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Submitted to: Prof. Kavitha Chavali

Date of Submission: 22-11-09
Amrita Pal Anurag Agarwal

Neeraja Swetha Nutan Prasad

Sanjay G Kothari Sanjeev Agarwal

Dipti Jha Varun Nair

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The Micro, Small and Medium enterprises have lent a major hand in catapulting India to the
position of India’s fastest growing world economies. 40% of the country’s manufacturing output
and almost 38% of its exports come from this sector. More important in this age of inclusion
centric growth mantra is the fact that MSME’s generate huge employment – the present figure is
around 42 billion, and can promote balanced regional development along with a more equitable
distribution of wealth.

Since December, over 38500 accounts of MSMEs have been restructured. The interim budget
has extended the 2% interest rate subvention in shipment credit up to the end of the second
quarter of the next fiscal. The size of refinance facility with SIDBI has been increased by Rs.
10,000 crore. The Central Government is ensuring that the MSME Act, of making payments
within 45 days, is being implemented. Most banks have set up special SME care centres. The
Government on the other hand claims that the problems being faced by MSMEs are being
thoroughly addressed.

But still there are many problems faced by MSMEs. They generally borrow from NBFCs, who
themselves have their own share of liquidity problems. They can barely sustain the existing level
of lending let alone increase it. MSMEs, especially micro export-oriented units are finding it
extremely difficult. The US Customs’ figures indicate that India’s textile and garment exports
have declined by 8% since last year. FIEO feels that SIDBI is not being proactive enough. Policy
makers need to take measures that yield immediate results. On the other hand MSME units
should also cut costs in order to have a better restraint during a crisis. Many banks like SBI, PNB
etc have tried to come to rescue of the MSMEs and even others tend to be more safeguarded as
the current liquidity crunch is hard to withstand.

In spite of its impressive performance notwithstanding, MSMEs in the country are faced with
numerous problems that need urgent attention. Despite doubling of credit flow to the sector in
the last two years, most MSMEs are facing massive financial crunch. Thus there are problems of
marketing, infrastructure, access to latest technology and training. The current global meltdown
has rendered a further blow to the sector, as it has led to shrinking of the export markets, made
banks more wary of lending to small entrepreneurs, slowed down remittances from migrant

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workers and aggravated the already severe problem of delayed payments from corporate clients.
So a more realistic view is expected from the policy makers as the MSME industry accounts for
a significant value for the country’s total output and so for this, a more serious policy needs to be
implemented that would yield quick results.


The main focus of this article is regarding how the government is responding to SMEs after the
economic crisis through SMSE financing.

Impact of Economic Crisis on SME Sector

The recession in the US market and the global meltdown termed as Global recession have
engulfed complete world economy with a varying degree of recessional impact. This recession
led to job losses, dip in sales, profits etc. In India every sector had an impact of recession. The
badly hit sector being the financial sector has led to the liquidity crunch which directly or
indirectly affected many other sectors. SME sector is one among them because the main source
of fund for SMEs is from financial institutions.

March March, March, March, March,

Sectors , 2005 2006 2007 2008 2009
Micro (Amount in Rs.
Crore) 34315 33314 44311 66702 86508

Small Crore) 33319 49178 60392 79538 104460
MSE Crore) 67634 82492 104703 148651 190968
Net Banking 71872 101761 131770 136426 169431
Credit(NBC) 2 4 5 8 3
MSE Credit as
percentage of
NBC 9% 8% 8% 11% 11.2%

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The graph above shows the credit flows to SME sector in the past few years and the MSE credit
as percentage of net banking credit. There has been an increasing trend in the credit flow in this
sector except in the year 2006. The credit flow to SME sector in 2009 has almost remained same
as in the previous year with a slight increase from 11% in March, 2008 to 11.2% in March, 2009
because of recession effect. The reason being the liquidity crunch, banks have tightened their
money flow into this sector because of high defaults in this sector.

