CHAPTER – 1 Setting up of MSME

• Contribution of MSME – 8% to GDP and 45% to Industrial Production, 40% of exports

• Second largest provider of employment after agriculture
• The Industries Development and Regulation Act 1951 provides basic framework for post-
independence industrialization strategy
• Under the constitution of India, development of SSIs is a state subject
• At the state level, the commissionerate/ directorate of industries implements the state specific
policies for promotion and development, among others, of the MSMEs.
• District industries centre ( DIC ) at the district level aim at providing support facilities and
services to industries.
• Germany’s MSME unit Mittelstand Companies – key contributor to their economy
• In E U, enterprises with less than 500 employees are small & medium enterprises
• The enterprises are expected to grow 20% year on year with 90% of industrial units presently
belonging to the sector
• Staley and Morse used five-type classification to identify small enterprises
• UNIDO categorizes manufactures into – Modern, Modernizing and non- modern
• The term SSI was defined under Industries ( development and regulations) act 1951
• The factories act defines a manufacturing unit in terms of workers employed
• DRT admitted disputes in excess of 10Lakh rupees for its adjudication
• An industrial undertaking which undertakes to export atleast 30% of the annual production at
the end of 3rd year is classified as Export Oriented Unit ( EOU)
• Ancillary industrial undertaking : One which is engaged in manufacturing or services and
undertakes to supply or render not more than 50% of its production or services and where
investment In fixed assets / plant and machinery does not exceed 1 crore
• When the industrial unit is set up by companies under the companies act , one unit shall be
considered as controlled by the other if the equity holding of the other in it exceeds 24 percent
and when the same person holds the position of the managing director for both the companies
• Components of small business:
o Retail trade ( RT )
o Business enterprise ( BE)
o Professional and self employed persons
o Transport operators – both water and surface transport
• A transport operator whether an individual or an association of not more than six persons is
categorized as an eligible enterprise provided the number of vehicles owned does not exceed
ten
• The amendment to Industries (Development and Regulation ) Act , 1951, in 1984 empowered
the government to reserve items for the exclusive production by the small scale industries.
• Expert committee report on small industries - Abid Hussain
• Policy of reservation of products for exclusive manufacture in SSI was initiated in 1967
• The items are reserved / dereserved in accordance with section 29B of the industries (
Development and regulation ) Act, 1951, which , inter alia, provides for the constitution of an
Advisory committee headed by the union secretary ( MSME)
• As per notification passed on 13th april 2015, there are no items reserved for exclusive
manufacture in micro and small enterprise sector
• The government of India has enacted the Micro, Small and Medium Enterprises Development (
MSMED) Act, 2006 on June 16, 2006 which was notified on Oct 2, 2006
• Key changes in MSMED act-
o Inclusion of services sector
o Extending the scope to medium enterprises
o Modification in the definition of Micro, Small and Medium enterprises
o Definition as per the act has been adopted for the purposes of bank credit
• Finance to micro and small enterprises in classified under priority sector whereas finance to
medium enterprises is not classified as priority sector
• Indirect finance :
o Loans to persons involved in assisting the decentralized sector in supply of inputs and
marketing of outputs of artisans, village and cottage industries.
o Loans to cooperatives of producers in decentralized sector
o Loans sanctioned by banks to MFIs for on-lending to MSE sector
• Bank credit to MFIs extended on or after 1st April 2011 for on-lending to individuals and also to
Self help groups ( SHG)/ JLGs will be categorized as priority sector provided not less than 85% of
total assets of MFIs or in the nature of ‘qualifying assets ‘. In addition, aggregate amount for
income generat0ing activity is not less than 70% of the total loans given by MFIs
• Liability of the proprietor is UNLIMITED
• Partnership firms can be started where the number of partners in more than 2 but less than 20.
Max. Number of members that can exist in partnership is ten in case of firm carrying on banking
business and 100 in case of any other business.
• Partnership firm gets dissolved in the event of retirement or death of any partner calling for the
reconstitution of the firm
• No other partnership firm should be partner in another firm
• As per section 32 of Indian Partnership Act, 1932, a minor can be admitted to the benefits of a
partnership with the consent of all the partners but he will not be liable for losses of the firm
• Joint Stock Company can become the partner in a partnership firm.
• A search should be made at RoC within 30 days by lending institution where credit facilities are
granted to limited company
• Private limited company:
o Minimum number of share holders is 2 and maximum 100
o Shares are not quoted in the stock market
o Minimum paid up capital – Rs. 1lakh
o Enjoys continuity of existence even if all its members die or desert it
• Public limited company –
o Minimum number of share holders is 7 and no restriction on maximum
o Defined in section 3(1)(iv) of the Companies act 1956
o Minimum paid up capital - Rs. 5 lakh
o Minimum 3 directors and 7 shareholders
o Enjoys continuity of existence, larger amount of capital, limited liability etc.
• Joint hindu family ( JHF) : consists of Kartha (the eldest male member), Coparceners ( Adult male
members) and other minors according to the Mitakshara school
• Registration of a new enterprise is to be done with district industries center or the directorate of
industries and commerce.
• Women entrepreneur: an enterprise owned and administered by a woman entrepreneur having
a minimum financial investment of 51 percent of the share capital and giving at least 50 percent
of the employment generated in the enterprise of women .
• The scheme to set up women’s development corporations in all states and Union territories was
formulated in 1985-86.
• Two schemes implemented by SIDBI – Mahila Udhyam(Udhyog) Nidhi and Mahila Vikas Nidhi
• TRYSEM – Training For Rural Youth For Self Employment (TRYSEM)
• DWACRA – Development Of Women And Children In Rural Areas
• TREAD – Trade Related Entrepreneurship Assistance And Development
• STEP – Support To Training And Employment Programme For Women
• SEWA – Self Employed Women Association
 Chapter - 2. MSME POLICY, REGULATORY AND LEGAL FRAMEWORK

• Karve Committee report (1955) – one of the earliest exercises

to recommend protective environment for the growth of small
industries in India
• Micro, small and medium enterprises development
organisation (earlier known as Small Industries Development
Organisation- SIDO) was set up in 1954 as an apex body for
sustained and organized growth of MSMEs
• The new Policy for Small, Tiny and Village Enterprises of Aug
1991 laid the framework for govt support in the context of
liberalization
• Delayed Payment Act was enacted to facilitate prompt
payment of dues to MSEs
• Industrial Infrastructure Development (IID) scheme was
launched to set mini industrial estates for small industries
• Ministry of MSME (earlier known as Ministry of SSI and Agro&
Rural Industries)came into being from 1999
• Head Office of National Board for Micro, Small & Medium
Enterprises shall be at Delhi with a total of 47 members (20
non-official members). Union Minister incharge of MSME is
chairman
• There are 6 chapters in MSMED Act 2006
• PPP – Public Private Partnership
• An industry located in rural area in which fixed capital
investment per head of artisan or worker does not exceed Rs.
1.00 lakh (Rs. 1.50 Lakh in hilly area) is called Village Industry
• Policy of FDI in MSE:
 o A company with interests in Industry can invest upto
24% equity in a MSME unit
o If the equity goes beyond 24%, the industrial unit loses
its MSME status
o No restriction on extent of equity by NRI
o Approval for the investment is ordinarily granted in 15
days
o For foreign investment outside automatic route,
clearance has to be obtained from Foreign Investment
Promotion Board (FIPB)
o Applications for setting up 100% EOU to be filed with
SIA
o For setting up unit in Export Processing Zone (EPZ),
appln has to be filed with development commissioner of
concerned EPZ
• Composite loan limit for SSI without security is Rs. 25.00
Lakhs
• The stage of MSME for which regulations are not required –
Manufacturing Stage
• Limited Liability partnership Act, 2008 was enacted on 7th jan
2009, on the lines of similar form of enterprise existing in UK
and various provisions of the act were notified on 31st mar
2009.
• LLP Features:
o Indian Partnership Act 1932 does not apply
o Incorporated with minimum of 2 persons, no maximum
o Notice period of 30 days for resigning as partner
o Audit must if turnover exceeds Rs. 40.00 Lakhs
o Minor cannot be a partner in LLP
3. INSTITUTIONAL FRAMEWORK
• The organisation structure for SSIs was set up in 1950 with the establishment of SSI board in
1954
• While the ministry of MSME designs policies, programmes and projects to ensure growth and
promotion of MSMEs, Office of Development Commissioner operates a number of schemes for
MSME sector
• Small Industries Development Corporation (SIDO) was established in 1954 on the basis of
recommendations of Ford Foundation
• With enactment of MSMED ACT 2006, SIDO has been renamed as MSME-Development
Organisation (MSME-DO), with over 60 offices and 21 autonomous bodies under its
management
• National Manufacturing Competitiveness Program (NMCP) Schemes under XI Plan: Formulated
in 2005 to support MSMEs to become competitive and also to adjust the competitive pressure
caused by liberalization and moderation of tariff rates.
• Micro and small enterprises cluster development program (MSE-CDP): Launched for holistic
development of selected clusters through value chain and supply chain management on
cooperative basis. The approach is adopted as a strategy for enhancing the productivity and
competitiveness as well as capacity building of MSEs
• Credit linked capital subsidy scheme for technology up gradation (CLCSS): Launched in October
in 2000 and revised in 2005, the scheme aims at facilitating technology upgradation of M&SE by
providing 15% capital subsidy (12% prior to 2005) on institutional finance availed by them for
induction of well established and improved technology in approved products. The subsidy is
calculated with reference to purchase price of plant and machinery. Max. limit of eligible loan
for calculation of subsidy has been raised from Rs. 40 lakhs to Rs. 100 lakhs W.E.F 29.09.2005.
• Credit guarantee scheme: CGMSE was launched by GOI in Aug 2000 to make available
collateral-free and guarantee-free credit to existing as well as new M&SEs. It is implemented by
Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) established jointly by
the Ministry of MSME and SIDBI. Coverage to the extent of 75% (80% in specific categories) of
the sanctioned amount of credit facility. Credit facilities upto Rs.100.00 Lakhs are eligible under
the scheme.
• ISO 9000/ISO 14001 Certification Reimbursement Scheme: The permanent registered
SSI/Ancillary/Tiny/Small Scale Service Business Enterprises (SSSBE) units are eligible for
reimbursement of expenses for acquiring Quality Management System (QMS) ISO 9000
Certification / Environment Management System (EMS) ISO 14001 Certification / HACCP
Certification to the extent of 75% or Rs. 75,000/- whichever is lower
• MSME MDA:
o Funding upto 75% of to and fro air fare for participation in International
Exhibitions/Fairs/Trade Delegations, by MSME units having valid permanent
registration with Directorate of Industries/ District Industries Centre
o Funding 25% of costs for producing publicity material
 o Funding upto Rs. 2.00 Lakhs for Sector specific studies
o Funding of 50% upto Rs.1.00 Lakh for contesting anti-dumping cases
o Reimbursement (by MSME-DI) of 75% of one time registration fee and 75% of the
annual recurring fee for first three years paid by MSME units to GSI India (Solution
Provider) for using of Bar Coding
o Purchase and Price Preference Policy administered through Single Point Registration
Scheme of NSIC, under which 358 items are reserved for exclusive purchase from
MSME by central govt. Other facilities include cost-free tender documents, exemption
from earnest money and security deposit and also 15 % price preference in central govt
purchases.

