nature of international dealings including factors such as distance,
differing laws in each country and difficulty in knowing each party personally. The
bank acts on behalf of the buyer (holder of letter of credit) by ensuring that the

19

supplier will not be paid until the bank receives a confirmation that the goods
have been shipped.
Bank Guarantee
It is a guarantee issued by a banker that, in case of an occurrence or nonoccurrence of a particular event, it guarantees to fulfil the loss of money as
stipulated in the contract. It may of various types like Financial Guarantees,
Performance Guarantees and Deferred Payment Guarantee.
In other words, if the debtor fails to settle a debt, the bank will cover it. It
enables the customer (debtor) to acquire goods, buy equipment, or draw down
loans, and thereby expand business activity.

Methods of Lending:
Historically, two methods have been used to calculate the maximum permissible
bank finance of a firm, the working capital approach and the turnover
approach.
Working capital approach: The working capital approach is based on the
presumption that firms current assets are illiquid, and firms should finance 25%
of the gap from equity, and 75% from bank credit. Maximum permissible bank
finance is thus defined as 0.75 CURRENT ASSETS OTHER CURRENT
LIABILITIES.
Turnover approach: It is defines as firms financing need to be 25% of projected
turnover, and allows the firm to finance 80% of this need from banks, i.e. up to
20% of turnover. Turnover based maximum permissible finance is thus min (0.20
Projected turnover, 0.25 Projected turnover available margin) where the
available margin is Current Assets Current Liabilities, calculated from the firms
balance sheet. The margin is deducted because it is presumed that the firms
other financing will continue to be available.
Cash Budget Method: This method is used for financing seasonal industries
like sugar, tea etc.
In UCO Bank the second method of lending is used in MSME projects so that the
loan given is less as compare to first method of lending.

Borrower Selection:
Credit officers should study the following fields while selecting a borrower for
allowing credit facilities.
a) Person/Man: Person means the man behind the organization, characters,
past record, managerial capacity, educational background, family status,
willingness to repay the loan are the ingredients to emphasize. The owner must
be a person of integrity, good character, educated, experienced and status. The
reimbursement of the loan also depends upon the willingness to pay. The
willingness to pay off the loan depends upon the honesty and character of the
borrower.

20

b) Purpose: Purpose of the loan should be productive, legitimate, and fruitful so

that the money not only risk-free but also provide a certain source of repayment.
If the borrower invests the money in an unproductive or speculative project the
advance would be in threat. The advances should not be in one particular track
or to one particular industry, because any adversity faced by the particular
industry will have severe effects on the bank.

c) Capacity: Capacity includes the business ability, managerial and marketing

power of the borrower. The capacity depends upon the borrower's tangible assets
and the achievement of his business. The banker should take atmost care in
ensuring that the enterprise or business for which loan is sought is sound.
d) Capital/Credit worthiness: Credit worthiness is the financial strength, net
worth to cover the business risk. Personal Net Worth is also the backup of
monetary strength.
e) Collateral: Additional comfort or securities provided by borrower is collateral
security. The collateral security must have quick scalability or convertibility. It is
the insurance or shock absorber to fall back upon in case of demand.

Computation of Maximum Permissible Bank

Finance (MPBF):
The Tendon Study group had suggested the following alternatives for working
out the maximum permissible bank finance:Method 1:
Bank can work out the working capital gap. i. e. total current assets less current
liabilities other than bank borrowings and finance a maximum of 75 per cent of
the gap; the balance to come out of long-term funds, i.e. owned funds and term
borrowings

