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A Study on Credit flow to SME Sector Is it adequate? If not, suggest remedies...




2011-2013 BATCH

Durgadevi Saraf Institute of Management Studies 23A, 24-28, Rajasthani Sammelans Educational Complex, S. V. Road, Malad (W), Mumbai - 400 064, India. Phone: +91-22-6681 2311 Fax: +91-22-6681 2338


I have taken efforts in this project. However, it would not have been possible without the kind support and help of branch Manager and Mentor. I would like to extend my sincere thanks to both of them. I am highly indebted to Deepak Chavan (Branch Manager) and Jeet Shah (Mentor) for their guidance and constant supervision as well as for providing necessary information regarding the project & also for their support in completing the project. I would like to express my gratitude towards my colleague& member of Bank Of Baroda for their kind co-operation and encouragement which help me in completion of this project. I would like to express my special gratitude and thanks to industry persons for giving me such attention and time. After the completion of this Project I feel myself as a well aware person about the Research Procedure and the complexities that can arose during the process. Also I get an insight of the SME sector. Finally, I am also grateful to all those personalities who have helped me directly or indirectly in bringing up this project report.


Durgadevi Saraf Institute of Management Studies Malad, Mumbai May 2012 June 2012

Students Declaration
I hereby declare that this report, submitted in partial fulfilment of the requirement for the award for the Master in Management Studies, to Durgadevi Saraf Institute of Management Studies, is my original work and not used anywhere for award of any degree or diploma or fellowship or for similar titles or prizes. I further certify that without any objection or condition I grant the rights to Durgadevi Saraf Institute of Management Studies, to publish any part of the project if they deem fit in journals/Magazines and newspapers etc without my permission. Place : Mumbai Date : -----------------------------------Signature Name : Vikas Jain Class : MMS - SEM-II Roll No: 095


Executive Summary Introduction About SME Swot Analysis Composition Of Sme Sector Trend Of Sme Sector Performance Contribution Towards Gdp Credit Flow To Sme Sector From Banks Banks products State Bank Of India (Psu) Bank Of Baroda (Psu) Idbi Bank(psu) Small Industries Development Bank of India (SIDBi) Barclays Bank (Foreign) Problems/Challenges Remedies / Suggestions Conclusion Bibliography

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Executive summary--------------------------------------------------------Before going to describe about the topic i.e. Credit flow to SME Sector, It is an essential to know about what is SME? The abbreviation of SME is Small and Medium Enterprises. The Small scale industries are those industries whose total fixed expenditure is does not exceed 1crore and Medium enterprises are those whose total fixed expenditure is above 1 crore and below 10 crores. Small and Medium Enterprises (SMEs) play a vital role for the growth of Indian economy by contributing 45% of industrial output, 40% of exports, employing 60 million people, create 1.3 million jobs every year and produce more than 8000 quality products for the Indian and international markets. SME's Contribution towards GDP in 2011 was 17% which is expected to increase to 22% by 2012. Despite its commendable contribution to the Nation's economy, SME Sector does not get the required support from the concerned Government Departments, Banks, Financial Institutions and Corporate, which is a handicap in becoming more competitive in the National and International Markets.

Following are the main challenges faced by the SME sector: According to RBI, bank credit to SMEs grew by 13 per cent in May, 2011, as compared to 14.8 per cent growth in the same month in 2010. So it is clearly described, that bank credit is decline from last year. High bank interest rate and lack of required infrastructure are the major barriers that hurt the SME sectors growth in the country. Due to high interest Many SME entrepreneurs dont dare to take loan at higher interest rate. As a result, many enterprises are nipped in the bud. SME have inadequate access to finance due to lack of financial information and nonformal business practices. In India, there is not availability of suitable technology in operational field. Due to scarcity of fund, there is low production capacity, non-availability of skilled labour and there are constraints in modernisation and expansions.

Introduction-------------------------------------------------------------------With the advent of planned economy from 1951 and the subsequent industrial policy followed by Government of India, both planners and Government earmarked a special role for small-scale industries and medium scale industries in the Indian economy. Due protection was accorded to both sectors, and particularly for small scale industries from 1951 to 1991, till the nation adopted a policy of liberalization and globalization. Certain products were reserved for small-scale units for a long time, though this list of products is decreasing due to change in industrial policies and climate. SMEs always represented the model of socio-economic policies of Government of India which emphasized judicious use of foreign exchange for import of capital goods and inputs; labour intensive mode of production; employment generation; non concentration of diffusion of economic power in the hands of few (as in the case of big houses); discouraging monopolistic practices of production and marketing; and finally effective contribution to foreign exchange earning of the nation with low import-intensive operations. It was also coupled with the policy of de-concentration of industrial activities in few geographical centres. It can be observed that by and large, SMEs in India met the expectations of the Government in this respect. SMEs in spite of having low Capital base with concentration of functions in one / two persons, inadequate exposure to international environment and inability to face impact of WTO regime, inadequate contribution towards R & Dand lack of professionalism, SMEs have made significant contribution towards technological development and exports. SMEs have been established in almost all-major sectors in the Indian industry such as: Food Processing; Agricultural Inputs; Chemicals & Pharmaceuticals Engineering; Electricals; Electronics; Electro-medical equipment; Textiles and Garments; Leather and leather goods; Meat products; Bio-engineering; Sports goods; Plastics products; Computer Software, etc. The contribution of SMEs in the Indian economic development has been immense. The sector currently accounts for about 39 per cent of the manufacturing output and around 33 percent of the total exports of the country. There are approximately 1.3 crore Smes which employ nearly 3 crore people. The sector contributes close to 7 percent of our GDP. Thus, special thrust by the Government to the sector has been consistent with the objectives of employment generation, regional dispersal of industries and fostering of entrepreneurship.

