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FINANCING

SMEs
Presented
by
M S M E
SHIV
NADAR


Engineering graduate, worked as business trainee in DCM data systems
Launched HCL in 1975 with 6 others out of a garage
Started with Calculators, Copiers & Computers

Now a $ 6 bn company
M S M E
Dr K ANJI
REDDY
Came from a middle class family, agricultural background
Initially worked for a PSU IDPL
Started with a cash of $ 40,000 and $ 120,000 loans
A LANDMARK COMPANY IN PHARMA SECTOR NOW
M S M E
BABA
KALYANI
A Mechanical Engineer

Now manufacturing facilities spread over eight locations

Asias largest forging unit already and still going strong
Micro, Small and Medium
Enterprises (MSME) Sector in India

Total 13 mn SMEs which act for 80 pc of the Indian
companies
manufactures about 8000 items,
Contributes around 40 % of gross manufacturing
output, almost 34 % of Indias total exports
Share in GDP 8 to 9 pc
Contributes 33 mn employment in the country &
Offers the largest employment opportunity after
agriculture sector
Mainly Garments, Leather, Auto components,
Gems/Jewellery, Pharma


FROM SSI TO MSME DEFINING
THE NEW PARADIGM
So far the Govt. policy and RBIs credit
policy have concentrated on
manufacturing units under the small
scale sector.
Worldwide, the micro and small
enterprises (MSME) have been
accepted as the engine of economic
growth for promoting equitable
development.


Financing SMEs in India
SME financing has been a part of
directed lending of commercial
banks.
In India multiple institutions
operating in Public, Private and
Cooperative sector cater to the
credit needs of SMEs, both for long
term as well as working capital.

Nayak Committee set up by RBI in 1991 to
ensure adequate and timely credit to SSIs.

The Committee, in 1992,
recommended commercial banks to
provide working capital to SSI units
@ 20% of their annual turnover
subject to a limit of Rs. 1 crore.
The limit of working capital has
since been raised to Rs. 5 crores.
CREDIT ASSESSMENT OF
SSIs

The working capital needs of SSI units is
assessed as per
1. Turnover method,
2. MPBF System or
3. Cash Budget System.
The extent of finance is called as
Maximum Permissible Bank Finance or
MPBF.
Limits to the various borrowers are
assessed depending upon their
Requirements and their
Line of activity

Maximum Permissible Bank
Finance:

Under this method,
The borrowers requirements
are assessed based on the
Past practice/holding levels.
While the projections should
Reasonably conform to the past trends,
Deviations can be accepted subject to
Satisfactory justification.
This method is also called
Tandon Committee Method of lending.

Cash Budget System:
Under this method, the working capital
requirements are determined on the basis
of the Cash Gap after taking into account
the monthly and quarterly projections of
cash receipts and outflow.
Requirements of borrowers and the
strength of their balance sheet are taken
into account.
The borrower is required to submit the
cash budget to the bank along with actual
as well as projected financial statements

Maladies of SSIs
The incidence of sickness in the
small-scale sector is alarming
While the industries may get
registered at the entry point, there
is no record of their exit.
Closure of such units leads to
unemployment and locking up of
capital deployed

Bottlenecks:
The major problems faced by the
SSI sector relates to
Availability of loan without
collaterals,
Delay in getting the loan,
High cost of funds,
Delayed payments,
Marketing problems,
Sickness etc.

Sickness:

A unit becomes sick when it fails to
generate internal surplus funds to
honour its obligations towards
its suppliers and creditors in time.
An industrial unit is said to be sick
when the working conditions are so
unsatisfactory that it threatens the
viability of the undertaking

Definition of Sick SSI Unit

An SSI unit should be considered sick if:
a. Any of the borrowal accounts of the
unit remains sub-standard for more than
six months
Or
b. There is an erosion in the net worth
due to accumulated losses to the extent of
50 percent of its net worth during the
previous accounting year.


RBI MEASURES
To address the incidence of growing
sickness in the sector,
In 2002, RBI issued
A complete set of revised guidelines
on the basis of the Recommendations
of a Working Group chaired by SS
Kohli.

Rehabilitation Measures

Sickness can be classified into three
categories. They are:
i. Sickness at birth - due to in-
feasibility of the project
ii. Induced sickness - incompetence of
the management
iii. Genuine sickness - beyond the
control of the promoters in spite of the
sincere efforts.

Revival of sick unit requires diagnostic
survey in order to identify four Rs:
Reasons, Rationale, Risk and Requirements

Reasons includes proper diagnosis to
cure the disease of sickness,
Rationale is justification for
categorizing, rationale is followed by
risk,
Revival is the re-establishment of the
unit and
Requirements includes efficient
management, updated technology,
support from the government, etc.

INSTITUTIONAL SUPPORT TO
SSIs

The Ministry of SSI, Govt of India, has
been playing a major role in development
of the SSIs.
The Department of SSI and Agro and
Rural Industries, functioning under the
Ministry of SSI, has formulated a citizens
charter which, states its mission as
To support the SSI by way of an
advocacy role, provide services to support
SSI growth and to organize programmes
through Govt and NGOs for the benefit of
small, medium and tiny industries..


Small Industries Development
Bank of India


SIDBI was set up by an Act of Parliament,
as an apex institution for promotion,
financing and development of industries
in small-scale sector and for coordinating
the functions of other institutions
engaged in similar activities.
It commenced operations on April 2,
1990. SIDBI extends direct/indirect
financial assistance to SSIs, assisting the
entire spectrum of small and tiny sector
industries on All India basis.

Small Industries Service Institute
(SISI)-since converted to MSMEDI
SISI with its network of 26 institutes and 30
branch institutes performs the following
functions:
i. Interface between state and central
governments
ii. Technical support and consultancy services
iii. Entrepreneurship development
programmes
iv. Developmental efforts
v. Export promotion and liaison activities
vi. Ancillary development

Product-cum-Process Development
Centers


Development
of new processes
And technology
Product design
and innovation
Manpower
development
and training

R & D support
Technical
support
Six PPDCs established across the country provide the
following services:

Time Norms

Time norms are the schedule adopted for
the disposal of the loan applications.
The time norms for SSIs are:
1. For loan applications up to Rs 25,000
1 week
2. For loan applications above Rs 25,000
and up to Rs 2 lakh 2weeks
3. For loan application above Rs 2 lakh 9
weeks






Who will build India

If we all go global

A M Naik
L & T

IN THE END
Thanks for your
attention
Dr. S. C. Bihari
Tell:08417-236660 to
65(Extn: 6214)
Mail:drbihari@ibsindia.org