• Mini Tool Rooms: To meet the growing demand of tools and dies in the country in
particular in MSMEs, central government provides the financial assistance to state
governments in the form of one time grant-in-aid equal to 90% of cost of
machinery/equipment or Rs.9.00 Cr whichever is less for setting up mini tool room. For
upgradation / modernization of existing tool rooms the assistance is restricted to 75% or
Rs. 7.50 Cr whichever is less
• Assistance to Entrepreneurship development institutes (EDIs) - Financial assistance by
central govt through DC/MSME provided for strengthening training infrastructure in EDIs
to the extent of 50% of cost or Rs. 100 lakh whichever is less. Proposals for this to be
submitted to DC- MSMEs through state government
• Scheme Of Micro Finance Programme: ‘Portfolio Risk Fund’ (PRF), provided by Central
Govt for Micro Finance Programme to SIDBI is used for security deposit requirement for
loans from the NGOs/MFIs and to meet the interest costs.
• Scheme of National Award: Ministry of MSME gives national award to selected
entrepreneurs and enterprises to recognize their efforts and contribution
• Scheme to support 5 selected universities/colleges to run 1200 entrepreneurs clubs per
annum: scheme provides support to one each from northern, western, southern, eastern
and north eastern region. Each university will have to run 240 clubs per year and each club
may have membership of 50 entrepreneurs etc.
• Scheme of fund for regeneration of traditional industries ( SFURTI) : A special component
plan to support hundred Khadi institutions and self help groups in the border, HILL and left
wing extremism affected areas has been sanctioned at a cost of Rs. 76 Cr
• Mahatma Gandhi Institute for Rural Industrialization (MGIRI): This national level institute
(erstwhile Jamnalal Bajaj Central Research Institute) has been established at Varda,
Maharashtra under Societies Registration act ( 1860) to improve R&D activities in KVI/
Rural industrial sector
• MSME testing center, New delhi: Imparts various types of training in the field of electrical,
chemical, metallurgical and mechanical testing of various products to develop trained
human resources and to improve the skill of their testing personnel.
• National institute of MSME (NIMSME) – The institute (earlier known as NISIET) established
in 1960 by GOI is an autonomous arm of the ministry of MSME. It works for the promotion,
development and modernization of MSME sector through a gamut of operations like
training, consultancy, research and education.
• Indian institute of entrepreneurship, Guwahati – Established in 1993 by GOI as an
autonomous national institute operates with North East Council (NEC), governments of
Assam, Arunachal pradesh and Nagaland and SIDBI as its stake holders, with an aim to
undertake training research and consultancy activities in small and micro enterprises. Its
chairman is secretary to GOI ministry of MSME, governing council of the institute is headed
by Chairman, NEC and executive committee is headed by secretary ministry of MSME.
• National institute for entrepreneurship and small business development ( NIESBUD) :
This is an apex institute in the area of entrepreneurship and small business development
under the ministry of MSME and its objectives are promotion and development of MSMEs
including enhancement of their competitiveness in various activities
• National Small Industries Corporation (NSIC): A GOI enterprise under ministry of MSME
operates with countrywide network of offices and technical centres in the country. It
operates from his office in Johannesburg in South Africa for its operations in African
countries. It has also set up it training cum incubation centre. It also operates Performance
And Credit Rating Scheme for small industries through empanelled agencies like ICRA,
CARE etc.
• Directorate of Industries- It is executive agency in each state for promotion and
development of village and small industries sector, with a network of District Industries
Center (DIC) at district level, Industrial officer at sub-division level and extension officers at
block level. It acts under overall guidance of SIDO which functions as both regulatory and
development agency
• District Industries Center ( DIC) : Established during 1980, DICs have budgetary provisions
for supply of machinery and equipment providing raw materials etc. Study of various DICs
reveals lapses in their functioning like lack of adequate budgetary support, lack of trained
man power, weak information system, being ill equipped in terms of technology and
resources.
• State Financial Corporations (SFCs) : There are 18 SFCs across the country mandated to
serve as regional development banks for promoting industrial growth. SFCs are set up
under State Financial Corporation Act, 1951. In view of the various problems faced by SFCs
after financial sector reforms, GOI has enacted amendments to the SFCs in the year 2000
with a view to enlarge their share holders base, give them a greater functional autonomy
and operational flexibility and also enable them to respond to the needs of the changing
financial systems. SFCs provide finance by way of term loan, debentures etc. Their main
resource is SIDBI refinance. Working Capital Finance is also sanctioned under single
 window concept. SFCs had huge NPAs despite powers for recovery of dues exists under
Section 29 of SFCs act. Since 2004 several steps for revival of these were taken by GOI
through a tripartite memorandum for which concerned State Governments , SIDBI and
SFCs are parties.
• State Industrial Development Corporations/State Industries Investment Corporations
(SIDC/SIIC): Wholly owned subsidiaries of the state govt, developed in 1956, act as
catalysts for industrial growth. These are created for industrial promotion by way of
providing industrial infrastructure such as Industrial Areas/Industrial Estates/Margin
Money/Project feasibilities. SIIC has basically devoted for promotion of industries as a
development banking institution.
• Small Scale Industries Development Corporation (SSIDC): Established under Companies
Act, 1956 to cater to the needs of small and tiny village industries in the states/UTs
concerned.
• Housing & Urban Development Corporation (HUDCO): A public sector company fully
owned by GOI and incorporated on 25th Apr 1970 under Companies Act 1956, a premier
techno financing institution of the country. Finances housing and urban infrastructure
activities in India.
• Institute for the design of electrical measuring instruments: Set up in 1969 with the
assistance of UNDP and UNIDO to render services to the instrument industries.
• Technical consultancy organization (TCO): Created for facilitating technical consultancy for
industrial projects. Established by All India Financial Institutions in collaboration with state
level financial / development organizations and commercial banks. There are 18 state level
TCOs across India. Some TCOs such as KITCO have diversified to offer consultancy services
for implementation of projects under one roof from ‘Concept to Commissioning ‘.
• Khadi & Village Industries Commission(KVIC): Established in 1957, as an autonomous
statutory body formed by GOI as an apex organisation under Ministry of MSME, for
promoting Khadi and Village Industries. Its Head Office is at Mumbai with 6 Zonal Offices at
Mumbai, Kolkata, Delhi, Bhopal, Bengaluru and Guwahati, besides offices in 29 states.
• Entrepreneurship Development Institute of India (EDII): An autonomous and not-for-
profit institute set up in 1983 and situated at Ahmedabad, EDII has been sponsored by IDBI
bank Ltd, IFCI Ltd, ICICI Bank Ltd, State bank Of India and the Govt of Gujarat.
• To ensure uniform progress in provision of banking services in all parts of the country, a
roadmap has been proposed for a banking outlet in every un-banked village having a
population of over 2000 through Information and Communication Technology (ICT) -
based model including Business Correspondents (BCs)
• As per recommendations of PM’s Task Force on MSME chaired by Shri I K A Nair, principal
secretary, GOI, banks were advised to achieve 20% y-o-y growth in credit to micro & small
enterprises and allocation of 60% of MSE advances to Micro Enterprises
• As per the recommendations of Working Group to review the Credit Guarantee Scheme
(CGS) constituted by RBI, chaired by Sri V K Sharma, Ed, RBI, the limit for collateral free
loans to the MSE was increased from the level of Rs. 5.00 lakhs to Rs. 10.00 lakhs.
• RBI lays down the policies of lending, supervision and follow-up of advances to MSEs which
is recognized as Priority Sector. It constituted standing committee in Dec 1991 under the
chairmanship of Sri P R Nayak, the then Dy Governor of RBI, to review the flow of
institutional credit to the small sector. It also constituted a high level committee headed by
Sri S L Kapoor, former secretary, GOI to suggest measures for improving the credit delivery
system and simplification of procedures for credit to this sector.
• Banking Codes and Standard Board of India (BCSBI) has formulated a Code of bank’s
commitment to M & S Enterprises, which is a voluntary code.
As per BSCBI disposal of credit limits is as under: Upto Rs. 5 lakhs within two weeks
Rs. 5 lakhs and upto 25 lakhs within 4 weeks
Exceeding Rs. 25 lakhs within 8 weeks
Sanctioned loans are to be disbursed within 2 working days from date of compliance of
sanctioned terms and conditions.

Techno economic viability (TEV) study – Maximum 30 days

• Small Industries Development Bank of India (SIDBI): Established on 2nd April, 1990 under
an act of Indian parliament as the principal financial institution for the financing,
promotion and development of SSI sector and coordination of the functions of the
institutions engaged in similar activities. Provides refinance support to vast network of
eligible primary lending institutions for onward lending to MSMEs. Also directly assists
through its 64 branch officers. Extends micro finance support in the form of loans and
grants to accredited NGOs/ MFIs, SHGs for on-lending.

Authorized capital of SIDBI is Rs. 1000 crores and paid up capital is Rs. 450 crores which is
held by 36 institutions/ PSBs/ Insurance Companies owned or controlled by GOI.

Constituted a specialized department called SIDBI Foundation for Micro credit (SFMC) to
create a national network of strong, viable and sustainable MFIs.

To provide venture capital support to innovative, knowledge based, first generation

entrepreneurs having neither equity nor collateral, SIDBI established SVCL (SIDBI VENTURE
CAPITAL LIMITED), as a wholly owned subsidiary of SIDBI. It presently manages the
National Venture Fund for Software and Information Technology ( NFSIT) set up in 1999
and the MSME growth fund launched in 2004.
• Credit Guarantee Fund Trust for Micro and Small Enterprises ( CGTMSE): Helps M& SEs in
getting term loan and working capital credit without collateral security / third party
guarantee. It covers credit facilities not exceeding Rs. 50 lakhs (RRBs/ FIs) and not
exceeding Rs. 100 lakhs (SCBs/ select FIs). Coverage should be done during the next
quarter. Eligible only if at the time of coverage, there are no dues, activity has not ceased.
The credit facility has not been utilized to clear bad depts. Guarantee cover is for tenure of
the term loan and 5 years in case of working capital.
Not eligible: To the extent of covered by another scheme by DICGC/ RBI etc. Credit facility
sanctioned against collateral security / third party guarantee. Any credit facility with interest
rate more than 3% over the prime lending rate.

Credit facilities above Rs. 50 lakhs and upto Rs. 100 lakhs have to be rated internally by the
lending institution and should be of investment grade.

