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Small and Medium Enterprises (SMEs) have played a significant role world over in the
economic development of various countries. Over a period of time, it has been proved
that SMEs are dynamic, innovative and most importantly, the employer of first resort to
millions of people in the country. The sector is a breeding ground for entrepreneurship.
The importance of SME sector is well-recognized world over owing to its significant
contribution in achieving various socio-economic objectives, such as employment
generation, contribution to national output and exports, fostering new entrepreneurship
and to provide depth to the industrial base of the economy.

Small and medium-sized enterprises (SMEs) are the backbone of all economies and are a
key source of economic growth, dynamism and flexibility in advanced industrialized
countries, as well as in emerging and developing economies. SMEs constitute the
dominant form of business organization, accounting for over 95% and up to 99% of
enterprises depending on the country. They are responsible for between 60-70% net job
creations in Developing countries. Small businesses are particularly important for
bringing innovative products or techniques to the market. Microsoft may be a software
giant today, but it started off in typical SME fashion, as a dream developed by a young
student with the help of family and friends. Only when Bill Gates and his colleagues had
a saleable product were they able to take it to the marketplace and look for investment
from more traditional sources. SMEs are vital for economic growth and development in
both industrialized and developing countries, by playing a key role in creating new
jobs. Financing is necessary to help them set up and expand their operations, develop
new products, and invest in new staff or production facilities. Many small businesses start
out as an idea from one or two people, who invest their own money and probably turn to
family and friends for financial help in return for a share in the business. But if
they are successful, there comes a time for all developing SMEs when they need new
investment to expand or innovate further. That is where they often run into

problems, because they find it much harder than larger businesses to obtain
financing from banks, capital markets or other suppliers of credit.

Common Characteristics of SMEs

(a) Born out of individual initiatives & skills

SME startups tend to evolve along a single entrepreneur or a small group of
entrepreneurs; in many cases; leveraging on a skill set. There are other SMEs being set
up purely as a means of earning livelihood. These includes many trading and retail
establishments while most countries continue SMEs to manufacturing services, others
adopt a broader definition and include retailing as well.

(b) Greater operational flexibility

The direct involvement of owner(s), coupled with flat hierarchical structures and less
number of people ensure that there is greater operational flexibility. Decision making
such as changes in price mix or product mix in response to market conditions is faster.

(c) Low cost of production

SMEs have lower overheads. This translates to lower cost of production, least upto
limited volumes.

(d) High propensity to adopt technology

Traditionally SMEs have shown a propensity of being able to adopt and internalize the
technology being used by them.

(e) High capacity to innovate export:

SMEs skill in innovation, improvisation and reverse engineering are legendary. By being
able to meet niche requirements, they are also able to capture export markets where
volumes are not huge.

(f) High employment orientation:

SMEs are usually the prime drives of jobs, in some cases creating up to 80%. Jobs SMEs
tend to be labour intensive per se and are able to generate more jobs for every unit of
investment, compared to their bigger counterparts.

(g) Reduction of regional imbalances

Unlike large industries where divisibility of operations is more difficult, SMEs enjoy the
flexibility of location. Thus, any country, SMEs can be found spread virtually right
across, even through some specific location s emerge as ‘clusters’.


Despite its commendable contribution to the Nation's economy, MSME Sector does not
get the required support from the concerned Government Departments, Banking Sector,
Financial Institutions and Corporate Sector, which is a handicap in becoming more
competitive in the National and International Markets and which needs to be taken up for
immediate and proper redressal. SME sector faces a number of problems - absence of
adequate and timely banking finance, limited knowledge and non-availability of suitable
technology, low production capacity, follow up with various agencies in solving regular
activities and lack of interaction with government agencies on various matters.
Some of the major problems are briefly as follows:

a) Financial problems of MSMEs:

