SMALL AND MEDIUM EN TERPRISE-AN OVERVIEWPRESENTED BY T.P.

MISRA

DEFINITIONS
‡ Micro Enterprise: Investment in P&M25 lacs manufacturing & upto Rs 10 lacs in equipment in service sector ‡ S.S.I-Investment in p&m does not exceed Rs500lacs in P&M and Rs10 to 200 lacs in equipment in service sector ‡ Medium Enterprise: Above 500 lacs and upto Rs1000lacs in P&M in manufacturing and Above rs 200 lacs upto Rs500 lacs in

DEFINITIONS
‡ Equipment in service sectorncillary unitsproposes to supply 50% of its production or services ‡ Tiny units-Investment in p&m does not exceed Rs25lacs ‡ Village & cottage industry.--population not exceeding 50000.

directors not less than 51%. ‡ Women enterprises--SSI related related service where share of the women as partner shareholders.DEFINITION CONTD. ‡ SSSBE--An industry related service business enterprises with investment in fixed assets upto 5lacs except land&bldg . ‡ Export oriented units--exports at least 30% of its production.

‡ Provides employment next to Agri.I.S. . ‡ Accounts 40% of the total export of the country ‡ Plays crucial role in the economy.Importance of S.

‡ 5-Potential for employment ‡ 6-Effective mobilisation rural resource .S.Inherent advantage of S.I ‡ 1-Shorter gestation period ‡ 2-Low cost of establishment ‡ 3-Widely dispersed building wider industrial base. ‡ 4-Low capital intensive.

I fails Inordinate delay in sanction of credit limit Need based lending not extended Big units deleberately promote ancillaries Placed order in large nos of small ones Gets payment on the whims & fancies of big units ‡ Disadvantageous position of raising funds ‡ ‡ ‡ ‡ ‡ .S.Why S.

S. ‡ ‡ ‡ ‡ ‡ Lacking basic infrastructure Old/outdated technology Poorly placed in market situation Promoters lack specialisation Weak capital base &lesser access to capital market ‡ Lacking managerial&professional skills .I.Inherent weakness of S.

‡ ‡ ‡ ‡ Face resource crunch Poor accounting system No planning budgeting or monitoring Short term fund are deployed for long term uses ‡ Pre operative expenses are not considered in project appraisal .Inherent weakness of SSI contd.

B.Role of Govt.I ‡ ‡ ‡ ‡ ‡ Banks should convey timely sanction Loan applications to be timely disposed Need based & timely credit to be extended Simplified & uniform application form Rejection of application form should be done with approval of higher authorities ‡ Collaterals upto 1lac not to be insisted ‡ .of India& R.

Contd.B.Role of GoI & R. ‡ Financial assistance for meetig T/L&W/C be given ‡ Interest on delayed payment to SSI and ancillary undertaking act 1993.I. ‡ Target for financing priority secctor where SSI is a constituent .

.Bankers approach to SSI financing ‡ ‡ ‡ ‡ Anxiety to secure banks fund at any cost Stop discounting bills of SSI units Discourage to draw against book debts Current ratio is lowered due to high receivables ‡ Branches are not equiped nor trained ‡ Borrowers are not educated.

Tourism.Diagonistic center Pharmaceutical companies working on loan licencing policy .Cinema house Tea processing blending .Activities not covered under SSI ‡ ‡ ‡ ‡ SSI units set up by state/central govts. Hotels.

‡ 1-Tendency to avail short term credit more than requirement ‡ 2-Tendency to divert short term funds for acquisition of non current assets ‡ 3-Approach of the bank is security oriented ‡ 4-Correct credit assessment is not done .Structured approach in SSI financig ‡ DEHEJIA COMMITTEE RECOM.