Method 2:
Borrower should provide for a minimum of 25 per cent of total current assets out
of long-term funds, i.e. owned funds and long term borrowings. A certain level of
credit for purchases and other current liabilities inclusive of bank borrowings will
not exceed 75 per cent of current assets.
It may be observed from the above that borrowers contribution from long term
funds would be 25 per cent of the working capital gap under the first method of
lending and 25 per cent of total current assets under the second method of
lending.
The above minimum contribution of long-term funds is called minimum
stipulated Net Working Capital (NWC) which comes from owned funds and term
borrowings. Above two method of lending may be illustrated by taking the
21

following example of a borrowers financial position, projected as at the end of

next year.
Method 3:
In this method core current assets has been deducted from the total current
assets, so this method provide with net working capital as total current assetscore current assets- current liability.
While estimating the total requirement of long-term funds for new projects,
financial institutions/banks should calculate for working capital on the basis of
norms prescribed for inventory and receivables and by applying the second
method of lending. A project may suffer from shortage of working capital funds if
sufficient margin for working capital is not provided as per the second method of
lending while funding new projects. Proper co-ordination between banks &
financial institutions is necessary to ensure availability of sufficient working
capital finance to meet the production requirement.

RBI, Regulatory Monitoring on Priority

Sector Lending:To ensure continuous flow of credit to priority sector, there will be more frequent
monitoring of priority sector lending compliance of banks on quarterly basis
instead of annual basis. The data on priority sector advances have to be
furnished by banks at quarterly and annual intervals as per revised reporting
formats, the guidelines for which will be issued separately.
In case of non-achievement of Priority Sector targets scheduled commercial
banks having any shortfall in lending to priority sector shall be allocated amounts
for contribution to the Rural Infrastructure Development Fund (RIDF) established
with NABARD and other Funds with NABARD/NHB/SIDBI, as decided by the
Reserve Bank from time to time. For the year 2015-16, the shortfall in achieving
priority sector target/sub-targets will be assessed based on the position as on
March 31, 2016. From financial year 2016-17 onwards, the achievement will be
arrived at the end of financial year based on the average of priority sector
target /sub-target achievement as at the end of each quarter. The interest rates
on banks contribution to RIDF or any other Funds, tenure of deposits, etc. shall
be fixed by Reserve Bank of India from time to time.
Therefore for non-achievement of target under priority sector RBI impose
penalties to all banks, equal amount of shortfall has to deposit in RIDF on any
other scheme as per Government of India.

Sick Units:
Number of sick enterprises and amount involved increased substantially by 81
percent and 137.6 percent between 2005 and 2013. Number of sick enterprises
progressively declined until 2010 except in 2009 when it increased by 22.1
percent over the previous year. Again it increased in 2011 and 2013 significantly.
As against this, amount involved in sick enterprises substantially increased over
the previous year in 5 years. Potentially viable enterprises increased by 225.8
percent between 2005 and 2013.
22

Although number of potentially viable enterprises as percentage to total sick

enterprises increased progressively except in 2011 to 2013 amount involved in
sick enterprises in term of percentage of outstanding credit was 6.44 percent in
2005 which progressively declined to 0.99 in 2012.
Number of Sick, Potentially Viable with Amount (INR lakh)
TABLE 7: NUMBER OF SICK, POTENTIALLY VIABLE WITH AMOUNT (INR LAKH )
Year
2005
2006
2007
2008
2009
2010
2011
2012
2013

Total sick enterprises

Number
Amount
1,38,041
5,386
1,26,824(-8.2)
4,981(-7.5)
1,14,132(-10.1)
5,267 (+5.7)
85,187(-25.4)
3,083 (-41.5)
1,03,996(+22.1)
3,620 (+17.4)
77,723 (-25.3)
5,233 (+44.5)
90,141(+16.0)
5,211 (-0.5)
85,591 (-5.1)
6,790 (+30.3)
2,49,903 (+191.0)
12,800 (+88.5)

Potentially Viable
Number
Amount
3,922(2.84)
435
4,594(3.62)
498
4,287(3.76)
427
4,210(4.94)
247
8,168(7.85)
732
9,160(11.78)
965
7,118(7.89)
1113
10,315(12.05)
1721
12,779(5.11)
3926

Classification of current assets & Current

liabilities:

