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“ROLE OF BANK IN DEVELOPMENT OF SMALL & MEDIUM SCALE ENTERPRISE” – Catch them young, watch them grow...

SMALL SCALE INDUSTRY

INTRODUCTION :

The definition for small-scale industrial undertakings has changed over

time. Initially they were classified into two categories- those using power with less

than 50 employees and those not using power with the employee strength being more

than 50 but less than 100. However the capital resources invested on plant and

machinery buildings have been the primary criteria to differentiate the small-scale

industries from the large and medium scale industries. An industrial unit can be

categorized as a small- scale unit if it fulfills the capital investment limit fixed by the

Government of India for the small-scale sector.

As per the latest definition which is effective since December 21, 1999,

for any industrial unit to be regarded as Small Scale Industrial unit the following

condition is to be satisfied: -

Investment in fixed assets like plants and equipments either held on

ownership terms on lease or on hire purchase should not be more than Rs 10 million.

However the unit in no way can be owned or controlled or ancillary of

any other industrial unit.

The traditional small-scale industries clearly differ from their modern

counterparts in many respects. The traditional units are highly labor consuming with

their age-old machineries and conventional techniques of production resulting in

poor productivity rate whereas the modern small-scale units are much more

productive with less manpower and more sophisticated equipments.

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Khadi and handloom, sericulture, handicrafts, village industries, coir,

Bell metal are some of the traditional small-scale industries in India. The modern

small industries offer a wide range of products starting from simple items like

hosiery products, garments, leather products, fishing hook etc to more sophisticated

items like television sets, electronics control system, various engineering products

especially as ancillaries to large industrial undertakings.

Nowadays Indian small-scale industries (SSIs) are mostly modern small-

scale industries. Modernization has widened the list of products offered by this

industry. Theitems manufactured in modern Small-scale service & Business

enterprises in India now include rubber products, plastic products, chemical

products, glass and ceramics, mechanical engineering items, hardware, electrical

items, transport equipment, electronic components and equipments, automobile

parts, bicycle parts, instruments, sports goods, stationery items and clocks and

watches.

A leading, industrially advanced developing country, India has large,

medium and small industrial units of production in almost all branches of the

industry. Since the time of the independence in 1947, a significant feature of the

Indian economy has been the rapid growth of the small industry sector. The small

industry sector is considered to have a major role in the Indian economy due to its 40

percent share in the national industrial output along with an 80 percent share in

industrial employment and nearly 35 percent share in exports. The small scale

industries sector has been assigned an important role in the industrialization of the

country by the previous and current governments of India.

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However, there is a clear distinction between the traditional and modern

small industries. The traditional small industries include Khadi and handloom,

village industries, handicrafts, sericulture, coir, etc. Modern small industries

manufacture a wide variety of goods from simple items to sophisticated items such

as television sets; electronics control system, various engineering products,

particularly as ancillaries to large industries. The traditional small industries are

highly labor-intensive, while the modern small industries use highly sophisticated

machinery and equipment. The term small-scale industries are mostly used to

represent modern small industries. The SSIs manufacture many items which include

rubber products, plastic products, chemical products, glass and ceramics, mechanical

engineering items, hardware, electrical items, transport equipment, electronic

components and equipments, automobile parts, bicycle parts, instruments, sports

goods, stationery items and clocks and watches.

Since Independence, the growth and development of the small-scale

sector has been favored by the GoI on the following grounds: (1) generation of

employment opportunities by SSIs, (2) mobilization of capital and entrepreneurship

skills, (3) regional dispersal of industries and (4) equitable distribution of national

income. The policies pursued by the GOI over the years have helped in the growth

of the SSIs to a considerable extent.

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HISTORY OF SMALL SCALE INDUSTRY :

Ministry of Agro and Land Rural Industries and Ministry of SSI have been

merged into a single namely, Ministry of Micro Small & Medium Enterprises.

The President under Notification 9th May 2007 has amended the

Government of India (Allocation of business) Rules 1961,Pursuant to this amended

Ministry of Agro and rural Industries (Krishi Evam Gramin Udyog Mantralay) and

ministry of SSI (Laghu Udoyag Mantralay) have been merged into a single Ministry,

namely, Ministry of Micro Small & Medium Enterprises ( Suksham Laghu Aur

Medium Udyam Mantralay )

CONCEPT & DEFINATION OF SSI :

In most parts of the world the nomenclature used is small and Medium

Enterprises (SMEs) and the criteria for defining include the number of employees

and /or the turnover. In India the Small Scale Industry evokes different meanings for

different agencies and the financial institution. For example for the purpose of excise

and sales Tax Exemption, the turnover alone is the determining criterion. However in

broder terms, currently, an SSI is defined in terms of investment ceiling on the

original value of installed plant and machinery.

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DEFINITION OF SSIs:

YEAR INVESTMENT LIMITS

1960 Upto Rs 5 lacs in Plant & Machinery

1966 Upto Rs 7.5 lacs in Plant & Machinery







The definition for small-scale industrial undertakings has changed over

time. Initially they were classified into two categories- those using power with less

than 50 employees and those not using power with the employee strength being more

than 50 but less than100capital investment limit fixed by the Government of India

for the small scale sector. As per the last definition which is effective since

December 21, 1999, for any industrial unit to be regarded as Small Scale Industrial

unit the following condition is to be satisfied: -

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CLASSIFICATION OF SSIs:

A common classification is between traditional small industries and modern

small industries.

