Chapter-1

INTRODUCTION TO THE STUDY

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1.1

Introduction
SMEs are the backbone of any developing nation like India. Its importance and

contribution to the nation cannot be ignored. These enterprises have been in existence since ages but it got an organised format only after the independence. The growing importance and the its contribution to the economy has resulted in the making of this report. The following data gives a quick review of the Indian SME sector:
1.1.1

Evolution of SME
Evolution of SME can be broadly grouped into three periods:

Phase – I: 1948-1991
Recognition to the M & S Enterprises; To expand employment, equitable distribution of the national income, etc.,  The Micro, Small and Medium Enterprises Development Organisation was set up in 1954 as an apex body for sustained and organised growth of micro, small and medium enterprises. In 1956 -National Small Industries Corporation, Khadi and Village Industries Commission and the Coir Board set up.  The supportive measures like reservation of items for their exclusive manufacture, access to bank credit on priority through the Priority Sector Lending, etc.,  MSME – Development Institutes set up all over India to train youth in skills/entrepreneurship. German and Danish assistance for providing technical skilltraining to MSMEs.

Phase – II: 1991 - 1999
 The new Policy for Small, Tiny and Village Enterprises of August ,1991.  To replace protection with competitiveness to infuse more vitality and growth to MSEs in the face of foreign competition and open market.  Measures concentrated on improving infrastructure, technology and quality.  The Small Industries Development Bank of India (SIDBI) and a Technology Development and Modernisation Fund were created to accelerate finance and technical services to the sector.  A Delayed Payment Act was enacted to facilitate prompt payment of dues to MSEs (Maximum period upto 45 days).
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Phase – III: 1999 onwards.
The Ministry of MSME created in 1999 to provide focused attention to the sector  The new Policy Package -August, 2000 to address the persisting problems relating to credit, infrastructure, technology and marketing more effectively.  A Credit Linked Capital Subsidy Scheme was launched to encourage technology up gradation  Credit Guarantee Scheme to provide collateral-free loans to micro and small entrepreneurs.  In 2006, enactment with the passage of the MSME Act.  In March, 2007 - a third Package for the Promotion of Micro and Small Enterprises was announced for the promotion and development of the sector 1.1.2 Traditionally defined as       Small Scale Industries (SSIs) Small Scale Enterprises (traders and services) Small Road Transport Organisation Professionals Focus primarily on manufacturing and less on servicing Concentration on traditional industry - textile, engineering, jute, auto ancillary

According to a UNIDO report, SMEs are generally based on three assumptions.    it sustains a broad and diversified private sector and creates employment and thus benefits the country as a whole a strong SME sector will not emerge without support from the state, but they suffer disadvantages in the markets because of their size the programs aimed at smallest enterprises, have been justified more in terms of their welfare impact than their economic efficiency.

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1.1.3 Sectors of SME There are basically three sectors of SME. They are:   Manufacturing Servicing

The Importance of Small and Medium Enterprises (SMEs) in any economy cannot be overlooked as they form a major chunk in the economic activity of nations. They play a key role in industrialization of a developing country like India. They have unique advantages due to:• their size • their comparatively high labour-capital ratio • need a shorter gestation period • focus on relatively smaller markets • need lower investments • ensure a more equitable distribution of national income • facilitate an effective mobilization of resources of capital and skills which might otherwise remain unutilized and • Stimulate the growth of industrial entrepreneurship. 1.1.4 Indian SME at a Glance In India, SME sector accounts for around 95% of the industrial units, 40% of the value added in the manufacturing sector output, 34% of exports and provides direct employment to 20 million persons in around 3.6 million registered SME units. The SME sector in India contributed to about 8% of India’s GDP during 2010-11. Now, the question is, Can it overtake the invasion of foreign companies through their innovative, quality,

affordable/reasonable and readily available products? In developing countries like India, making the SMEs more competitive is particularly pressing as trade liberalization and deregulation increase the competitive pressures and reduce the direct subsidies and protection that Governments offer to SMEs.

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1.1.5 SMEs Financing – “The Rising” India

The only way out of the mire is that the Indian manufacturing sector could be strengthened by the existing rural systems and making them self-sufficient. This could take place only by helping Small and Medium Enterprises and the rural artisans (people with innate skills and talents) in becoming effective and competitive enough to face the future. A number of issues and business practices of global players and markets can be observed, learnt and adapted for ensuring competitiveness of Indian SMEs

Let us take an anecdote, which is a part of the school days about the meaning of domestic and global competition. It is about two friends who while walking through a dense forest suddenly hear the roar of a bear. One of them immediately changes his shoes that he is wearing in, to the one, he uses for running. His friend asked him: “If you change your shoes, do you think you can out beat the bear?” The other one replied: “The idea is not to beat the bear, but you.” The moral of the story is that the Indian SME sector should be strong enough to out beat the other players in the economy and not the competition itself. 1.1.6 Prime Minister’s Task Force on Micro, Small and Medium Enterprises

A High Level Task Force was constituted by the Government of India (Chairman: Shri T K A Nair) to consider various issues raised by Micro, Small and Medium Enterprises (MSMEs).The Task Force recommended several measures having a bearing on the functioning of MSMEs, viz., credit, marketing, and taxation. labour, The exit policy,

infrastructure/technology/skill

development

comprehensive

recommendations cover measures that need immediate action as well as medium term institutional measures along with legal and regulatory structures and recommendations for North-Eastern States and Jammu & Kashmir. Banks are urged to keep in view the recommendations made by the Task Force and take effective steps to increase the flow of credit to the MSE sector, particularly to the micro enterprises.

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35. apart from extending the scope to medium enterprises. A small-scale unit is defined as one having original investment in plant and machinery not exceeding Rs 1 crore. the paradigm shift that has taken place is the inclusion of the services sector in the definition of Micro. The Government felt that a separate category of medium enterprises (MEs) needs to be recognised and. 2010 advising implementation recommendations of the Prime Minister‟s task Force on MSMEs. The Indian SME (small and medium enterprise) market seems to be emerging as a promising hunting ground for banks and financial institutions because it poised for tremendous growth. 2006 has modified the definition of micro. No. 2006 on June 16. 2006 which was notified on October 2. 2006 The Government of India has enacted the Micro. 2006. 2007 Considering the growth potential of Indian SMEs. has been adopted for purposes of bank credit vide RBI circular ref.1. accordingly.No. Small & Medium Enterprises Development (MSMED) Act. SME & NFS BC. S. they largely depend on borrowed funds from banks and financial institutions. With the enactment of MSMED Act 2006. the definition.31/2009-10 dated June 29. headed by Mr A.000 crore in 20042005 to Rs 1. as recommended by the Working Group on Flow of Credit to the SSI sector.A circular was issued to all scheduled commercial banks vide RPCD. As the access of SMEs to capital markets is very limited. 90/06.63/ 06. as per the Act. While recognizing the needs for larger investment in some of the more important segments of small scale industries (SSIs). small and medium enterprises engaged in manufacturing or production and providing or rendering of services. the Government of India has asked public sector banks to achieve a minimum 20 per cent year-on-year growth in the funding of SMEs that will lead to double the flow of credit to the sector from Rs 67. In majority of the 6 of the . the new policy package clearly defined the medium enterprises as those units having investment in plant and machinery above the small-scale industry limit and up to Rs 10 crore. BC.7 Micro. The Reserve Bank has notified the changes to all scheduled commercial banks. RPCD. Further.02. Small & Medium enterprises.PLNFS. 1.31/ 2006-07 dated April 4. the Government has enhanced this to Rs 5 crore for specified industries.000 crore by 2009-2010. Small and Medium Enterprises Development (MSMED) Act. The MSMED Act. Ganguly.02.

Developing SMEs is not only a means to improve the competitiveness but also for alleviation of poverty. commercial banks extended working capital.3 Objectives of the Study In view of the above backdrop. the term loan and working capital are becoming available from the same source. enabling better credit flow and sustenance of environment issues more effectively and sustainably. with growing demand for universal banking services. To study the growth and development of SMEs in India 7 . 2. infusing technology. 1. the changing global environment has generated demand for introduction of new financial and support services by SMEs. fostering innovation. SMEs in India are in its developing stage and the Government is taking steps enough to bring it in lines with other important sectors and at the same time finding innovative methods of funding such small scale enterprises.economies. To get an overall view of the performance of the two enterprises over the years. Small and Medium Enterprises was set up in the year 1948 and has been developing since its inception. The financial requirements of SMEs have been a matter of concern for the government and hence over the years gained much importance. 1.2 Rationale of the Study SME is one of the important sectors of our country. The concept of Micro. This study helps in understanding the financial requirements of SMEs as well as suggesting methods of improving the borrowing and lending procedure of the bank. while the investment credit to SMEs was being provided by financial institutions. the present study has been undertaken with the following specific objectives:1. It contributes around 8 % to the country‟s growth story and employs around 20 million people. In the recent past. generation of sustainable employment. Besides the traditional needs of finance for asset creation and working capital.