In order to calculate net working capital & maximum permissible bank finance, it
is necessary to have proper classification of various items of current assets &
current liabilities. All illustrative lists of current assets & current liabilities for the
purpose of assessment of working capital are furnished below;
Current assets: Cash and bank balances
Investments
Receivables arising out of sales other than deferred receivables (including
bills purchased & discounted by bankers)
Instalments by deferred receivables due within one year
Raw materials & components used in the process of manufactured
including those in transit
Stock in process including semi-finished goods
Finished goods including goods in transit
Other consumable spares
Advance payment for tax
Prepaid expenses
Advances for purchases of raw materials, components & consumable
stores
Payment to be received from contracted sale of fixed assets during the
next 12 Months

23

Current Liabilities:
Short-term borrowings (including bills purchased & discounted) from Banks
and Others
Unsecured loans
Public deposits maturing within one year
Sundry creditors (trade) for raw material & consumer stores & spares
Interest & other charges accrued but no due for payments
Advances/progress payments from customers
Deposits from dealers selling agents, etc.
Statutory liabilities
Provident fund dues
Provision for taxation
Sales-tax, excise, etc.
Obligation towards workers considered as statutory
Miscellaneous current liabilities
Dividends
Liabilities for expenses
Gratuity payable within one year
Any other payments due within one year

Information/Data required for assessment

of working capital:
In order to assess the requirements of working capital on the basis of production
needs, it is necessary to get the data from the borrowers regarding their
past/projected production, sales, cost of production, cost of sales, operating
profit, etc. in order to ascertain the financial position of the borrowers & the
amount of working capital needs to be financed by banks, it is necessary to call
for the data from the borrowers regarding their net worth, long term liabilities,
current liabilities, fixed assets, current assets, etc.
Bank may also call for additional information required by them depending on the
nature of the borrowers activities & their financial position. The data is collected
from the borrowers in the following six forms: 1. Particulars of the existing/proposed limits from the banking
system (form I)
Particulars of the existing credit from the entire banking system as also the term
loan facilities availed of from the term lending institutions/banks are furnished in
this form. Maximum & minimum utilization of the limits during the last 12 months
outstanding balances as on a recent date are also given so that a comparison
can be made with the limits now requested & the limits actually utilized during
the last 12 months.
2. Operating Statement (Form II)
The data relating to last sales, net sales, cost of raw material, power & fuel,
direct labour, depreciation, selling, general expenses, interest, etc. are furnished
in this form. It also covers information on operating profit & net profit after
deducting total expenditure from total sale proceeds.
24

3. Analysis of Balance Sheet (Form III)

A complete analysis various items of last years balance sheet, current years
estimate & following years projections is given, in this form. The details of
current liabilities, term liabilities, net worth, current assets, other non-current
assets, etc. are given in this form as per the classification accepted by banks.
4. Comparative statement of current assets & current liabilities
(Form IV)
This form gives the details of various items of current assets and current
liabilities as per classification accepted by banks. The figures given in this form
should tally with the figures given in the form III where details of all the liabilities
& assets are given. In case of inventory, receivables and sundry creditors; the
holding/levels are given not only in absolute amount but also in terms of number
of month so that a comparative study may be done with prescribed norms/past
trends. They are indicated in terms of numbers of months in bracket below their
amounts.
5. Computation of Maximum Permissible Bank Finance (Form V)
On the basis of details of current assets & liabilities given in form IV, Maximum
Permissible Bank Finance is calculated in this form to find out credit limits to be
allowed to the borrowers.
6. Fund Flow Statement (Form VI)
In this form, fund flow of long term sources & uses is given to indicate whether
long term funds are sufficient for meeting the long term requirements. In
addition to long term sources and uses, increase/decrease in current assets is
also indicated in this form.

Check list for verification of the

information/data:
Bank should verify not only the arithmetical accuracy of the data furnished by
the borrowers but also the logic behind various assumptions based on which the
projections have been made. For this purpose, bank officials should hold
discussions with the borrowers on projected sales, level of operations, level of
inventory, receivables, etc. if necessary, a visit to the factory may also be made
to have a clear idea of products and processes.