The financial problem of SMEs is the Root Cause for all the other problems faced by the
SME sector. The small and medium industrialists are generally poor and there are no
facilities for cheap credit. They fall into the clutches of money lender who charges very
high rates of interest, or else they borrow from the dealers of their goods, who exploit
them by completing them to sell their products at very low price. After the
nationalization of 14 major Indian Banks in July, 1969, the Commercial banks were
providing only a small proportion of SMEs financial requirements. Credit to the SME
sector continues to be non-commensurate with its contribution to the total industrial

output. As against the share of the village and SME at 40% in the industrial output, its
share in total credit to the industrial sector is only about 30%.

b) Raw Material problem of MSMEs:

This difficulty is experienced in a very pronounced form. The quantity, quality and
regularity of the supply of raw materials are not satisfactory. There are no
quantity discounts, since they are purchased in small quantities and hence
charged, higher prices by suppliers. Difficulty is also experienced in procuring semi-
manufactured materials. Financial weakness stands in the way of securing raw materials
in bulk in a competitive market.

c) Production problem of MSMEs:

SME units suffer from inadequate work space, power, lighting and ventilation,
and safety measures etc. These short comings have tended to endanger the health of
workmen and have adversely affected the rate of production. Many units are
following primitive methods of production. Adoption of modern techniques is either
disliked by the entrepreneurs is not feasible. Wage rates and service conditions of
small industries are not attractive to skilled labor.

d) Technological problem of MSMEs:

Today technology is changing at a very fast phase; it becomes difficult for SMEs to cope
up with changing technology. Technology up gradation and the frequent need to renew
the equipment has emerged as a big problem.

d) Marketing problem of MSMEs: As marketing is not properly organized, the

helpless artisans are completely at the mercy of middle man. The potential demand for
their goods remains under developed. The SMEs have to face the competitions from large
scale units in marketing their products. It causes damage to the growth and stability of
SMEs. SMEs cannot afford to spend lavishly for advertisement to promote their sales.

e) Managerial problem of MSMEs:

Small scale industries in our country have suffered from the lack of entrepreneurial
ability to develop initiative and undertake risks in the unexplored industrial

fields. The in efficiency in management comes first among managerial problems.
The entrepreneurial ability of promoters of cottage industries and SMEs are
handicapped by technical know how in the areas of production, finance, accounting and
marketing management.

f) Sickness of MSMEs:
A serious problem which is hampering small and medium sector has been sickness.
Many small units have fallen sick due to one problem or the other. Sickness is caused by
two sets of factors, Internal and external factors. From among the various internal
and external causes of sickness the important ones are bud management,
high rate of capital gearing, inadequacy of finance, short of raw materials, outdated
plant and machinery, low labor productivity etc.

Problems of MSMEs Financing

The main problem faced by SME’s when trying to obtain funding is that of uncertainty:

• SME’s rarely have a long history or successful track record that potential investors can
rely on in making an investment;

• Larger companies (particularly those quoted on a stock exchange) are required to

prepare and publish much more detailed financial information – which can actually assist
the finance-raising process;

• Banks are particularly nervous of smaller businesses due to a perception that they
represent a greater credit risk.

Because the information is not available in other ways, SME’s will have to provide it
when they seek finance. They will need to give a business plan, list of the company
assets, details of the experience of directors and managers and demonstrate how they can
give providers of finance some security for amounts provided. Prospective lenders –
usually banks – will then make a decision based on the information provided. The terms

of the loan (interest rate, term, security, and repayment details) will depend on the risk
involved and the lender will also want to monitor their investment. A common problem is
often that the banks will be unwilling to increase loan funding without an increase in the
security given (which the SME owners may be unable or unwilling to provide).A
particular problem of uncertainty relates to businesses with a low asset base. These are
companies without substantial tangible assets which can be use to provide security for
lenders. When an SME is not growing significantly, financing may not be a major
problem. However, the financing problem becomes very important when a company is
growing rapidly, for example when contemplating investment in capital equipment or an
acquisition. Few growing companies are able to finance their expansion plans from cash
flow alone. They will therefore need to consider raising finance from other external
sources. In addition, managers who are looking to buy-in to a business ("management
buy-in" or "MBI") or buy-out (management buy-out" or "MBO") a business from its
owners may not have the resources to acquire the company. They will need to raise
finance to achieve their objectives

A review of literature is a critical analysis of a segment of a published body of
knowledge. Various studies on a number of issues concerning small and medium
enterprises had been conducted in foreign countries. However, in Indian context, the
number is quite few. A number of studies had been conducted related to MSME
Financing schemes of Public sector banks. Due to shortage of time and inability to cover
all these past studies, some of these studies have been considered in this section that has
provided a base for this research.