Traditional small industries include Khadi and handloom, village industries,

handicrafts, sericulture, coir, etc. Modern SSIs produce wide range of goods from

comparatively simple items t sophisticated products such as television sets,

Electronics, control system, various engineering products, particularly as ancillaries

to the large industries...

The traditional small industries are highly labour-intensive while the modern

small-scale units make the use of highly sophisticated machinery and equipment. For

instance, during 1979-80, traditional small-scale industries accounted for only 135 of

the total output but their share in total employment was 56%. As against this, the

share of modern industries in the total output of this sector was 74% in

1979-80 but their share in employment was only 33%. That means these industrial

units have higher labour productivity.

One special characteristic of traditional small-scale industries is that they

cannot provide full time employment to workers, but instead can provide only

subsidiary or part time employment to agricultural laborers and artisans. Among

traditional village industries, handicrafts possess the highest labour productivity,

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besides handicrafts make a significant contribution to earning foreign exchange for

the country.

Nowadays Indian small-scale industries (SSIs) are mostly modern small-

scale industries. Modernization has widened the list of products offered by this

industry. The items manufactured in modern

Small-scale service & Business enterprises in India now include rubber products,

plastic products, chemical products, glass and ceramics, mechanical engineering

items, hardware, electrical items, transport equipment, electronic components and

equipments, automobile parts, bicycle parts, instruments, sports goods, stationery

items and clocks and watches.

Micro, Small and Medium Enterprises Development act

MSM E D A ct – 2006 and i t s I m pa c t

Clause Salient Features Impact

1. Establishment of National Small and Medium Enterprises Board– Maximum No. of members 47

Specific representation for Women Mandatory Quarterly Meeting.

Statutory Status, compact board and quarterly meetings will address problems of SMEs immediately to take corrective action.

2. Concept of Enterprises Clear-cut demarcation of manufacturing/production and rendering services.

Facilitates SMEs to enter into service enterprises aggressively.

3. Definition of Enterprises

Specific ceiling limit for manufacturing/production

Existing small units can graduate into

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and service enterprise definition for Medium enterprises.

Medium units and avail facilities under the act.

4. Filing of memoranda optional for Micro and Small enterprises in manufacturing and service sector Medium enterprises in Service Sector but mandatory for Medium enterprises in manufacturing sector.

Replacement of registration with memorandum.

Facilitates SMEs to avail the benefits of the act immediately after setting up of the unit.

5. Procurement Policies Notification of preference policies by central or State Governments for goods and services provided by Micro& Small enterprises.

Facilitates opportunityfor supply of

goods/services without any hassles. Public Procurement Policy under Section 11 of MSME Act, yet to be notified.

6. Delayed Payment Penalty & dispute resolution

• Period of payment by the procuring organizations – 45 days• Penal interest 200% of PLR

SMEs can plan their cash flow/financial requirement.

7. Dispute Resolution Establishment of MSE facilitation Council; 90 days framework for dispute resolution.

Easy financial planning and no waste of human resources for chasing/follow up.

8. Delayed Payment: allowable deduction under IT Act 1961

Deduction disallowed This will encourage procurement agencies to ensure timely

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payment to SMEs.

9. Closure of Business Statutory notification of scheme for closure

Facilitates expedition of liquidation.

10. Notification of guidelines or instructions for promotion of SMEs Wrt. To Funds appropriation and release

Statutory Mandatory on all facilitating development of SMEs ensuring fast growth.

11. Facilitating Credit Statutory Mandatory on all providing Guidelines for credit for 20% year on year growth.

Statistics on SSIs:

The total number of SSI units increased from 2.082 million units in 1991-

92 to 2.724 million units in 1995-96. During the same period, at constant prices, the

production increased from nearly $1.6 billion to approximately $2.2 billion. The total

number of persons employed in SSIs increased from 12.9 million to 15.2 million.

According to Second All-India Census of Registered SSI units, 42 percent of the

units were functioning in rural areas, 48 percent in urban areas and 10 percent in

metropolitan areas. 62.2 percent of the units were located in backward areas. The rate

of growth of this sector has been higher as compared to the whole industrial sector.

In terms of the abovementioned development, the progress of the SSI

sector is considered impressive by experts. But the SSIs are mostly affected by a

number of problems that have hampered its absolute growth. According to the

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http://www.cherry.gatech.edu/sim/students/papers97S/perumalla.html#SECTION00010000000000000000


Seventh Five Year Plan (1985-90) the growth of the SSIs has been constrained by

various factors ``including technological obsolescence, inadequate and irregular

supply of raw materials, lack of organized market channels, imperfect knowledge of

market conditions, unorganized nature of operations, inadequate availability of

credit, constraint of infrastructure facilities including power etc. and deficient

managerial and technical skills.''

For SMEs, sky is the limit:

Small and medium enterprises (SMEs), particularly in developing

countries, are the backbone of the nation's economy. They constitute the bulk of the

industrial base and also contribute significantly to their exports as well as to their

Gross Domestic Product (GDP) or Gross National Product (GNP).