Procedure for MSME Process

As per this the revised process is divide into two components that is Pre
sanctioning and Post sanctioning. In the pre sanctioning it is the only time that
the bank can take due assessment and precautions to make sure that the
investments are done for the benefit of the bank. The post sanctioning is the
follow of the payment. In case the payment defaults then the account will go into
NPA in stages and the bank is then said to scrutinize the said account.

25

PRE SANCTION PROCESS: Obtain loan application when a customer required loan he is required to
complete application form and submit the same to the bank also the borrower
has to be submit the required information along with the application form.
The information, which is generally required to be submitted by the borrower
along with the loan application, is under:

Audited balance sheets and profit and loss accounts for the previous three
year (in case borrower already in the business)
Estimated balance sheet for current year.
Projected balance sheet for next year.
Profile for promoters/directors, senior management personnel of the
company.
In case the amount of loan required by borrower in General Scheme and
MSME he should be submit the CMA Report.
Examine for preliminary appraisal
RBI guidelines. Policies
Prudential exposure norms and bank lending policy
Industry exposure restriction and related risk factors.
Compliance regarding transfer of borrowers accounts from one bank to
another bank
Government regulation / legislation impact on the industry
Acceptability of the promoter and applicant status with regards to other
unit to industries.
Arrive at the preliminary decision.
Examine/analysis /assessment
Financial statement (in the prescribed forms) refers figure WC cycle & BS
assessment thumb rules.
Financial ratio & Dividend policy.
Depreciation method
Revaluation of fixed assets.
Records of defaults (Tax, dues etc.)
Pending suits having financial implication (Customs, excise etc.)
Qualifications to balance sheet auditors remarks etc.
Trend in sales and profitability and estimates /projection of sales.
Production capacities and utilization: past & projected production
efficiency and cost.
Estimated working capital gap W.R.T acceptable build up of
inventory/receivables/other current assets and bank borrowing patterns.
Assess MPBF determine facilities required
Assess requirement of off balance sheet facilities with letter of credit and
bank guarantee.
Management quality, competence, track records
Companys structure and system
Market shares of the units under comparison.
Unique feature
Profitability factors
Inventory/Receivable level
26

Capacity utilization

POST SANCTION PROCESS

Supervision and follow up: - Sanction credit limit of working capital requirement
after proper assessment of proposal is alone not sufficient. Close supervision and
follow up are equally essential for safety of bank credit and to ensure utilization
of fund lend. A timely action is possible only close supervision and followed up by
using following techniques.

Monthly stock statement

Inspection of stock
Scrutiny of operation in the account
Quarterly/half quarterly statements.
Under information system
Annual audited report

Proposal format for MSME

Executive Brief
This is the proposal created by the bank for each corporate. This contains not
just the financial data but also the other details regarding the credit facility and
various parts of it like, securities, limits entailed, details of the directors, risk
involved, etc. This task gives an Executive Brief document of the corporate as an
output. This document is used for making the decision of disbursing the
requested credit facility to the corporate.
1

Purpose of the proposal:

The purpose of the proposal is to be specified in this portion. For example
if there is a modification in the terms of the facility, to renew the facility, to
review the facility, etc.
For example: If a borrower is enjoying a term loan facility with the bank
and there are some changes in the terms of the facility like the ROI of the
facility has been increased and the limits of the facility have been
decreased. Then the proposal according to the purpose is to be made.
That is as there is no availment of any other facilities the proposal is to be
made accordingly.
2 Limits Recommended:
This table contains the details of the credit facility(s) availed to the
borrower by the bank. The details like the amount of credit availed,
various facilities availed and the limits of each facility, the rate of interest
at which the credit is availed, the margin that is the amount the borrower
has to invest, the proportion of the banks share in the facility that is in
case of a consortium.
3 Risk rating:
The risk involved is calculated by various rating agencies like CARE, CIBIL,
etc. This is the external rating. Rating agencies rate corporates and