Wtterwulghe and Jannsen (1997) conducted a research and analyzed the role of banks
in financing medium enterprises in Belgium. It shows that, like small firms, medium-
sized businesses have a preference for self-financing. As far as external funding is
concerned, debt is generally their main source. How ever, their low debt ratios indicate
that, as compared to the large firms, these enterprises take less recourse to banks and, as a
result, pay little attention to their financial function. The banker does not play an
important role as an adviser either, except when the firm decides to raise funds through
the stock market. The article calls for greater specialisation on the part of the banks so that
they can avoid conflicts of interest arising out of the mismatch between their service
priorities and the needs of their clientele

Kaura and Sharma (1999) made a research and analyzed the attitudes of the financial
institutions whether belong to Central Government or state Government or the
Governmental Agencies promoted for this purpose. In the wake of the MSME Act,
2006 passed in the interest of the small scale sector by the Government of India, the
attitude of the financial institutions towards SME sector is totally changing. New
innovations are being made for fulfilling the financial needs of SME units. The attitude of
the Employees of above said financial institutions is also changing.

Raju (2002) conducted a research by revisiting the Seoul and Bologna Charters on the
SMEs and clarifies that the SME definition centers round the small scale industries in the
absence of a clearly defined medium industry sector in India. A review of the policy,

laws and the regulatory and institutional framework has been done in sufficient detail with
a view to highlighting the fact that the SSIS in India require globally compatible
facilitation in order to be competitive both domestically and internationally. The author
maintains that easy and adequate institutional finance support is a necessary but not
sufficient condition for the growth of this dynamic and vibrant sector. He envisages a
clear role for the Small Industry Associations recognized on the basis of well-defined
criteria. He argues for a quick enactment of a comprehensive enabling law for the sector
and for restructuring the office of the DC-SSI, to attain the envisaged competitiveness

Nambiar (2007) conducted a research on financing for the priority sectors that paved the
way for thinking strategy for financing of small scale and medium scale industries by the
bank officers. The government of India through its industrial policy clearly stated
that the commercial banks should give priority treatment to the SMEs. The nature of
the banking officials was also discussed in the article. But that is not sufficient to promote
the SME sector because the sector was totally neglected for the last several decades
due to invention of the MNCs. By enacting the MSME act, 2006, the government of India
clearly indicated the signal to the banking people to provide the credit facilities to the

Raju (2008) conducted a study and analyzed that SMEs form the backbone of the Indian
manufacturing sector and have become engine of economic growth in India. It is
estimated that SMEs account for almost 90% of industrial units in India and 40% of
value addition in the manufacturing sector. This paper closely analyses the growth and
development of the Indian mall scale sector from opening of the economy in 1991. Third
part looks into the present scenario of SMEs and the problems they phases like lending,
marketing, license raj issues in detail. The Micro, Small and Medium Enterprises Act,
2006 is intended to boost the sector. The provisions of the Act are examined closely. The
final part provides some future policy framework for the sustainability of the sector.