About SME-----------------------------------------------------------------------Micro, Small and Medium Enterprises (SMEs), including khadi and village/rural enterprises are credited with generating the highest rates of employment growth and account for a major share of industrial production and exports. They also play a key role in the development of economies with their effective, efficient, flexible and innovative entrepreneurial spirit. The socio-economic policies adopted by India since the Industries (Development and Regulation) Act, 1951 have laid stress on SMEs as a means to improve the countrys economic conditions. The Micro, Small and Medium Enterprises (SME) Sector is an important pillar of the Indian economy by way of creating employment of about 70 million through 30 million units, manufacturing more than 6000 products, contributing about 45% to manufacturing output and about 40% of exports, directly and indirectly. The small and medium enterprises segment has been a topic of intense deliberation among banks, financial institutions, industry and academicians. In India, small and medium enterprises (SME) is a generic term used to describe small scale industrial (SSI) units and medium-scale industrial units. As per the Micro, Small and Medium Enterprises Development Act of 2006, any industrial unit with a total investment in its fixed assets or leased assets or hire-purchase asset upto Rs10 million is considered as a SSI unit and investment up to Rs. 100 million is considered as a medium unit. In addition, an SSI unit should neither be a subsidiary of any other industrial unit nor can it be owned or controlled by any other industrial unit. The SME sector produces a wide range of industrial products such as food products, beverage, tobaccoand tobacco products, cotton textiles, wool, silk, synthetic products, jute, hemp & jute products, wood & wood products, furniture and fixtures, paper & paper products, printing publishing and allied industries, machinery, machines, apparatus, appliances and electrical machinery. SME sector also has a large number of service industries. In India, SME is the biggest provider of employment next only to Agriculture. The SMEs constitute 95% of total industrial units and constitute 40% of total industrial output. Formerly, both Government and RBI credit policy placed emphasis on manufacturing units from the Small-scale Sector. However, in order to make the size of the unit and the technology employed by firms to be globally competitive, the definition of Small Scale Sector was revisited. Keeping in view the same and the global practices, it was decided to broaden the concept of SSI Sector by inclusion of services within its ambit as also including the Medium Enterprises in a composite sector of Small & Medium Enterprises. Banks were interalia advised to formulate comprehensive and more than the existing policies in respect of loans to SME Sector. liberal policies

SWOT analysis----------------------------------------------------------------STRENGTHS Contribution to National Economic Growth. Generating Employment and Vitalizing Indian brand to the world. Regional Development. Technological Innovation. Export Market Expansion.

WEAKNESS Lack of Funds Lack of Marketing Skill Lack of Information. Poor adaptability to changing trade trends. Nonavailability of technically trained human resources. Lack of management skills. Lack of access to technological information and consultancy services.

OPPORTUNITY Bilateral & Multilateral trade agreements. Enhanced credit support. Support for technological upgradation. Comprehensive support for cluster development. Marketing assistance and export promotion support growing domestic and international markets. WTO regime THREATS Dumping from developed countries. Distrust between SMEs and Financial Institutions. Poor incentive structures for entrepreneurs. Virtual absence of Enterprise Education. Nontariff barriers from developed countries. Slow improvement in quality to meet the international standards.

Composition of SME sector --------------------------------------------The SME Sector includes Micro Enterprises, Small Enterprises, Artisans & Village Industries, Medium Enterprises, Service Sector units & individual sub-sector units. a. Micro Enterprises: Micro Enterprises are those engaged in manufacturing, processing, preservation of goods, mining, quarrying, servicing & repairing of specified type of machinery & equipment, agro service units whose investment in Plant and Machineries does not exceed Rs. 25.00 lacs irrespective of location of the unit in respect of manufacturing units and investment in equipments not exceeding Rs 10.00 lacs in respect of Service Sector units. b. Small Enterprises: A Small Enterprise industrial undertaking / unit is one which is engaged in the manufacture, processing or preservation of goods or is a servicing and repair workshop undertaking repairs of machinery used for production, mining or quarrying or custom service unit (except water service units), having investment in Plant and Machineries (original cost) above Rs 25.00 lacs but not exceeding Rs. 5.00 crores in respect of manufacturing unit and above Ra 10.00 lacs but not exceeding Rs 2.00 crores in respect of Service Sector unit. c. Medium Enterprises:

A Unit which is engaged in the manufacture, processing or preservation of goods or is a servicing and repair workshop undertaking repairs of machinery used for production, mining or quarrying or custom service unit (except water service units), with investment in Plant & Machinery in excess of Rs 5.00 crores and upto Rs.10.00 crores in respect of manufacturing units and investment in equipments in excess of Rs 2.00 crores and upto Rs 5.00 crores in respect of Service Sector units will be treated as Medium Enterprises (MEs).

The SME segment is broadly classified as under: Particulars Micro Enterprises Small Enterprises Medium Enterprises

Investment in Plant & Machineries of Manufacturing Enterprises Upto Rs. 25/- lacs Above Rs. 25/- lacs and upto Rs.500/- lacs Above Rs.500/lacs and upto Rs.1000/- lacs

Investment in Equipments of Service Sector Enterprises

Upto Rs.10/- lacs Above Rs.10/- lacs and upto Rs.200/- lacs Above Rs.200/- lacs and up to Rs.500/- lacs

Trend of SME sector-------------------------------------------------------According to the Ministry Of Micro, Small and Medium Enterprises, the number of SME units in India has grown at a CAGR of 4.5 per cent during FY07 FY11, and stood at 31.2 million at the end of FY11. The cumulative investments in these units rose at a CAGR of 11.5 per cent during the same period. Strong growth in total investments in SMEs indicates towards their expanding footprint and growing importance. The SMEs are increasingly contributing towards employment generation in India. The number of people employed by SME has grown to 73.2 million during FY11 recording a CAGR of 5.3 per cent since FY07.

As per the fourth All-India Census of SMEs (2006-07), 94 per cent of the enterprises are in the unorganised sector. The SMEs are not concentrated in terms of rural versus urban origin. Rural areas account for 45 per cent of all SMEs, while the remaining 55 per cent are located in urban areas. On the other hand if classified with respect to sector of operation, 67 per cent are involved in manufacturing activities and the remaining 33 per cent units are distributed in the service sector (17 per cent) and repairing and maintenance sector (16.1 per cent), respectively.