Measures taken by Government

In this tough time when the MSMEs are hit hard by the economic crisis, government is making
special focus towards this sector. There are several measures taken by the government and the
RBI for the sustainability and growth of the sector. To minimize the hard blow of recessionary
effects in terms of liquidity crunch, efforts has been made to increase the flow of credit on a
more aggressive level by the banking sector instead of depending on financial institutions. SBI
has revised its loan portfolio and increased the lending to 9000cr and also extended the scheme
till 30th Sept.09, wherein its existing SMEs customers can avail term loans as well as 20%
additional working capital limits at 8% concessional interest. Other banks are also extending
loans to SME customers at soft interest rates. Bank of India is planning to expand its no. of
branches from 86 presently to 100 dedicated especially to SME sector. SME credit of Bank of
India stood at Rs. 25,630/- at June end, further targeting a growth of 25% during the year.

For strengthening the delivery of credit to the MSMEs, the Government announced a ‘Policy
Package for Stepping up Credit to SMEs so as to double the credit flow to this sector within five
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years. To facilitate the flow of credit to MSMEs, RBI has announced a refinance facility of Rs.
7,000crore for SIDBI which will be available to support incremental lending, either directly to
MSMEs or indirectly via banks, NBFCs and SFCs. In addition, the following steps are being

(a) To boost collateral free lending, the current guarantee cover under Credit Guarantee Scheme
for SMEs on loans has earlier been extended from Rs. 50 lakh to Rs. 1 crore with guarantee
cover of 50%. It has now been decided to extend the guarantee cover to 85% for credit facility
up to Rs 5 lakh.

(b) The lock in period for loans covered under the scheme will be reduced from 24 to 18 months,
to encourage banks to cover more loans under the guarantee scheme.

Government has made it mandatory for all central and state PSE wings including private units to
make payments to MSMEs units within 45 days of the date of purchase of goods from them. All
public sector banks are to setup Regional MSME Care Centres to facilitate MSME entrepreneurs
for quick redressal of their grievances. The district level committee is also given the role of
assisting MSMEs to access credit. Special monthly meetings of state level bankers' committees
would be held to oversee the resolution of credit issues of MSMEs by banks. Department of
MSME and the department of financial services will jointly set up a cell to monitor progress on
this front.

In order to address the problem of infrastructure, govt. has authorized India Infrastructure
Finance Company Limited (IIFCL) to raise Rs. 10,000 crore to refinance bank lending for
infrastructure projects. A Working Group on Rehabilitation of Sick SMEs as appointed by RBI
made several significant recommendations pertaining not only to the issue of rehabilitation of
sick SMEs but also to the larger issues of credit flow to the SME sector and other developmental

Focussing towards the delayed payment to the export-oriented units, interest on delayed
payments by foreign buyers (refund of terminal excise duty / duty drawback on deemed exports
and CST) would be payable in lines of provisions in Customs and Income Tax Acts. This facility
would also apply to delayed payments for deemed exports. RBI came out with a proposal to

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implement Base Rate System under to ease the export credit difficulties for MSMEs. The single
base rate for loans will also help depositors and borrowers to equally avail benefits of monetary
policy as under prevailing BPLR system, banks continue to exercise discretionary powers not to
pass on benefits of monitory policies.


It is often observed that SMEs are going to be the growth engines if a country needs to progress.
In India, the MSME industry accounts for 40% of the Industrial output and 38% of exports. In
case of an economic downturn as in the present scenario, financing the MSME sector becomes
vital for faster recovery and stable economic growth. Ill financing of this sector would result in
liquidity crunch in the hands of the manufacturer which in turn results in delayed payments to its
suppliers and lenders, mainly NBFCs and Banks. This would lead to a widespread liquidity
crunch in the whole economy because MSME contribute around 30% of the manufacturing GDP
and employs 60 million people.

This article also brings forth the importance of government’s intervention in times of need.
Policy makers and banks need to restructure various MSME loans, provide stimulus packages
such as lower interest rates, easier accessibility to loans etc, various fiscal measures and be
proactive in refinancing. It also brings out the importance of carefully selecting the financing
options available to the SMEs - not entirely depending on bank finance and exports, to maintain
a good working capital and increase the active involvement of institutions like SIDBI. These all
would help the MSMEs to be adequately financed and manage the recessionary trends

Suitable topic would be: “MSME financing and its importance in economic crisis”