Rani and Rao (2008) conducted a research that Small and Medium Enterprise sector is a
vibrant and dynamic one, and an engine of growth for the present millennium. Financing

of Micro and Small Enterprises (MSEs), which is part of the SME sector, has been given
special attention by banks and financial institutions, and is included in priority sector
lending. In spite of the special efforts, only 14.3% of registered small enterprises have
availed institutional credit, as per the 3rd All India Census of Small Scale Industries of
2001-02. From 2000 to 2004, institutional credit for MSEs has shown disturbing trends,
despite the high level of liquidity in the banking system and the initiatives taken by the
Union Government and Reserve Bank of India (RBI). This paper examines the recent
trends in credit flow to MSEs, in particular, and medium enterprises, in a limited way,
from commercial banks and the Small Industries Development Bank of India (SIDBI),
and outlines the recommendations of A S Ganguly Working Group and Internal Group
chaired by C S Murthy. The Union Finance Ministry's directive to public sector banks is
to double the credit flow to SMEs during the five-year period 2005-10. The year, 2005-06
has shown good progress in this direction. The task is to be pursued vigorously in the
next four years, of which 2006-07 has been completed with encouraging performance.
Innovative approaches and directions for the future are presented in the paper. SMEs need
special treatment through devising special instruments of credit for strengthening their

Torre et al (2008) made a research and investigated the conventional wisdom in

academic and policy circles argues that, while large and foreign banks are generally not
interested in serving SMEs , small and niche banks have an advantage in doing so
because they can overcome SME opaqueness through relationship lending. This paper
shows that there is a gap between this view and what banks actually do. Banks perceive
SMEs as a core and strategic business and seem well positioned to expand their links
with SMEs. The recent intensification of bank involvement with SMEs in various
emerging markets documented in this paper is neither led by small or niche banks nor
highly dependent on relationship lending. Rather, all types of banks are catering to
SMEs and larger, multiple-service banks have in fact a comparative advantage in offering
a wide range of products and services on a large scale, through the use of new
technologies, business models, and risk management systems.

Mercieca et al (2009) conducted a research and analyzed that how the concentration and
competition in the European banking sector affects lending relationships between small
and medium sized enterprises (SMEs) and their banks. Recent empirical evidence
suggests that concentration and competition capture different characteristics of banking
systems. Using a unique dataset on SMEs for selected European regions, we empirically
investigate the impact of increasing concentration and competition on the number of
lending relationships maintained by SMEs. They find that competition has a positive
effect on the number of lending relationships, weak evidence that concentration reduces
the number of banking relationships and weak persistent evidence that they tend to offset
each other.

Popli and Rao (2009) made a research that in banking sector, the quality of customer
service plays an important role, particularly in the context of growing competition and
sustained business growth. The study is an attempt to ascertain the service quality
provided by Public Sector Banks to Small & Medium Enterprises which play a key role
in India’s economy. The major findings of the study have been that 1. Modernization and
Communication affect the services to a large extent and there is a need of training to the
staff for improvement of service to the SMEs customers; 2. The service quality of private
banks is superior to that of Public sector banks; 3. Majority of the respondents revealed
that the credit flow to SMEs sector is not sufficient and the Government will have to
initiate necessary steps for making the required funds available easily on convenient
terms; 4. Majority of the respondents feel that the policies for SME Sector of other
countries are far better from the policies of India; 5. Delay in loan application processing
due to unhelpful nature of the staff members, as claimed by the majority of the
respondents. The banks usually provide finance against security and as high as 86% of
the respondents are of the view that the banks ask for collateral security/guarantee from a
third party even where the project has been assessed as viable and primary security is

Popli and Rao (2009) conducted a study and analyzed that Small and Medium
Enterprises have been globally recognized as vital components of a domestic economy

and major contributors to employment generation in a country, regardless of global
barriers. SMEs form the lifeblood of any vibrant economy. In an emerging economy
like India, SMEs have a significant socio-economic role to ensure overall development of
the nation. Electronic Sector is an upcoming sector in India. The Indian Electronic
Industry is undergoing transformation due to the new economic policy and business
environment in the post WTO regime. This paper examines the problems, strategies for
investments, competences development, technological up gradation, quality
improvement, Govt. Policies, Equity participation by MNCs and overall improvement of
this sector in the post WTO regime. The study has been done by using data acquired from
an extensive survey of Indian SMEs in the Textile Sector and from the experienced
Bankers/ Officials/Policy makers of Govt. of India. The key findings of the study are that
lack of quality consciousness, growth conducive environment, inadequate government
support and difficulties in raising funds from market. Further, the study highlights the
need to upgrade technology in the Indian Electronic SME Sector and also develop a
strong and supportive Financial System.