PERFORMANCE OF SMEs-----------------------------------------------------The sector has consistently registered a higher growth rate than the rest of the industrial sector. There are over 8000 products ranging from traditional to high-tech items, which are being manufactured by the SMEs in India. It is well known that the SMEs provide good opportunities for both self-employment and wage employment. The Office of the DCMSME (SME) provides estimates in respect of various performance parameters relating to the sector. The time series data in respect of the sector on various economic parameters is given in the following Table 1. Table 1: SMEs Performance: Units, Employment, Investments, Production & Exports
Sl. No. Year Total Working SMEs
(Lakh numbers)


Fixed Investment
(Rs. crore)

(Current Prices)


(Lakh persons)






1 2 3 4 5 6 7 8 9* 10#

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

105.21 (4.07) 109.49 (4.07) 113.95 (4.07) 118.59 (4.07) 123.42 (4.07) 261.12 (111.57) 272.79 (4.47) 285.16 (4.53) 298.08 (4.53) 311.52 (4.51)

249.33 (4.44) 260.21 (4.36) 271.42 (4.31) 282.57 (4.11) 294.91 (4.37) 595.66 (101.98) 626.34 (5.15) 659.35 (5.27) 695.38 (5.46) 732.17 (5.29)

154349 (5.11) 162317 (5.16) 170219 (4.87) 178699 (4.98) 188113 (5.27) 500758 (166.20) 558190 (11.47) 621753 (11.39) 693835 (11.59) 773487 (11.48)

282270 (8.03) 314850 (11.54) 364547 (15.78) 429796 (17.90) 497842 (15.83) 709398 (42.49) 790759 (11.47) 880805 (11.39) 982919 (11.59) 1095758 (11.48)

71244 (2.07) 86013 (20.73) 97644 (13.52) 124417 (27.42) 150242 (20.76) 182538 (21.50) 202017 (10.67) N. A. N. A. N. A.

The figures in brackets show the percentage growth over the previous year. The data for the period up to 2005-06 is Small Scale Industries (SSI). Subsequent to 2005-06, data with reference to Micro, Small and Medium Enterprises are being compiled. The growth for the year 2010-11 is based on the average growth rate for the previous three years. *:Provisional, #:Projected, N. A.:Not Available.

Contribution towards GDP --------------------------------------------Small and Medium Enterprises (SMEs) play a vital role for the growth of Indian economy by contributing 45% of industrial output, 40% of exports, employing 60 million people, create 1.3 million jobs every year and produce more than 8000 quality products for the Indian and international markets. SMEs Contribution towards GDP in 2011 was 17% which is expected to increase to 22% this year. There are approximately 30 million SME Units in India and 12 million persons are expected to join the workforce in the next 3 years. SMEs are the fountain head of several innovations in manufacturing and service sectors, the major link in the supply chain to corporate and the PSUs. By promoting SMEs, the rural areas of India will be developed. SMEs are now exposed to greater opportunities than ever for expansion and diversification across the sectors. Indian market is growing rapidly and Indian entrepreneurs are making remarkable progress in various Industries like Manufacturing, Precision Engineering Design, Food Processing, Pharmaceutical, Textile & Garments, Retail, IT and ITES, Agro and Service sector.

The statistics reveal the contribution of the sector to India's economy.

Credit Flow to sme sector from Banks-------------------------SME is fast growing sector in the Indian Economy. Every Bank has given highest importance to financing SMEs in their strategically growth plan. It has become necessary to bring policy shift and create free market environment from regulations & interventions in economic activity. Growth resulting from globalization and liberalization is visible most profoundly in the SME segment. Funds are invariably a pressing issue for most entrepreneurs, more so for those starting or running a small or medium enterprise. Though venture capital (VC) and private equity (PE) funding has grown considerably in the last decade or so, micro, small & medium enterprises (SMEs) are still founded mostly with the entrepreneur's own money or, in some cases, with loans from banks. The RBIs consistent direction to PSBs to allocate 40 per cent of their lending towards the priority sector, i.e., agriculture, small scale industries, tiny sector, village and cottage industries, small traders, professionals and self-employed, housing loans, etc.

In order to enhance the flow of credit to the sector, various initiatives have been taken by the Government of India/Reserve Bank of India from time to time, viz. Enhancement of loan limit under Composite Loan Scheme Increase in project cost limit under National Equity Fund (NEF) Scheme Launching of Credit Guarantee Fund Trust for Small Industries Extension of concessional assistance under Technology Development and Modernisation Fund Scheme Introduction of special schemes for modernization of units under Technology Up gradation Fund Scheme for textiles and jute industries Tannery Modernisation Scheme and Credit Linked Capital Subsidy Scheme for Technology Up gradation. Public sector banks have so far opened 391 specialised SME branches so as to give focused attention to the needs of SMEs Dedicated agencies for credit rating to SME sector have been created with provision of subsidized credit rating charges.

Financing options available for SMEs in India--- The Long term funding includes funding through Capital market (Equity Shares, Preference Shares, non- voting shares). Quasi capital (Investment Subsidiaries, Soft loans/ Equity Fund Loans, VC Debts- Term Loans, Non-convertible Debentures, Leasing and Hire Purchase, Floating Rates Notes, Structured Obligations, Bonds, Technology Up-gradation and Modernization Credit from FIs, Development Institutions )

The Short term funding includes Working Capital, Commercial Paper, Intercorporate Deposits, Trade Credit, Factoring, FCNR, Bills Discounting and Public Deposits. The Foreign Funding and Miscellaneous options for SMEs is to take Term loan assistance, refinance, loans for leasing and hire purchase, bill discounting, foreign currency loans, and venture capital loan. Not many SMEs are aware of the finance options. The SMEs must have the acumen to understand the business processes integrated with the banking options to meet the requirements to continuous flow to credit. They must also have the ability to re-jig the business process to meet the short-time challenges of the market. Comparison of the SME Sector with the Overall Industrial Sector The SME Sector has consistently registered a higher growth rate than that of industrial sector. Table 2.8 depict the comparative annual growth rates of production in the SME segment vis--vis that of the industrial sector as a whole since 1997 98. It is pertinent to note that the annual growth rate of SME sector has consistently outpaced that of the industrial sector during the Ninth and Tenth Plans. According to the Eleventh Plan document, the SME sector in India has grown significantly since 1960, when there were only 12,376 SMEs providing employment to 10 lakh people of which, direct employment was 1.85 lakh; annual production level was Rs 875 crore. At the beginning of the Tenth Plan, 249 lakh people in the rural and urban areas were employed in 105.21 lakh SMEs. This has increased to 295 lakh people in 128 lakh units now; an average annual growth rate of 4.4% in the number of these units and 4.62% in employment. If the units in the khadi, village, and coir sector are taken into account, the employment is estimated to be over 332 lakh. With the inclusion of handlooms, handicrafts, wool, and sericulture, the total job in the SME sector in India goes up to 650 lakh. The employment intensity of the registered units indicates that an investment of Rs 0.72 lakh is required for creating one employment in SME sector as against Rs. 5.56 lakh in the large organized sector.