Dehejia committee recommendation ‡ Appraisal of credit application based on present & projected financial position ‡ Bank with one bank to avoid multiple financing ‡ Cash credit requirement should be segregated into hardcore &short term component .

uniform appraisal .Puri Committee recommendation ‡ Uniformity & simplicity of loan application ‡ No viable scheme shall be turned down for want of margin ‡ Largely be guided for viability not to insist collaterals ‡ Repayment considered as per sustenance ‡ Loaning power.

payment of statutory dues.full capacity utilisation .reduction of public deposit . diversification.Tandon committee recomendations ‡ ‡ ‡ ‡ Norms for inventory & receivables Approach to lending Identification of excess borrwing No slip back in current ratio except expansion.

II.III Peak nonpeak level limit Regulation of drawal of funds Ad hoc limits Enhancement of borrower´s contribution .Chore committee recommendation ‡ ‡ ‡ ‡ ‡ ‡ Periodical review Quarterly information system QIS-I.

functioning units.subjected to condition that dealing with100% products &due settled in30days.As such fudbased facility upto 10lacs &10 to 50 lacs are subjected to inventory&receivable norms & ist method of lending respectively ‡ The banks lend on the basis of 1st method of lending to those units engaged in marketing&trading of SSI products.The single window scheme of SIDIBI enables the same agency to cater the need.NAYAK COMMITTEE RECOMMENDATION ‡ Banks should step up the credit flow to meet the legitmate requirement of SSI through preparing an annual budget for new units. requirement upto20lacs&10lacs respectively.&sick SSIunits ‡ Single financing agency to meet T/L.W/c. . ‡ Inventory norms &Ist method of lending not applicable to ssi units upto 50lacs(raised to 100lacs).

& other SSI while extending finance to SSIs.Nayak committee (contd) ‡ Banks have been advised to give preferences to village industries.tiny industries. ‡ IMPORTANT BANKING OPERATIONAL CLARIFICATION ON NAYAK COMMITTEE RECOMMENDATIONS ‡ The assessment of credit limitsfor all borrwers enjoying credit limits less than 1crores--(fund based)is to be granted on higher of the 2 limits assessed on the basis of traditional &turn over methods ‡ Where the w/c cycle is shorter than 3months the w/c requirements would be less than 25%of the PTO ‡ If the liquid surplus available is more than 5%of the T/Othe limit can .

Care to maintain 1:4 ratio should be ensured. ‡ fixed at a lower than 20% of the T/O ‡ The units having operating cycle more than 3monhs should be provided proper limits since 20% T/O is the minimum ‡ In case of seasonal industries peak/nonpeak level should be considered instead of annual turn over. Higher liquidity surplus could be considered. ‡ Creditos & OCL are to be considered as source of funds for building C/A & will be treated in the same manner as in traditional method ‡ The borrwer´s contribution should be 5%ofT/O except where the w/c cycle is not taken as3 monthsThe margin will proportionately increase with increase in period of operating cycle. Contd. Dilution less than 5% could be considered except in sick units .Operational clearification on Nayak commt.

‡ The sub limits against various componets of stock.This would help in arriving effective operational limits.Other information like modernisation.actual turn over on monhly basis. ‡ Monitoring of borrowal account based on stock . ‡ In order to check the validity of projection of existing units actuals for last 5 years .Auditor´s certificate on 6´monhly basis.esimates .govt.book debt statements.policy.Banks should adopt a flexible approach.prjections including true analysis of industries to which the borrowing unit belongs is useful. .Receivables are sanctioned based on norms of inventory & receivables .Operational clearification on Nayak commt.external&internal factors are relevent.manufg.taxation. Capacity. expansion. Recomm.

For loans >25las sidibi with banks to have MOU sign .Kapur committee recommendation ‡ Delegation of sanctioning power ‡ To be delegated to sanction 20% of limit as adhoc limit ‡ Banks to consider composite loan limit upto 5lacs (enhanced to 10lacs) ‡ Project requiring credit upto 25lacs should be sannctioned by banks or sfc .

contd ‡ sfc & selected public sector banks.upto 1crore--->50lacs to 2cr. 15 lacs--->50lacs. The securities shall be shared on pari pasu basis. ‡ For considering applications acommittee approach should be considered & disposed of with in1month. . ‡ Application forms used--2lacs-->10lacs.Kapur committ. Recm.