• SIDBI has set up foundation for micro credit with Rs. 1 billion to assist NGOs for on-lending
at micro level.
• Small and Medium Enterprises Rating Agency ( SMERA): It is a third party rating agency
exclusively set up for MSME, promoted by SIDBI and Dun&Bradstreet along with various
government, public and private sector banks.
• Federation of Association of Small Industries in India (FASII): Established in 1959, it has a
nationwide constituent membership with the objectives of promoting, developing MSME.
• Federation Of Indian Micro& Small and Medium Enterprises (FIMSME) : Established in the
year 1995, traces its origin to 1967 when the National Alliance of Young Entrepreneurs
(NAYE) was established to promote small industries.
• Indian Industries Association (IIA): An apex representation body of MSMEs with a strong
membership base of about 5000 MSMEs. It was formed in 1985 as U.P Chapter of NAYE
and in 1992 NAYE has been renamed as IIA.
• The Chamber of Small Industry Association (COSIA) : It is an apex body of All India
associations serving MSME industry.
• Laghu Udyog Bharati: All India organization to assist and promote SSIs and having
representation in International Labour Organization (ILO) Geneva, Switzerland, and
representation of ministry of finance at pre-budget discussion, a member of National
Productivity Council.
• Indian Council of Small Industries (ICSI): Founded in the year 1979, it has 1500
associations of decentralized sector in its fold.
• Federation of Small and Medium Industries ( FOSMI) : Largest organization set up in 1951
in West Bengal.
• Associated Chamber of Commerce & Industries in India ( ASSOCHAM) : Established in
1920 with its head office in New Delhi and regional offices at Ahmadabad, Bangalore and
Kolkata, it covers a membership of over 4 lakhs companies and professionals across the
country. Its main objective is to promote both domestic and international trade and work
for the growth of trade and industry in India. It operates through 59 expert committees to
facilitate economic and social growth. It is authorized by GOI to issue certificate of origin,
certify commercial invoices and recommend business visas.
• World Association of Small and Medium Enterprises (WASME): A global NGO with head
quarters at Noida working for the cause of MSMEs throughout the world since its inception
in 1980.
• Consortium of Women Entrepreneurs of India (CWEI): Registered in 1996 as a civil society
non- profit organization in New Delhi and is a member of national board, ministry of
MSME, a knowledge partner to the state government of Andhra Pradesh.
• Federation Of Indian Women Entrepreneurs (FIWE): Founded in 1993 and based in
Hyderabad and has a member base beyond 15000 individual members / professionals and
more than 28 member associations spread throughout the country

NOTE: Points with Green Headings are Schemes/Programmes and Red Headings are
Institutes/Organisations
Chapter - 4. Financing Options & Modes

• The main changes in the banking sector that influence MSME finance:
o Increased competition on account of globalization resulting in profit orientation
o The ups and downs of many sectors making the banks more focused on
profitability
o Implementation of norms on capital adequacy and Basel III
o Mergers and acquisitions in banking industry having less attention on MSME
with large size of the bank
• Major problems facing MSME sector :
o More than 90% of the SME units have not been extended any finance.
o Most of the MSME borrowers being new entrepreneurs do not have collateral
security to offer to banks.
o Lack of proper technology and infrastructure
o Lack of alternate sources of capital
o Delayed realization of resources
o Growing incidence of sickness of MSME units.
o Lack of proper mechanism for efficient liquidation of units in case of failures.

• Two pillars on which MSME should be built – Prudence and profitability

• The two ways of funding for an entrepreneur
o Debt finance: Essentially a loan which has to be repaid with interest. In case of
the failure of the business, borrower bares most of the risk. Credit history of the
entrepreneur is the basis for the funding.

o Equity finance: Essentially an investment with an expectation of future earnings

by investors. In case of failure, risk is shared by equity contributors. Equity
financing seeks ownership in company in exchange for money lent.

• MSMEs prefer debt finance as the entities start off as own-enterprises or family-based
enterprises with small owned capital. For them, it will be difficult to access equity fund
and more expensive and time taking in the beginning.

• Ways to raise own capital/ start-up finance for the MSMEs:

o Personal savings and assets
o Personal loans – Banks will often lend up to specified limits without security
o Life Insurance Policies – Loans will be available upto 60% of the paid up value of
the policy.
o Credit cards – A smart window to raise funds despite high interest rate.
o Supplier sources – Supply of machinery on differed payment schedule and raw
materials on credit for certain agreed period.
o Trade credit – Supplier’s credit and buyer’s credit
o Friends and relatives
• Hurt Money – A reference to how much business owners are prepared to get hurt
financially if the venture goes bad
• As per guidelines, if an industrial undertaking is subsidiary of another industrial
undertaking or one unit is owned or controlled by another unit and total investment in
fixed assets/plant & machinery of both the units together exceed the prescribed
investment limits of MSMEs, then none of the units can be considered to be
MSME/Ancillary industrial undertakings.
• Where 2 or more industrial units are set up by the same person as proprietor, then
each of such unit shall be considered as controlled by the other unit.
• When 2 or more industrial units are set up as partnership firms under the Indian
Partnership Act 1932 and one or more partners are common in such firms, each of
such firms shall be treated as controlled by the firm/s
• Where industrial units are set up by the companies under Companies Act 1956, an
industrial units shall be considered as controlled by other unit if

o The equity holding by other unit in it exceeds 24% of its total equity
o Management control of first unit is passed on to the other unit by way of the MD
of the company being also MD or Director of the other company or Majority of
the directors on the board of first company being the equity holders in the other
company.

• Hybrid Capital: Refers to a combination equity and debt with capacity to convert as
equity at a particular growth stage of the company
• Venture Capital: Refers to independently managed and dedicated pools of capital which
are put in equity or equity-linked investments in privately-held, high-growth companies.
They invest in a company through purchase of shares and even if they get majority of
shares, they generally don’t involve in day-to-day operations of the company. They act
as mentor and business partner. They seek to exit within a period of 5 to 7 years.
• Angel funds: The name originates from angels that funded theatrical productions in
USA. They pool money and invest in larger deals. They introduce potential investors to
business opportunities.
• Composite Loan Scheme: Sanction of WC and Term Loan together from a single agency
(Banks/ FIs). The limit has been enhanced to Rs. 1.00 Cr under the single window
concept
• NSIC Schemes:

o Bill financing by way of discounting the bills drawn by MSMEs for the supplies
made to reputed and well established enterprises and duly accepted. Maximum
period of finance 90 days
o Working Capital Finance
o Export Development finance to EOUs, pres-shipment and post-shipment finance
o Equipment Leasing Scheme to assist in procuring the equipment for
modernization, expansion and diversification
• Small Industries Development Bank Of India (SIDBI ) reaches out to Indian MMSMEs
with its refinance assistance to banks. Commercial banks in India have a sound, pan-
Indian presence with over 80,000 branches. Some of the SIDBI schemes:
 o Nation Equity Fund Scheme : Provides equity support to small entrepreneurs
setting up projects in Tiny sector
o Technology Development & Modernization Fund Scheme (TDMFS): Provides
finance for existing MSME units for technology upgradation/ modernization.
o Single Window Scheme : Provide both term loan for fixed assets and loan for
working capital through the same agency
o Composite Loan Scheme : Equipment or/and working capital and also for work
sheds to artisans, village and cottage industries in Tiny sector
o Mahila Udyam Nidhi (MUN) Scheme : Provides equity support to women
entrepreneurs for setting up projects in Tiny sector
o Scheme for finance activities relating to marketing : Provide assistance for
undertaking various marketing related activities such as market research,
product upgradation, R&D, etc.
o Equipment Finance Scheme: Acquisition of machinery/ equipment including
Diesel Generator Sets which are not related to any specific project.
o Venture Capital Scheme : To encourage MSME ventures/ sub-contracting units
to acquire capital equipment and also required technology for building up of
export capabilities, import substitution including cost of total quality
management and acquisition of ISO 9000 certification and for expansion of
capacity
o ISO 9000 Scheme: To meet the expenses on consultancy, documentation, audit,
certification fee etc. required for obtaining ISO 9000 Certification.
o Micro Credit Scheme: To meet requirement of voluntary agencies which are in
existence for at least 5 years in the field of small savings cum credit programmes
with SHGs
o SmallB.in : A unique initiative of SIDBI to help the enterprising individuals who
want to start a business in varied matters like preparation of business plan,
understanding various and regulations, funding the business, managing the
business etc.

• As per RBI guidelines, loans upto Rs. 10 lakhs to units in the MSE sector has to be
sanctioned without a collateral security.
• Some banks decided to extend collateral free loans upto Rs. 25 lakhs subject to
fulfillment of following :
o Satisfactory conduct of account for 3 years
o Sound financials of the unit
o Continuous profit for last 3 years
o Constant growth in sales for last 3 years
• Banks cover new and existing MSEs under CGT MSE upto Rs. 100 lakhs provided no
collaterals are obtained as security
• Prime Minister’s Employment Generation Programme (PMEGP) : Launched by Ministry
of MSME on 15th August, 2008 by merger of PMRY and REGP that existed till
31.03.2008. The scheme relates to setting up of self employment ventures through
industries, services and business routes. It is implemented throughout the country with
KVIC/KVIB and DIC as Nodal/ implementing agencies. It is reviewed by MSME, GOI as
well as Ministry of Finance and Planning. To moniter the flow of funds under the
 schme, KVIC coordinates with Central Plan Scheme Monitoring System (CPSMS) which
is monitored by Controller General of Accounts (CGA), Ministry of Finance.
• A loan repayable less than 3 years is a demand loan and beyond that is a term loan
• Documentary Bill is a bill which contains documents to title to goods like RR, LR, Bill of
Lading etc, along with other documents and in the absence of Document to title to
goods, it is called a clean bill. Cheques and drafts are examples of clean bills.
• A bill of exchange made payable on demand or sight is called a demand bill. Such a bill
is to be paid immediately. A documentary sight bill is called is called DP bill
(Documents against Payment). A bill drawn payable after certain period or on a specific
date is called Usance Bill. It is presented to the buyer for acceptance to pay the bill on
future date (DUE DATE) and documents are delivered against the acceptance. Finally
the bill is paid on scheduled due date. A documentary usance bill is called is called DA
bill (Documents against Acceptance)
• Bill purchase facility is extended against clean demand bills, cheques, drafts by which
bank lends to payee of the cheque / draft and to drawer of the bills.
• Bill Discounting Facility is extended against Usance bills by which the amount of the
bill less the interest amount for the unexpired duration of the bill is to be credited to the
costumers account
• Cash-flow based financing- As the balance sheet is the culmination of finances on a
particular date at the end of the year, cash-flow based appraisal is an approach to
assess the credit requirement where cash requirements based on work orders for each
month to be worked out with necessary margins.
• Pre-shipment Export Finance : Fiancial assistance provided to exporters to enable them
to manufacture/ procure goods meant for exports and arrange for their shipment to
foreign countries is called pre-shipment / packing credit advance which is provided in
INR and foreign currency as well.
• Pro-shipment Export Finance: After shipment of goods to foreign country, the exporter
draws the bill on the foreign buyer and submits to banker for collection. The banker
provides purchase/discount facility to the exporter which is called as post-shipment
advance. The exporter raises claim of duty draw backs etc, on various government
agencies after export and may approach his banker to make advances against such
claims which is another example of post-shipment finance
• The credit facilities given by banks where actual bank funds are not deployed but a
commitment or a guarantee is provided are called non-fund based facilities.
• Bank Guarantees: Section 126 of Indian Contract Act, 1872 defines a Contract of
Guarantee as “A contract to perform the promise or discharge the liability of a third
person in case of his default”. They should not normally extend beyond 10 years. But
taking into account the impact of long duration on their asset liability management,
bank boards may approve issuance of guarantee even beyond 10 years.
o Financial Guarantees: Bank guarantees the customer’s financial worth, credit
worthiness etc, generally favoring tax/ customs/ excise / court authorities in
respect of disputed claims, payment of taxes etc.
o Performance Guarantees: Bank guarantees on behalf of its customers about
their performance as per the contracts entered into.
o Deferred Payment Guarantee: It is a way of raising long term resources for
acquiring fixed assets/ capital goods by securing guarantee of repayment of
principal and interest from his banker to the supplier.
• Letter of Credit (LC): It is a method of settlement of payment of a trade transaction and
is used to finance purchase of machinery and raw material etc. It is a return
undertaking by the bank on behalf of its purchaser customer to the seller to make
payment of an amount on presentation of stipulated documents subject to fulfillment of
mentioned terms and conditions. LCs in India relating to foreign trade are subject to
provisions of “ Uniform customs and practice for documentary credits (UCPDC 600)