As per the Reserve Bank of India, the credit to the Micro and Small Enterprises (SME) sector by Scheduled Commercial Banks (SCBs) registered a growth of 21.8% during FY 2010-11

i.e. from Rs. 3,73,530 crore as at end March 2010 to Rs. 4,54,995 crore as at end March 2011. But it is still not enough as Sme Sector in India is growing like anything. According to the data, SME contributes around 17% to GDP but they didnt getting adequate fund to run their business properly and some of the entrepreneur are not aware about the financing options and their benefits. So the overall framework of the credit dispensation is found to be inadequate in meeting the need for sufficient and timely institutional credit to the SMEs.

Banks products-------------------------------------------------------------STATE BANK OF INDIA (PSU)

State Bank of India (SBI) is the largest banking and financial services company in India by revenue, assets and market capitalisation. It is a state-owned corporation with its headquarters in Mumbai, Maharashtra. As of March 2011, it had assets ofUS$370 billion with over 13,577 outlets including 157 overseas branches and agents globally. The bank traces its ancestry to British India, through the Imperial Bank of India, to the founding in 1806 of the Bank of Calcutta, making it the oldest commercial bank in the Indian Subcontinent. Bank of Madras merged into the other two presidency banksBank of Calcutta and Bank of Bombayto form the Imperial Bank of India, which in turn became the State Bank of India. The Government of India nationalised the Imperial Bank of India in 1955, with the Reserve Bank of India taking a 60% stake, and renamed it the State Bank of India. In 2008, the government took over the stake held by the Reserve Bank of India. SBI is ranked No. 292 globally in Fortune Global 500 list in 2011. SBI provides a range of banking products through its vast network of branches in India and overseas, including products aimed at non-resident Indians (NRIs). The State Bank Group, with over 18,324 branches, has the largest banking branch network in India. SBI has 14 local head offices situated at Chandigarh, Delhi, Luck now, Patna, Kolkata, Guwahati (North East Circle), Bhuwaneshwar, Hyderabad, Chennai, Trivandram, Banglore, Mumbai, Bhopal & Ahmedabad and 57 Zonal Offices that are located at important cities throughout the country. It also has 157 branches overseas. SBI is a regional banking and is one of the largest financial institutions in the world. It has a market share among Indian commercial banks of about 20% in deposits and loans. The State Bank of India is the 29th most reputed company in the world according to Forbes. Also, SBI is the only bank featured in the coveted "top 10 brands of India" list in an annual survey conducted by Brand Finance and The Economic Timesin 2010. The State Bank of India is the largest of the Big Four banks of India, along with ICICI Bank, Punjab National Bank and HDFC Bankits main competitors. State Bank of India has been playing a vital role in the development of small scale industries since 1956. The Bank has developed a wide array of products to meet the changing needs of the industry. It provides end -to -end solutions for the financial needs of the industry. To service the specific credit needs of small and medium enterprise (SME) the Bank established the Small & Medium Enterprise business unit in 2004. Apart from the general working capital requirements (like Cash credit, Bill Discounting limits, LC, BG etc) to meet the day to day requirements and term loans to take care of investment needs for acquiring fixed assets, Bank has an array of products/schemes to cater to the enterprise specific requirements of SME Units both in Manufacturing and Trade and services sectors. Brief details of some of the schemes are as under:

SME Credit Card (Up to Rs.10 Lakh) Product provides loans for the micro enterprises, small business enterprises, professional and self-employed persons, small retail traders, transport operators etc. for meeting any kind of credit requirement including purchase of shops, maximum limit being Rs 10 lakhs including term loan & working capital loan. The loan will be sanctioned for 3 years with an annual review. This product has simplified sanction process without requirement of elaborate financial data. The borrower will be provided a photo identity card and a passbook giving details of the limit and validity of the facility. A cheque book marked as SME Credit Card and a pass book would be issued to the customer. SME Smart Score (Up to Rs.50 Lakh)

The Loan product is for units in Micro and Small Enterprise sector in manufacturing trade and services segments to meet working capital needs and for acquisition of fixed assets. A simplified appraisal model has been developed to standardize the appraisal process for loans upto Rs 50 lakhs in SME sector and upto Rs 25 lakhs for trade and services sector available with attractive interest rates. The loan will be sanctioned for 2 years with an annual review. SBI SMILE (Interest Free Loan as equity) The scheme envisages grant of interest free loan as equity assistance towards part of margin requirements of the project, to assist eligible professional and technically qualified entrepreneurs setting up new Micro and Small enterprises and units covered under the Banks Project uptech for technology upgradation. Equity assistance is up to a maximum of Rs.10 lakhs. Professional and Technically qualified persons will cover doctors including dentists, engineers, and management graduates etc. The interest free loan is repayable in 3 years with a moratorium period of 5-7 years. SME Credit Plus For existing and new borrowers this scheme provides a clean cash credit facility to meet contingencies, sudden and unforeseen expenditures like repairs, meeting bulk orders, tax payments, mismatch in cash flows etc. Under the scheme 20% of aggregate WC or max Rs.25 lakhs fund based limit can be availed. Margins are not required and interest rate will be same as applicable to cash credit limit. The facility is repayable in 2 months and can be availed for 12 times a year SME Collateral Free Loan (SMECFL) Collateral free loan for viable projects of micro and small enterprises in manufacturing and service sector with maximum guarantee cover up to Rs.1.00 crore under CGTMSE guarantee scheme for working capital & Term Loan (FB+NFB) facilities. This facility is available to all

borrowers except those involved in trading (wholesale & retail), SHGs, educational institutions & training institutions. Additional benefits for borrowers if they opt for the scheme, Guarantee Fee & Annual Service Fee charged under the scheme is absorbed by the bank at present. In addition there is 50% concession in processing fee & 0.25% concession in interest rate. Traders Easy Loan Easy loan for specific business needs of traders, wholesalers and professionals, selfemployed, small business enterprises, agents engaged in purchase and sale of food grains, commodities, cold storage units, having collaterals like land, buildings and liquid securities. Loan can be availed for normal day to day business requirements or for purchase of equipments/ fixed assets. Loan is available upto Rs 5 crore with very competitive rate of interest.