The perusal of literature reveals that Small and Medium enterprises face a lot of
problems, and inadequate financing is the major one. A rich literature house has been
developed over time, mostly in foreign countries, with regard to SME funding. A very
few studies has been conducted in India regarding the effectiveness of SME financing
schemes of the public sector banks. That is why a need was felt to conduct a study in
Indian context and that too in case of SME financing schemes of public sector banks and
their usage that has not been extensively researched.


3.1 Need of the study

The researches that were conducted in past by the various professionals are in foreign
context and not in Indian context. Study relating to SMEs, their problems and source of
financing has been done but regarding the SME financing schemes of public sector banks
has not been done. This gap has been identified and it has led to the present research to be
undertaken. So, the need was felt to cover the areas neglected. Thus, here a study on SME
financing schemes of public sector banks was taken care of.

3.2 Scope of the study

The scope of this study was limited to Coimbatore city only.

3.3 Objectives of the study

Objectives are the guiding lights of a study. The present study was undertaken to achieve
the following objectives: -

 To know about the various Problem facing MSME schemes of public sector
banks and their usage.
 To know the effectiveness of various MSME financing schemes of public sector
 To know the problems faced by MSMEs in getting credit from public sector
 To know the benefits of MSME financing schemes of the public sector banks.
 To check the satisfaction level of Micro Small and Medium enterprises regarding
SME financing schemes of the public sector banks.


Research Methodology is a way to systematically solve the research problem. The

Research Methodology includes the various methods and techniques for conducting a
Research. “Marketing Research is the systematic design, collection, analysis and
reporting of data and finding relevant solution to a specific marketing situation or
problem”. D. Slesinger and M.Stephenson in the encyclopedia of Social Sciences define
Research as “the manipulation of things, concepts or symbols for the purpose of
generalizing to extend, correct or verify knowledge, whether that knowledge aids in
construction of theory or in the practice of an art”.
Research is, thus, an original contribution to the existing stock of knowledge making for
its advancement. The purpose of Research is to discover answers to the Questions
through the application of scientific procedures. Our project has a specified framework
for collecting data in an effective manner. Such framework is called “Research Design”.
The research process followed by us consists of following steps:


This research was descriptive and conclusion oriented research.

 Conclusion Oriented Research: -Research designed to assist the decision

maker in the situation. In other words it is a research when we give our own views
about the research.

 Descriptive Research: -A type of conclusive research, which has as its major

objective the description of something-usually market characteristics or functions.
In other words descriptive research is a research where in researcher has no
control over variable. It just presents the picture, which has already studied.

Sampling can be defined as the section of some part of an aggregate or totality on the
basis of which judgment or an inference about aggregate or totality is made. The
sampling design helps in decision making in the following areas: -

4.2.1 Universe of the study-The universe comprises of two parts as theoretical universe
and accessible universe

 Theoretical universe- It includes all the MSMEs throughout the universe.

 Accessible universe- It includes the MSMEs inCoimbatore city.

4.2.2 Sample Frame-Sample frame was Micro Small and Medium enterprises all over

4.2.3 Sample Unit- Sampling unit is the basic unit containing the elements of the
universe to be sampled. The sampling unit of the present study was MSMEs located in
Ludhiana city in Punjab.

4.2.4 Sample Size- Sample size is the number of elements to be included in a study.
Keeping in mind all the constraints 100 respondents were selected.

4.2.5 Sampling Techniques- The sampling techniques used were convenience technique
and simple random sampling technique.


4.3.1 Data Collection: Information has been collected from both Primary and Secondary
sources of data collection.
 Secondary sources- Secondary data are those, which have already been collected
by someone else, which already had been passed through the statistical process.
Secondary data had been collected through websites, newspapers and journals.