8 . development and future financial requirements of such SMEs have been considered. 1. The Scope for Credit Growth for Punjab National Bank in the SME. 1.3. Moreover the scope of study is limited to understanding only the working capital requirements of the enterprises as this has been an important part of financial requirement of the small industries at the same time the study is limited to the two SMEs of Kolkata falling under SME HUB of PNB branch.4. 1. The method of collection of such data includes personal interaction and interview through unstructured questionnaire. by collecting information about them and having a thorough study on the topic through questionnaire and journals. risk rating and post sanction monitoring of the two enterprises taken into consideration.1 Scope of the Study This study covers various aspects of SME and their financial requirements. All the aspects that are necessary for the growth. To calculate the future financial requirements of the two enterprises taken as case studies. Thus this project will act as a learning device for finance students. Primary sources Primary source includes first hand data from the people in the practical field visit. They are the employees of both the enterprises as well as the owners.4. The study also includes the credit appraisal.2 Sources of Data The project includes data that has been collected both from primary and secondary sources.4 Research Methodology The study has been done about the development and growth of SMEs and their financial requirements.

The area of study considered was quite vast field of study and lack of sufficient time was also a constraint.Secondary sources Valuable information was collected from secondary sources like annual reports of the enterprises from the bank officials. Thus it hopes to be of use for further research work. Inherent limitation of the study has been the accuracy and authenticity of published data. The primary limitation has been the owner‟s non-cooperation in providing much of their financial data. journals. Number of enterprises in Kolkata being very large and spread in different parts of the district. books. 1. and internet websites.5 Limitations of the Study Time was a limiting factor in this study. it was not possible to interrogate the owners of each and every enterprise. 9 . annual reports of certain SMEs. Thus this research work mainly tries to understand the health of the SMEs with primary focus on their financial requirements limited to the scope of working capital requirements within a stipulated time of two months. circulars. The study required personal interrogation with the owners. newspapers. magazines.

Chapter2 COMPANY PROFILE 10 .

PNB is ranked as the 2nd largest bank in the country after SBI in terms of branch network.52% Mar‟09) and a Return on Assets of 1. PNB has achieved significant growth in business which at the end of March 2010 amounted to Rs 435931 crore. PNB has remained fully committed to its guiding principles of sound and prudent banking. Gold coins & asset management business. The Earning per Share improved to Rs 123. PNB has continued to retain its leadership position amongst the nationalized banks. business and many other parameters.39% Mar‟09). As on March‟10. its ratio of Priority Sector Credit to Adjusted Net Bank Credit at 40. etc Since its humble beginning in 1895 with the distinction of being the first Swadeshi Bank to have been started with Indian capital. During the FY 2009-10. total Business.77 (Rs 416.03 Mar‟09) while the Book value per share improved to Rs 514.53% respectively. debit card.85% share of CASA deposits.74 Mar‟09). bullion business. with 40.1 Introduction With over 56 million satisfied customers and more than 5000 offices including 5 overseas branches.44% (1. Operating and Net profit in the year 2009-10. Besides being ranked as one of India's top service brands. life and non-life insurance. Advances. Apart from offering banking products. The bank enjoys strong fundamentals.7% was also higher than the stipulated requirement of 40% & 18% respectively.57% in Mar‟10 (3. Punjab National Bank continues to maintain its frontline position in the Indian banking industry. the Bank achieved a net profit of Rs 3905 crore.15% and 5.98 (Rs 98. the bank has retained its NUMBER ONE position among the nationalized banks in terms of number of branches. the bank has also entered the credit card. During the FY 2009-10. large franchise value and good brand image. Assets.71% and 0. The impressive operational and financial performance has been brought about by 11 .01% respectively. In particular.5% & Agriculture Credit to Adjusted Net Bank Credit at 19. The Bank has been able to maintain its stakeholders‟ interest by posting an improved NIM of 3. Bank has a strong capital base with capital adequacy ratio of 14.16% as on Mar‟10 as per Basel II with Tier I and Tier II capital ratio at 9. the Bank has the Gross and Net NPA ratio of 1.PUNJAB NATIONAL BANK 2. Deposit.

SME & Agri Advances and with more inclusive approach to banking. With the help of advanced technology. Towards developing a cost effective alternative channels of delivery. With its policy of inclusive growth.in) PNB has always looked at technology as a key facilitator to provide better customer service and ensured that its „IT strategy‟ follows the „Business strategy‟ so as to arrive at “Best Fit”. The Bank has launched a drive for biometric smart card based technology enabled Financial Inclusion with the help of Business Correspondents/Business Facilitators (BC/BF) so as to reach out to the last mile customer.co. vegetable vendors. the Bank has been a frontrunner in the industry so far as the initiatives for Financial Inclusion is concerned. the Bank‟s mission is “Banking for Unbanked”. improved margin management.42 16.98 14. 12 .29 23.09 (Source:www. the Bank with more than 3700 ATMs has the largest ATM network amongst Nationalized Banks. payment of utilities bills. dairy farmers. purchase of airline tickets. better asset liability management. The Bank has made rapid strides in this direction. etc. The Bank has started several innovative initiatives for marginal groups like rickshaw pullers.01 15. All branches of the Bank are under Core Banking Solution (CBS) since Dec‟08. construction workers. The performance highlights of the bank in terms of business and profit are shown below: ( Rs in Crore) Parameters Operating Profit Net Profit Deposit Advance Total Business Mar'08 4006 2049 166457 119502 285959 Mar'09 5690 3091 209760 154703 364463 Mar'10 7326 3905 249330 186601 435931 CAGR (%) 22.pnb. thus covering 100% of its business and providing „Anytime Anywhere‟ banking facility to all customers including customers of more than 3000 rural & semi urban branches. Retail. thrust on recovery and increased efficiency in core operations of the Bank. The Bank has also been offering Internet banking services to its customers which also enables on line booking of rail tickets. etc.Bank‟s focus on customer based business with thrust on CASA deposits.

who was also the founder of Dayal Singh College 13 . the Bank is planning to realize its global aspirations. Backed by strong domestic performance. representative offices at Almaty.2 History Punjab under the British especially after annexation in 1849 witnessed a period of rapid development giving rise to a new educated class fired with a desire for freedom from the yoke of slavery. a wholly owned subsidiary in UK. Lala Harkrishan Lal who had returned from England with ideas regarding commerce and industry. Dubai. He felt keenly "the fact that the Indian capital was being used to run English banks and companies. 2. was eager to give them practical shape. 1 each at Kabul and Dubai. Bank is pursuing upgradation of its representative offices in China & Norway and is in the process of setting up a representative office in Sydney. had long cherished the idea that Indians should have a national bank of their own. 1895. the profits accruing from which went entirely to the Britishers whilst Indians had to contend themselves with a small interest on their own capital". the efforts materialized. the Bank is implementing 40 projects in 16 States.” in Bhutan. On May 23. the common objective of providing country with a truly national bank which would further the economic interest of the country. Australia and taking controlling stake in JSC Dana Bank in Kazakhastan. a joint venture with Everest Bank Ltd.Under Branchless Banking model. The idea was first mooted by Rai Mool Raj of Arya Samaj who. Lala Lajpat Rai sent round a circular to selected friends insisting on an Indian Joint Stock Bank as the first special step in constructive Swadeshi. Nepal and a JV banking subsidiary “DRUK PNB Bank Ltd. however. with 2 branches at Hongkong. Amongst the cherished desires of this new class was also an overriding ambition to start a Swadeshi Bank with Indian Capital and management representing all sections of the Indian community. The first Board of 7 Directors comprised of Sardar Dayal Singh Majithia. Shanghai and Oslo. At the instance of Rai Mool Raj. The founding board was drawn from different parts of India professing different faiths and a varied back-ground with. The Bank opened for business on 12 April. as reported by Lal Lajpat Rai. Bank continues its selective foray in international markets with presence in 9 countries. 1894.