27

release reports, these are the sources of the external rating. The validity
period of an external rating is 1 year.
The risk calculated internally by the bank is also specified in this table. The
risk as explained before is divided in to four parts. Risk regarding all the
parts is specified.
4 Pricing and other charges:
In availing a credit facility the bank has to do various tasks like
documentation, inspection, processing, etc. The bank charges an interest
rate on a credit facility which has two components:
i Base rate, which depends (fluctuates) upon monetary policy of RBI.
ii Additional rate of interest, which depends upon the risk rating of the
borrower. In other words, the bank is charging an additional interest to
compensate for the risk involved in case of default by the borrower.
Here As per Rating Policy is based on the internal rating done on the
corporate. As per policy according to the rating the rate of interest limit is
proposed. This may not be the final ROI. For example the rating of the
corporate stands at CBI-IV then the additional rate is 2.5%.
5 Deviations from Policy:
This table contains the ratios that are deviating from the policy. That is as
explained above the current ratio of the corporate as per policy should be
greater than 1.33. This may not be the case in all cases. So if there is any
deviation from the policies they are specified in this table.
6 Sharing Pattern:
In case of a consortium, that is if a facility availed to a borrower is shared
by various other banks it is called a consortium. The share of each bank in
the total facility is specified in both Fund based and non-fund based
facilities.
7 Securities:
The security given by a borrower is classified into two broad kinds.
Primary: It is the security on which the loan is availed. In simpler
terms if a borrower is taking a loan of Rs.100 crores on his plant and
machinery. Then the tangible assets of the borrower are the primary
security.
Collateral: Apart from Primary security the borrower is expected to
give other assets like real estate, gold, etc. these are the collateral
security to the bank. These two run side by side. In case of MSME
the 125% of collateral security is kept.
8 Details about the Borrower:
Various details about the borrower are also specified in the document like
Board of Directors of the corporate, shareholding pattern, Industry details,
brief history, strengths and weaknesses of the company, etc.
9 Group Details:
If the corporate is a subsidiary of a group then the details of the group are
collected. Details like group exposure, group financials, etc.
28

10 Financial Indicators:
TABLE 8: FINANCIAL INDICATORS
Particulars
a) i. Authorized Capital
ii. Paid-up Capital
b) Reserves &
surplus( Revaluation
Reserve)
c ) Tangible Net
Worth(excluding
Revaluation Reserve)

Audited

Audited

c1) Adjusted TNW( Net

of investments in
group/subsidiaries)
c2) TNW (treating
unsecured loan from
Promoters as quasi
equity)
d) Long Term Secured
Loans
e) Long Term unsecured
Loans
f ) Net Fixed Assets
including Capital workin-progress
g) Capital work-inProgress
h) Noncurrent assets
i) Inventories
j) Receivables
k) Other Current Assets
l) Total Current Assets
m)other Current
Liabilities excl.BB
n) Bank Borrowings (BB)
o)Total Current
liabilities
p) Net Working
Capital(TCA-TCL)
q) Current ratio(TCA/TCL)
r) TL inst due within 1
year
s) Current ratio( without
T/L inst. Due within 1 yr.
As CL)
29

Provision
al

Projected

Total Outside Liability

t) Debt-Equity Ratio
i) Considering all
outsideLiab (TOL/TNW).
ii) Considering Term
liab. Only
iii) TOL/Adjusted TNW
(iv)
TOL/TNW( Considered
unsecured loan from
promoters into quasi
capital)
u) Net Sales
v) Operating Profit/(Loss)
(GP)
w)Other income
x) Profit before interest
,tax and depreciation
(PBDIT)
y) Depreciation
z) Interest
aa) Tax
bb) i. Profit after
tax(PAT)
ii. Profit Before Dep.
(PBD)
cc) Cash accruals
dd) Increase in Net
sales (%)
ee) % of operating profit
to Net Sales
ff) % of PBDIT to Net
Sales
gg) i. PAT to Net Sales
(%)
ii. PBD to Net
Sales (%)
hh) Interest as % to Net
Sales
ii) Return on Capital
Employed. ( PAT +
INTT/TNW + LTB + BB)
(%)
jj) Interest Cover (Times)
kk)Fixed assets to
Secured Term Liabilities

