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Module - 3

15 October 2012


Role of SME Concept and definitions of SME Government policy and SME in India Growth and performance of SME sector Problems for SMEs Sickness in SME - Criteria to identity sickness - Symptoms - Causes - Consequences - Remedial measures - Institutional support for SMEs.
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Classification of Industries (Enterprises)

Enterprises have been classified broadly into two categories, namely
1. The enterprises in the manufacture/ production of goods pertain to any Industry. 2. The enterprises engaged in providing/rendering of services.
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Definition of Micro, Small and medium Enterprises

Enterprises have been defined in terms of investment in plant & machinery/equipment (excluding Land & building).
Types Micro Manufacturing : up to Rs. 25 lakh. Services Enterprises up to Rs. 10 lakh. More than Rs.10 lakh and up to Rs. 2 Crore.

Macro : More than Rs.25 lakh and up to Rs. 5 Crore.

Medium: More than R.s 5 Crore More than Rs. 2 Crore and up to Rs. 10 Crore. and up to Rs. 5 Crore.
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Role of SMEs
The Small Scale Industry today constitutes a very important segment of the Indian economy. The development of this sector came about primarily due to the vision of our late Prime Minister Jawaharlal Nehru who sought to develop core industry and have a supporting sector in the form of small scale enterprises. SSI has emerged as a dynamic and vibrant sector of the economy. Today, SSI accounts for nearly 35 per cent of the gross value of output in the manufacturing sector.

In terms of value added, SSI sector accounts for about 40 per cent of the value added in the manufacturing sector.
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SSIs contribution to employment is next only to agriculture in India. As of 2005, about 26 million rural enterprises employed 51 million people, whereas about 16 million urban enterprises employed 49 million (Rural
Development of India web accessed on 11-10-2009).

It contributes 40 per cent of Exports. SSI makes better use of indigenous management capabilities and provide option of opening outlets for enterprising independent people. It provides opportunities for development of technology.

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SSIs have been producing a wide variety of goods like food products, beverages, cotton textiles, leather products etc.,

Problems of SSIs
Finance (scarcity of capital, non availability of credit facility) Raw Material (Poor quality, uneven supply of raw material,
inadequate qty)

Technology ( not exposed to latest technology) Infrastructure (Transport, power, communication) Marketing (not in a position to get first hand information about the

Idle Capacity ( due to underutilization) Underutilization of Capacity (due to non availability of raw
material, power, finance)

Skilled Manpower (Being in backward areas) Project Planning (Lack Tech & Economical) Managerial inadequacies like overdependence
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Performance of SSIs
Over the last five decades, the small scale industries sector has acquired a place of prominence in the economy of the country. It has contributed significantly to the growth of the GDP, employment generation and exports. During 2000-01 to 2004-05, the average annual growth in the number of units was around 4.1 per cent while employment grew by 4.4 per cent annually. Further, the average annual growth in production, at current and constant prices, was 10.6 per cent and 7.6 per cent respectively.
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Growth of SSIs
The number of industries registered has increased from 79 lakhs in 1994-95 to 118 lakhs in 2004-05.

Employment generation by this sector has recorded a 59 per cent increase from 84.2 lakhs in 1983-84 to 134.0 lakhs in 1992-93 and it generated employment of 229 lakhs in 19902000 and 274 lakhs at end of March 2004.
Small scale sector accounts 92 per cent of marine products, 95 per cent of ready-made garments, 84 per cent of woolen goods, 65 per cent leather goods, 40 per cent of engineering goods, 45 per cent of cashew kernels and 60 percent of chemical items.
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Sickness in SMEs
A sick industry is one which is not healthy. A healthy unit is one which earns a reasonable ROCE and which builds up reserves after providing reasonable depreciation. According to RBI a sick unit is one which incurs cash losses for one year and is likely to incur cash losses for the current year as well as for the following year. The Sick Industrial Companies Act 1985, defines a sick industry as an industrial company which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth and has also suffered from cash losses in such financial year immediately preceding such financial year.
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Criteria for Identifying Sickness

Continuous decline in gross output compared to the

previous two financial years.

Delays in repayment of institutional loan, for more than 12

Erosion in the net worth to the extent of 50 per cent of the net worth during the previous accounting year.

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Symptoms of Industrial Sickness

Shortage of liquid funds (Cash ) Decline in capacity utilization Inventories in excessive quantities Deteriorating financial ratios Irregularity in maintaining the bank accounts Delay & default in the payment of statutory dues Morale degradation of employees Frequent request to banks and financial institutions for loans Delay in the audit of annul accounts Frequent break downs in plant & equipments Decline in the quality of products Frequent turnover of personnel Continuous decline in prices of the shares

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Causes for Industrial Sickness

External Causes There may be several external factors causing a unit sick and which may vary from time to time for industry to industry. The important factors are Changes in the industrial policy of government

Inadequate and untimely availability of necessary inputs

Lack and shrinkage of demand for the product Frequent industrial strikes & labour unrest

Shortage of financial resources especially working capital

Natural calamities like drought, floods etc.,
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Internal Causes:
Lack of good management Poor implementation

Marketing problems
Non-availability of raw materials Shortfall of working capital Labour trouble Technical/ operational problems

Uneconomic location, inefficient method of production etc.,

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Consequences of Industrial Sickness

Huge financial losses to the banks and financial institutions Loss to employment opportunities Emergence of Industrial unrest Adverse effect on perspective investors and entrepreneurs Wastages of Scarce resources Loss of revenue to government

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Remedial Measures
Monitoring and nursing the sick units during infancy Diagnostic studies [(Role of Board for Industrial & Financial
Reconstruction (BIFR)]

Provide incentives to the professional managers helping in reviving sick units Issuing guidelines on major aspects that affect the image of the company Brain storm with a select group to get creative ideas for improvement Adopt better practices, right technology, better work culture and professional management SSI can improve their health as well as the economy.
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RBI guide lines RBI has constituted a standing coordination committee to consider issues relating to coordination between commercial banks and lending institutions.

A special cell has been set up within the rehabilitation finance division of IDBI to attend the case of sickness.
RBI has issued suitable guidelines to the banks to ensure the potentially viable sick units receive attention and timely support from banks. RBI has clarified that units becoming sick on account of willful management, willful default should not be considered for rehabilitation.
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