in 1913."Your Bank survived. 14 . Punjab. Lala Harkishan Lal who became widely known as the first industrialist of Punjab. Lala Harkishan Lal. Thus a Bengali. Parsi. EC Jessawala. the banking industry in India was hit by a severe crisis following the failure of the Peoples Bank of India founded by Lala Harkishan Lal. A Maiden Dividend of 4% was declared after only 7 months of operation. eminent Bengali pleader who was also the Chairman of the Reception committee of the Indian National Congress at its Lahore session in 1900. merchant and philanthropist of Multan. Dayal Singh Majithia was the first Chairman. remarked. merchant and Rais of Amritsar. 62 crores. Punjab National Bank survived. The first branch outside Lahore was opened in Rawalpindi in 1900. Bakshi Jaishi Ram. From a modest base of 71.and the Tribune. the then Financial Commissioner. was operated by Mahatma Gandhi and Pandit Jawaharlal Nehru. The Bank made slow. of Lahore. Lala Lajpat Rai joined the Board of Directors soon after. 10 crores to Rs... Lala Lalchand one of the founders of DAV College and President of its Management Society. a Sikh and a few Hindus joined hands in a purely national and cosmopolitan spirit to found this Bank which opened its doors to the public on 12th of April 1895. It spoke volumes for the measure of confidence reposed by the public in the Bank's management. They went about it with a Missionary Zeal. the first secretary to the Board and Shri Bulaki Ram Shastri Barrister at Lahore. a great banker.no doubt due to good management". was appointed Manager. On March 31.. Sh. and Lala Dholan Dass. Kali Prosanna Roy. Lala Lajpat Rai was the first to open an account with the bank which was housed in the building opposite the Arya Samaj Mandir in Anarkali in Lahore. Lala Prabhu Dayal. the Bank officials decided to leave Lahore and transfer the registered office of the Bank to Delhi and permission for transfer was obtained from the Lahore High Court on June 20. As many as 78 banks failed during this crisis. 1947. an eminent Civil Lawyer of Lahore. JH Maynard. a leading Rais.. the number of branches increased to 278.. but steady progress in the first decade of its existence. Mr. which in the decade that followed. Deposits grew from Rs. a well known Parsi merchant and partner of Jamshedji & Co. It was during this period that the Jalianwala Bagh Committee account was opened in the Bank. The five years from 1941 to 1946 were ones of unprecedented growth. 1947.

1947. Deposits grew from Rs."Your Bank survived. Punjab.The Bank then embarked on its task of rehabilitating the displaced account holders. The Bank was forced to close 92 offices in West Pakistan 15 .. On March 31. Lala Lajpat Rai joined the Board of Directors soon after. the banking industry in India was hit by a severe crisis following the failure of the Peoples Bank of India founded by Lala Harkishan Lal. Punjab National Bank survived.. It had total staff strength of nine and the total monthly salary amounted to Rs. As many as 78 banks failed during this crisis. but steady progress in the first decade of its existence. remarked. Many a staff member fell victim to the widespread riots in the discharge of their duties. It spoke volumes for the measure of confidence reposed by the public in the Bank's management. 10 crores to Rs. Authorised total capital of the Bank was Rs.. 62 crores. It was during this period that the Jalianwala Bagh Committee account was opened in the Bank. Lala Lajpat Rai was the first to open an account with the bank which was housed in the building opposite the Arya Samaj Mandir in Anarkali in Lahore. The policy paid rich dividends by opening up an era of phenomenal growth. JH Maynard. Such gestures cemented their trusts in the bank and PNB became a symbol of Trust and a name you can bank upon. Surplus staff posed a big problem. PNB was then housed in the precincts of Sreeniwas in the salubrious Civil Lines.. the number of branches increased to 278. From a modest base of 71. The first branch outside Lahore was opened in Rawalpindi in 1900. The five years from 1941 to 1946 were ones of unprecedented growth. 20000. which in the decade that followed. The 1929 Wall Street crash plunged the world into a severe economic crisis. the then Financial Commissioner.no doubt due to good management". Delhi. the working capital was Rs.. Mr.The years 1926 to 1936 were turbulent and loss ridden ones for the banking industry the world over. in 1913. 1947. the Bank officials decided to leave Lahore and transfer the registered office of the Bank to Delhi and permission for transfer was obtained from the Lahore High Court on June 20. 2 lakhs. The conditions deteriorated further. was operated by Mahatma Gandhi and Pandit Jawaharlal Nehru. The Bank made slow. Fast expansion became a priority. His younger brother joined the Bank as a Manager. The migrants from Pakistan were repaid their deposits based upon whatever evidence they could produce. 320. A Maiden Dividend of 4% was declared after only 7 months of operation.

From its dwindled deposits of Rs. Gobind Ballabh Pant. 19 crores in 1949 to Rs. PNB has always been a "People's bank" serving millions of people throughout the country and also had the proud distinction of serving great national leaders like Sarvshri Jawahar Lal Nehru. R Kamath K. 2. 243 crores by July 1969 when it was nationalised. In 1962. 43 crores in 1949 it rose to cross the Rs. and became the second largest bank in the private sector. Smt. Indira Gandhi etc.K Mishra T.3 Mission of the Bank Banking for the Unbanked 2. Rafi Ahmed Kidwai. continued to maintain a few caretaker branches.R Kamath Ravneet Kaur Jasbir singh V. 355 crores mark by the July 1969.N Chaturvedi Designation Chairman Managing Director Director Director Director Director 16 . Lal Bahadur Shastri. Its number of offices had increased to 569 and advances from Rs. 2. it amalgamated the Indo-Commercial Bank with it. The Bank.constituting 33 percent of the total number and having 40% of the total deposits.3 Vision of the Bank To be a leading Global bank with Pan India footprints and become a household brand in the Indo-Gangetic Plains providing entire range of financial products and services under one roof. however. the Bank took over the assets and liabilities of Bharat Bank Ltd. In 1951. Since inception in 1895.4 Board of Directors Name K.

This contributes to the fact that PNB has been able to continuously improve its performance and has successfully retained its position of being the second largest public sector bank in terms of revenue. Moreover its experienced management base has been able to take the organisation to greater heights along with its wide variety of products and services. 17 .G R Sundaravadivel D. K Single Pradeep kumar Mohinder Paul Singh Mushtaq A Antulay Rakesh sethi M V Tanksale Director Director Director Director Director Executive Director Executive Director 2.5 Products and Services          Insurance Business Mutual fund Merchant Banking ASBA Wealth Management Services NSE Tracker Internet Banking Share Trading Mobile Banking From the above information we see that PNB has had a very humble beginning and has slowly spread its wings.

Chapter 3 SME – AN OVERVIEW 18 .

2 crore.S. 3. 5 crore. They are the engines of growth in developing and transition of economies. 2006) are specified below. and (iii) A medium enterprise is an enterprise where the investment in plant and machinery is more than Rs. processing or preservation of goods as specified below: (i) A micro enterprise is an enterprise where investment in plant and machinery does not exceed Rs. In case of the above enterprises.10 crore. (ii) A small enterprise is an enterprise where the investment in plant and machinery is more than Rs.10 lakh but does not exceed Rs. 2006 (Annex I). fittings and other items not directly related to the service rendered or as may be notified under the MSMED Act. (b) Enterprises engaged in providing or rendering of services and whose investment in equipment (original cost excluding land and building and furniture. 25 lakh but does not exceed Rs. (i) A micro enterprise is an enterprise where the investment in equipment does not exceed Rs. 1722(E) dated October 5.10 lakh. exports and employment.5 crore but does not exceed Rs.1 Definition of Micro.O.SMALL and MEDIUM ENTERPRISES (SMEs) play a catalytic role in the development of any country. investment in plant and machinery is the original cost excluding land and building and the items specified by the Ministry of Small Scale Industries vide its notification No. Small and Medium Enterprises (a) Enterprises engaged in the manufacture or production. In India they account for a significant proportion in manufacturing. (ii) A small enterprise is an enterprise where the investment in equipment is more than Rs. and are major contributors to GDP. 25 lakh. and 19 .