30

Break up of other Current assets

Audited

Audited

Provision
al

Projected

Break up of other Current

Liabilities:
Items
Audited

Audited

Provision
al

Projected

Audited

Provision
al

Projected

Items
Loans and advances
(staff & others)
Loans and advances
(suppliers)
Fixed deposits with bank
(Deposit with
parties/departments)
Cash & bank balances
TDS/Adv. Payment of tax
Others
Total ( A)

Sundry creditors for

purchase
Sundry creditors for
expenses
Adv. From customers
Others
Provision
Provisions for taxation
TL Inst due within 1 year
Total ( B)
Break up of Non current assets
Items

Audited

Investments in Joint
ventures (Pre Operative
Exp.)
Investments in
bond/shares etc.
Investments in group
company
Security Deposits with
Govt.
Others
Total ( C)

31

Funding Pattern of the Bank

NWC to TCA
BB
to TCA
Sundry Creditor to TCA
OCL to TCA
Total

Audited

Audited

Provision
al

Projected

100.00%

100.00%

100.00%

100.00%

Audited

Provision
al

Projected

Sources & application of fund

Audited
Long term sources
Long term application
Long term Surplus /
(deficit)*
Short term sources
Short term application
Short term surplus/
(deficit)
ASSESSMENT OF WORKING CAPITAL REQUIREMENTS
(FUND BASED
Financial Parameters
Provision
Audited
Audited
al
Current Ratio

Projected

TNW with Quasi& Capital

subsidy
DER (TOL/TNW)
Operating profit/ Sales %
(after interest).
NWC

ASSUMPTIONS
Audited

Audited

a) Sales Gross
Sales Net
b) Cost of Production
c) Cost of Sales (Incl.
Depn.)

32

Provision
al

Projected

d) Raw Material
Consumption
e) % Cost of
Production/Sales
f) % Cost of Sales/Sales
g) % Raw material
consumption to cost of
production

LEVEL OF HOLDINGS: [MONTHS]

Audited

Audited

Provision
al

Projected

Audited

Provision
al

Projected

Raw materials
Indigenous
Imported
Consumable, Spares &
Stores (Indigenous)
Work in-process (SIP)
Work in-process(In
months)
Finished goods
Finished goods (In
Months)
Receivables
Receivables (In Months)
Other current assets
% of other Current
Assets to Total CA
Sundry Creditors (Goods
& expenses)
Other current
liabilities( other than BB)
COMPUTATION OF WORKING CAPITAL
Audited
Current Assets
Raw Materials
Work in progress
Consumable
Spares/Stores
Finished goods
Receivables
Advances to suppliers
33

Cash & Bank Balance&

Fixed Deposit etc.
Other Current assets
Total Current assets
(CA)
Less: Sundry Creditors
(Goods & expenses)
Less: Other Current
Liabilities
Total Current liabilities
other than BB/ Other CL
Working Capital Gap
Computation of Permissible bank finance
Audited

Audited

Provision
al

Projected

1. Working Capital Gap

(WCG)
2. Minimum stipulated
NWC (25% of current
assets- except export
recievables)
3. Actual/Projected NWC
4. Item (1) Item (2)
5. Item (1) Item (3)
6. Permissible Bank
Finance
7. Excess over bank
borrowing representing
shortfall in NWC
8. Our share in assessed
Fund based WC limit
proposed

Ratios
These ratios are then compared with bank standards to determine feasibility of
project. The parameters include:
i

Current Ratio: It is a liquidity ratio that measures a company's ability

to pay short-term obligations.

The formula is: Current Ratio =

Total Current Assets

Total Current Liabilities

The ratio is used to determine company's ability to pay back its short-term
liabilities (debt and payables) with its short-term assets (cash, inventory,
receivables). The higher the current ratio, the more capable the company is of
34

paying its obligations. According to Banks policy, Current ratio should be

minimum 1.33: 1.
ii

Debt-Equity Ratio: It gives a measure of a company's financial

leverage calculated by dividing its total liabilities by stockholders'
equity. It indicates what proportion of equity and debt the company is
using to finance its assets. According to Banks policy, D-E ratio should
be maximum 3: 1.