o Inland L/C: Where all the parties to an LC are located within the country.
o Foreign L/C: Where the opener or beneficiary is located outside the country of
issue and arising out of export or import of the goods/ services.
o Irrevocable: It is definite undertaking of the issuing bank to honour the
documents strictly drawn as per terms and conditions of LC which cannot be
amended or cancelled without the agreement of all the parties, especially the
beneficiary.
o Confirmed: Where credits carry the confirmation of the advising bank which is
in addition to the opening bank.
o Transferable: Under this, the benifiacry may request the bank authorized to pay,
incur a deferred payment undertaking, accept or negotiate.
o Acceptance: Where the payment is to be made on the maturity date calculated.
o Revolving: Provides that the amount of drawings made under this would be
reinstated and will be made available to the benificiary again and again for the
further drawings during the currency of credit upto a certain sum.
o Red clause L/C: Carries a provision which allows a seller to draw up a fixed sum
from the advising or paying bank, in advance of the shipment or before
presenting the required documents. It is normally used only where the buyer
and seller have close working relationship because it amounts to unsecured loan
to seller having financial as well as currency risk.
o Green clause L/C: This L/C besides guaranteeing packing credit facility, covers
cost of storage and warehouse charges for goods awaiting shipment. The
advance is paid against receipt of an additional document providing proof that
the goods to be shipped have been warehoused as well as against receipt and
written commitment from the beneficiary to subsequently deliver the
transportation documents by an agreed date.
o Back to back LC: In this case, the exporter uses LC that he has received from
the foreign buyer as a security to open fresh LC favoring the local supplier and
gets materials for manufacture and export.
• Disposal of Applications: Upto Rs. 2.00 Lakhs within two weeks and above Rs. 2.00
Lakhs within 4 weeks. Banks with CPC s to sanction within 14 days if TEV study is not
required and within 21 days if TEV is required
• A composite loan limit of Rs. 1.00 cr can be sanctioned by banks to enable WC and TL
through single window
• PSBs should open at least one specialized MSME branch in each district.
• Banks are permitted to categorize their general banking branches with 60% or more of
advances to MSME sector as specialized MSME branches.
• Factoring: Involves the purchase of book debts or receivables of either a commercial
organization or industrial unit. The institution that purchases book debts, called
 Factor, also maintains the sales ledger, covers the risk involved in recovery of debts and
prepays amounts due on account of sales.
• Difference between Factoring and Bill discounting by bank: Bank discounts bill for a
certain tenor i.e. till the maturity date of bill and on due date if the proceeds don’t
come, bank collects from the drawer thereby impacting the customer’s liquidity (which
is called ‘with recourse’) where as factoring is done ‘without recourse basis’ and hence
even if the buyer does not pay, Factor will take over the risk of non-collection and will
not recover the amount from its client.
• SBI Factors cover West and North while Can Factors covers south.
• CLPC – Centralized Loan Processing Cells
• Management Appraisal: Appraising of the person/persons behind the enterprise. Basis
is 5 ‘C’s
- Character, capacity, capital, collateral, conditions
• Technical Appraisal: Availability of basic infrastructure, Licensing / registration
requirements, Availability of raw material, skilled labour etc.
• Financial Appraisal: Main source of information for assessing the financial strength of
the borrower are P&L account, balance sheet, cash flow, director’s report and auditor’s
report on financial statement.
o P&L account: Shows income and expenditure of a concern during the year. It is
divided into 3 sections viz. Manufacturing/ trading account, general profit and
loss account and appropriation account. Manufacturing/ trading account t will
show income on right side and expenses and gross profit on the left side.
General P&L account will open from the gross profit/loss and with the net
profit/loss.
o Balance sheet: Statement of assets and liabilities of a concern as on a particular
day. It shows what the firm owes to others (Liabilities) and what others owe to it
(assets). If a concern suffers loss, it is treated as ‘USE OF FUNDS’. Loss is
shown on assets side. All limited companies have to publish their financial
statements in prescribed formats laid down in the companies act, 1956.

Assets have to be classified into 4 groups viz. fixed assets, current assets, non-
current/miscellaneous assets and intangible/ fictitious assets.

➢ Fixed assets like land and building, plant and machinery etc, should be
acquired through long term sources.
➢ Current assets are those which will turn into cash within a period of
next 12 months like inventories, receivables, bank balance
➢ All tangible assets other than fixed and current assets are classified
under this head and it includes investments of any kind.
➢ Intangible and fictitious asset: Intangible are those which carry some
value to the concern like goodwill, patents, copyrights etc. Fictitious
assets include deferred revenue expenditure, share issue expenses etc,
which are to be return of in due course and debit balance in P&L
account.
 Liabilities are grouped under 2 categories viz. long term liabilities and current
liabilities.
➢ Long term liabilities will have 2 components viz. own funds or net
worth and external liabilities (long-term debts). Net worth is paid up
capital and reserves after providing for doubtful / bad debts in
advances, factious and intangible assets. Long term debt is a debt
which is payable 1 year after the date of balance sheet.
➢ Current liabilities include Sundry creditors, short term borrowers, etc
and any other dues falling due within next 12 months.

Contingent liabilities are those items which are indictated by way of a footnote in
the balance

sheet such as claims not ackwnoledged as debts, payment for capital contracts not
provided for.

o Ratio Analysis: The performance of a unit is ascertained on the basis of various

ratios which are broadly grouped as under:

➢ Liquidity ratio which indicates the ability of a unit to meet its short term
commitments and current ratio also known as working capital ratio is
the most widely used
➢ Solvency ratio or leverage ratio or gearing ratio will provide assessment
of risk entailed by the debt of a unit. Debt Equity Ratio and Debt Service
Coverage Ratio come under this group
➢ Efficiency Ratio or Profitability ratio or Earnings ratio indicates the
generating capacity of profit to sustain its activities. Gross Profit ratio,
Net Profit Ratio and Interest Coverage Ratio fall under this category
➢ Activity Ratio gives the level of holding of inventory, credits available on
purchases.
o Current Ratio: It is arrived at dividing total value of current assets by current
liabilities
ie CR =CA/CL It is a measure of short term liquidity of the firm. More is the CR
means the better the liquidity of the company. Working Capital resources
position is reflected in CR.
A current ratio of 1.33 : 1 is considered satisfactory
o Debt-Equity Ratio: It is arrived at dividing total term liabilities by own funds.
ie. DER = Debt/Equity =Total Term Liabilities/Tangible Net Worth
Total Liabilities minus net worth & Current Liabilities
=------------------------------------------------------------
Net Worth Minus intangible and fictitious assets

DER of 3:1 is considered satisfactory.

o Fixed Assets Coverage Ratio: This Ratio shows the number of times the value of
net fixed
Assets(after providing Depreciation) covers the terms liabilities.

FACR = Net Fixed Assets/Term Debts (Medium & Long).

 FACR of more than one is reasonable.

o Debtors Turnover Ratio: The Ratio refers to borrowers credit policy as part of its
overall financial management.
DTR= Outstanding Debtors/Credit Sales X 365.
This shows average period of credit extended by the firm. Lower figure means
less credit sales and more availability of funds. Generally outstanding of one to
three months is reasonable.
o Creditors Turnover Ratio:
CTR = Outstanding Creditors/Credit Purchase X 365.
Ratio anything between half to two months is acceptable.
o Material Management Ratio: There are three ratio under this head.
Inventory Turnover Ratio= Inventory / Cost of goods sold X 365.
If the ratio is lower, Inventory Management is more efficient.
Raw Material Turnover Ratio = RM on hand / RM consumed during year X 365.
Finished Goods Turnover Ratio = FG on hand / Cost of goods sold during year
X 365.
o Debt Service Coverage Ratio: It is calculated while appraising TL proposals,
studying rehabilitation, reschedulement/restructuring proposal to check
whether the firm has financial ability to service term loan instalment and
interest. A DSCR ratio of ‘n’ means company’s internal generation of funds is ‘n’
times of its commitment towards tem loan obligations and interest there on
DSCR=(Profit after tax + Depreciation + Int. on TL) / (Int. on TL + TL
Installment )
DSCR of 1.75 is reasonable

o Interest coverage ratio: ICR indicates the number of times a firm’s income in an
accounting period can pay off the interest on term debt during the same period.
This is used in assessing the firm’s borrowing capacity and the risk of servicing
of debt.
ICR = Earnings before interest, tax, Depreciation & Amortization (EBITDA) /
Annual Interest Obligation.

o Break Even Analysis / Break Even Point ( BEP) : It is the point where total
costs equal sales value and at this point cost or expenses and revenues are
equal. Consequently, there is no net loss or gain and this is used in analysis of
term loan proposals. The ratio indicates the shock absorbing capacity of the
unit.
BEP = Fixed cost /contribution per unit
Fixed costs refer to the costs which are incurred regardless of the operations
and level of activity of the unit like rent, taxes, insurance, maintenance of
building and machinery etc. The contribution represents the total net sales less
variable costs / marginal costs like raw material, power and fuel expenses etc.
A lower BEP means the unit has adequate margin of safety.
Margin of safety is computed as 1 minus BEP
A higher BEP indicates the possibility of unit incurring losses even at marginal
variance in fixed cost, variable cost, sales etc.
• Economic Appraisal: Aims at finding out whether project is coming up in a priority
sector, whether the project is likely to contribute to the development of the region,
economy and most importantly whether the allocation of varied resources justifies the
social benefits in terms of employment, export potential etc. This upraisal includes
sensitivity analysis and computation of the Internal Rate of Return (IRR) of the project.
o Sensitivity Analysis: This is carried out to analyse financial viability of the
proposal assuming variation to the extent of +10 % or -10% in values of
parameters like capacity utilization, sale price per unit, sales volume, cost of
raw material.
o Internal Rate of Return (IRR): This is used to measure and compare the
profitability of investment in financing a large project. It is also called
Discounted Cash Flow Rate of Return (DCFROR) or simply Rate of Return
(ROR). IRR on an investment is the annualized effective compounded return
rate that can be earned on the invested capital. It is the interest rate at which
the investment has a zero net present value.

A project is viable if it is generating IRR greater than the cost of the capital and
it is worth funding.
o Net Present Value (NPV): NPV is the total present value of the project crash
course. It Isstandard method for using the time value of money while uprising
long term projects. NPV measures the excess or short fall of cash flows in
present value terms, once finance charges are met .