NABARD.(iii) A medium enterprise is an enterprise where the investment in equipment is more than Rs.1.62 lakhs worth of goods or services with an approximate value addition of ten percentage points      Public sector banks‟ overall credit to SME sector grew by 26% in 2006-2007. Lending by banks to medium enterprises will not be included for the purpose of reckoning of advances under the priority sector 3. NSIC.1        Characteristics of SME The growth recorded by SSI in India is 2% more than any other sector The sector accounts for 9% of the country‟s GDP The sector employs more than 20 million people It has been estimated that a lakh rupees of investment in fixed assets in the small scale sector generates employment for four persons Among the large PSBs. which amounted to Rs.000 cores Reserve Bank of India has advised all commercial banks to achieve 20% annual growth in SME lending till 2010 Non-traditional products constitute a massive 95% of the SSI exports SIDO. retail trade.85. SIDBI. 5 crore.1. These will include small road & water transport operators. professional & self-employed persons and all other service enterprises. small business. state bank of India‟s SMEs exposure grew by 24% in 2008 All banks are targeting SMEs credit growth of 25% It has been estimated that a lakh rupees of investment in fixed assets in the small scale sector produces 4. 2 crore but does not exceed Rs. export promotion authorities are actively involved in the development of SMEs in India 45%-50% of the Indian Exports is being contributed by SSI sector 20 .

2   Business Environment of SMEs units These units are mainly dependent on larger customers for business SMEs do not have very good reach for marketing that restricts their volumes and makes them too dependent on large units (in spite of SME expertise in niches)    SMEs are generally starved for funds and have to spend too much time for collections of Accounts Receivable & external funding arrangements Banks are not very keen on supporting these units for working capital due to uncertain business cycles and growth Too much time required to be spent with Govt. This leads to:   Lack of available funds (perpetually caught up in this vicious cycle) Inability to pay competitive wages / salaries to trained professional in working classes  Need for training of the leadership and Promoters of such units 21 .3. / Semi Govt.1.1.3 Challenges Faced by SMEs Lack of adequate Management Training and Bandwidth amongst promoters of such units resulting in lack of:      Non-availability of Business plan leading to ad hoc decision making Lack of Business & Financial discipline Lack of Forward planning resulting in unforeseen situations Lack of cognizance to even appreciate that there is a better way to manage the projects Lack of inadequate internal systems   Inability to attract & retain highly trained manpower in this segment since there is lot of poaching from larger units / MNCs  Lack of succession plans and new generation not available for such causes  Lack of awareness of modern Management practices and specifically Project Management practices and methodologies amongst them  Inadequate attention to financial disciplines and cash flow control (controllable & uncontrollable) affecting even the sheer existence of these units. Agencies 3.

This brings in the concept of SME networks and clusters that stimulate innovative and competitive SMEs. Indian SMEs and rural artisans deserve all the policy support the Government can offer. infrastructure support and adequate working capital finance.4   Risks Faced by SMEs  Management Risks General Management skills / methods / training / attitudes Perpetuation of the units as an ongoing concern  Financial Risks  Lack of Financial Plans (Too many surprises & ad hoc decisions)   Funds & Cash Flow planning  Marketing Risks Reach & Net working Dependence on few customers     Technology Risks (Scope / Costs / Quality) Need for perpetual R&D Technology obsolescence  Human Resource Risks  Need for formally trained manpower  Ability to pay competitive wages  Support Structure & Associates 22 . financing arms. but can be traced back to Alfred Marshall‟s analysis of industrial districts in Britain in 1890s) essentially bring together various stakeholders like technology providers.1. not protection but institutional support to fund modernization and technology up gradation. and others. marketing arms. consultants. labour force.To overcome all these difficulties. What they need is. These concepts (are not something new. for a common good that will help in enhancing the strength of SMEs 3. Also they have to have professional inputs and knowledge about various happenings in their own industries in and around the country.

help diversify economic activity and make a significant contribution to exports and trade.1.5 Some vital statistics  Number of enterprises in this sector.2 SME.1 crore 99.2.43 crore basis of fixed assets number employees India Defined on the basis of limit of historical value of investment in plant & 1.7% and of of Employment (in generated SMEs 75% of the country's employment 99.6 Cr  Number of Manufacturing enterprises – 70 lakh  Number of Service enterprises – 1. Country Definition Number SMEs units) China Defined on the 0. The underlying table gives a global comparison of SMEs.30 crore 4. programmes and enterprise development policies.A Global Scenario SMEs are one of the principal driving forces in the economic development of every nation. Most governments have policies that encourage the growth of SMEs because they facilitate in alleviating poverty by increasing income levels and creating jobs.0% Percentage by total business of 23 . they are flexible and can adapt quickly to changing market demand and supply situations.5% 3. They stimulate private ownership and entrepreneurial skills. Many transition economies have acknowledged that SMEs are crucial for industrial restructuring and have formulated national SME policies.8 Cr  Number of Women enterprises – 20 lakh (8%)  Number of rural enterprises 54.3.

as per the MSMED Act of 2006.57 crore 2.machinery. India SMEs form the backbone of the Indian Economy. Japan Defined on the basis of capital size and number of employees USA Defined by the number of Employees ( Source: Government websites of SMEs of respective countries) 2. Apart from the policy focus and government's thrust towards promoting the SME segment.2% Not Available Not Available Not Available China In China there are two definitions being used: one.755. and the other definition is in terms of the number of employees (small enterprises are between 10 and 50 employees). and is viewed as agents of growth.5 crore 99. with increased focus from several government institutions. and that of large enterprises is 3.0% 0. The actual industrial census shows that the average size for small enterprises is about 15 employees. The SME segment in India has come into the limelight. that of medium enterprises are 893 employees.8 million in book value of fixed assets). on the basis of fixed assets that is. globalisation and India's robust economic growth has opened several latent business opportunities for this 24 .9 crore 99. European Union Defined on the basis of number of people employed in the enterprise.30 crore 8. corporate bodies and banks. the level of fixed assets(small industry is up to $1.

They create wealth. while mediumsized business often refers to those with less than 500 employees 3.3 SME. The classification of SMEs in India is discussed in the next section. exports. which –    Employs fewer than 250 people Has a turnover of less than € 40 million per annum or net balance sheet assets of less than € 27 million Must be less than 25 percent owned by larger company/companies which do not qualify as an SME themselves Japan SMEs are the economic base of the industrial value chain and the underpinning of the Japanese economy. there are said to be more than 60 definitions of small and medium industries used in 75 countries surveyed. In 25 . 60% of SMEs in Japan have direct or indirect transactions with large enterprises in the manufacturing industry. In the United States. small business is defined by the number of employees and it refers to those businesses with less than 100 employees. annual turnover of the company determines the size of an enterprise. foster new ideas and are a key source of new jobs. United States In the US.segment. In some other countries. employment and creation of an entrepreneurial base. a Government Department called SmallBusiness Administration (SBA) sets the definition of small business. According to the EU definition. The European Union (EU) SMEs play a central role in the European economy. whereas certain countries define SMEs on the basis of number of Employees. According to a World Bank study.2% of all businesses are SMEs and these enterprises have provided a safety net by covering 70-80% of total employment. an SME is defined as a company. 99.An Indian Scenario The Small and Medium Enterprises (SMEs) constitute an important segment of the Indian economy in terms of their contribution to the country's industrial production.

GOI) 26 .3. as per the MSME Act 2006 (Investment in plant & micro enterpriseDoes n 3.the Indian context an SME is defined on the basis of limit of historical value of investment in plant & machinery.1 Total Bank Credit to SMEs Year March 2007 2008 2009 ended Public Banks 102550 151137 191307 Sector Private Banks 13136 46912 47916 11637 15489 18138 127323 213538 257361 (Source: RBI) Sector Foreign Banks All SCBs 3.2 Growth And Development of SMEs 1948-1991      Recognition given to micro and small enterprises SIDO set up in 1954 NSIC established in 1955 SISI set up for entrepreneurial and skill DICs set up at state level 1991-1999  SIDBI set up in 1990  IID scheme introduced in 1994  Introduction of technology development and modernization fund in 1995 1999-2006    Ministry of MSME came into being in 1998 CLCSS launched to encourage technology upgradatio n CGS started to provide collateral free loans to entreprene urs Performanc e and credit rating Scheme introduced in 2005 2006 onwards   MSMED Act introduced in 2006 The Act defines medium enterprise for the first time The Act provided the first ever legal framework for recognition of the concept of „enterprise‟ which comprises both manufacturing and service entities 11     (Source: Ministry of Small and Medium Enterprises.3.