 Primary sources- Primary data are those, which are collected are fresh and for
the first time and thus happen to be original in character. Primary data had been
collected by conducting surveys through questionnaire, which include several
questions and personal and telephonic interview.

b) Tools of Analysis and Presentation:

To analyze the data obtained with the help of questionnaire, following tools were used:
Tools of Presentation: -

 Tables: This tool was used to present the data in tabular form.

 Bar Graphs and Pie Charts: These tools were used for analysis of data.


Due to constraints of time and resources, the study is likely to suffer from certain
limitations. Some of these are mentioned here under so that the findings of the study may
be understood in a proper perspective.
The limitations of the study are:
 The research was carried out in a short period. Therefore the sample size and the
parameters were selected accordingly so as to finish the work within the given
time frame.
 The information given by the respondents might be biased as some of them might
not be interested to give correct information.
 Some of the respondents could not answer the questions due to lack of
 Some of the respondents of the survey were unwilling to share information.

Name ………………………………..
Designation ……………………………….
Name of the company ……………………………….
Location ……………………………….

Q1. What are the sources of finance used by your enterprise?

a) Owners financing

b) Private financial institutions

c) Equity finance

d) Bank financing

e) Venture capital

f) Hire purchase and leasing

g) Business angel financing

Q2.Rank the obstacles that are faced by your enterprise in its growth from 1 to 5; 1 being
the biggest

a) The frequent need to renew the equipment

b) Instability of demand for product or service

c) Obtaining adequate financing

d) Low profitability of the sector

e) Taxation levels

Q3. Have you ever raised finance from public sector banks?

a) Yes b) No

Q4. What type of loan is taken by you?

a) Sulabh Vyapar loan d) Open term loan

b) Transport Loan e) Working capital loan

c) Paryatan plus Loan

Q5 For what purpose, your enterprise has taken loan?

a) Real estate acquisition to house the business

b) Increase the production

c) Construction, renovation or leasehold improvements

d) For flooring of inventory and working capital

e) For modernization and upgradation of technology

Q6.Rank the benefits of these schemes on the scale of 1-5; 1 being the most important:

6.1) Better service 6.4) Attractive financing conditions

6.2) Single window dispensation 6.5) Low rates of interest

6.3) Easy access

Q7. What were the problems faced by your enterprise in raising finance from public sector

a) Insufficient collateral d) Cost involved is high

b) Poor documentation e) Biasness

c) Delay in the sanction of loan f) High rate of interest

Q8. What are the most common reasons given to your enterprise by the public sector bank
for rejecting an application for Loan?

a) The management team is too inexperienced

b) The application did not meet the criteria

c) The application was not correctly completed

d) Poor credit history

e) The enterprise could not provide enough guarantees

f) Not a profitable venture

Q 9.What factors demotivate you in applying for finance from the MSME financing
schemes of the public sector banks?

a.) We were turned down before

b.) Procedure to obtain this type of financing is too complicated

c.) The process is lengthy

d.) Too much of documentation is required

Q.10 Are these private sector bank schemes are better than public sector bank schemes?

a) Yes b) No

Q11. Please indicate your level of satisfaction with various aspects of obtaining finance
from these public sector banks. Kindly rate them on 5-point scale basis; 5 being strongly
satisfied and 1 being strongly dissatisfied:
Strongly Satisfied Neutral Dissatisfied Strongly
Satisfied Dissatisfied
12.1) The amount granted by the bank
relative to the amount requested
12.2) The simplicity of the application
12.3) Interest rate
12.4) Service fees
12.5) Time to obtain approval
12.6) Guarantees required by the
12.7) Behavior of the bank staff

Q12. Apart from such schemes, what initiatives government can take for improving
MSME business in India?
a) Decrease the amount of taxes

b) Support innovative technological companies

c) Guidance for upgrading skills & knowledge of entrepreneurs

d) Assistance and support for revival of sick units

e) Introduce a Single Window concept for helping MSMEs