Bank of Baroda (BoB) is the highest profit-making PSU bank in India and the third largest PSU bank in terms of number of total business in India. It is also the country's second largest public sector lender in terms of annual profit. BoB is ranked 715 in Forbes Global 2000 list. BoB has total assets in excess of Rs. 3.58 lakh crores, or Rs. 3,583 billion, a network of 4002 branches (out of which 3909 branches are in India) and offices, and over 2000 ATMs. It plans to open 400 new branches in the coming year. It offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialized subsidiaries and affiliates in the areas of investment banking, credit cards and asset management. Its total global business was Rs. 6,722.48 billion as of 31 March 2012. The Maharajah of Baroda, Sir Sayajirao Gaekwad III, founded the bank on 20 July 1908 in the princely state of Baroda, in Gujarat. The bank, along with 13 other major commercial banks of India, was nationalised on 19 July 1969, by the government of India. To promote the growth of SME Sector, the Bank has launched a special and novel delivery model, viz. SME Loan Factory, which at present, is operationalized in 36 centres of the Bank and well accepted in the marketplace. The SME Loan Factory is an innovative model for streamlining processes and for timely sanctions of SME loan proposals. The model comprises of the Central Processing Cell for speedy appraisal and sanctioning of proposals within the stipulated deadline. Business Model on assembly line is adopted by the bank for SME segment by establishing separate Hub for Centralized Processing of SME proposals. This model is named as SME LOAN FACTORY at identified centers. These SME Loan Factories sanctioned loans aggregating Rs 11,071 crore during FY10 as against Rs 8,508 crore in the previous year. Products: Baroda Vidyasthali Loan Baroda Vidyasthali Loan is a special scheme for financing Educational Institutions to meet the financial requirements for setting up the institutions which includes construction of building, purchase of equipment etc. for the new set up as also renovation of the existing facilities, purchase of instruments for imparting education training to the students. Limits are minimum Rs. 25 lacs and maximum Rs. 10 crores. Baroda Arogyadham Loan The purpose is to meet the financial requirements for setting up of new Nursing Home/Hospital including Pathological Laboratory, Expansion/renovation/modernization of existing Nursing Home/ Hospital including Pathological Laboratory, Purchase of medical

diagnostic equipments as also office equipments, viz. computers, air conditioners, office furniture, Purchase of ambulance etc. and to meet working capital requirements. All entities are eligible, i.e. SMEs, Enterprises other than individuals like Proprietorship, Partnership firms, Private Limited Companies and Trusts engaged in providing medical/pathological diagnostic services to the Society and with turnover upto Rs. 150/crores. LIMIT

Rural Centres - Rs. 0.50 crores Semi-Urban Centres - Rs. 6.00 crores Urban & Metro Centres - Rs. 12.00 crores

Baroda Artisans Credit Card (BACC) The purpose is to provide adequate and timely assistance to the artisans to meet their credit requirements - both investment needs as well as working capital - in a flexible and cost effective manner. The scheme is implemented in rural and urban areas. And limit will be maximum Rs.2/- lakhs per borrower. ELIGIBILE BORROWERS:

All artisans involved in production / manufacturing process. Preference given to artisans registered with Development Commissioner (Handicrafts). Beneficiaries of other Government Sponsored loan schemes will NOT be eligible for coverage under BACC scheme.

Baroda Laghu Udhyami Credit Card The purpose is to provide hassle free credit facilities to Small business units, retail traders, artisans, village industries, small scale industrial units and tiny units, professionals and selfemployed persons etc. And limit will be maximum Rs.2/- lakhs per borrower. All existing customers in the categories of Small Business, Retail Trade, Artisans, Village Industries, Small Scale and Tiny Units, Professional & Self Employed persons etc. having satisfactory track record / dealing with the bank for last 3 years are eligible for this credit card. Technology Upgradation Fund Scheme (TUFS) For Textile and Jute Industries

Bank of Baroda grants loans under Technology Up-gradation Fund Scheme launched by Government of India as per guidelines received from time to time from Ministry of Textiles. Bank of Baroda is a nodal agency for determining eligibility and releasing of subsidy for the cases financed by the bank under the scheme.

The objective is to provide encouragement to textile industrial units for taking up technology up-gradation and to modernize their production facilities. The scheme envisages 5% interest reimbursement (4 percentage for spinning industry) of the normal interest charged by the bank on the loans availed by the units from the bank for undertaking technology upgradation/modernization. The scheme also provides 25% capital subsidy on purchase of new machinery and equipments for the pre-loom and post-loom operations, handlooms/up-gradations of handlooms and testing and quality control equipments for handloom production units.


In an effort to give a boost to the SME financing, IDBI Bank has developed a special business model to serve the SMEs in India. The Bank has set up 24 City SME Centres (CSCs) across India in Mumbai, Delhi, Kolkata, Chennai, Bangalore, Hyderabad, Pune to name a few. These CSCs are the Bank's hubs while dedicated SME desks have been set up in several branches across these cities. These branches serve as front offices for sales delivery and customer service. Answering its commitment to strengthen the SMEs in India, IDBI Bank has been actively engaged in providing a major thrust to financing of SMEs by improving the credit delivery mechanism and shortens the Turn Around Time (TAT). IDBI Bank has a wide variety of products and services catering to the needs of different segments within small business. The Bank has been, for long, a trusted partner of large and mid-corporate and the experience has transpired the bank into deeper understanding of needs of small businesses and industries. The Bank has since parameterised products for transporters, dealers, traders, and vendors. In addition, it has a separate Transaction Banking Group that has expertise in products like cash management services, letter of credit, bank guarantees and treasury products.