INDIA'S SME SCENARIO:

India has nearly three million SMEs, which account for almost 50 percent of

industrial output and 42 percent of India’s total exports.

A special role for SMEs was earmarked in the Indian economy with the

advent of planned economy from 1951 and the subsequent industrial policy followed

by government. By and large, SMEs developed in a manner, which made it possible

for them to achieve the objectives of:

1. High contribution to domestic production

2. Significant export earnings

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3. Low investment requirements

4. Operational flexibility

5. Low intensive imports

6. Capacity to develop appropriate indigenous technology

7. Import substitution

8. Technology-oriented industries

9. Competitiveness in domestic and export markets

However, as a result of globalization and liberalization, coupled with WTO

regime, SMEs have been passing through a transitional period. With enhanced

competition from China and a few low cost centers of production from abroad many

units have of late been facing a tough time.

However, those SMEs who had a strong technological base, international

business outlook, competitive spirit and willingness to restructure themselves

withstood the current challenges and came out successful to make their own

contribution to the Indian economy.

It is the most important employment-generating sector and is an effective

tool for promotion of balanced regional development. These account for 50 percent

of private sector employment and 30 to 40 percent of value-addition in

manufacturing. It produces a diverse range of products (about 8000 odd items),

including consumer items, capital and intermediate goods.

However, the SMEs in India, which constitute more than 80 percent of the

total number of industrial enterprises and form the backbone of industrial

development, are as yet, in technological backwaters vis-á-vis advances in science

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and technology. These suffer from problems of suboptimal scales of operations and

technological obsolescence.

While most of the large companies, even in developing countries, have

financial as well as technical capacity to identify technological sources and evaluate

alternate technologies that would suit their requirements, unfortunately, this capacity

is conspicuously missing in most SMEs.

It is these features of SMEs that make them an ideal target for

technological up gradation through technological cooperation with foreign and local

enterprises, with R&D institutions and centre’s of technology development.

So, what these SMEs need today is primarily access to new technology.

Poor financial situations and low levels of R&D, poor adaptability to changing trade

trends, non-availability of technically trained human resources, lack of management

skills, and lack of access to technological information and consultancy

services and isolation from technology hubs, etc. are some of the reasons why these

SMEs are not being able to surge ahead.

Small and Medium enterprises are the backbone of India's economy. They

have to now work hard to get out of this impending scenario. There has to be a major

change in policy on how they are operating. SMEs have to put in more effort on

research and development (R&D) and on ways to use technology at par with the

international standards.

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PROMBLES FACED BY SME SECTOR:

Indian governments have proclaimed many policies and also implemented

several initiatives and programs. Most of the policies before the 1990s were aimed at

protecting the small sector rather than making it competitive. Some of the major

issues that these policies did not address are as follows:

Problems in obtaining credit One of the serious problems affecting the

small scale sector is the hardship of obtaining credits from the banking sector.

Although this has been a problem for past several years and though the issue has

been mentioned in budget speeches by government, none of the policies seem to

solve it. Many entrepreneurs who had been drawn into industrial activities hoping to

receive financial assistance have subsequently found that working capital is not

forthcoming. The internal financial resources of the SSIs are held to be so small that

have no surplus money in times of business strain. This along with the situation of

unstable profits prevents the banks from issuing them unsecured loans. As a result,

many of these SSIs are still dependent for funds on money-lenders who charge high

interest rates. And those who have tried to obtain loans from the various financial

institutions have only faced corruption associated with grant of loans and long delays

in delivery.

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In a 1996 survey of small entrepreneurs by the Confederation of the Indian

Industry (CII), a large proportion of the respondents attributed their problems to

delayed payments, high cost of borrowing and inadequate credit.

Sickness in the SSIs As of September 1992, about 233 thousand small-scale units

were sick. Many of the sick units ultimately close down due to finance and

marketing problems. Poor management has also been identified as a major cause of

sickness. Therefore a need exists to continuously provide help in terms of training

for the small enterprises to manage themselves. The recent policies and programs

providing management training by the SIDBI is hopefully a step towards solving this

problem.

Negative impacts of reservation policy The previous and current small-

scale industries policies have followed the policy of reserving certain items to be

manufactured only by the SSIs. Many of the items that are reserved are in the

mechanical engineering, chemical products and auto-ancillary industry groups.

Though the policy was mainly aimed at protecting the small firms from competition

from the large firms, the lack of any licensing to identify SSIs has resulted in the

entry by large firms into those areas. There is no enforceable penalty for moving into

reserved areas. It is also held by many authors that the policy is actually

counterproductive as those producing non-reserved items have performed better than

those in reserved areas. Hence the reservation policy tends to become large

redundant.

The Equity policy The New Small Industry Policy allows the large firms to

have equity in SSIs. This policy is contended to be a bad one as it only encourages

the small units to continue to act as dependent on the large firm. A fear that the large

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firms might at a later stage takeover the small units is also expressed by some

industry experts.

Apart from the abovementioned critical issues, there are several other

issues such as non-classification of a separate medium enterprise under the Indian

industrial sector, regional imbalances in the concentration of small scale industries

and survey data showing that government institutions were the ``least important

sources of technological information.'' More information on these issues could not be

obtained.