The formula is:

DER =

Long Term Liabilities

Tangible Net Worth

A high debt/equity ratio generally means that a company has been aggressive in
financing its growth with debt which can result in volatile earnings as a result of
the additional interest expense and ultimately lead to bankruptcy.
iii

TOL/TNW: This ratio reflects the relationship between capital

contributed by creditors relative to what is contributed by owners. From
a lender's perspective a lower TOL/TNW is better as it demonstrates a
larger owner commitment and rules out the company from bankruptcy.
According to Banks policy, TOL/TNW ratio should be maximum 4: 1.

The formula is: TOL/TNW =

iv

Totla Outside Liabilities

Tangible Net Worth

Asset Coverage ratio: It determines a company's ability to cover

debt obligations with its assets after all liabilities have been satisfied.

According to Banks policy, ACR ratio should be minimum 1.5: 1.

The formula is: ACR =
v

Total chargeable assets +value of collateral security

Total Indebtness

Fixed Asset coverage ratio: It determines a firm's ability to uphold

its debt payments with all of its fixed assets. It helps banks to analyse
if the loans given against fixed assets are safe or not. According to
Banks policy, FACR ratio should be minimum 1.5: 1.

Total

The formula is: FACR =

vi

assets

Total term loan

Debt-service coverage ratio: It is the

loan assessment. It determines the cash
interest, principal and lease payments.
easier it is to obtain a loan. According
should be minimum 1.5: 1.

The formula is: DSCR =

most important ratio for term

available for debt servicing to
The higher this ratio is, the
to Banks policy, DSCR ratio

Net Income+ Deprecetion +Other noncash expenses

Principle Repayment + Interest Payment

35

Articles Based on MSME

Micro, Small and Medium Enterprise (MSME) sector in India is highly

heterogeneous in term of the size of enterprises, variety of products and
processes produced, services rendered and the level of technology employed.
Inherent strength of the sector is that Micro and Small Enterprises (MSEs) can be
established with small amount of investment anywhere in the country. They have
strong linkages with large enterprises. The geographic distribution of MSMEs is
relatively more even. These characteristics make MSME sector truly a strategic
asset for countrys economy and has the potential to achieve the national
objective of inclusive growth with equity. The MSME sector contributes around
7.28 percent of countrys GDP, 37.7 percent of the manufactured output and 40
percent of its exports. The 11th five year plan mentioned MSMEs are more than
just GDP earners; they are instruments of inclusive growth which touch upon the
lives of the most vulnerable, the most marginalised people. Yet this sector in
successive Five Year Plans has not received its due.
It has significant
unexplored unfathomable potential driven by individual creativity and innovation
in term of product and processes. In order to formulate policies, implement
programs and monitor their implementation to help MSME sector achieve
sustained growth, from 2nd October 2006 the Micro, Small & Medium Enterprises
development Act came into effect and from 9th May 2007 the erstwhile Ministry
of Small Scale Industries and ministry of agro and rural industries were merged
to form a new Ministry of MSMEs.
However growth and development of MSMEs remains severely constrained by
one of the major factors, with non- availability of adequate and timely credit,
high cost of credit, collateral requirement, and incidence of sick enterprises. The
MSEs being small in size deploy their savings and loans from friends, relatives
and money lenders since they have often inadequate and unreliable access to
banking system. The fourth Census estimated that a merge 12.5 lac units (5.2 %)
out of 261 lac enterprises had access to institutional credit.
The latest survey of 1.30 lac enterprises by the Forth Census revealed following
important findings that can guide framing policy and programs for the sustained
growth and development of the sector.