IDBI BANK SME PRODUCTS: Sulabh Vyapar/ Business Solutions Traders act as a vital link between the manufacturers of goods/commodities and the consumer. The product aims to provide hassle free finance to traders and to meet their business and financial needs at competitive interest rates. Any individual or a firm (partnership or proprietorship) engaged primarily in buying and selling mercantile goods is eligible for this mode of finance. IDBI Bank offers solutions to all the financial needs of the wholesalers/traders/retailers under the Product. Dealer Finance Programme Dealers are one of the important channel partners through whom a substantial volume of business is conducted by most of the manufacturers. IDBI Bank's "Dealer Finance Programme" is designed in such a way such that it leads to a better liquidity position by providing various facilities to the dealers, thereby improving the overall business environment. Vendor Financing Programme Realization of funds tied at various points of the value chain is one of the primary concerns of those involved in the business of manufacturing & supplying of various kinds of goods. Funds are required by the manufacturers/suppliers at two stages of the production viz., the

manufacturing stage (Accounts Payable Cycle) and the post-manufacturing stage (Accounts Receivable Cycle), while in the former, funds are required to acquire the raw-materials, in the latter it's required for smooth functioning till the products are sold and realized into cash. IDBI Bank's "Vendor Finance" product is so designed such that all the links in the value chain always remain adequately funded, thereby leading to a smooth functioning for the vendor. Funding Under Credit Guarantee Scheme for Micro and Small Enterprises (CGMSE) Providing security for the loan availed by the micro/small enterprises units (MSEs) has been found to be a major roadblock for their inability to access banking systems. Keeping this in view, the Government of India and SIDBI had set up "Credit Guarantee Fund Trust for Micro & Small Enterprises" (CGTMSE). On the basis of the guidelines issued by CGTMSE, IDBI Bank offers collateral free loans up to Rs. 1 crore and enable SMEs realize their dreams. Loans to Small Road & Water Transport Operators (SRWTOs) Road & Water Transport Operators play a key role in the socio-economic development of the nation by providing transport and communication services to the society in general and the industry in particular. This product enables various transport operators acquire fleets of vehicles/ vessels thereby offering cheap yet safe and convenient solutions to transport related issues. Lending Against the Security of Future Credit Card Receivables In today's environment, there has been a phenomenal change in the way business is run and payments are made. More and more number of people is taking to electronic payments by means of credit or debit cards. IDBI SME product "Lending against Future Credit Card Receivables" - provides financial assistance to the business entity accepting payments through credit/debit cards. Working Capital Financing to IT & ITES Entities Information Technology Industry in India has the potential of tremendous growth as a global IT solutions provider. IDBI SME Product "Working Capital Financing to IT & ITES Entities" offers all the necessary financial assistance to those engaged in this sector.

Small Industries Development Bank of India (SIDBi)

Small Industries Development Bank of India or SIDBI was founded on April 2, 1990. It was founded with the intention of providing easy financing option to SMEs and other non-credit schemes in order to assist, promote and develop the MSME sector in India. SIDBI runs various credit schemes in conjunction with primary lending institutions like banks, state financial corporations etc. SIDBI helps the small and medium sized industries in sustaining income generating activities by assisting them in their various activities- finance and otherwise. Some of the schemes initiated by SIDBI are: 1. Development of Industrial Infrastructure fund- This fund was set up to allow ease in setting up industrial units or the development of existing industrial units. This fund helps industries in SME sector strengthen their warehousing facilities and also helps the business in procuring support services like raw materials, research centres, test centres, etc. This scheme is meant to give risk capital to the SME sector, who finds it hard to get equity funding because of various reasons. The risk capital is provided in a flexible manner with different options available for repayment. This scheme can be availed for projects costing up to Rs 100 million. The debt to equity ratio in this scheme is 3:1. 2. Vendor Development Scheme- This scheme from SIDBI is meant for financing SMEs in the manufacturing and service sector who are vendors of large corporations or OEMs. OEMs are effectively run corporate, PSU or MNC. Under this scheme, the bank ties up with the OEM to facilitate the development of vendor by means of flexible loan assistance. This loan helps the SME vendor in expansions, diversification and modernisation plan. 3. Scheme for energy saving projects in MSME sector- SIDBI in conjunction with Japan International Cooperation Agency, extends loans for SMEs who undertake energy saving investments for their plant, machinery etc. or to improve their energy efficiency. Loan under this scheme is granted only after screening the energy saving investment of the SME concerned. Both new as well as existing SMEs are eligible for a loan under this scheme, subject to the fact that they have a worthy track record. A minimum assistance of 10 lakhs is provided under this scheme and it has a debt to equity ratio of 2.5:1. Furthermore, it does not have a rigid repayment policy. Although the general norm of repayment is 7 years, it can be extended according to the needs of the business. 4. Risk Capital Fund- Realising that lack of equity funding is the major source of hindrance for SMEs with expansion plans, SIDBI offers risk capital fund. The risk capital fund can be available for tangible investments like purchase of equipment or machinery as well as intangible investments like R&D centre, brand building, marketing, training etc. The intangible investments requirements are often ignored by banks.

Again, this funding scheme is flexible and the repayment is matched to the cash flow of the business. It involves mezzanine funding as one of the tools which allows easier exit options than equity based investments. It involves the interest rate of return of 14-16% per annum.

SIDBI has several refinancing schemes for SMEs as well. It has the following refinancing schemes: I. General Refinance Scheme- This scheme for small and medium enterprises who want to set up new units or expands their existing ones. All forms of business viz. sole proprietorship, partnership, company etc. are eligible for this finance scheme. Technology upgradation fund- This financing scheme is primarily meant for textile industry and help the small units modernise their technology. A special incentive of 5 percentage points with respect to interest is also given to SMEs which are new or which take loans from recommended Private Lending Institutions (PLI). Acquisition of ISO Certification by SSI Unit- As the name suggests this funding scheme helps SMEs in the SSI sector avail funding for auditing, certification and other fee involved in the certification process. To avail this fund, an SME should have been in operation for at least 2 years, should have a good track record and should have earned a profit for two successive years before applying for the finance. Single Window Scheme- This scheme is meant for financing fixed assets acquisition as well as working capital. New businesses in the SSI sector or new promoters who are acquiring assets of existing SSI are available for this kind of funding. A maximum loan of Rs 20 million is extended under this scheme.