Another concern is the lack of coordination between the various support

organizations set up by the government. It would also be interesting to know if any

evaluation systems are in place for these institutes and their programs. Information

on this aspect could not be gathered.

An article by Ira Gang mentions that policies intended to support the small

industry such the reservation, financial incentives, etc. are ``neither promoting

employment nor improving the competitive base of small firms. Rather, they are

working as strong disincentives for growth of small firms.''

Though all the previous efforts at helping the SSIs to grow and modernize

seem to have had very little effect, the recent modernization efforts such as the

setting up of the Technology Development Board, the Technology Development and

Modernization Fund, greater emphasis on providing management skills and in

obtaining ISO 9000 certification seem more focused and promising. Since these have

very new, no specific conclusions as to their success or impact can be drawn at this

time. Hopefully, some systematic methods to ensure that SSIs are actually receiving

benefits and necessary assistance will be put in place.

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FINANCING OF SSI:

`Government has recognized the important role of entrepreneurs in the

industrial development of the economy, especially through the small-scale industries

(SSIs). SSI is essential for Indian economy in terms of employment generation,

foreign exchange earnings, and its share in industrial output, and contribution to

national income. The government of India and state governments provides a number

of special facilities and incentives.

The incentives not only motivate entrepreneurs to set up industries in the

small scale sector, but also strengthen the entrepreneur’s base in the economy. Of all

the elements that go into a business, credit is the perhaps the most crucial. The best

plans can come to naught if adequate finance is not available at right time. SSIs need

credit support not only for running the enterprise & operational requirements but also

for diversification, modernization / up gradation of facilities, capacity expansion etc.

In respect of SSIs, the problem of credit becomes all the more critical whenever any

episodic event occurs such as a large order, rejection of consignment, inordinate

delay in payment etc. In general, SSIs operate on tight budgets, often financed

through owner’s own contribution, loans from friends and relatives and some bank

credit. Government of India recognized the need for a focused credit policy for SSI

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in the early days of promotion of SSIs and RBI has been instrumental in devising a

multi-stage approach / financial system for credit dispensation to different sectors of

the economy, for example, agriculture, industry, exports, SSIs etc. This section

focuses on the role of SIDBI, SFCs and commercial banks in granting credit to small

scale and tiny sector.

ROLE OF BANKS IN DEVELOPMENT OF SME’s:

Many of the banks in India is providing loan to SME Sector. Such as

SIDBI, PNB, SBI, etc. Maharashtra Small Scale Industries Development

Corporation was established in 1962.The basic objective was to help the small scale

Industries to develop and grow to the fullest extent enabling them to play their role

towards realization of the national objective of accelerating the place of Industrial

Development, generation of employment and income.

The main objective of assisting Small and Medium scale industries (SME)

Units in the State. The Company failed to achieve fully its main objective of

assisting SSI units, as there was continuous decline in number of SSI units assisted

during 1997-2002.

(i) Aid, counsel, assist, finance, protect and promote the interests of SSI to enable

them to develop and improve their methods of manufacture, management, marketing

and techniques of production.

(ii) Enter into contracts for fabrication, manufacture, assembly and supply of goods,

materials, articles and equipment and to arrange for the performance of such

contracts by sub-contracting with small scale units.

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(iii) effect co-ordination between large industries with a view to procure orders for

SSI and to enable them to manufacture parts, accessories, ancillaries, components

and other articles required by large industries. Pursuant to its objectives, the

Company undertook the following major Activities

a) Procurement and distribution of raw materials

b) Assistance in marketing of products

c) Commercial warehousing

d) Assistance in import of raw materials and export of products

e) Running of emporia for handicrafts and production centre.

Recent modernization scenario:

In spite of the existence of all the aforementioned organizations to help the

development of the SSI, an increasing spread of sickness is reported in the sector.

Acknowledging this fact, the DCSSI set up a working group in 1985 to make

recommendations for a suitable action. The suggestions made by this group included

the following:

Establish a well-equipped design and technology development cell in the

office of the DCSSI to coordinate programs of modernization in the small

small-scale sector.

Special cells called ``Product-cum-Process Development Centers'' will be

necessary for undertaking research, locating sources of modern technology,

identifying suitable technology for transfer and help the small-scale industries

in obtaining inputs.

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Liberal imports of technology and equipment should be allowed to modernize

the small-scale sector.

Incentives should be provided to enterprises with modern technologies to

transfer them to the SSIs.

In August 1991, the GoI announced its new policy towards the small scale

sector. The government announced that a Technology Development Cell would be

set up in the Small Industries Development Organization (SIDO). This Cell would

provide technology inputs ``to improve productivity and competitiveness of the

products of the small scale sector''. The Technology Development Cell would

coordinate with other industrial research and development organizations to achieve

its objectives. Information on whether such a Cell had been set up was not available.

Under its scheme of direct assistance, the SIDBI had launched the

Technology Development and Modernization Fund. The main objective of this fund

is ``to encourage existing industrial units in the small scale sector to modernize their

production facilities and adopt improved and updated technology so as to strengthen

their export capabilities''. Through this fund, its helps the SSIs meet the costs of

purchasing capital equipment, acquisition of land, expenditure incurred in obtaining

ISO 9000 series certification and also the costs for improvements in packaging. The

SSIs have to meet some criteria before they can apply for financial assistance under

this scheme, for e.g. units must be in operation for at least three years. It is also

working towards prospects of marketing the products of SSIs in the internal and

international markets.