‡ The loan application should be examined by an officer with adequate experience. Contd. . ‡ One field officer in specialised branch should handle at least 50ssi accounts ‡ A charter of credit entitlements hae to be displayed at the banking hall.Selective specialised banks have to experiments with new products such as Factoring services.recm.Kapur committ.

.they should not ask cash margins from ssi borrowers for non-fundedfacilities provided there is adequate surplus to cover .marketingexp. ‡ Special term loans be granted to meet preoperativeexp.Kapur committ. ..technicalfee.inR&D. invst. Contd. Rcom. ‡ Refer-april1998.co/br/84/71 dated4-6-1992 ‡ Where banks have first charge on fixed assets .collaborationcost .

recom. Banks should at least should finance 10% of its accounts without collaterals. ‡ Exemption of collaterals upto 1lac ‡ Upto 10lacs the collaterals plus netmeans of 3rd party guarentee should not exceed 50%of fund & non fund based business. .Kapur committ.contd.

Working capital requirement of SSI units ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ EXISTNG UNITS Balance sheet. Cash & credit sales Cash& credit purchases of raw materials Basis for manufacturing cost&overheads basis for administration expenses liquid surplus available opening&closing stock balance manufacturing process details&marketing arrangements .profit&loss accounts.

exp.exp.&admn. Period involved in various stage of operating cycle ‡ Prportion of cash&credit sales ‡ Liquid surplus presently available .W/C requirement--new units ‡ ‡ ‡ ‡ Projected balancesheet Projected profit&loss account Basis for projecting manuf.

&receivable estimate ‡ Demand&supply &marketing arrangement .FG.SIP.W/C assessment ---new units ‡ Manufacturing process details ‡ Closing stock of RM.

Factors determine W/C ‡ ‡ ‡ ‡ Policies for production Manufacturing process seasonality pace of turn over .

mode of availability.---Technology used. ‡ Finished Goods--market for sale.P. ‡ S. product quality ‡ Receivables--Demand &supply position . of processes.price variation.no.Selling arrangements.Fixing the quantum of W/C ‡ RM--place of availability.I. seasonality.lead time.minimum quantity stipulation.

buyers financial soundness.credit policy.discount allowed. .Fixing quantum of W/C contd.credit period. ‡ --Receivables-----other competitors.

provision for contigencies. ..retained earnings.misc.fixed assets ‡ preliminary exp.reserve&surplus.Techinical Know how&other misc related charges.ECONOMIC.preoperative expenses.Plant&Machinery. ‡ MEANS OF FINANCE ‡ Share capital. margin for working capital.long term borrowings.Building.deferred payments.Fixed assets financing through Term Loan ‡ The appraisal of the term loan covers 4 broad aspects of the project such as TECHNICAL.expenses on training.other sources. FINANCIAL.MANAGERIAL ‡ FINANCIAL--COST OF THE PROJECT ‡ Land&site development.

PRESENTING A CREDIT PROPOSAL ‡ ‡ ‡ ‡ Documentation of creation of entity Names. ‡ Documents authorising the approval of---SSI registration certificate. ‡ Details of borrwings ‡ Audited balance sheet/profit &loss account .address.sales tax.NOC from muncipal /pollution control board etc.excise duty assessment order .wealth tax.brief biodata &details of assets &liabilities Particulars of securities other than primary Copies of assessment orders of income-tax.power sanction letter.

estmate of construction.cash/fund flow.profit &loss a/c.Presenting a credit proposal ‡ Details of associates ‡ Loan application form ‡ In case of term loan a project report covering projected balance sheet.copy of import licence .depriciation.quotation.int.rate chart.copy of tittle of land.list of existing plant&machinery.break even chart.DSCR chart.

Documentation C.Insurance F.Flow of information Dperiodical inspection E.Post sanction monitoring of SSI advances ‡ ‡ ‡ ‡ ‡ ‡ A.Periodical review/renewal of credit limits .Getting the sanction accepted B.

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