If NPV is greater than zero, it means the investment would add value to the firm
and the project may be accepted.
If NPV is less than zero, it means the investment would subtract value from the
firm and the project should be rejected.
If NPV is equal to zero, it means that the investment would neither gain value
nor lose value for the firm and the project adds no monetary value. Then
decision has to be taken based on other criterion.
• Market Appraisal: A careful survey of the market about the prospects of the product,
size of the market, price structure etc is done
• Environmental Appraisal: Deals with the impact of environment on the project and
effect of project on the environment.
• All proposals for term loan and WC upto Rs. 100.00 lakhs can be processed by using
CART (Credit Appraisal and Rating Tool) method, a software developed by SIDBI. CART
generates rating of the proposal so as to decide on the pricing and generates loan
documents once the loans is sanctioned.

Under the Small Enterprises Financial Centre (SEFC) Scheme of RBI, SIDBI has given
the software free of cost to all MoU Banks and SFCs.

• Working capital Assessment:

The funds / capital required for maintaining the required level of current assets is
called Gross Working Capital (GWC).
 The difference between Total Current Assets and Current Liabilities other than bank
borrowings is called Working Capital Gap.
The difference between total current assets and total current liabilities is called Net
Working Capital (NWC).

Factors determining WC:

o Products with longer manufacturing process require higher level of working
capital, as the realization of sale proceeds takes long time.
o Higher credit sales of the product demands higher level of working capital
requirement because of the blocking of funds in receivables/ book debts
o The faster sales would need less working capital as the sales are realized faster
o Seasonal availability of raw material or seasonal sale of the products would
require more working capital.

• Methods of lending:
o First method of lending: Borrower is required to contribute minimium of 25% of
the working capital gap from the long term sources. The balance 75% of the
working capital gap represents the maximum permissible bank finance (NPBF).
To ensure compliance under this method of lending, CR of the firm should not
be less than 1.17 : 1.
o Second method of lending : Borrower is required to contribute a minimum of
25% of total current assets from the long term sources irrespective of the
working capital gap. Therefore, NPBF will be working capital gap less the
amount to be so contributed by the borrower. CR of the company should not be
less than 1.33 : 1 under this method

For WC limits beyond Rs. 5.00 Cr to MSMEs, banks generally apply 1 st or 2nd
method of lending.

o Turnover Method (Nayak Committee Method): Originally proposed for SSIs but
later on made applicable to for all borrowers with Fund based Working Capital
limits upto and including Rs. 5.00 Cr. Under this method, WC is computed at
25% of the projected annual turnover and out of this, 80% is financed by bank
and 20% is to be contributed by the borrower. Operating cycle is assumed as 3
months. WC limits upto Rs. 5.00 Cr to MSME is computed under this method.
o Cash Budget Method: Under this method, peak level cash deficit ascertained
from projected cash budget statement will be the level of total WC finance
provided by the banking system. Banks have been advised y RBI to follow this
method for seasonal industries like Sugar and Tea besides construction
activities.
• Enterprise Wide Risk Management (EWRM) is managing risk with the support of IT
• Main Provisions of Ordinance 1992 for payment of interest on delayed payments to
Small Scale and Ancillary Industrial Undertakings:

GOI has amended the above act from 11th Aug 1998 with following changes.
o Agreement between seller and buyers for payment of bills for supply of
material/rendering of services shall not exceed 120 days
 o State Govt.s have been empowered to establish Industry Facilitation Councils
(IFCs) for the settlement of disputes.
o Payment of Interest by buyer at the rate of one and half times the Prime Lending
Rate of SBI for any delay beyond the agreed period not exceeding 120 days

After enactment of MSMED 2006, the existing provisions have been further
strengthened as under

o Any buyer who fails to make payment to MSME as per agreed terms or a
maximum of 45 days, would be liable to pay monthly compounded interest to the
supplier on the amount from the appointed day at three times the Bank Rate
notified by RBI
o In case of dispute with regard to any amount due, a reference shall be made to
the Micro and Small Enterprises Facilitation Council, constituted by respective
State Govt

• Credit Process involves 1.Appraisal 2.Assessment 3.Sanction 4. Documentation and 5.

Disbursement
5. MSME DEVELOPMENT BUSINESS DEVELOPMENT SERVICE PROVIDERS

• Market failure is generally referred in the context of Perfect Markets, though

markets are never perfect
• The factors that delay the market to return to perfection, after a disruption in the
market, are called Market Failures
• BDS – Business Development Services
• Two types of BDS – operational and strategic. Common parlance and practice of
BDS is operational i.e. providing services mainly for setting up a unit.
• Institute of Small Enterprises and Development (ISED) through its special
window for Non-commercial Business Development Services (NCBDS)
channelizes world class BDS to the requirements of MSMEs in India who cannot
afford such services at market rates, to interact with the world class business
professionals in Europe
• Linkage is the main task of BDS and networking is their key function
• Among all sectors, the most dramatic development and explosive growth is in the
field of telecommunications.
• National Skill Development Mission is launched in 2015 on occasion of World
Youth Skills Day to create convergence across sector and states in terms of skill
training activities and also achieve the vision of ‘Skilled India’, through Ministry of
Skill development and entrepreneurship (MSDE).
• It is estimated that only 2.3 % of the work force in India has undergone formal
skill training as compared to 52% in USA, 80% in Japan and 96% on South
Korea.
• More than 54% of the total population of India are below 25 years of age and over
62% of the population is in the working age group (15-59 years).
• NSDM’s objective is to maintain a national data base known as Labour Market
Information System (LMIS) which acts as portal for matching the demand and
supply of skilled work force in the country.
• An innovation which causes little disruptive impact on behavior pattern is called a
continuous innovation. Example- Floride toothpaste.
• Three effects of Inventions :
o Innovation effect: Inventions that would lead altering the existing product
to change the consumption pattern or to suit the change in consumption
pattern. Example – Electric toothbrush
o Substitution effect- Occurs when a new technology captures the
substantial share from an existing old technology. Example– Substitution
of black & white TV with color TV.
o Diffusion effect
• Technology upgradation ordinarily means induction of state-of-art or near state-
of-art technology. It also includes installation of improved environmental
conditions.
• Credit Linked Capital Subsidy Scheme (CLCSS) has been introduced to
facilitate technology upgradation of tiny and SSI units in the specified products /
sub-sectors by providing 15% capital subsidy for induction of well established
and proven technologies approved under 45 categories.
• Technology and Quality Upgradation support to MSME – TEQUP Scheme is
being implemented by Ministry of MSME to provide capital subsidy to MSEs for
technology and quality upgradation support under activity number 2 of the set
scheme.
• TIFAC – Technology Information, Forecasting and Assessment Council founded
in 1988 with a task to look ahead at the technologies emerging worldwide and
pick those which are relevant for India and promote them.
• Earlier Technology Upgradation Fund Scheme (TUF), Ministry of Textiles:
o Provides for reimbursement of 5% interest charged by FIs / banks for
technology upgradation projects. Interest reimbursement of spinning
machinery has been reduced to 4%.
o Also provides for coverage of exchange rate erosion not exceeding 5%
points per annum for FC loans. Here to 4% for spinning machinery.
o Additional option to the power loom units to avail 20% margin money
subsidy in lieu of 5% interest reimbursement subject to a capital ceiling
of Rs. 200 lakhs and ceiling on subsidy Rs. 20 lakhs.
o 15 % margin money subsidy for SSI textile and jute sector in lieu of 5%
interest reimbursement subject to capital ceiling Rs. 200 lakhs and
ceiling on subsidy Rs. 15 lakhs.
o 5% interest reimbursement plus 10% capital subsidy for specified
processing machinery, garmenting machinery and machinery required
for manufacture of technical textiles.
o 25% capital subsidy on purchase of new machinery and equipments for
pre-loom and post-loom operations, handlooms etc.

• Revised and Restructured TUFs Scheme (RR-TUFS) :

o 10% of the approved outlay for new sanctions will be earmarked for
MSME.
o In case of stand-alone spinning sector, cap of Rs. 250 crores on project
cost for new sanctions
o Total subsidy outflow to stand-alone sector at 26% of the plan allocation
 o A pilot project on technology upgradation of power-loom with an outlay of
Rs. 300 crores
o Interest reimbursement for a period of 7 years including 2 years of
moratorium / implementation
• Scheme for Technology Upgradation for Industrial Clusters called Project Uptech
was launched by SBI
• Back-ended Interest Subsidy Scheme (BEIS): To encourage MSE s for
technology upgradation and modernization, ISO certification and R&D facilitates
state governments provide incentives as 3% back ended interest subsidy for
loans borrowed from various lending institutions, subject to a maximum of Rs. 10
lakhs per enterprise over a period of 5 years. The units with investment upto Rs.
5 crores are eligible for BEIS. Scheme is implemented by DIC, TIIC and SIDBI.
• India MSME technology Services Limited (ISTSL): A joint venture of SIDBI, SBI,
OBC, IOB and Indian Bank, provides a platform where MSMEs can tap
opportunities at the global level for acquisition of new and emerging technology
or establish business collaboration.
• India has the second largest population of MSMEs among BRIC and US
• SaaS (Software-as-a-Service) – A platform for delivering applications
• Travel Carma, a travel firm based in Gujarat extends its service in Frankfurt
• MSMEs provide employment to 75% of India’s workforce and spend 30%of the
country’s IT spending. Only 12% of Indian MSMEs use computers and 90% of
them use it for document processing.
6. CLUSTERS & CLUSTER DEVELOPMENT:
• Two parallel initiatives – First, through Ministry of Industry and Commerce
providing funds for infrastructure and development in clusters through SPVs
promoted by private or PPP and incentivizes export oriented clusters located
in SEZs and AEZs

Second, through the ministry of SSI with DCSSI as the nodal officer,
implementing cluster initiatives through state governments and industry
associations.
• UNIDO implemented development initiative in the knitwear cluster of
Ludhiana whose products represent 95% of the Indian woolen market.
• APPEAL (Apparel Exporters association of Ludhiana) was created by 6
exporters has grown to the level of exporting 80% of exports from the cluster.
• Clusters are estimated to contribute upto 60% of the India’s manufactured
exports
• Gems and Jewellery in Surat and Mumbai – 80% of Total Industry
• Tirupur in Coimbatore district – 80% in cotton hosiery exports
• Panipat produces 75% of total blankets produced in the country
• Ludhiana produces 95% of woolen knitwear, 85% of the country’s sewing
machines and 60% of the nation’s bicycle parts.
• Policy Level Support to UNIDO Cluster Development Programme (CDP) is
provided by Focal Point Office based in New Delhi.
• Phases of cluster development:
o Initial Phase: Formation of cluster may be natural such as marble-
cutting at Kishangarh in Rajastan due to availability of raw material
locally , demand-based like readymade garments cluster at Indore and
Mumbai, presence of PSUs like automobile component industry at
Gurgaon because of Maruthi Udyog Ltd and Petro-chemical based
industry at Vadodara because Indian Petrochemical Industries Ltd
(IPCL). another PSU

Initial phase is characterized by slow growth and high costs. An

example of cluster in initial stage is Floriculture Industry at
Bangalore, Pune and Gurgaon.
o Growth Phase: Characterized by rapid development and increased
competition.
 o Maturity Phase: Characterized by slow down of growth of cluster due
to over capacity created in cluster leading to very high competition
amongst units in cluster. This stage lasts longer than the two previous
stages. The examples of this stage clusters are Electric fans cluster in
Kolkata, Stationery Diesel Engines cluster in Rajkot and Sewing
machines cluster at Ludhiana
o Extinction Phase: This stage may be due to change in lifestyles, lack of
demand for the product, technological changes or losing the
competitiveness because of increased labour costs.