Barclays bank (Foreign)

The importance of the SME sector is well recognised world over, owing to its significant contribution to the global economic growth. The vibrant SME sector in India plays a pivotal role in generating employment, increasing cross - border trade and fostering the spirit of entrepreneurship. Keeping in mind the important role played by the SME sector in the economic growth of the country and also with a view to enhance SMEs' competitiveness in the present globalised scenario, Business banking from Barclays provides a gamut of comprehensive financial solutions and services. These are aimed at supporting the growth of the Indian SMEs, thereby enabling them to create a sustainable competitive advantage. Whether you are an entrepreneur starting your business or an established business looking to grow, Barclays leverages its global footprint and expertise to offer your business relevant and innovative products and services. Furthermore, we apply our expertise to ensure that our products and services are customised to suit your specific needs and requirements. Whatever your future need, be it sustained growth or business expansion, Business banking offers many types of financial solutions. We offer the know-how you need so your potential can be realised with bespoke solutions tailored to your business. Products: Transaction banking Transaction banking products from Barclays are offered in INR. These current account products provide services that fulfil the domestic as well as cross border business requirements of customers. They provide convenience, superior service and cost effective solutions to customers. A wide range of variants are offered to cater to the transaction needs of various segments. The variants offered are Business First, Business Special, Business Super and Business Royal. Exchange Earners Foreign Currency (EEFC) account The EEFC account is a special type of current account aimed at exporters / individual professionals who receive eligible remittances in foreign currency as per FEMA regulations. The account is maintained in foreign currency, shielding accountholders from exchange rate fluctuations. EEFC accountholders are required to open a current account in INR for crediting the INR leg of the transaction / converting the balance held in the EEFC account into INR as well as for paying the applicable charges. Features & benefits Zero balance account, so no need to maintain any average or minimum balance in the EEFC account Available in four currencies: US Dollars, Japanese Yen, Pound Sterling (GBP) and EURO Comprehensive range of Doorstep banking services

Wide range of trade services available at attractive rates

Power trade Power trade from Barclays gives you the required strength to catapult your business and take it to the next level. A packaged product, Power trade bundles both trade & forex services thus offering you the extra edge, convenience and flexibility for your business. It is a specially designed product to take care of specific trade requirements of business. Power trade customers are entitled to a comprehensive range of Doorstep banking services including cash pickup and delivery, demand draft / pay order delivery, cheque pick up and document pickup and delivery Importers, exporters and domestic businesses having a minimum business turnover of Rs. 8 million are eligible for power trade. Products offered under power trade

Pre and post shipment finance Invoice / bill discounting Letters of credit Guarantees

Enterprise solutions Enterprise solutions from Barclays offer a comprehensive range of product suites and services suiting all your business needs. It's a complete package starting from a current account, working capital finance, term loans, trade finance to forwards, which you can, choose from depending upon your business needs and requirements thus helping your business grow to greater heights. Enterprise solutions customers are entitled to a comprehensive range of doorstep banking services including cash pickup and delivery, demand draft / pay order delivery, cheque pick up and document pickup and delivery. Manufacturers, traders, service providers, importers and exporters having a minimum business turnover of INR 10 million are eligible for Enterprise solutions. Products offered under Enterprise solutions

Overdraft Term loans Invoice financing Pre / Post shipment finance Letter of credit Bank guarantee Forwards

Problems/challenges---------------------------------------------------There are a number of issues in lending to the SME sector, which banks generally face. The key issues among them are outlined below: Information Asymmetry: Accurate information about the borrower is a critical input for decision-making by banks in the lending process. Asymmetric information about the business prospects of small-scale projects and financial standing of the small borrowers arises because small-scale borrowers generally do not have a well-documented credit history. In such situations, banks may also curtail the extent of lending even when SMEs are willing to pay a fair risk adjusted cost of capital. The implication of raising interest rates and/or curtailing lending is that banks will not be able to finance as many projects as otherwise would have been the case. Granularity: This refers to a situation where the risk grading system at banks does not have the requisite capability to discriminate between good and bad risks. The consequence is tightening of credit terms, or an increase in prices, or both. From the borrowers perspective, this leads to an outcome where the bank is over-pricing good risks and under-pricing bad risks. The fact that most banks in India have not developed adequate expertise in SME lending risk assessment exercises leads to the problem of granularity when it comes to SME lending. Pecking Order Theory: Pecking order theory flows from the above two issues, which makes SME lending highly difficult for banks. Under this hypothesis, SMEs, which face a cost of lending that is above the true risk-adjusted cost, will have incentives to seek out alternative sources of funding. Evidence suggests that in such situations SMEs prefer to utilise retained earnings instead of raising loans from banks. Moral Hazard: Even when loans are made to SMEs, it may so happen that the owners of these SMEs take higher risks than they otherwise would without lending support from the banks. One reason for this situation is that the owner of the firm benefits fully from any additional returns but does not suffer disproportionately if the firm is liquidated. This is referred to as the moral hazard problem, which can be viewed as creating a situation of over-investment. The moral hazard problem may, thus, result in SME lending turning bad in a short period of time, a situation that all banks would like to avoid. Switching Costs: SMEs may find it harder to switch banks, when countered with any issue. It is a known fact that the smaller the business, the more significant the switching costs are likely to be and, therefore, it is less likely that the benefits of switching outweigh the costs involved. This situation results in SME lending becoming a sellers market, which may not be attractive to SME borrowers.