3 Indian SMEs future trends With the growth of SMEs the business environment have now started demanding improved servicing standards and a faster cycle time for achieving business success.000 to 10.  National Manufacturing Competitiveness Programme  (NMCP) plans to launch a lean manufacturing project worth Rs 2.Resulting in an increase in Threats Stiff competition from developing economies China poses as a serious threat as they manufacture in bulk and enjoy large scale economies in manufacturing and distribution of goods and services Pricing pressure SMEs are forced to sell at lowest possible prices in order to keep up with competition from other SMEs as well as from established players in the industry.000 units by 2012. The future of SMEs can be briefly explained as follows:  SMEs in future aim to concentrate on lean manufacturing systems in order to keep up with the rising competition. Locational disadvantage Compelled to set up manufacturing units 27 . The project is scheduled to a turnover of 7.30. 3.  10 new tool rooms are to be set up under Public Private Partnership (PPP) as training needs of SMEs are rapidly rising.3.3. manufacturers can increase production and export surplus.  Policies that create an enabling environment for SME growth are devised for the future. Cluster based financing approach and encouragement to credit ratings. thereby increasing overall profitability Increased disposable income .000 crore.4 SWOT analysis of SMEs in India Strengths Self reliance Flexible and self managed business Manufacturing flexibilityProduction as per requirement Availability of cheap labour Extensive use of unskilled labour which is easily available in India Weaknesses High cost of input material Concentration on high quality raw material to keep up with intense competition Lower productivity Lack of specialization and skilled work force resulting in poor efficiency Technological obsolescence Deployment of outdated technology and excessive dependence on manual operations Opportunities End of quota regime – End of quota regime replaced protection with competitiveness to infuse more vibrancy and growth to SMEs in the face of foreign competition and open market Shift in domestic market -Due to globalisation and liberalization. are some of the initiatives to be undertaken to double the flow of institutional credit towards SMEs by 2010.

The Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGMSE) was launched by the Government of India to make available collateral-free credit to the micro and small enterprise sector. established a Trust named Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) to implement the Credit Guarantee Fund Scheme for Micro and Small Enterprises. 2007. the corpus is likely to be raised to Rs. 28 .purchasing power and consequently an increased demand for goods and services Emerging economy and expansion . 2000 and is operational with effect from 1st January 2000.2500 crore. Both the existing and the new enterprises are eligible to be covered under the scheme. The problem is more serious for micro enterprises requiring small loans and the first generation entrepreneurs. The corpus of CGTMSE is being contributed by the Government and SIDBI in the ratio of 4:1 respectively and has contributed Rs. The scheme was formally launched on August 30.These laws pose restrictions on functioning of SMEs 3. Based on the future requirement.5 CGTMSE One of the major causes for low availability of bank finance to this sector is the high risk perception of the banks in lending to MSEs and consequent insistence on collaterals which are not easily available with these enterprises. automobile etc resulting in higher domestic and international trade 199 in rural areas.Growth in sectors like manufacturing. Small and Medium Enterprises and Small Industries Development Bank of India (SIDBI). retail.1346. due to high cost of land and labour in urban areas International labour and environmental laws . The Ministry of Micro.54 crore to the corpus of the Trust up to September 30.

6 PNB’s association with SME PNB‟s association with the SME sector has been very fruitful.To MSEs 27920 31994 11412 35032 14370 33500 13960 1532 410 Adv. 29 .10 in Rs) 31.co.3.To Micro 9923 enterprises No.11 (in Rs) NORMAL SUPER ORDINATE NORMAL GAP SUPER ORDINATE GROSS MSME 35034 40267 45296 45000 48000 +296 -2704 (Rs in Crores) OUT OF THE ABOVE Adv.in) Observations:  MSME credit increased from Rs 35034 crore as at March 10 to Rs 45296 crore as at March 11 stands achieved  MSE credit increased from Rs 27920 crore as at March 10 to Rs 35032 crore as at March 11.pnb. Of micro 311169 enterprises 348118 384859 357844 27015 (Source:www. 50% of MSE advances.3.3.e.9. The SOI budget of Rs 33500 crore for MSE advances stands achieved  Credit to micro enterprises increased from Rs 9923 crore as at March 10 to Rs 14370 crore as at March 11. The following data would make it all the more clear: LEVEL OF ADVANCES GOAL CATEGORY 31. The bank has for the first time achieved mandated level of advances to micro enterprises i.10 (in Rs) 31.

50% concessions on chargeable interest rate to Micro Enterprises for loans up to Rs 25 lakh. (b) Launched scheme for financing auto dealers under supply chain arrangement The salient features of the scheme are as under:       Concessional rate of interest : base rate 2.   Current Account will be opened simultaneously. credit scoring model launched w. (g) For hassle free credit to MSE sector.50% Margin: NIL. 30 . (d) Funding of interest on term loan as well as on working capital during the moratorium period. Existing borrower will also be provided option to switch over from cash credit to WCDL. however 15% margin against book debts and spares Relaxed collateral security norms i. Concession of 0.50% for WCDL above Rs 50000 and up to Rs 20 lakh on applicable rate of interest. (e) Collateral free loans up to Rs 1 crore. subject to annual review by the bank.e.e.  The WCDL limit sanctioned will be valid for 3 years.Steps taken by PNB to help accelerate growth in advances to Micro Enterprises: (a) Launched a new scheme for Working Capital Demand Loan with concession in rate of interest and current account for day to day operations.25% will be allowed from applicable ROI for WCDL up to Rs 50000 and 0. The salient features of the scheme are as under:  MSE borrowers in manufacturing sector with working capital requirements maximum upto Rs 10 lakh are eligible for WDCL facility.f. 50% of the total credit facility Working Capital to be assessed at 1/6 of the projected annual turnover Advance payment can be made for supply of vehicles Letter of assurance for reputed manufacturer companies is not required (c) Concession to Micro Enterprises:0. (f) ROI under trading agreement has been reduced and re-aligned with MSE rates. However. the same may be provided. 1st September 2010. any borrower specifically opts for cash credit limit.

Asia Motors Works. technology up gradation. scenario and outlook. competition faced from the units engaged in similar products. reliability and reasonableness of projections. facilities. industry rating. To get a quantitative study of the need based requirement of the firm. reputation of promoters. qualifying remarks of auditors/inspectors etc. a comparison of the need based requirements and demand of the enterprise has been done and their future expansion and diversification plans have been taken into consideration.(h) Growth in service sector: tie-ups/MOUs with vehicle manufacturers like Ashok Leyland. Business analysis. we need to have an intensive study of the firm. track record in execution of projects. track record in industrial relations etc. reliability of operational data and financial ratios. integrity and market standing.background. three methods of calculations have been used(a) Simplified Turnover Method (b) MPBF (c) Cash Budget System 31 .7 Analysis of an SME To have a detailed analysis about how a SME performs we need to have a good study about the following aspects: Industry analysis. 3. Financial analysis. (i) Strategy initiatives like leveraging CGTSME to achieve SOG budgets. past financial performance.financial strength. MOU has been entered in to with Escorts for supply chain financing and more are in the offing. cost of labour. organisational set up and management hierarchy. cost of raw material Management analysis.operating efficiency. Hindustan Motors etc. 3. demand and supply position.8 Financial Requirements of an SME To understand the financial requirements of the firm. track record in debt repayment. For this purpose. availability of infrastructure.Government regulations and policies.

bank credit for working capital purposes for borrowers requiring fund based limits upto Rs 5 crore for Micro. Any optimism or pessimism in accepting projections is neither desirable for the bank nor for the borrower as it may lead to over financing or under financing. Since in terms of Nayak Committee norms the banks are required to have minimum 20% of turnover of the business enterprises as the bank finance and 5% is to be obtained as margin.2 MPBF Assessment of WC limits in respect of borrowers not eligible to be provided fund based WC limits under Simplified Turnover Method. 3. the maintenance of current ratio at the minimum level of 1.33 may not be insisted. Under this method. is to be done as per MPBF. may be assessed at minimum of 25% of the projected annual turnover of which 1/5th should be provided by the borrower(i.8. minimum margin of 5% of the annual turnover to be provided by the borrower) and the balance 4/5th (i.25.e. sugar. 20% of the turnover) can be extended by way of working capital finance.1 Simplified Turnover Method Under this method. construction companies. the current ratio comes to 1. To assess the reasonableness of borrower‟s projections. film industry and service sector where credit requirement is assessed as per cash budget system.3. the following factors should be kept in view: 32 . Since the bank finance is only intended to support need based requirement of a borrower.8. for assessment of borrower‟s WC needs. Small and Medium enterprises borrowers and Rs 2 crore in case of other borrowers.e. the projections submitted by the borrower in the various forms for the following year are relevant. except in case of tea. Therefore while considering working capital limits to SMEs where working capital requirement is computed based on simplified turnover method (Nayak Committee‟s norms). The first step in assessing the quantum of WC finance is to find out whether the projections given by the borrower are reasonable. if the available net working capital is more than 5% of the turnover the former should be reckoned for assessing the extent of bank finance.