Sometimes the cluster’s change of location may be viable. For example

Shoddy yarn cluster at Prato in Italy is shifted to Panipat, India due to
presence of availability of skilled and cheap labour and favourable
market. An example of extinct cluster is Tile Industry cluster based in
Mangalore on account of scarcity of raw material and increased
competition from China.
• Activities in Cluster Development Programme (CDP): Soft Activity and hard
Activity
• Project Duration for cluster is 3 years
• Cluster Development Executive (CDE) is the officer from the Government
Agencies and he conceptualizes the overall developmental strategy,
coordinates the activities
• Contribution of Ministry of MSME to MSE-CDP does not exceed 80% of the
total project cost with a maximum of Rs. 10.00 lakhs per project that includes
Rs.10.00 lakhs for soft activities. Scheme expects at least 10% contribution
from stake holders
• Government Support for Clusters:
o Indian Diamond Institute and Diamond Industrial Park at Surat
o Customs Office at Panipat for Shoddy yarn and other textile units
engaged in international trade
o National Institutes of Fashion Technology at New Delhi and
Gandhinagar
o Footwear Design and Development Institutes at Noida, Agra, Chennai
and Kanpur
o Central Glass and Ceramics Research Institute(CGCRI) at Kolkata,
Khurja and Naroda
o Central Leather Research Institute at Chennai
• In the post-liberalization era, government has invited private entrepreneurs
in infrastructure building through the scheme of ‘Build, Own, Lease and
Transfer’ (BOLT)
• The scheme of SIDBI that has been helpful in case of ancillaries and sub-
contracting with large firms is the ‘Bill Discounting Scheme’
• State Level Bankers’ Committee (SLBC) Convenor banks incorporate in their
Annual Credit Plans, the credit requirement in the clusters identified by the
ministry of MSME
• As Per Ganguly Committee recommendations, banks have been advised that
a full service approach to cater to the diverse needs of the MSE sector may be
achieved through extending banking services to recognized MSE clusters by
adopting a 4-C approach namely Customer Focus, Cost Control, Cross Sell
and Contain Risk.
• The ministry of MSME approved a list of clusters under the Scheme of Fund
for Regeneration of Traditional Industries (SFURTI) and MSE-CDP located
in 121 Minority concentration districts.
• FICCI has started ‘BISNET’ where information on trade enquiries,
technological offers etc are available online. The other institutes doing this
are NSIC, Asia Pacific Centre Technology Transfer (APCTT), Maharashtra
Chamber of Commerce & Industry (MCCI) based in Pune and TANSTIA-FNF
Centre in Chennai
• Indian Government has declared 2010-2020 as the ‘Decade of Innovation’
• Brassware Cluster located in Moradabad ( U P )
• National Innovation Council – NInC
• Experiences of CDP:
A network of Entrepreneurs, not Enterprises – Kottayam Network –Rubber
Industry
Member Enterprises Credit Guarantee Fund (MCGF) – Alleppey – Semi-
Finished Coir Mats
Calico Printers Co-operative Society Limited, Jaipur – Cluster of printers
Scottish food and drink

South – East England Development Agency (SEEDA) – Devoloped its

enterprise hub network in England

With the help of research institutes, cluster development in Silicon Valley in

USA and Cambridge in UK.
• First Step towards Cluster approach is on account of Abid Hussain
Committee’s direction (1997).
CHAPTER – 7 – MSME REHABILITATION

• Sick units – A unit is sick when it has become doubtful advance i.e. principle or
interest in case of any of its accounts is overdue for a period of exceeding 90
days and there is an erosion in the net worth due to accumulated losses to
extent of 50% or more of its peak net worth in the previous account years
provided that the unit has completed 2 years of commercial production
• RBI’s definition for sick MSE
“MSE remains NPA for 3 months or more
Or
There is erosion in the net worth due to accumulated losses to extent of 50% of
its net worth during the previous accounting year.
• Causes of sickness
o Internal causes –
➢ Management
➢ Finance
➢ Production
➢ Personnel
➢ Marketing
➢ Entrepreneurship qualities
o External causes :
➢ Finance
➢ Production
➢ Marketing
➢ Lack of demand
➢ Power shortage
➢ Equipment problem
➢ Miscellaneous
o Natural Calamities
• Symptoms of Incipient sickness –
o Continuous irregularities in account
o Non-payment of principal/ interest
o Non-payment of bills of various services like water, power
o Non submission/ delayed submission of stock statement
o Frequent return of cheques
o Downward trends in sales and fall in profits
o Diversion of funds
o Failure to place statutory liability
o Non cooperation for stock inspections
• Financial indicators of sickness:
o Negative liquid surplus
o Increase in Sundry Debtors/Sundry Creditors
o Increase in Debt Equity Ratio
o External borrowing at high rates
o Excessive drawings by promoters or directors
o Sale of fixed assets
• Classification of sick units
o Units that can be rehabilitated or rehabilitation plans are under
implementation or the study has been completed
o Units that can be nursed but suitable nursing programme has not been
devised. This is known as Sick Grey Area Account
o No scope for nursing and the account has to be called up
• Kapur Committee - Sickness of Units
• Agencies identified towards prevention of sickness
o Term Lending Institutions: Averting sickness commences with the
identification of sick unit by term lender. Proper appraisal and market
survey. Proper monitoring the project in implementation stage.
o Commercial Banks: Proper appraisal, Timely Disbursement, feedback
from commercial banks, detection of early warning signals, market
intelligence, stemming sickness
o Entrepreneur: Proper people on Management Board, honest sharing of
information to lenders
o Government: Not resorting to frequent and sudden changes in policy,
empowering term lenders to make management changes when a unit is
likely to become sick
• Viability Norms & Rehabilitation Package: A unit is considered as potentially
viable if the unit will be in a position to continue to service its repayment
obligations as agreed upon after implementing a relief package spread over a
period of not more than 5 years from the commencement of package, without
such concessions after that period. The repayment of the restructured debt
should not exceed seven years from the date of implementation of package.
The rehabilitation package should be fully implemented within 6 months from
the date the unit is declared as viable/potentially viable. While
identifying/implementing rehabilitation package, banks/FIs should do holding
operation for 6 months and units draw funds from accounts to the extent of
their deposit of sale proceeds during this period.
 The period of relief/concession and repayment of debts for tiny/decentralized
sector have been revised from two/three years to five/seven years respectively

To review the rehabilitation efforts by banks/FIs, RBI formed State Level Inter-
Institutional Committee (SLIIC) with the Secretary SSI as convener and the
Regional Director RBI as Chairman to meet at quarterly intervals.

For assessing viability in case of limited company, net worth means the sum
total of paid up capital and free reserves. In case of a partnership/proprietary
concern net worth means the sum total of partners/proprietor’s capital and
free reserves.
• Incipient Sick or Handholding stage of an account in the event of following:
o Delay in commencement of commercial production by more than 6
months for reasons beyond the control of the promoters
o Company incurring loss for 2 years or cash loss for 1 year, beyond the
accepted time frame
o Capacity utilization is less than 50% of the projected level in terms of
quantity
Or
Sales are less than 50% of the projected level in terms of value during
the year.

Handholding support to be undertaken within 2 months of identification

of sickness

Units becoming sick on account of diversion of funds or wilful default are

not eligible for any relief or concessions and recovery proceedings to be
initiated

• MSE units which could not be revived after intervention by banks at

Handholding Stage need to be classified as Sick and viability study to be
conducted. If the units are found viable/potentially viable then rehabilitation
package should be implemented within 6 months from the date of declaration
of viability. The decision on viability should be taken not later than 3 months of
unit becoming sick.
• A unit can be declared unviable by a viability study. For Micro Enterprises
(manufacturing) having investment in plant & machinery upto Rs. 5.00 Lakhs
and Micro Enterprises (service) having investment in equipment upto Rs. 2
lakhs, the branch manager may take a decision on viability subject to approval
by next authority/ present sanctioning authority.
• For unviable sick units with credit facilities of Rs. 1 crore and above, a
committee comprising of senior officials of the bank may examine such
proposals, as a committee approach will improve the quality of decision
because of the collective decision. This process should be completed within 3
months
• RBI vide its circular dated 12th September, 2011 has withdrawn reliefs and
concessions given in circular dated 16th January, 2002 and has advised banks to
have their own restructuring / rehabilitation policy for revival of viable /
potentially viable sick units.
• Though banks are not allowed to lend below base rate, the restructured loans
like WCTL, FITL etc, can be granted below the base rate for the purposes of
viability.
• Declassification of sick unit: A sick unit can be declassified if the unit is
restored back as a healthy unit showing positive results and is likely to show
profits in the current year without any concessions given to a sick unit. If there
are several banks/FIs as lenders for the sick unit, then declassification can be
done with consent of all. If there are any court cases, declassification can be
done only after suits are disposed off and dues are recovered/written-off.
• MSME Debt Restructure Mechanism: RBI has formulated debt restructuring
mechanism which covers
o All non-corporate MSMEs irrespective of the level of dues to banks
o All corporate MSMEs, enjoying banking facilities from single bank,
irrespective of level of dues to the bank
o All corporate MSMEs having funded, non-funded outstanding upto
Rs.10.00 Cr under multiple/consortium banking arrangement

Accounts involving wilful default, fraud etc. and accounts classified as

LOSS ASSETS by banks are not eligible for restructuring. In respect of
BIFR cases, all formalities in seeking approval of BIFR to be completed.