High-risk perception: High-risk perception with small-scale sector stems from a number of factors such as weak financial strength, inability to provide adequate collateral and other factors. Inability to properly appraise the new projects, new firms and new activities by bankers often results in banks shunning a small borrower. Insistence on collateral: As a result of asymmetric information and high-risk perception, banks primarily prefer collateral-based lending rather than cash-flow analysis while working with small-scale sector borrowers. Although there is a threshold up to which bankers should not insist on collateral, they seldom assume the risk involved in non-collateralized lending. The surveys conducted by Reserve Bank revealed that many bank branches are insisting on collaterals even for loans upto Rs. 5 lakh. High transaction costs: Due to the small amounts of each loan, the aggregate costs of information gathering, due diligence, loan processing and monitoring are much higher than for loans to large corporate borrowers. Interest rates: The financial institutions charge relatively higher interest rates to small-scale sector than to larger companies in order to compensate for the higher costs of information collection, the smaller volume of external financing and perceived greater credit risk. Miscellaneous: Other reasons stated by banks for the weak growth of SME credit are (i) the large number of unregistered enterprises, which require different lending and risk management techniques, processes, and skills; (ii) lack of a secured transactions law to regulate assignment and registry of movables; and (iii) the difficulty and high cost of registering property and enforcing contracts. The surveys conducted by Reserve Bank revealed that majority of the banks are not having any periodical meetings with local SSI/SME Associations to sort out credit related issues. Regarding delayed payments to SSI and SME by large corporates, no information is available with the bank branches. Some of the banks have suggested for relaxation in NPA norms for SSI sector and enhancement in limit for coverage under CGTSI scheme. During the survey some of the borrowers suggested for setting up monitoring cell at controlling offices of banks to monitor credit flow to the sector. They also suggested for reduction in guarantee fee under CGTSI scheme.

Remedies / suggestions--------------------------------------------------Steps for Smooth SME Lending In order to ensure that the above issues do not stand between SMEs and Bank Finance, the following steps could be taken as remedial measures: Relationships: The length of the relationship between a bank and its SME customers is also an important factor in reducing information asymmetry, as an established relationship helps to create economies of scale in information production. A relationship between a SME and a bank of considerable duration allows the bank to build up a good picture of the SME, the industry within which it operates and the calibre of the people running the business. The closer the relationship, the better are the signals received by the bank regarding managerial attributes and business prospects. Collateral: Existence of collateral that can be offered to banks by SMEs could be one effective way of mitigating risk. Banks could, therefore, look at collateral when pursuing the question of SME lending. It can also be stated that a borrowers willingness to accept a collateralised loan contract offering lower interest (relative to unsecured loans) will be inversely related to its default risk. However, not all SMEs would be able to offer collateral to banks. Hence, Reserve Bank of India (RBI) allows banks, with a good track record and financial position on SME units, to dispense with collateral requirements for loans up to Rs. 25 lakhs. Quality of Information: SMEs are required to provide accurate and qualitative information to the banks for them to undertake a reliable risk assessment. Accurate risk assessments obviously rely upon good information regarding the SME and its prospects. Hence, it is suggested that banks should make efforts to encourage SMEs to improve the quality of information provided. Customer Consideration: The SME markets is somewhat different to the corporate market in that corporate customers generally have a wide range of financing options to choose from and are not as dependent on bank financing as is the case with SMEs. The extent to which SMEs can take necessary steps, with the aid of public initiatives, to easily switch to another bank is another factor that can influence the level of competitive pressure on banks in the case of SME lending. Self-Targets: All banks may fix self-targets for financing to SME sector so as to reflect a higher disbursement over the immediately preceding year, while the sub-targets for financing tiny units and smaller units to the extent of 40% and 20% respectively may continue.

Credit Appraisal & Rating Tool: SIDBI has developed a Credit Appraisal & Rating Tool (CART) as well as a Risk Assessment Model (RAM) and a comprehensive rating model for risk assessment of proposals for SMEs. The banks may consider taking advantage of these models as appropriate and reduce their transaction costs. Increase coverage: In order to increase the outreach of formal credit to the SME sector, all banks, including Regional Rural Banks may make concerted efforts to provide credit cover on an average to at least 5 new small/medium enterprises at each of their semi urban/urban branches per year. Create awareness: Create awareness among banks people and sme entrepreneurs about law and infrastructure related to SME Sector like: SMERA SMERA is the country's first Rating agency that focuses primarily on the Indian Micro, Small and Medium Enterprise (MSME) segment. This would facilitate greater and easier flow of credit from the banking sector to MSMEs. SMERA Credit Ratings provides a comprehensive and independent third-party evaluation of the overall condition of the applicant. Currently, SMERA offers Obligor Ratings which takes into account the financial and non-financial factors that have bearing on the credit worthiness of the applicant. MSMED Act, 2006 The registration under Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 is for facilitating the promotion and development and enhancing the competitiveness of Micro, Small and Medium enterprises. Benefits available under the MSMED Act Registration of Micro, Small and Medium (MSM) Enterprises under MSMED Act is a very powerful medium to enjoy the benefits available to such firms: Micro and Small Enterprises: Easy finance availability from Banks, without collateral requirement Protection against delay in payment from Buyers and right of interest on delayed payment Preference in procuring Government tenders,

Stamp duty and Octroi benefits, Concession in electricity bills Reservation policies to manufacturing / production sector enterprises Time-bound resolution of disputes with Buyers through conciliation and arbitration Reimbursement of ISO Certification Expenses Medium Enterprises: Easy finance availability from Banks, without collateral requirement Preference in procuring Government tenders Reservation policies to manufacturing / production sector enterprises Time-bound resolution of disputes with Buyers through conciliation and arbitration Role of Government and Banking Regulator in SME Lending As is apparent, the above factors are only idealistic solutions and may not be practical for SMEs to follow because they are faced with several problems such as weak nancial strength, inability to provide adequate collateral and other factors. Hence, the Government and banking supervisors should take a holistic view of the SME Sector while considering SME nancing, taking into account the risks faced by banks and the problems faced by SMEs. In this regard, the initiatives taken up by the Government and Banking Regulators across various countries and in India are as follows: Cross-country Perspectives: Increased competition in financial markets in developed countries has led several Governments and Banking Regulators to encourage banks and other financial institutions to launch a number of initiatives to serve the financing needs of SMEs effectively. Some of these initiatives (along with necessary government and regulatory support) include the promotion of venture capital; receivables financing; leasing finance; soft loans, grants, and guarantees for entry into public tenders; setting up of special financing companies with state participation; microfinance programmes, etc.


Small and Medium Enterprises (SMEs) play a vital role for the growth of Indian economy but some hindrances are there which restricting to grow more. In order to solve these problems and develop the Sme sector they have to follow above suggested remedies to become No. 1 sector in India.


Sidbi annual report 2010-11 Msme annual report 2011-12 Ministry Of Micro, Small and Medium Enterprises State bank of Bank of Baroda Barclays Idbi Bank Article in dna paper---finance to sme sector--Date:14 june-2012