If the future projections are markedly different from the past trend in relation to projected rate of growth. the reasons for the same have to be ascertained before accepting the various projections. cost of raw materials. availability of inputs. The comparison has to be made between the past performance and the future projections. The following steps can be taken for finalising other data:  The relationship between different items constituting cost of production can be studied in relation to sales and cost of sales.e. The bank has to assess how far these assumptions are realistic and likely to materialise. it has to be ensured that the projections do not go beyond the Choking Factor (i. the level beyond which the operations start giving negative results). The bank has also to ensure that the borrower is willing to create the necessary support to achieve the sales target. has the conduct of the account been as per terms of sanction or these have been frequently violated. The branches can use with advantage the past data given by the borrower as well as the data available with it. as this will inhibit the further expansion  Critical analysis of sales projections – the most important area to be looked into is sales. It is to be ensured that the projected increase in respect of any items is not out of proportion to the past relationship. have been utilized by the borrower in the past. determining the projected level of sales is the first step in assessing the working capital needs of the borrower. the other data can be easily determined in relation to sales. A higher than normal sales for the following year can be accepted only after the bank is satisfied on the basis of the above scrutiny that the projected level of sales can be achieved and the available past data and future plans give positive indications in this regard.  The branch having satisfied itself to the projected level of sales. All other aspects are directly related to the projected level of sales. 33 .  While accepting the borrower‟s projections.  How limits already sanctioned by the bank. can determine the other data in relation to sales. price. Therefore. Once the level of sales has been determined. Valuation of various items should be based on current costs.  The projections given by the borrower are normally based on certain assumptions such as market demand. and other environmental factors.

 The projected level of NWC should at least be 25% of total current assets under second method of lending. credit limits are fixed on the basis of the projected monthly cash budgets to be received before 34 .e. sugar. Therefore.3 Cash Budget System In case of tea.e. Therefore. The holding period of current assets is to be determined. If the available NWC is more than the minimum stipulated working capital under the second method of lending.   The levels of other current assets can also be estimated on the basis of the borrower‟s past trend. the holding period of current assets is to be determined. other current liabilities. 3. the quantum of bank finance is very much dependent upon availability of short term credit from other sources i. After finalising the above mentioned projections. mainly as follows:    The actual requirement of working capital can be arrived at on the basis of position of current assets and other current liabilities. the available NWC is to be taken into account for arriving at the permissible level of bank finance i. The bank is to partly meet the difference between the current assets and the other current liabilities. The bank should ensure that the level of other current liabilities is projected properly. The holding period of chargeable current assets can be determined based on the rule that the projected holding should be preferably lower of norms or past practice. permissible bank finance will be reduced accordingly.  Once the borrower‟s overall projections for the following year have been accepted by the bank.8. the actual requirement of working capital and banking finance can be worked out on the basis of steps given in HO circulars relating to computation of MPBF. film industries and service sector requirement of finance may be at the peak during certain months while the sale proceeds may be realised throughout the year to repay the outstanding in the account. construction companies. The bank is to bridge the gap between current assets and current liabilities after ensuring the borrower‟s contribution.

Branches should follow the procedure/guidelines issued from time to time through various circulars for financing these types of enterprises. From the above data we observe that PNB has successfully achieved its target of lending to this sector. Thus SMEs since its inception have been a support to the economy and hence PNB‟s association with SMEs has been very fruitful. 35 .beginning of the season. Moreover there are a number of steps followed by PNB to achieve its target.

Chapter 4 CASE STUDIES – AN OVERVIEW 36 .

any other material required for manufacturing process. Based on the detailed study of these two enterprises. two SMEs have been taken up . Kolkata-700084 Factory/Godown: Ramchandrapur.one from the manufacturing sector and the other from the service sector.1 Company Profile Name of the company: Power System Date of Incorporation/Establishment: 1. CASE STUDY .00lakhs 25% on stock BPLR+1.00 which comes to 12% Hypothecation of stocks of raw materials. WIP.1990 Directors/Promoters: Mr Subimal. FG Facility No 2 Nature Limit Term Loan Continuation of existing term loan of 37 .1 4. PO-Narendrapur. West Bengal Existing facilities: Facility No. Garia Fartabad More.To make a comprehensive study about the SMEs and their financial requirements.05. an analysis of the scenario of the entire sector has been derived. Mr Sukumar Activity engaged in: Manufacturing of electrical control panel Sector: Manufacturing Dealing with PNB since: 2001 Registered office: 1363.1 Nature Limit Margin Interest Security Cash Credit (H) Rs 70. South 24 Paraganas.

Sources of Funds Partners Capital Loan Fund 170.08 27.91 332.19 121. 4.60 569.00 179.69 38 .27 lakhs Facility No 3 Nature Limit Purpose ILG 50 lakhs For issuing guarantee in favour of PSU/govt.1 Financial Analysis: The following is the balance sheet of the company of the last 4 years along with the projected balance sheet for the financial year 2011-2012: (Rs in crores) 2007-08 2008-09 2009-10 2010-11 2011-2012 (estimated) A.2.62 432. companies Margin Security 25% in shape of FD/Cash Counter Indemnity from the borrower and counter guarantee from the Enterprise/Pvt sector guarantors Collateral security Extension of bank’s charge on CA and FA Facilities Proposed: Renewal of the existing limits.2 Analysis of the Enterprise: 4.66 521.47 80.42 70.35.

69 Fixed 161.03 346.88 842.8 490.55 329.34 30.98 146.73 _ 4.40 410 finished 2.48 35.00 Total CL & 396.99 39 .83 296.83 241.03 194.95 382.46 481.00 408.15 5.97 146.62 advances Closing stock of materials Closing stock of WIP Closing stock of goods Sundry Debtors Adjusted deposits. Application of funds Net Assets Current assets.Total B.15 412.76 147.11 Provisions Net CA 181.59 162.03 _ 220.59 646.01 302.62 235.32 710.70 327.93 405.59 452.60 265.84 577. other CA Total CA Less: CL & provisions CL Provisions 326.88 150. 350.77 282.00 5.04 85.19 911.02 639. loans.31 244.74 549.86 324.03 23.07 .00 raw 32.73 .22 120.61 559.10 454.96 69.09 512.96 480.52 173.44 173.89 971.

46 76.31 229.07 51.32 1110.10 136.5 1283.60 1511.0 1282.23 1023.90 140.95 173.03 4. opening stock FS Total Less.86 87.73 1023.73 19.60 .00 Administration and 124.07 _ 104.02 3.06 38.34 1086.86 1280. Interest PBT Provision for tax Provision for FBT PAT 4.14 151.16 1311.97 _ 1315.96 2.29 1.55 106. closing stock FS Balance PBIT (income-COS) Less.27 1311.03 618.00 9.85 47.The following is the Profit and Loss account of the last 4 years along with the projected P/L account for the financial year 2011-2012: (Rs in crores) 2007-08 2008-09 2009-10 2010-11 2011-12 (estimated) Incomes Sales Other incomes Total Cost of incomes Material consumed Operating expenses 739.52 934.24 1875.90 219.51 84.40 1131.00 1930.00 55.01 69.65 693.79 1023.90 969.76 .39 1179.04 .01 other expenses Depreciation Total Add.24 .07 22.00 27.23 155.97 2.73 935.07 48.53 1460.07 24.21 58.37 145.53 3.36 934.33 .97 537.97 155.74 50.17 141.85 1120.00 1052.48 783.04 144.64 40 .53 47.96 _ 24.73 _ 94.22 975.20 152.97 9.73 19.63 971.99 7.61 68.36 63.60 151.67 1048.22 971.36 606.

expected to grow in next year Availability of Inputs Production/Product strength Marketing strength 2 2 2 Easy availability of inputs Good maintained Satisfactory customer quality/norms base/marketing network Total score of 10 business/industry 41 .Analysis of the financial performance of the enterprise through various ratios: Ratios Current Ratio ROCE TOL/TNW Inventory and debtors 1.4 48.53 Score 4 8 6 0 holding(months) Score under past financials Subjective assessment of financials Reliability of annual 18 financial statement Discounting above score Net score under financials after discounting 12.47% 1.60 factor for -30% 4.2.68 6.2 Business Analysis: Parameters Expected sales growth Score awarded 4 Remarks Positive growth rate of min 5%.

