Imperial Journal of Interdisciplinary Research (IJIR)
Vol-2, Issue-11, 2016
ISSN: 2454-1362, http://www.onlinejournal.in
Commercial Banks Finance to Small
Industries in India – An Overview
Dr. C. Paramasivan, Ph.D.1 & Ms. A. Jainambu Gani2
1
Assistant Professor of Commerce & Research supervisor,
Periyar E.V.R. College (Autonomous), Tiruchirappalli – 23
2
Ph.D. Research Scholar –Part Time B Category, Department of Commerce
Research and Development Centre, Bharathiar University, Coimbatore
Abstract: Indian banking sectors play a vital role
in the field of socio economic development through
its conventional as well as pioneering services in
the modern periods with innovative banking models
like payments and small finance banks. The central
bank granted in-principle approval to 11 payments
banks and 10 small finance banks in FY 2015-
16.RBI’s new measures may go a long way in
helping the restructuring of the domestic banking
industry. MSME needs liberal financial assistance
from commercial banks to establish and extent
their business operation to meet the global
competition.RBI has formulated several policies
regarding financing to priority sectors particularly
in small industries in the country.
Key words: banking sectors, industrial
development, public sector banks, MSME
Introduction
Growth of industrial development in a
country depends on availability of infrastructural
facilities and credit facilities offered by the
financial institutions particularly commercial
banks. The Indian banking system consists of 26
public sector banks, 25 private sector banks, 43
foreign banks, 56 regional rural banks, 1,589 urban
cooperative banks and 93,550 rural cooperative
banks, in addition to cooperative credit institutions.
Public-sector banks control nearly 80 percent of the
market, thereby leaving comparatively much
smaller shares for its private peers. Banks are also
encouraging their customers to manage their
finances using mobile phones. The value of mobile
banking transactions in December 2015 increased
four times year-on-year and jumped by 46 per cent
over the previous month to Rs 49,029 crore (US$
7.34 billion), as per data from the RBI.
MSME Sectors
Micro, Small and Medium Enterprise
(MSME’S) are recognized having enormous
potential for employment generation and wealth
creation in any economy in addition other
immeasurable virtues. Micro , Small and Medium
Enterprises play a vital role for the growth of
Indian economy by contributing 45 per cent of the
Imperial Journal of Interdisciplinary Research (IJIR)
industrial output, 40 per cent of exports, 42 million
in employment, create one million jobs every year
and produces more than 8000 quality products for
the Indian and international markets. The
Government of India enacted the Micro, Small and
Medium Enterprises Development Act 2006 to
provide a policy framework for the development of
the MSMEs. The Micro, Small and Medium
Enterprises Development Act 2006 groups MSME
firms into manufacturing enterprises and service
enterprises. A manufacturing firm with investment
in plant and machinery not exceeding Rs. 25 lakhs
is considered a micro enterprise. Firms with
investment in plant and machinery between Rs 25
lakhs and Rs 5 crores are considered a small
enterprise, and medium enterprises are those where
the investment is in the range of Rs. 5 crores to Rs
10 crores . In the service group, for investment in
equipment of less than Rs 10 lakhs,the firm would
be in the micro category, if it is between Rs 10
lakhs to Rs 2 crores,then it would fall in the small
enterprise category; if investment in equipment is
in the range of Rs 2 crores to Rs 5 crores, then it
would fall in the medium enterprise category. As a
result, MSMEs are today exposed to greater
opportunities for expansion and diversification
across the sectors. The Indian market is growing
rapidly and Indian industry is making remarkable
progress in various Industries like Manufacturing,
Precision Engineering, Food Processing,
Pharmaceuticals, Textile & Garments, Retail, IT,
Agro and Service sectors. SMEs are finding
increasing opportunities to enhance their business
activities in core sectors.
Review of Literature
Sivasankar. P.R, and Ekambaram.K, K
(2005) concluded that commercial banks continue
to play an important role in financing small scale
industrial sectors. The growth rate of bank credit
has been low as compared to the growth rate of
production from small scale industrial sector.
Rajan Kumar and SubhashChander,
(2005) focused that most of the small scale
industries in Punjab depended heavily on the
owner’s capitals for financing fixed capital. They
resorted to long – term borrowings under
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Imperial Journal of Interdisciplinary Research (IJIR)
Vol-2, Issue-11, 2016
ISSN: 2454-1362, http://www.onlinejournal.in
compulsion and not as a matter of policy or
convenience to take advantage of favourable
financial leverage. Commercial banks are the most
prominent institutions approached by the units for
long – term borrowings followed by Punjab
Financial Corporation, Punjab Small Industries
Development Corporation of India and
DistrictIndustrialCenter.
Sindhu Vijayakumar(2007), noted that
commercial banks sanction loans to industries but
their focus is generally on large – scale units. They
hesitate to provide large funds to small – scale units
because of two reasons. First, small – scale units
generally need small amount of finance. Second
creditworthiness of small – scale entrepreneurs is
doubtful. So small scale entrepreneurs especially
women entrepreneurs, largely depend on financial
institutions other than commercial banks.
RamachandracRao. K.S, Abhiman Das
and Aravind Kumar Singh, (2006) viewed that the
definition and coverage of the small scale industrial
sector is being revised from time to time by
excluding more and more commodities from the
reserved small -scale industries list and also
through liberalizing the credit delivery mechanism
of the banking industry. Despite increase in the
coverage of the small-scale industrial sector, its
share in bank credit decreased and growth
fluctuated.
Thingalaya. N.K, (2006) described that
new generation banks are normally not interested in
small amounts of credit. They have ventured in to
this only after the upward revision is made in the
definition of small and medium sector, and with a
narrow base of advances made; their progress in
credit disbursements appears impressive.
Prasain.G.P. Nixon Singh. E. and Sharat
Singh.N, (2006) concluded that there was a severe
lack of capital as well as credit, largely because of
low productivity in many branches of small scale
industries. The commercial banks and financial
agencies may establish more small scale industrial
specialized branches at least one in every district
Performance of all Scheduled Commercial Banks
Table -1 All Scheduled Commercial Banks
Items
2008-09
No. of banks 80
No. of offices 67562
No. of employees 954684
Business per employee 73.98
Profit per employee 0.55
Capital and Reserve & Surplus 3679473
Deposits 40632011
Imperial Journal of Interdisciplinary Research (IJIR)
headquarters to cater to the financial needs of small
entrepreneurs
Basarkar.A(2006) said that banks did not
doubt technical capabilities of delivering on the
project. The bankers probably expect small
enterprises to grow at only 20-25 percent and not
more. His study indicates that, 32000 small and
medium enterprises and 2,500 large corporate by
rating agency, CRISIL, shows that small and
medium enterprises have lower access to bank
funding.
Parimalam. M(2006), concluded that
commercial banks performance towards small-scale
industries in Erode district is not satisfactory. They
are confronted with so many problems. If they are
expected to play the role assigned to them
effectively, right type of climate and effective
solutions of the problems has to be provided.
Joseph AndrewKuzilwa (2005), viewed
that lack of access to credit has been identified as
one of the major constraints hindering the
development of small business and the supply of
entrepreneurial activities not only in Tanzania but
also in other developing countries. Commercial
banks have traditionally concentrated their lending
on large formal enterprises which possess collateral
and therefore, are deemed to be less risk from.
The Banking news (2006), Tamil Nadu
Merchant Bank limited has introduced a new loan
product called small and medium enterprises credit
to cater to the exclusive needs of the small and
medium enterprises sector. Under this scheme, an
individual can get a maximum loan of Rs. 2 crore
and group borrowers up to Rs. 10 crore.
Ruddar Datt and Sundharam. K.P.M
(2002), said that considering the vital role of small
industries within the Indian Industrial Economy,
the total amount of loans granted to small industry
forms a very small part of the total loans of Indian
industry. In March 1994, as against a total advance
of Rs. 80,492 crores to all industries from
commercial banks, small industries received Rs.
22, 620 crores that is 28.1 percentages.
(Amount in ` Million)
Year
2009-10 2010-11 2011-12 2012-13
81 81 87 89
72906 78215 85262 92114
955990 1001096 1048520 1096984
86.23 99.03 109.95 121.33
0.60 0.70 0.78 0.83
4301613 5099192 6085618 7089300
47469196 56158743 64535485 74295324
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Imperial Journal of Interdisciplinary Research (IJIR)
Vol-2, Issue-11, 2016
ISSN: 2454-1362, http://www.onlinejournal.in