One of Development and Support Services extended by the SIDBI is the

Enterprise Strengthening service. Under this service, there are specific programs

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including technology transfer, technology up gradation in indentified industry

clusters and management development.

In the 1996-97 Union Budget, the government announced the setting up of

a Technology Development Board and this has been instituted under the Department

of Science and Technology. During the presentation of the budget, the Union

Minister for Finance proposed that the unutilized corpus of $1.75 billion under the

Technology Development and Modernization Fund Scheme of the SIDBI should be

provided to the State Financial Corporations and commercial banks. These banks

will in turn be able to make it available for the SSIs for modernization projects.

In addition, the SIDO and SISIs have introduced a program for promoting

technological modernization of the SSIs. Under this initiative, the small production

units are provided information, advice and training. Reports are distributed among

them for spreading modernization information. The SSIs can register for these

programs for a fee. As of March 1986, there were 570 enterprises registered under

the modernization scheme of the SIDO. However only 24 of these have been

provided with modernization guides.

A recent change in the small-scale industrial policy allows the large firms

to hold up to 26 percent of equity in small enterprises without the requirement of

consolidation of accounts. This is considered as a good way to induce the transfer of

technology and skills from large industrial units to SSIs. Industry experts are

however skeptical about this. Most large units use the small-scale sector as sub-

contractors. Doubts have been expressed whether these large units would allow for

transfers of technology to SSIs and enable them to grow and become independent

units in their own right.

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POSITIVE IMPACT OF SME:

The importance and potential contribution of the SME sector are supported

by both theoretical and empirical arguments and evidence. We turn first to the

former. Part of the contribution of the SME sector both to the overall total factor

productivity (efficiency, as usually defined) of an economy and to employment

generation and distributional equality comes by virtue of its pattern of technology

choice. SME technology tends to be intermediate between the highly labour

intensive technologies of micro enterprise, which as a result achieve only low

average labour productivity, and the highly capital intensive technologies of large

firms which thereby achieve high labour productivity, but use more capital per

worker than is available for the economy as a whole. A larger SME sector is best

thought of as the alternative to a highly dualistic economy with most of the capital in

the large scale sector and most of the workers in the very small-scale sector. An

economy which is dominated by SMEs, as Taiwan’s has been, can generate a low

level of inequality in the distribution of primary income (before tax and transfer)

whereas the dualistic economy characterized by the combination of much large

enterprise and much micro enterprise typically generates a high level of primary

inequality.

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Its intermediate technology characteristic is what gives the SME sector a

special role (together with small-scale agriculture) in the generation of adequate or

decent employment. When most jobs are in the micro enterprise sector, too many of

them are destined to be low productivity and hence low income in character. SME

firms can be substantially more productive, so in terms of the potential to generate

“decent” jobs this sector competes with large private firms and the government, but

it has the advantage of being able to generate many more such jobs for a modest

input of capital. The key mechanism in generating decent employment in most

developing countries involves the expansion of this sector fast enough to absorb

people previously unemployed (a few) or engaged in low productivity informal

sector jobs (the bulk).

Developing countries without substantial SME sectors (hence often

described as having a “missing middle” in their firm size structure) tend not only to

have capital and the income from it concentrated in the larger firms but also to have a

“labour elite” in that sector, able to bargain for wages much higher than elsewhere in

the economy. With the economy’s capital stock almost completely used up by the

large firms (usually a result of capital market imperfections), there is little remaining

capital to be distributed among the many workers not hired by large firms; this

produces a large micro enterprise sector with the SME sector squeezed out for lack

of capital. The equilibrium wage in the micro enterprise sector is very low and

capital incomes are low there as well. In short, income is very unequally distributed.

When the SME sector is large, these extremes in the distribution of both capital

income and labour income are avoided.

Apart from being the sector to which one would like to see a high share of

resources allocated at a given point of time, for the above reasons, the SME sector

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also plays a key dynamic role in generating growth, especially pro-poor growth.

Nearly all developing economies have large micro enterprise sectors that, like the

SME sector itself, are highly heterogeneous in many respects--the goods or services

produced the entrepreneurial capacity of the owner, and the potential for growth, etc.

Many are survivalist in character but others have dynamic potential. In most

countries for which such data are available it appears that most small firms (of say 6-

25 workers) began their lives as microenterprises and then grew

SIDBI

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VARIOUS BANKS POLICIES IN RESPECT OF SME SECTOR

SIDBI

Direct Finance:

Objective

SIDBI had been providing refinance to State Level Finance Corporations /

State Industrial Development Corporations / Banks etc., against their loans granted to

small scale units.

Since the formation of SIDBI in April, 1990 a need was felt/ representations

were made that SIDBI being the principal financial institution for the small sector,

should take up the financing of SSI projects directly on a selective basis.

So it was decided to introduce direct assistance schemes to supplement the

other available channels of credit flow to the small industries sector. Since then, SIDBI

has evolved itself into a supplier of a range of products and services to the Small &

Medium Enterprises [SME] sector.