06 42 Score 8 .2.75) (profit target-255.5 For Term Loan: Parameters Debt equity ratio Actual .41)(sales target-2000) Actual profits vis-a-vis 0 Below 75% estimated profit(profit achievement-144.25) Constitution/establishment Commitment and sincerity Track record in debt 4 2 2 No Partnership>15 years Satisfactory irregularity during repayment and statutory dues Total score of management 8 past 1 year/no statutory liabilities overdue 4.2.4 Conduct of Account: Parameters Conduct of accounts Submission and reliability of feedback statements and other information Score 6 0 Delay Remarks Good in submission beyond 30 days of due date/lack of reliability of date Total score of code of account 6 4.4.3 Management Analysis: Parameters Achievement of sales vis-avis estimates (sales Score 0 Remarks Below 75% achievement-1086.2.

95 319.Total Current Liabilities(excluding bank borrowings) 5.99 242.Projected Net Working Capital 8.Current Assets 669 2.Other Current Assets 3.04 .6 Score out of 100 53.DSCR/repayment period (in case of existing already 2.83 490.37 238.83 971.2.Working Capital Gap 6.6 Overall Assessment of the enterprise: Grand Total Score out of 120 64.3 Financial Requirements of the Enterprise: Computation of MPBF (requirement based): (As per projected balance sheet) Value 1.69 12 companies availing TL/DPG) Total for TL 20 4.Minimum Stipulated Net Working Capital (25% of 3) 7.84 480.(5-6) 43 302.Total Current Assets 4.83 Credit Risk Rating: PNB-BB This implies Average Risk 4.

(5-7) 10.4 Company Profile Name of the company: InfoTech Pvt Ltd (An ISO 9001:2000 certified organisation) Date of Incorporation/Establishment: 15.62 161. CASE STUDY-2 4.Rs 80.e. Mrs Anita ED Activity engaged in: school computer education.02. the bank should grant all the credit facilities. Conclusion The conclusion here we arrive at is that the party should be granted loan as its demand is much less than its requirement. A&N Islands. Moreover the party is one of the oldest customers of PNB and the bank is not aloof from its creditworthiness. is less) 161.62 Requirement of the enterprise (demand): The party requires renewal of existing facilities available.1996 Directors/Promoters: Mr. Bokaro. Sikkim. Hence on the ground of being a trusted customer and fulfilling all its criteria. hardware sales and maintenance.O.20 lakhs 44 .MPBF (8 or 9 w. Alipore Chetla. Kolkata-700029 Branch office: B. Dover Lane. corporate IT training. software development.9. Subhasis CMD. Sector: Services Dealing with PNB since: 2005 Registered office: 11C. CO Kolkata Sites: wherever the company gets assignments. Bilaspur Existing facilities: ILG. like Mizoram.

Education & Human Resources Department for supply. provision of IT Education and computer aided learning in 260 Govt.71 lakhs Brief of the proposal: The party has entered into a prestigious contract with Govt of Mizoram. installation and maintenance of IT.Facilities Proposed: Bank Guarantee of Rs 150 lakh for furnishing Performance Guarantees/Earnest Money for new bids. And Govt aided school having 272 computer labs across the nine districts in the state of Manipur on BOOT basis to be executed within 5 years Bank Guarantee No 1 Nature Limit Security Specific letter of Guarantee (Inland) Rs 17367200 Counter indemnity from the company and counter guarantee from the guarantee Margin Beneficiary Validity Purpose Bank Guarantee No 2 Nature Limit Security Specific Letter of Guarantee (Inland) 8683600 Counter indemnity from the company and counter guarantee from the 25% in form of FD The Director. Directorate of Education 7 months Advance Payment Guarantee guarantee Margin Beneficiary Validity Purpose 100% in form of FD The Director.Rs 340. Directorate of Education 5 years Performance Guarantee 45 . etc. infrastructure. ILG.

4.63 .27 532.05 127.76 135.58 46 64.20 234.38 30.84 .75 35.03 422.85 16.88 16.11 -.69 407.5 Analysis of the firm 4.19 241.67 236.61 548.27 352.67 59.00 5. Debtors Cash bank balances Loans and 168. loans 169.27 862.00 16.93 26.74 30.97 32.00 50.17 35.27 283.81 16.76 34.5.26 .34 -.37 106.9 268.98 878.41 16.00 699.66 .37 and 88.78 300.1 Financial analysis The following is the balance sheet of the company of the last 4 years along with the estimated balance sheet for the financial year 2011-2012: (Rs in crores) 2007-08 2008-09 2009-10 2010-11 2011-2012 (estimated) Sources Funds Shareholder’s fund Capital Reserves and surplus Deferred tax liability Total Applications of Fund Fixed assets Net block Investment Current assets.96 of and advances S.27 217.79 368.35 135.28 27.

61 742.10 0 0 0 115 165 The following is the profit and loss account of the company of the last 4 years along with the estimated profit and loss account for the financial year 2011-2012 (Rs in crores) 2007-08 2008-09 2009-10 2010-11 2011-12 (estimated) Incomes Education fees and charges Profit on sale of long term non trade _ 2.02 772.98 517.43 300.79 403.82 1128.63 1914.54 233.20 834.34 368.31 680.91 403.18 32.91 338.60 47 non 21.33 30.26 92.31 2147.advances Other current assets Total Less: current liabilities and provisions Liabilities Provisions Total Net CA Total 233.95 1099.81 234.62 25.89 888.17 .32 398.60 1889.54 468.26 852.04 97.33 1418.99 .78 689.49 2179.96 167.21 268.74 1446.41 25.39 667.46 521.54 1383.54 203.98 650.45 167.44 1564.78 97.81 685.11 investment Other operating income Total Expenditure Consumables 275.25 548.

Personnel expenses Administrative expenses and 0 255.34 After 59.83 1619.58 5.75 268.62 324.03 194.66 28.31 5.47 278.68 471.01 _ mutual fund Depreciation Total Profit Tax Provision tax Income tax -Current tax -Deferred tax Fringe Benefit Tax Profit Tax Balance b/f Balance carried to BS 134.20 1659.03 68.90 other expenses Loss from sale of units of .68 824.54 28.75 (.68 178.24 584.55 5.00 85.02) 2.18 Analysis of the financial performance of the enterprise through various ratios Parameters TOL/TNW Current ratio ROCE Inventory & Debtors Value 1.70 (.71 5.71 520.75 200.00 27.72 200.28) _ 91.56 1351.94 294.87 268.84 319.04 95.81 352.19 66.96 198.87 471.62 604.52 for before 3.56% 1.33 326.72 134.1 1.97 Score 6 6 8 8 48 .74 167.02 96.11 202.42 155.

5.60 250% 19.5.Holding Score under past financials Discounting score obtained Net score under financials Estimated cash profit to net repayment obligations Net score of financials 27.99 2009 3.32 2010 1.87 .24% Score 4 Remarks 100% 49 .84 1.3 Management Parameters % achievement of sales vis-a-vis estimates % achievement of profit to 0 45.2 Business Analysis Parameters Expected sales growth Score 4 Remarks Positive minimum three years Availability of inputs Production/production strength Marketing strength Total score of business 2 10 2 2 Easy availability of inputs Good maintained Satisfactory customer base quality/norms growth 5% for of last 4.76 .60 8 factor for 28 -30% Ratios Current ratio TOL/TNW 2008 1.10 2011 1.52 4.62 1.

estimated profit Constitution/establishment 4 Partnership >15 years /Pvt ltd >10 years Commitment & sincerity 2 Satisfactory Track record in debt 2 No irregularity during repayment and statutory dues Total score of management 12 past 1 year/no statutory liabilities overdue 4. The 20 is for evaluating the firm for eligibility for term loan.43 As the party has not availed for any term loan.4 Conduct of Account Parameters Conduct of accounts Submission and reliability of feedback statements Total score of conduct of accounts Score 6 N.A Remarks Good 6 4. the score remains the same even out of a total of 120.5 Overall assessment of the enterprise Grand Total Score out of 120 60.43 Score out of 100 60. Credit risk rating PNB.5.5.AThis implies – Modest risk 50 .

Conclusion The conclusion here we arrive at is that the party should be granted the facility as the contract that the party has entered into is one of the prestigious one as it comes from the Government of Manipur.4.6. 51 . so here MPBS does not hold true (MPBS is applicable in case of only fund based limit) In such cases the bank usually grants what the party has demanded.6 Financial Requirements of the Enterprise: 4. Here the bank is at least risk.1 Assessment of Non-Fund Based Limit As the firm has non fund based requirement. Moreover seeing the party‟s financial performance it would be advisable to grant the credit facility. As it is obvious that the party would demand only that what it has to pay to the third party and not more than that.