Investments 14495506 17290059 19236333 22339033 26132752

Advances 29999239 34967200 42974875 50735592 58797025
Interest Income 3884816 4151786 4913407 6552839 7636115
Other income 752204 792676 798501 863437 977866
Interest expended 2632232 2720836 2989248 4303557 5138027
Operating expenses 895814 1000279 1231403 1375720 1565855
Net Interest Margin 2.62 2.54 2.91 2.90 2.79
Cost of Funds (CoF) 5.99 5.10 4.75 5.90 6.12
Return on advances adjusted to COF 4.56 4.19 4.47 4.51 4.21
Wages as % to total expenses 13.60 14.85 17.22 13.73 13.02
Return on Equity 15.44 14.31 14.96 14.60 13.84
Return on Assets 1.13 1.05 1.10 1.08 1.03
CRAR 13.97 14.54 14.19 14.24 13.88
Net NPA ratio 1.05 1.12 0.97 1.28 1.68
Source: Banking statistics in India

The above table indicates that the
performance of all scheduled commercial banks in
India during the year 2008-09 to 2012-13. Numbers
of banks have been increased from 80 to 89 and
also number of branches has been increased to
92114 in the year 2012-13. Number of employees
rose to 1096984 and Business per employee
recorded with 121.33.
As regards the business performance,
Capital and Reserve & Surplus amounted to Rs.
7089300 million, deposits amounted to Rs.
74295324 million, investment amounted to Rs.
26132752 million, advances amounted to Rs.
58797025 million and amounted to Rs. 58797025
million.
As regards the earnings and expenditure of
All Scheduled Commercial Banks in 2012-13,
Interest Income amounted to Rs. 7636115 million,
other income amounted to Rs. 977866 million,
Interest expended amounted to Rs. 5138027 million
and Operating expenses amounted to Rs. 1565855
million. Return on Equity is recorded with 13.84
per cent , CRAR is 13.88 per cent and Net NPA
ratio is 1.68.