1. Direct Credit Schemes

SSIs

Service sector units

with project cost

Upto Rs.25 crore

Medium Sector Enterprises

(MSE) and

Service sector units with

project cost above Rs.25 crore

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and Upto Rs.250 crore.

Eligible

BorrowersI] New or existing SSI units.

ii] SSI unit graduating to

medium scale, and

iii] Service sector units with

an overall project cost not

exceeding Rs.25 crore.

i] New or existing medium sector

enterprises, and

ii] Service sector units with an overall

project cost above Rs.25 crore and

Upto Rs.250 crore with Bank's

assistance not exceeding Rs. 50 crore.

Constitution The unit should generally be

a private limited / public

limited company. However,

partnership firms, sole

proprietorship concerns and

Societies and Trusts would

also be considered on a case

to case basis.

The unit should generally be a private

limited / public limited company

Nature of

assistanceTerm loan and other forms of

assistance such as Working

Capital Term Loan and bills

discounting (on selective

basis).

Term loan and other forms of

assistance such as Working Capital

Term Loan, suppliers' & purchasers'

bills discounting. Investment products

such as debentures, optionally

convertible cumulative preference

shares, zero coupon bonds, etc.

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Currency of

loan

In Rupee or foreign currency In Rupee or foreign currency

Purpose Assistance for purposes, such

as

Assistance for purposes, such as

Setting up of a new

SSI unit/ service sector

unit.

Expansion /

Diversification/

modernization/

technology up

gradation/ quality

certification.

Any other activity

considered relevant to

the project.

For undertaking

various marketing

related activities

Acquisition of

additional machinery /

equipment

Setting up of a new MSE unit/

service sector unit.

Expansion / Diversification/

modernization/ technology up

gradation/ quality certification.

Any other activity considered

relevant to the project.

For undertaking various

marketing related activities.

Acquisition of additional

machinery / equipment.

Meeting working capital

requirements including gap in

MPBF or margin on selective

basis.

Any other activity as per

guidelines (having linkages and

benefits accruing to MSE sector

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http://www.sidbi.com/dcsnote1.asp


http://www.sidbi.com/dcsnote.asp









Meeting working

capital requirements

including gap in

MPBF or margin on

selective basis.

Any other activity as

per guidelines (having

linkages and benefits

accruing to SSI sector

from the proposed

assistance).

All activities covered

under erstwhile

marketing assistance

scheme for SSIs.

from the proposed assistance).

All activities covered under

erstwhile marketing assistance

scheme for SSIs.

Minimum

loan amount Generally Rs.50 lakh

for setting up new unit

and Rs.25 lakh for

other purposes.

In respect of well run

existing SSI units, the

minimum loan could

be Rs. 10 lakh.

Generally Rs.100 lakh for setting up

new unit and Rs.50 lakh for other

purposes.

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Rate of

interestAs applicable from time to

time.

As applicable from time to time.

Desirable Norms and parameters

Debt Equity

Ratio

Generally not exceeding 2:1

for the company as a whole.

Generally not exceeding 2:1 for the

company as a whole.

Minimum

Promoter's

contribution

(wherever

applicable)

New projects - 33%, lower

contribution [Upto 25%]

could be accepted in respect

of existing well performing

companies / firms. Others -

25% (minimum)

New projects - 33%, lower

contribution [Upto 25%] could be

accepted in respect of existing well

performing companies. Others - 25%

(minimum)

Period of

loan / limitMinimum 6 months to

maximum 8-10 years for

term loan (including

moratorium of not exceeding

18 months).

Minimum 6 months to maximum 8-10

years for term loan (including

moratorium of not exceeding up to 18

months).

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2.Technology Up gradation Fund Scheme for Textile Industries (TUFS)

Note: At present this scheme is suspended until further instructions from Govt. of

India.

Purpose The Scheme is operated by the Ministry of Textiles, Govt. of

India. Policy guidelines are issued by the office of Textile

Commissioner, Govt. of India.

TUFS has been launched with a view to sustaining as well as

improving the competitiveness and overall long term viability of

the textile sector. The scheme intends to provide timely and

adequate capital at internationally comparable rates of interest in

order to upgrade the textile industry's technology level.

Special

FeaturesSIDBI is the nodal agency for SSI textile sector and cotton

ginning and pressing sector.

For SSIs: The borrowers can avail of any one of the following

benefits: 5% interest reimbursement on the interest actually

charged in respect of rupee loan or coverage of exchange rate

fluctuation not exceeding 5% p.a. from the base rate or cost of

forward cover premium Upto 5% p.a. on the base rate of

exchange in respect of foreign currency

OR

15% Credit Linked Capital Subsidy on eligible investment made

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for modernization, for Small Scale Textile and Jute Industries in

respect of Rupee Loans; The units are permitted to make new

investment eligible under TUFS Upto Rs. One crore or till the

unit reaches SSI limit, whichever is higher.

OR

20% Credit linked Capital subsidy (CLCS @20%) on machinery

cost exclusively for power loom units in SSI sector. The cost of

modern weaving machinery admissible is Upto Rs. 60 lakh (i.e.

Subsidy ceiling is Rs. 12 lakh).

For textile processing units, 10% capital subsidy is being given

as an additional incentive since April 19,2005 apart from the 5 %

interest incentive.