Chapter 5 CONCLUSION 52 .

e.7 from the year 2010 to 2011 i.  The working capital requirement of the enterprises varies from time to time but mostly varies within the range of 50 lakhs to 1 crore.(the need based assessment by bank has been done mainly by following the Nayak committee recommendations)  Both the enterprises are though technologically upgraded yet do not have the expertise to make effective utilisation of such technology.  There are prospective plans of expansion of both the enterprises for which there financial requirements are to increase manifold. as data shows that its customer base has increased by 16% from the year 2010 to 2011.5. by 75% The turnover of both the enterprises has also increased by Rs 560.  Business and Management: Lack of formal training of the Team  Vulnerable due to non-availability of trained staff is an important challenge / risk for the SME segment and the risk is real  Bank loan is a major source of finance of these enterprises.  Availability of inputs have not been commensurate with the requirements.68 from the year 2010 to 2011 i. The favourable conditions and the market trend of Kolkata have enabled the SMEs to make positive projections of their financial statements.e.1 Findings  Financial Performance:     The net profit of both the enterprises has increased by Rs 122.  PNB has been a good choice amongst the SMEs for loan financing. by 22% The general trend of net profit and turnover over the past 4 years has generally shown an increasing trend. 53 .  Demand of the customers for Working Capital finance has been in line with the need based requirement assessment by the bank.

The bank should be more liberal in providing funds to these enterprises as the county‟s development depends on the development of these enterprises. Developing equity market and venture capital for SMEs Evolving credit cards to maintain required liquidity in operation of SMEs 5.1.          Need for training of the leader and promoters of such units with right management thinking / attitudes & practices is recommended. analysis. The Government should take steps to bring about improvements in the guidelines for this sector along with increase in subsidy. Models of setting up of an SME can be adopted from the corporate sector as these are more objectively framed by experts.5. planning. At the same time bank should also improve on its monitoring system to check whether their funds are being used effectively or not. controlling and proper preparation and execution of strategy. You develop a particular skill at reflex level and can repeat the same in an effortless way 54 .2 Suggestions    Chit fund model can be established to finance such SMEs A partnership should be established between the bank and the firm so that the risk can be minimised and both parties have a share in the profit. Lack of formal training of staff can be managed if right from the beginning the enterprises have planned for such exercises and training programs for technology plus leadership skills as part of the on-going activity. Creating partnership relationship of micro financing institutions with SMEs for risk sharing.1 A short but effective plan to improve the situation Capacity to Excellence:    Capacity is basic potential Capacity is converted to Capability once you are willing to put in action your potential capacity and develop ability Capability is honed into Competence when you do well over & over again in flawless way. Risk can be managed through proper identification.

. To cite a few. Since its inception it has developed a lot. lack of cognizance to even appreciate that there is a better way to manage the projects. But after a detailed analysis of some of the small enterprises. Excellence emerges when you develop passion for your activities and master the art of doing it and living your life with zest and vigour. 2004) Report of The Internal Group to Review Guidelines on Credit Flow to SME Sector (Shri. 1992) Report of the Working Group on Flow of Credit to SSI Sector (Ganguly Committee. Journey from Capacity to Excellence is the Path one needs to travel all life for actualizing Goals in Life of an individual as well for an organization. At times journey and the process are far more important than the destination.3 Conclusion The evolution of SME dates back to the post independent period. Murthy. At the same time we cannot deny the fact that the Government has also played an important role in bringing about a lot of changes in the sector. Acts like MSMED Act. marketing.various challenges to be met like non-availability of Business plan leading to ad hoc decision making. lack of Business & Financial discipline. 2010) etc. support structure etc. C. inability to attract & retain highly trained manpower in this segment since there is lot of poaching from larger units / MNCs etc. S.V.Sharma. lack of inadequate internal systems. 5. we observe that there are still a number of flaws in the sector. Committee to Examine the Adequacy of Institutional Credit to SSI Sector and Related Aspects (Nayak Committee) (1992) Report of the High Level Committee on Credit to SSI (Kapur Committee. This sector needs special attention as it contributes to around 9% to the GDP and above that employs around 31 million people. human resources. lack of Forward planning resulting in unforeseen situations.K. Organization Development path would mean that we move from Capacity to Excellence.the various risks attached like technological. This research study on financing of SMEs have highlighted the need to link availability of finance to SMEs to the delivery of business development to improve its viability. 2005) Report of the Working Group to Review the Credit Guarantee Scheme of the Credit Guarantee Fund Trust for Micro and Small Enterprises (Shri. It is therefore necessary to evolve a model that shall provide for a partnership in between SMEs 55 .

However the challenge is to decide where do we start and what is the way to promote such thinking for this vital sector. In fact. Moreover. As recently Pranab Mukherjee. In this the supportive role of mutual funds and venture capitals could be of great help in developing capital market for SMEs. such partnership concept may lead to sharing of earnings instead of charging interest on loan as is prevalent in Islamic sharing of earnings instead of charging interest on loan as is prevalent in Islamic banking which of late is growing in importance due to present rise in oil prices. securitization is another area to be developed to take care of nonperforming assets (NPAs) that are blocking regular flow of funds to credit institutions catering to SMEs. We all need to change our ways of thinking and think for the long term to protect our own interest for all such units & start soon. SMEs are becoming an important segment of our economy and one can no more neglect such needs any more. the problems faced by SMEs can definitely be overcome. This may be done by spreading success stories of SMEs in India. it is necessary to build reliable information on SMEs to help assess market opportunities and risk management There is also an urgent need to develop equity market for SMEs. 56 . The partnership concept takes care of sharing of risk in business proportionate to their respective financial involvement. it would also help borrower to get more acceptable rate of interest. if we extend the partnership concept further. the Finance Minister has announced a grant of Rs 5000 cr to SIDBI for the development of this sector. Moreover the Government has also entered into collaboration with its US counterparts for higher value added services. But not to forget that every problem has a solution. Moreover. It has been the 71 findings of many research studies that SMEs mostly depend upon external capital and this should not be only loans from banks but should be partly equity raised from the market besides the nominal equity held by the promoter. Further. It is obvious that in India gradually banks should adopt relationship lending technology and treat transaction lending technology as a complimentary and not a substitute strategy. SMEs definitely need special attention from everyone of us.and banks.

PLEASE SPECIFY- 11.NAME OF THE ORGANISATION2.HOW HAS YOUR RELATIONSHIP WITH PNB BEEN OVER THE YEARS?a.TYPE OF THE ORGANISATION3.WHAT ARE YOUR FINANCIAL REQUIREMENTS 5 YEARS HENCE? 12.PLEASE SPECIFYB.DESIGNATION OF THE PERSON INTERVIEWED7.DO YOU HAVE ANY FUTURE PLANS OF EXPANSION OR DIVERSIFICATION? YES/NO A.WHERE DO YOU RANK PNB AMONG OTHER BANKS? 10.WHAT ARE THE PRESENT FACILITIES AVAILED FROM PNB? 57 .NAME OF THE PERSON INTERVIEWED5.SATISFACTORY c.ANNEXURE 1.GOOD b.DEALING WITH PNB SINCE8.IF YES.DO YOU HAVE ANY ASSOCIATION WITH ANY OTHER BANK? A.ACTIVITY ENGAGED IN3.IF YES.UNSATISFACTORY YES/NO 9.GENDER: MALE FEMALE 6.TURNOVER OF THE PREVIOUS YEAR4.

.PLEASE SPECIFY- 18...YOUR BANK IS A.DOES THE BANK ACCESS YOUR REQUIREMENTS OBJECTIVELY? YES/NO 19.. NECESSARY EVIL) 58 .ARE THERE ANY SHORTCOMINGS/DEFICIENCIES IN BANKING SERVICES? YES/NO A... FRIEND... (PARTNER.IF YES.GUIDANCE RECEIVED FROM BANK.13.......IF YES.WHAT WAS THE LAST SANCTION? 14....IF ANY? A..PLEASE SPECIFYYES/NO YES/NO 17.....HAVE THE FACILITIES PROVIDED BEEN ADEQUATE? 15..

co. “Indian Financial System”.in 2.BIBLIOGRAPHY 1. Pearson Publications c) Nayak.co.pnb. P. WEBSITES a) www.com c) www. Journal of Mumbai University. BOOKS AND JOURNALS a) PNB Books Of Instructions b) Pathak B. “Problems and Prospects of SMEs in Pune – A Case Study”. 59 . d) General Review Study of Small and Medium Enterprise (SME) in India. 2008.investopedia.in b) www..ministryoffinance.

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