The sector provide employment to about 805.24 lac persons through over
361.76 lac enterprises producing about 6000 products. Some of the major
subsectors in term of manufacturing output were food products (18.97%),
textiles and readymade garments (14.05%), basic metal (8.81%), chemical
and chemical products (7.55%), metal products (7.52%), machinery and
equipment (4.5%), rubber and plastics products (3.9%), Furniture (2.62%),
Paper and Paper products (2.03%) and leather products (1.98%).
Unregistered enterprises (346.12 lakhs) accounted for 95.7 percent often
located in non- conforming urban zones.
Six States had concentration of 53.20 percent enterprises providing 55.89
percent employment.
Proprietorship MSMEs were 94.4 percent and women owned about 7.3
percent.
Service-rendering enterprises were 68.2 percent providing employment to
60.2 percent.
36

Rural areas had 55.3 percent enterprises.

Perennially operating enterprises were 56.5 percent and the rest were
seasonal and casual. Enterprises using electricity accounted for 32.3
percent whereas 54.8 percent were not using any source of energy.
The sector is heterogeneous exhibiting few pockets with enterprises of
high technology and a vast majority suffering for low level of technology
resulting in low productivity and products of inferior quality. Despite the
clusters of MSME paying reasonably a high percentage of taxes, their
infrastructural condition continue to be in bad shape since the State
Government are reluctant to invest in creating additional infrastructure
and properly maintaining the existing that can sustain the MSME growth.

Currently 26 public Sector Banks, 20 Private Sector Banks, 73 Regional

Rural Banks, four foreign banks and nine other institution are engaged in
financing MSME sector. Outstanding Credit increased by 482 percent from
INR 83,498 crore in 2005 to INR 486,017 crore in 2011. Private Banks
outstanding credit is increased by 922 percent as compared to 455
percent by public sector banks followed by foreign banks (211%) during
the period. Share of public sector banks was as high as 82 percent in total
outstanding credit in 2005 which declined to 77.5 percent in 2011 whereas
share of private banks significantly shot up from 10.3 percent to 18.1
percent. Share of foreign banks also declined substantially from 8.3 to 4.4
percent during the period.
The high growth witnessed during 2008 is on account of re classification of
MSEs as per MSMED Act, 2006.
The investment limit of small manufacturing units was raised from INR
1.00 crore to INR 5.00 crore and small service sector was added to include
enterprises with investment limit between INR 10 lakhs to INR 2.00 crore.
The coverage of services enterprises was broadened to include small road
and water transport operators, small business, professional and selfemployed and other service enterprises.
Most banks continue to insist on collateral from MSMEs despite RBI
directives to provide collateral free loans up to INR 10 million. Besides,
Bank are reported to charge very high interest rate of 17 percent to 18
percent, rendering MSEs unviable lending to default in loan repayment.
The RBI has observed that
Unawareness of 18 percent of entrepreneurs about collateral- free MSE
loans
40 percent entrepreneurs had no knowledge about government scheme
promoting the MSE Sector. RBI has been repeatedly emphasising to reduce
the process and duration of sanctioning and disbursal of loans and easier
documentation procedure and to open MSME specific branches in all
industrial areas. RBI has directed that every branch of the bank should
open at least 5 micro enterprises accounts despite having significant
branch presence.

37

Bibliography
Chaudhary, D. (2005). MSME at a glance. Ministry of MSME, 2-8.
Jagat, V. N. (2006). Working Capital Assessment. Maharashtra bankers.
Kumar, R. (2008). Financing of SME firms in India. Indian Bank.
Patel, D. A. (2015). Bank Credit to MSME. The Indian Banker, 34-41.
Swain, S. K. (2012). Micro, Small and Mesium Enterprises (MSME) in India.
Tondon, A. (2011). MSME in India. International Finance Corporation.

Reference

http://www.smetimes.in/smetimes/face-to-face/2013/Jul/01/sidbi-providestailor- made-solutions-for-msme-financing892153.html
https://www.ecgc.in/Portal/productnservices/creditinsurance/scr/popup.htm
l
http://www.cgtsi.org.in/FAQs.aspx?artid=119
http://www.smechamberofindia.com/challenges_to_sme_sector.aspx

38