For units graduation out of SSI and Medium Sector

Enterprises (MSEs): The borrowers can avail 5% interest

reimbursement on the interest actually charged in respect of

rupee loan or coverage of exchange rate fluctuation not

exceeding 5% p.a. from the base rate or cost of forward cover

premium Upto 5% p.a. on the base rate of exchange in respect of

foreign currency loan.

Eligible

BorrowersSSI units, SSI unit’s graduation out of the sector after

implementation of the scheme and MSEs in the Textile sector

and Cotton Ginning and Pressing sector can be covered.

Debt Equity

RatioNot to exceed 2:1 for the company/firm/concern as a whole

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Loan Limit Amount of term loan shall be need based but not below Rs. 10

lakh. For SSI units graduating out of the sector, the amount of

loan shall be decided on a case to case basis.

Rate of Interest As per the commercial lending rate of SIDBI. Presently , within

band of 9.5% to 13.5%

Minimum

Promoters'

Contribution

20 per cent of the project cost for rupee term loan.

33.33 per cent of the cost of project for foreign currency term

loan

Upfront fee 1% of the loan amount

Scheme period Till March 31, 2007

Period of

RepaymentNot exceeding 10 years, including moratorium Upto 2 years,

based on the merits of the individual case.

3. Scheme for Development of Industrial Infrastructure for SSI Sector (DII)

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Purpose Setting up of industrial estates / development of industrial areas

including such projects found eligible under KVIC model.

Strengthening of existing industrial clusters / estates by providing

increased amenities for smooth working of the industrial units. Setting

up of warehousing facilities for SSI products / units.

Providing support services viz., common utility centre’s such as

convention halls, trade centre’s, raw material depots, warehousing,

tool rooms / testing centre’s, housing for industrial workers, etc. Any

other infrastructural facilities which will benefit predominantly SSI

units / entrepreneurs.

Eligible

Borrowers

All forms of organizations such as Public / Pvt. Ltd. Companies;

Registered Societies / Trusts; Government Corporations; Corporate /

Co-operative entities / accredited NGOs approved by KVIC.

Norms Cost of Project: Not to exceed Rs.100 million.

Debt Equity Ratio: Not more than 3:1

Repayment Period - Not exceeding 10 years including initial

moratorium period of Upto 3 years.

4. Integrated Infrastructural Development (IID)

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Purpose For setting up of IID centre’s with facilities like water supply, power,

telecommunication, common services centre including for

technological back up services for small scale industries in rural

backward areas as envisaged under the policy for promoting and

strengthening small, tiny village enterprises announced by Govt. of

India (GOI) on August 6, 1991.

The cost of improving / upgrading the deficient infrastructural

facilities to increase the productivity and optimum utilization of the

existing centre’s / clusters in backward / rural areas may also be

covered under the scheme.

Eligible

Borrowers

Implementing agencies (a public sector corporation or a corporate

body or a good NGO having sound financial position) entrusted with

the task of implementing the scheme by the concerned State / Union

Territory (UT) Govt.

5. Credit Linked Capital Subsidy Scheme (CLCSS)

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Note: At present this scheme is suspended until further instructions from Govt. of

India.

Purpose The Scheme is operated by the Ministry of SSI, Govt. of India. Policy

guidelines are issued by the office of DC (SSI), Govt. of India. The

objective of the scheme is to facilitate technology up gradation of tiny

and SSI units in the specified products / sub-sectors as indicated

below by providing 15% capital subsidy for induction of proven

technologies approved under the scheme in 45 products/sub-sectors

viz., leather and leather products including footwear and garments;

food processing( including Ice-cream manufacturing);Information and

Technology (Hardware);drugs and pharmaceuticals; auto parts and

components; electronic industry particularly relating to design and

measuring; glass and ceramic items including tiles; dyes and

intermediaries; toys; tyres; hand tools; bicycle parts; foundries -

ferrous and cast iron; and stone industry(including Marble Mining

Industry).

Cap on amount of subsidy :

15% of the cost of eligible Plant & machinery or Rs. 15 lac

whichever is less. Ceiling on the Loan amount : Rs. 100 lakh

Eligible

Borrowers

Eligible

Primary

a) Existing SSI units registered with the State Directorate of

Industries which upgrade with the state-of-the-art technology, with or

without expansion.

36 | P a g e


lending

institution

s

b) New SSI units which are registered with the State Directorate of

Industries and which set up their facilities only with the appropriate

eligible and proven technology duly approved by the GTAB.

Scheduled commercial banks and National Small Industries

Corporation (NSIC) and State Financial Corporation’s (SFCs).

Definition of Technology Up gradation

Technology up gradation would ordinarily mean induction of state-of-

art or near state-of-the-art technology. It would also include

installation of improved environmental conditions, including work

environment for the unit, installation of improved packaging

techniques, anti-pollution measures and energy conservation

machinery.

Duration of the Scheme

The scheme will be in operation for a period of five years from

October 1, 2000 to September 30, 2005 which has since been

extended Upto March 31,2007 or till the time sanctions of capital

subsidy by the nodal agency reach Rs.600 crore, whichever is earlier.

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7.SME-IT Loan Schemes

SIDBI for Business Enterprises

Introducing an easy-to-get, easy-to-pay finance bundle from SIDBI specially for

SMEs to computerise their business.