In the country like India, where there are always some issues associated with the maintenance of
legal practices, implementation is the key concern. There are numerous problems in all the
sectors; many of them have been addressed. But how far, is the question. Secondly the existing
loopholes in the system are further leading to delay in the proper implementation. So a proper
surveillance should be done with respect to whatever steps have been taken by banks for the
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credit lending to MSMEs. It should be ensured that it is reaching to MSMEs and other people in
the system are not misusing it for their personal interests. Further whenever government/RBI
extends the monetary help to financial institutions to extend it to MSME sector, a check on the
coverage has to be maintained. This is important to address complains as made by Federation of
Indian Export Organisations alleging SIDBI of not being proactive in extending the refinance
facility given by RBI. Although under the MSME Act, Govt. has addressed concerns regarding
delayed payments to MSMEs units, this concern is incomplete/due with regard to payment from
foreign buyers. Moreover, apart from liquidity concerns, special attention is required as far as
infrastructure and technology upgradations are concerned in order to make them competent
enough and support the economy better so that India becomes more water-proof to such
recession in future. This may also be the requirement to cater the growing needs of exporters as
the economy has already verge in the pace of recovery worldwide.

There should be an interest subsidy scheme as one of the major issues for MSMEs getting loans
at higher interest of 1-2% than the prime lending rates of banks. The interest subsidy will help
MSME’s to save tax which can be beneficial for the future growth of the MSMEs. Gujarat
government has already come out with a scheme to help micro small and medium enterprises in
the state by way of subsidy in interest.

There should be a single and a simple labour law exclusively for MSME as it’s not feasible for
small firms with minimal resources to comply with multiple laws. Also, most of the SME’s are
one man operations and they lack the infrastructure to implement the labour laws.

Encouraging selected MSME who have achieved good risk management practices to
diversify their product offerings, and supporting these MSME with a broader advisory
services scope that includes the development of techniques and systems to:
i) mobilize savings;
ii) provide other banking services to low-income households and businesses; and
iii) manage liquid assets;


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Revision of provisions by RBI and provisions by government in interim budget show a growth
prospective of SMEs in future. SMEs are slowly recovering from the crisis situation. Economic
Crisis has actually created an opportunity for employees who were fired from their organizations
to come up with their own ventures. The credit flow in the first eight months of 2009 for SMEs
is up around 28% over the same period last year. Micro and small enterprises have seen a credit
flow of Rs 40,146 crore this year compared to Rs 23,865 crore in 2008. The share of SMEs in
the overall credit flow has increased in this period from 4.9% to 13%. When the government of
India announced a policy package in 2005, the total bank exposure to MSMEs was Rs 67,600
crore. All banks were instructed to ensure 20% increase in credit to MSMEs every year so that it
doubles in five years by 2010. In March 2009, the exposure stood at Rs 2,57,000 crore which is
almost four times.

There are few problems being faced by export oriented units because of rupee appreciation
against dollar by 10% from 51Rs/$ to 46Rs/$. This currency appreciation is mainly because of
high capital inflows into the Indian economy. If government takes serious measures inorder to
restrict the excess inflows, the problem of export oriented units gets solved.

SMEs which are demanding for a separate exchange have found a solution. SMEs will now get a
chance to list their stocks in NSE or BSE and raise money from the public. As part of its efforts
to encourage SMEs to go public, the Securities and Exchange Board of India (SEBI) exempted
them from the usual eligibility norms applicable for initial public offerings (IPOs) and follow-on
public offerings. These norms include

• Minimum pre-issue net worth and profit-making track record

• Minimum paid-up capital requirement is 10 crores to get listed on the main board of NSE
or BSE and maximum paid up capital of 25 crores to get listed on SME exchange

• Can disclose financial results on half-yearly basis

• Minimum trading lot of 1 lakh shares

• 100% underwriting and market making for a period of minimum three years is required
by merchant bankers

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Thus the listing of SMEs will reduce their dependency on banks and helps them to tap public for
funds. Even the venture capitalists are showing interest in investing in SMEs because of their
growth potential and easier listings will guarantee good exit options for strategic investors in
these illiquid companies. Government of India is also offering 50% subsidy for schools on
entrepreneurship. This sector which contributes 45% to the country’s manufacturing production
and about 40% to its exports currently is the most important sector which cannot be neglected by
government and the future seems to be bright.


• Monthly Magazine “YOJANA” – November Edition, 2009

• Professional Banker - Nov Edition, 2009
• Economic Times newspaper (“SME Factory”)
• - Cached.html

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