Region wise distribution of Scheduled Commercial Banks' Advances to MSME

Table -2
(Amount in Million)
S.No 2013 2014
Region No. of Accounts Amount No. of Amount
outstanding Accounts outstanding
1 Northern 1609506 1478297 1837097 1863009
2 North Eastern 235008 93215 255616 112901
3 Eastern 1702537 672408 1739204 848132
4 Central 1505533 749533 1779208 982233
5 Western 2021571 1642328 2191900 1983530
6 Southern 4008594 1767170 4648726 2211270
7 Total 11082749 6402954 12451751 8001075
Sources: Report of RBI

The above table reveals that Region wise
distribution of Scheduled Commercial Banks'
Advances to MSME in the year 2013 and 2014. In
northern region, there are 1837097 accounts with
the outstanding amounted to Rs. 1863009 million,
In north eastern region, there are 255616 accounts
with the outstanding amounted to Rs. 112901
million, In eastern region, there are 1739204
accounts with the outstanding amounted to Rs.
848132 million, In central region, there are
1779208 accounts with the outstanding amounted
to Rs. 982233 million, In Western region, there are
2191900 accounts with the outstanding amounted
to Rs. 1983530 million and In southern region,
there are 4648726 accounts with the outstanding
amounted to Rs. 2211270 million. As on whole,
commercial banks outstanding amounted to Rs.
8001075 million with 12451751 accounts in the
year 2014.

Imperial Journal of Interdisciplinary Research (IJIR) Page 1514

Imperial Journal of Interdisciplinary Research (IJIR)
Vol-2, Issue-11, 2016
ISSN: 2454-1362, http://www.onlinejournal.in

Conclusion 8. Rajan Kumar, Subhashchander (2005),

The banking system occupies an important
place in a nation’s economy. A banking institution
is indispensable in a modern society. It plays a
pivotal role in the economic development of a
country and forms the core of the money market in
an advance country. With the effects of the
globalisation, banking sectors become highly
competitive and technology based with
multidimensional products to the customers and
public. Commercial banks particularly public
sectors banks are extremely responsible to the
provides financial support to industrial sectors not
only for generate revenue but also for the
development of industries in a particular region
which the banks is located. MSME needs liberal
financial assistance from commercial banks to
establish and extent their business operation to
meet the global competition.RBI has formulated
several policies regarding financing to priority
sectors particularly in small industries in the
country.
“Financing of fixed assets in Small scale
industries”, Journal of Accounting and
Finance, Vol 19: No.1, pp.186-188.
9. Ram Chandra Rao.K.S, Abhiman Das,
aravidn Kumar Singh. (2006),
“Commercial bank lending to Small scale
Industry”, Economic and Political weekly,
March 18, p.368.
10. Ruddar Datt and Sundharam. K.P.M
(2002), Indian Economy, ‘Policies and
Programmes to remove Disabilities’, S.
Chand and Company Limited, New Delhi,
p.362.
11. Sindhu Vijayakumar (2007), “Sources of
finance for small scale units”, Facts for
you, p.28.
12. Thingalaya.N.K (2006), “Who is financing
the SME segment” Industrial economist,
15-29 January, p.24.

References

1. Sivasankar.P.R, Ekambaram. K (2005),

“Role of public sector Banks in the
development of small scale sector in
India”, Journal of Banking finance, vol.
30, pp.3-5.
2. Banking News (2006), ‘Tamil Nadu
Merchant bank Limited launches credit
schemes for small and medium
enterprises,” Journal of banking and
finance, Vol. XIX No.9,p.23.
3. Basakar. A (2006), Survey of India’s
small and medium enterprises’, Business
Today, September 10, p.15.
4. Joseph Andrew Kuzilwa (2005), “The role
of credit for small business success., A
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Development Fund in Tanzania., The
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14,p.129.
5. Mary Jesselyn. Co (2004), ‘The formal
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6. Parimalam. M (2006), “Commercial
Banks performance towards SSI sectors in
Erode District”, M.Phil dissertation,
Periyar University, p.108.
7. Prasain.G.P, Nixon singh.E.N, Sharat
Singh. N (2006), ‘Financing Pattern of
Small scale Industries’, The Indian Journal
of Commerce, Vol. 59, No.4,p.123.

Imperial Journal of Interdisciplinary Research (IJIR) Page 1515