Banks may decide the viability benchmark ensuring that unit becomes
viable in 7 years and repayment period for restructured debt does not
exceed 10 years.
• The asset classification would not change if the outstanding is fully covered by
tangible security.
• Additional finance considered can be treated as standard asset in all categories
i.e. sub standard and doubtful account, upto one year from first payment of
interest or principal, whichever earlier falls due under restructuring package.
• Treatment of Provision: Provision toward interest sacrifice is by debit to P & L
account and held in a distinct account and amount of provision made for NPA is
reversed when the account is reclassified as Standard Asset.
• Banks should work out the restructuring package and implement the same
within 60 days from the date of receipt of such requests/
• Sub-Standard and doubtful assets can be upgraded to standard assets subject to
satisfactory performance during the period i.e. one year after the date when
first payment of principal or interest whichever falls due. The asset
classification status of rescheduled accounts will not deteriorate (fall) if there
is satisfactory performance during the one year. This special consideration is
available only if the account is restructured for the first time.
• Following cases are considered as wilful default.
o Default in repayment even if the unit has capacity to repay
o Default on account of utilization of funds for different purpose other
than declared and funds are diverted
o Default on account of siphoning off of funds and funds are not available
with unit in the form of assets.
o Default in repayment and disposing-off of fixed assets or immovable
property charged to bank without bank’s knowledge
• Diversion of funds:
o Utilizing short term WC for long term purposed, against sanction
o Deploying borrowed funds for activities/asset creation not mentioned in
sanction
o Transferring the funds to subsidiaries/group companies or other
corporate by any means
o Routing of funds through bank other than lending bank
o Investing in other companies by way of acquiring equities/debt
instruments without approval of lenders
o Shortfall in deployment of funds vis-à-vis the amounts disbursed/drawn
and the difference not being accounted
• Siphoning of funds: Utilization of funds borrowed from banks/FIs for purposed
unrelated to the operations of the borrower which adversely affects the
financial health of the firm/lender
• Penal Measures: The following penal measures are to be taken in case of wilful
defaulters with an outstanding balance of Rs. 25.00 lakhs or more
o No additional facilities by banks/FIs
o Entrepreneurs/promoters of companies identified of diversion of funds,
fraudulent transactions etc. to be debarred from institutional finance
from SCBs, Development FIs, Govt. owned NBFCs etc for floating new
 ventures for a period of 5 years from the date of publishing by RBI as
such.
o Initiation of legal process including criminal proceedings wherever
necessary against the borrowers/guarantors and foreclosure of recovery
of dues expeditiously
o Banks to adopt a proactive approach for change of management of the
wilful defaulting company.
• Wherever the chances of rehabilitation of unit are not there, the unit has to be
called up.
• RBI has introduced IRAC (Income Recognition and Asset Classification) norms to
recognize the income that actually is received and according the norms, the
assets have been classified as Standard Assets, Sub-standard Assets, Doubtful
Assets and Loss Assets.
• An asset which ceases (stops) to generate income is called Non-Performing
Asset (NPA). All assets other than Standard are NPA
• Classification of NPA for different categories of advances:
Facility Parameter for NPA

Term Loan Interest and/or principal overdue for beyond

90 days
OD/OCC Remains ‘Out of Order’ as above
Bills purchased/discounted Overdue beyond 90 days
Short duration crop loans Principal or int overdue for 2 crop seasons
Long duration crop loans Principal or int overdue for 2 crop seasons
Securitization transactions Liquidity facility outstanding beyond 90 days
Derivative transactions unpaid beyond 90 days
• Out of order: Outstanding balance continuously in excess of limit/DP
Or Outstanding is less than limit/DP but no credits for 90 days
continuously as on B/S date
Or Credits are not enough to cover the interest debits during the
period
• An asset continues in Sub-standard for not less than or equal to 1 year. In such
cases, the net worth of the borrower or market value of security is not enough
to ensure recovery of bank’s dues.
• Doubtful Asset – recovery highly questionable and improbable
• Loss Asset – considered uncollectible and of little value but not written off
wholly by the bank.
• Debt Recovery Tribunals (DRT) was set up for recovery of loans of banks and
FIs, under the Recovery of Debts to Banks and Financial Institutions Act, 1993,
known as RDB Act. Minimum amount is Rs. 20.00 lakhs. A Judge of the rank of
 District & Sessions Judge presides over DRT. Each DRT has 2 recovery officers.
Though the recovery officer is not a judicial officer, his orders are judicial in
nature and are appealable before the presiding officer of the tribunal.

DRT is empowered to pass comprehensive orders like in civil courts. The

Tribunal can hear cross suits, counter claims and allow set offs. However, they
cannot hear claims of damages or deficiency of services or breach of contract
or criminal negligence on the part of lenders.

DRT can appoint Receivers, Commissioners, pass ex-parte orders, ad-interim

orders, interim orders. DRT can review its own decision and hear appeals
against the orders passed by recovery officers of the tribunal.

• Securitisation and Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002 (SARFAESI):
o Enacted in 2002
o Notice period of 60 days from declaring as NPA
o Provides for setting up of Securitisation Companies/Reconstruction
Companies (SC/RC) to acquire NPAs from banks/FIs by raising funds from
Qualified Institutional Buyers (QIB), by issue of Security receipts
representing undivided interest in such financial assets. SC/RCs act as
debt aggregators or agents of banks /FIs in the resolution of NPAs by
taking the impaired assets thereby cleaning bank balance sheets and
permitting banks focus on their normal banking business.
o If the repayment of loan is due for a continuous period of 6 months bank
send notice to pay within 60 days and if not paid, bank goes for auction
of property by fixing reserve or minimum bid price. If the amount
fetched by auction is more than bank’s dues, the excess amount is given
to borrower.
o Banks have to draw the case from DRT before sending the notice under
SARFAESI
• Suit Filing: It is initiation of legal action. Borrower (Debtor) is known as the
defendant and bank (creditor) is known as plaintiff. The court issues the decree
favoring the plaintiff after hearing the case which can be executed against the
Judgment Debtor (borrower). Creditor (Bank) may seek an execution against
the property of debtor, seeking attachment before judgment. The legal and
miscellaneous expenses incurred by plaintiff can be recovered from debtor.
• Postponement of filings of suits – Postponement to be permitted if borrowers
dealings with the banks are satisfactory and efforts are made to sell the stocks
 and machines to reduce the liability. There is activity in the unit and any stern
action would cause harm to the interest to the bank.
• When the borrower is honest and making sincere efforts to set right, banks may
consider compromise offers to reduce non- performing assets. Compromises are
encouraged to avoid wastage of time in the legal process, retain relationship
and also good image in the locality. Before accepting compromise proposal, the
expected loss and the time likely to be taken to process it have to be
estimated.
• Concessions that can be extended in the compromise deal are
o Waiver of penal interest if charged
o Waiver of interest from the date the account has become NPA
o Remission of part of principal due
• RBI OTS scheme – Working group under the chairmanship of Dr. K C
Chakravarthy, then C & MD of PNB was constituted by RBI regarding
rehabilitation of potentially viable sick MSE units.
• Asset Securitisation: It is type of financial instrument involving pool of financial
assets and the issuance of securities and they are repaid from cash flows
generated by the assets. The most common assets are credit cards, mortgages,
retail consumer loans, corporate debt, MSME loans, export receivables etc.

• Asset Reconstruction Companies: Established to acquire, manage and recover

illiquid assets or NPAs from lenders
• Benefits:
o Believing banks of the burden of NPAs thereby allowing them to focus
better on their core business
o Transfer of such assets helps bank retain depositor and investor
confidence
o ARCs also help developing expertise in loan resolution apart from acting
as a catalyst and facilitator for legal reforms in bankruptcy procedures
and loan recovery
• Provisions for ARCs in SARFAESI Act 2002:
o Framework for establishment, ownership, operations and empowerment
of ARCs.
o That ARCs to be registered with RBI before commencement of its
operations and registration is accorded for ARCs with minimum capital
adequacy of 15% of assets acquired or 1 billion (USD 25 mn)
o Empowers RBI to stipulate guidelines and directions to ARCs.
o Prudential norms and operational guidelines
o Prescribes minimum capital
o No single sponsor (those having 10% or more in the equity capital) to
have controlling interest in ARC
o Foreign investors may participate in equity capital of ARCs registered
with RBI upto 100% on the automatic route
o Transfer of financial assets (loans, debentures etc, but not shares of
borrower, unless shares are collateralized for loan), by way of
assignment of right title and interest in favor of ARCs on a ‘True Sale’;
basis and thereby ARCs become legal and effective owners of financial
assets acquired.
o Enables acquisition of financial assets through securitization by way of
setting up of trusts by ARCs. Financial assets are held in such trusts for
the beneficial interest of investors. Security receipts (SR) issued by
trusts and ARCs acr as both trustees and managers of such trusts.
o Provides unfettered rights to lenders acting in majority (75% by value) to
enforce the security interest without judicial intervention. Lenders are
empowered to take possession of assets after giving 60 days notice to
borrower and after the possession, are entitled to sell, lease or manage
the assets for realization of dues.
CHAPTER – 8 – FUTURE OF MSMEs

• Micro finance is the provision of financial services to low income clients or

solidarity lending groups including consumers and the self-employed, who
traditionally lack access to banning and related services.
• It is a development tool with an objective to assist poor to work their way
out of poverty.
• Main features of micro finance :
o Borrowers are from low-income group
o Loans are of small amount
o Short duration loans
o Without collaterals
o A high frequency of repayment
o Loans availed for income generation purpose
• Need for microfinance :
Despite several poverty alleviation programmes, there is a need in the
society which is being met by micro finance institution (MFI). MFIs not only
offer micro credit, but also provide other financial services like savings,
insurance, remittance and non-financial services like individual counseling,
training and support to start own business. But the interest rate charged by
MFIs is higher than commercial banks and vary widely from 10% – 30%.
Though it is high, some feel that considering the cost of the capital and the
cost incurred in giving the service, the high interest rates are justified.
• Channels of Micro finance :
o SHG – Bank linkage programme – In this bank led microfinance
channel initiated by NABARD in 1992, usually women in villages are
encouraged to form groups of around 10 – 15 people. The members
contribute their savings and loans are given to needy members in the
group. Meetings are held periodically to organize these things. In the
later period, these SHGs are provided with bank loans for the purpose
of income generation. With support from NGOs and institutions like
NABARD and SIDBI, SHGs have become very successful and popular.
o Micro finance institutions – These lend through the concept of Joint
Liability Group (JLG), which is an informal group comprising of 5 to 10
individual members who come together for the purpose of availing
bank loans either individually or through the group mechanism against
a mutual guarantee. The MFI channel is dominated by NBFCs which
cover more than 80% of total loan portfolio through MFI channel.
• Concerns :
o Legal structure and regulation: For regulation of microfinance,
Malegam committee was setup but it covered only a section of MFIs
i.e. NBFCs. The Microfinance Institutions (Development and Regulation
 Bill, 2011 is a major step in the microfinance sector by appointing RBI
as the sole regulator for all MFIs
o Financial illiteracy: Though most of the MFIs claim to have educational
training and programme for the befit of the people, the reality is these
members of SHG and JLG are taught to do their own signature. This
has become a major hindrance in the growth of microfinance sector.
o Inability to generate sufficient fund: Though NBFCs are raising funds
through Private Equity Investments because of the for-profit motive,
such MFIs are restricted from taking public deposits. Not for profit
companies have to rely on donation and grants from government and
institutions like NABARD and SIDBI. In the absence of adequate
funding from equity market, bank loans have become major sources of
funds, resulting in high debt – equity ratio. To increase their portfolio
size, they need debt from banks for which equity to be raised
proportionately. After the Andhra crisis, it is reported that banks have
stopped issuing fresh loans and wherever loans are given, MFIs are
expected to increase their equity. Ultimately, MFIs have to increase
their equity to increase their portfolio size.
o Dropouts and migration of group members- The 2 major problems with
the group concepts are Dropouts (one or more members leaving the
group) and migration (one or more members moving to another
group).This is affecting the record of the group which is depriving
them of getting bigger loan amounts form MFIs

o Transparent pricing – Non transparent pricing by MFIs confines the

bargaining power of the borrowers and their ability to compare
different loan products, because they don’t know the actual price. This
results in clients end up borrowing more than their ability to payback
leading to over-indebtedness. Though the declared rate of interests
are less, the effective interest rate (annualized percentage rates –
APR) will be more after considering service charges, processing
charges etc. Some MFIs charge higher rate for smaller loans citing
higher transaction cost. This contradicts with the social aspect of
microfinance.

o Cluster formation – MFIs’ drive to grab an established market and

reduce their costs is resulting in formation of clusters. MFIs reduce
their initial cost of forming groups, educating them etc, when there is
availability of a ready market. This is one of the reasons for dominance
of micro finance sector in southern states. The negative effect of this is
that MFIs are staying away from rural areas where there is actual need
for micro finance. It is high time for MFIs to understand to increase the
 outreach of micro finance sector by including new clients and serving
new and far off location.

o Multiple lending and over-indebtedness- both of these are outcome of

the competition among the MFIs. In view of the competition, MFIs are
resorting to giving multiple loans to same borrowers leading to over
indebtedness of the borrowers, besides eating away the opportunities
of new borrowers.

• The Micro Finance Institutions (Development and Regulation) Bill, 2012:

India’s micro finance bill has been redrafted many times since the
introduction of the first draft in June 2011. A new version of the bill has
finally been released as presented by the Standing Committee on Finance.
Following are the features:
o Bill aims to provide for development and regulation of MFIs
o MFI is defined as an organization other than a bank, providing micro
finance services. These services are defined as micro credit facilities
not exceeding Rs. 5 lakhs in aggregate or with RBI specification Rs. 10
lakhs, to each individual.
Other services like collection of thrift, pension or insurance services
and remittance of funds within India also come under microfinance
services.
o The bill allows the central government to create a microfinance
development council with officers from different ministries and
department which advices central government on policies and
measures for the development of MFIs.
o The bill also allows the central government to form state micro finance
councils which will be responsible for coordinating the activities of
district micro finance committees (DMFC) and reviewing the MFIs in
the state.
o DMFCs review the development of microfinance activities within
district. These committees can be appointed by RBI.
o The bill stipulates that all MFIs have to obtain a certificate of
registration form RBI. The applicant needs to have net owned fund of
atleast Rs. 5 lakhs. By ‘net owned fund’ the bill means the aggregate
of paid up equity capital and free reserves on the balance sheet.
o Every MFI has to create a reserve fund and RBI may specify a
percentage of net profit to add to this fund and no appropriation from
this fund unless specified by RBI
o MFIs have to provide annual BS and P & L account for audit to RBI.
They should provide the return detailing their activities within 90 days
of bill being passed.
 o Any change in the corporate structure of MFI such as shutdown,
amalgamation, take over or restructuring can take place with approval
from RBI
o RBI has the power to issue directions to MFIs on various matters and
is responsible for redressal of grievances for beneficiaries of
microfinance services.
o RBI has authority to set maximum interest rate charged and maximum
margin (diff between lending rate and actual cost) that MFIs can make
o RBI shall create Micro Finance development Fund by raising funds from
donors, institutions and the public along with balance from the existing
micro finance development and equity fund. The central government
after due appropriation from parliament may grant money to this fund.
o Bill allows RBI to impose a penalty upto Rs. 5 lakhs for contravention
(violation) of the bill’s provisions. No civil court has jurisdiction against
any MFI over penalty imposed by RBI.
o Bill gives central govt. authority to delegate certain RBI powers to
NABARD or any other central govt. agency
o Central govt. has the power to except certain MFIs from the provisions
of the bill.
• MUDRA bank: GOI launched the Micro Units Development and Refinance
Agency Limited (MUDRA) bank on 8th April, 2015 with a corpus of RS. 20,000
crores and a credit guarantee corpus of Rs. 3,000 crores.
• Objectives of MUDRA:
o Regulate the lender and borrower of microfinance and bring stability to
microfinance system.
o Extend finance and credit support to MFIs and agencies that lend to
SB, RT, SHGs and individuals.
o Register all MFIs and introduce a performance rating and accreditation
system that results in competitiveness
o Develop the standardized covenants that will form the backbone of the
last–mile business in future.
o Offer a credit guarantee scheme to provide guarantees to loans being
offered to micro business.
o Introduce appropriate technologies.
o Build a suitable framework under the PRADHANMANTRI MUDRA
YOJANA (PMMY) for developing an efficient last mile credit delivery
system to small and micro businesses.
o Major products: MUDRA bank has classified the borrowers into 3
segments – The starters, mid-stage finance seekers, the next level
growth seekers.
o To address the 3 segments, it has launched 3 loan instruments which
are
o SHISHU: Covering loans upto Rs. 50,000/-
o KISHOR: Covering loans above Rs. 50,000/- and upto Rs. 5,00,000 /-
o THARUN: Covering loans above Rs. 5, 00,000/- and upto Rs.10,
00,000/- .
o MUDRA operates as a refinancing institution to NBFCs, MFIs, banks,
primary rending institutions etc, through state/ regional level
intermediaries. The units covered include proprietorship / partnership
running as small manufacturing units, fruits / vegetable sellers,
haircutting saloons, transporters, hawkers, SHGs etc, in rural and
urban areas, with financing requirements upto Rs. 10,00,000.
o MUDRA adopts a credit plus approach for supporting financial literacy,
working with credit bureaus, working with rating agencies etc.
o MUDRA loans are granted during loan melas.
o PMMY – Launched on 8th April, 2015, to “fund the unfunded” to bring
enterprises which are outside the formal banking fold. All “Non-farm
enterprises” under micro and small enterprises segment and engaged
in income generating activities in manufacturing, trading and services
and whose credit needs are upto Rs. 10,00,000 are eligible. The OD of
Rs. 5,000 under PMJDY is classified as MUDRA loans under PMMY.
Banks are further advised to classify all advances granted on or after
8th April, 2015 as MUDRA loans under PMMY. MUDRA loans other
than for retail loans are covered under CGTMSE scheme.
o Customer Relationship Management (CRM) is defined as
comprehensive approach for creating, maintaining and expanding
customer relationship and doesn’t belong just to sales and marketing.
It is the way of thinking about and dealing with customer relationships
(Anderson and Kerr).
o The 4 characteristics most commonly ascribed to services are :
o Intangibility : Abstract and intangible
o Heterogeneity : Non – standard and highly variable
o Inseparability :Services produced and consumed at the same time
o Perishability : It is not possible to store services in inventory
o Methods of setting the price :
o Cost-plus pricing : mark up over all costs
o Rate of return pricing : Also called arget return pricing
o Competitive parity pricing : Following what is set by market leader
o Loss leading pricing : Short-term, to establish position in the market or
to cross-sell other services
o Value based pricing – market driven approach where prices are based
on value perception by the customer
o Relationship rising based on future potential profit streams over the
life time of customers.
• Among all, relationship pricing is considered appropriate form as it ensures
long relationship and also the market oriented approach
• The well tested way of transforming an organization towards the path of
retail banking is creating a marketing oriented organization. In this process,
strategic marketing tools at Strategic (Bank level), tactical (branch level),
and functional level (Product, service level) are extremely useful.
• The Advantages and rick of relationship banking are evident from the
experience of Japanese main branch.
• Firms with relationship bank naturally have easier access to credit, are less
liquidity – constrained in their business.
• Deregulation and increased competition in the financial market pose a threat
to relationship banking.
• BASEL, Regulation and Market Responses: RBI started implementing Basel- I
accord on risk based supervision (RBS) in stages, since last quarter of the
financial year 2002-03. Prior to that, there was uniform supervisory system
in all institutions which was on-site driven supplemented by off-site
monitoring. The process was based on CAMELS/ CALCS (capital adequacy,
asset quality, management, earnings, liquidity and systems; and control).
Objectives of RBS are to optimize supervisory resources and minimize impact
of crisis situations on the financial system that used a RISK MATRIX. RBI has
defined business risk and control risk in great detail. There are 12
assessment areas covering these risks. RBI has built in a system of
incentives and disincentives for ensuring objectives of RBS. The incentive is
longer supervisory cycle and lesser supervisory intervention. The
disincentives are more frequent supervisions and higher supervisory
intervention including directions, sanctions and penalties.
• In order to maintain consistency and harmony with international standards,
banks were advised to adopt standardized approach for credit risk and basic
indicator approach for operational risk with effect from April, 2008.
• As per BASEL 1 accord, corporate lending comes under risk category of
100% whereas BASEL II provides for 4 categories viz. 20, 50, 100 and 150
percent.
• In response to the financial crisis of 2008, BASEL III guidelines were released
in 2010. As the quality and quantity of capital under BASEL II were felt
insufficient to contain risk, BASEL III aimed at making most banking
activities more capital intensive by focusing on 4 vital banking parameters
viz. capital, leverage, funding and liquidity. It was felt that the short coming
in BASEL II norms led to the financial crises of 2008.

BASEL-III establishes tougher capital standards through more restrictive

capital definitions, higher risk-weighted assets (RWA), additional capital
buffers and higher requirements of minimum capital ratios. BASEL III capital
 regulation has been implemented from 1st April 2013 in India in phases. For
international banks, the deadline for implementation of BASEL III is 31st
December, 2018 and for Indian banks it is 31st march, 2018.

• Central government announced INDHRA DHANUSH a revamp plan to infuse

Rs. 70,000 crores to state owned banks over 4 years.
• The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of
India which seeks to consolidate the existing framework by creating a single
law for insolvency and bankruptcy. The Insolvency and Bankruptcy Code,
2015 was introduced in Lok Sabha in December 2015.
• GOI has reduced its stake in IDBI bank to less than 50% which was earlier at
80.16%.
• Banks’ Board Bureau (BBB): Set up on 28th February 2016, with former CAG
Mr. Vinod Roy as its first chairmen is aimed at proposing ways for
consolidation of existing PSBs. It also selects heads and non official directors
on the PSB boards and is expected to be turned into a holding company for
state old banks.
• Credit scoring method reduces the possibility of discrimination in the credit
function.
• Securitization became a major tool to make illiquid assets of the banks
tradable and marketable.
• World Trade Organisation (WTO): Set up in 1995 with conclusion of Uruguay
round of trade talks under GATT and signing of final agreement at
Marrakesh. Aimed at promoting more liberalized multi-lateral trade with
faced removal of all non-tariff barriers, reduction in tariffs, promoting
increased market access through removal of quantitative restrictions on
imports and reduction of certain subsidies on production. The objective of all
these is expansion in world trade and rapid economic growth in trading
countries.
• USA, EU and Japan together account for more than 2/ 3rds of world trade in
goods and services.
• TRIPs – Trade Related Intellectual Property Rights
• TBT – Technical Barriers to Trade
• SPS – Sanitary and Phyto-sanitary Measures
• TRIMs – Trade Related Investment Measures
• India’s textile sector contributes 11% to the country’s total exports and
China is the world’s leading textile and garment’s exporter.
• Textile industry is the second largest employer in the country after
agriculture and contributes approximately 5% to GDP and 14% to Index of
Industrial Production (IIP).
• The Gems and Jewellery sector contributes around 6-7 per cent of country’s
GDP and India is world’s largest cutting & polishing centre for diamonds.
India exports 95% of world’s diamonds.
• India signed Memorandum of Understanding (MoU) with Russia to source
data on diamond trade between the two countries.
• The dyestuff industry has 3 segments – dyes, pigments and intermediates.
• On account of removal of restrictions by WTO, domestic markets faced stiff
competition with entry of foreign goods, MSMEs have greater access to global
markets, better technology, greater funding through FDI/Joint ventures.