SIDBI and Intel have come together with a first-of-its kind initiative to help SMEs

set-up or step-up IT in their business. While Intel will deliver a range of world

class IT products and solutions, SIDBI will provide the financial assistance for

SMEs to buy them. Called SMEITLOANS, it provides an easy access for SMEs to

get both the finance and the technology to adopt IT, especially since the loan is

available for hardware, software, installations and services.

8. Bills Finance Schemes:

Objective

Bills Finance Scheme involves provision of medium and short-term

finance for the benefit of the small-scale sector. Bills Finance seeks to provide

finance, to manufacturers of indigenous machinery, capital equipment,

components sub-assemblies etc, based on compliance to the various eligibility

criteria, norms etc as applicable to the respective schemes.

To be eligible under the various bills schemes, one of the parties to

the transactions to the scheme has to be an industrial unit in the small-scale

sector within the meaning of Section 2(h) of the SIDBI Act, 1989.

38 | P a g e


The various sub schemes that have been introduced are as listed on

the menu, on the left.

9.Receivable Finance Scheme

Purpose To enable SSI / SME / Eligible Service sector units (including

construction / small road transport operators) selling

components, parts, sub-assemblies, services, etc. to Medium &

Large scale units realise their sale proceeds quickly.

Eligible

BorrowersLimits are sanctioned by SIDBI to well established industrial

units using components / parts / sub-assemblies / accessories /

services manufactured / provided by by SSI / SME / Eligible

Service sector units. Either seller or Purchaser need to qualify

as SSI / SME / Service Sector unit

Norms Unexpired usance - Not more than 90 days

Others Facility without bills of exchange / LC backed receivables can

also be considered on the basis of merit.

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BANK OF BARODA

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Bank Of Baroda

Bank of Baroda participates in the Credit Linked Capital Subsidy

41 | P a g e


Scheme launched by Government of India to facilitate Technology Up gradation of

Tiny and SSI units in the specified products/ sub-sectors. Bank of Baroda is one

of the Nodal Agencies appointed by Government of India.

OBJECTIVE

To facilitate Technology Up gradation of Tiny and SSI units in the

specified products/sub-sectors as notified by Govt. of India by providing 15%

capital subsidy for induction of proven technologies approved under the scheme,

viz. leather and leather products including footwear and garments; food processing

(including ice-cream manufacturing); Information and Technology (Hardware);

drugs and pharmaceuticals; auto parts and components; electronic industry

particularly relating to design and measuring; glass and ceramic items including

tiles, dyes and intermediaries, toys; tyres; hand tools; bicycle parts; foundries

ferrous and cast iron; and stone industry (including Marble Mining Industry).

Baroda Vidyasthali Loan

Baroda Vidyasthali Loan is a special scheme for financing Educational

42 | P a g e


Institutions.

Purpose:

To meet the financial requirements for setting up the institutions which includes

construction of building, purchase of equipment etc. for the new set up as also

renovation of the existing facilities, purchase of instruments for imparting

education training to the students.

Eligibility:

Educational institutions, Schools, Colleges and other education bodies running

education activities

Note: HUF are not eligible.

Limit:

Minimum Rs.25 lacs

Maximum Rs.10 Crores

Security:

Equitable mortgage of Land & Building (not agricultural land).

Hypothecation of Instruments & Equipment acquired out of the loan and other

assets of the Educational Institution.

Personal guarantees of the Promoters of the Institution.

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Margin:

25% of the cost of the project.

Rate of interest:

0.50% below Bank’s BPLR from time to time.

Repayment period:

Maximum 84 months including moratorium period of 1 year, depending upon the

projected cash flow.

Baroda Arogyadham Loan:

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Purpose:

To meet the financial requirements for setting up of new Nursing Home/Hospital

including Pathological Laboratory, Expansion/renovation/modernization of

existing Nursing Home/ Hospital including Pathological Laboratory, Purchase of

medical diagnostic equipments as also office equipments, viz. computers, air

conditioners, office furniture, Purchase of ambulance etc and to meet working

capital requirements.

Eligibility:

All entities, i.e. MSMEs, Enterprises other than individuals like Proprietorship,

Partnership firms, Private Limited Companies and Trusts engaged in providing

medical/pathological diagnostic services to the Society and with turnover Upto Rs.

150/- Crores.

Note: The Promoters should have requisite qualification in any branch of medical

science from a recognized University and should have minimum 2 years of work

experience.

Limit:

Rural Centre’s - Rs. 0.50 Crores

Semi-Urban Centre’s - Rs. 6.00 Crores

Urban & Metro Centre’s - Rs. 12.00 Crores

Notes :

Working Capital limits Upto 10% of the annual sale or gross income, subject

45 | P a g e


to 20% of the above ceiling limits in case of borrowers requiring both Term

Loan and working capital facilities.

In case of borrowers requiring only working capital limit, 20% of the above

ceiling limit.

Security:

Equitable mortgage of Land & Building/premises of Nursing Home/Hospital

Hypothecation of medical equipment/office equipment acquired out of loan

amount.

Personal guarantee of Promoter Directors in case of Limited Companies and

Trustees in case of Trusts.

Hypothecation of medicines, receivables and other chargeable current assets.

Charge on unencumbered assets of Promoter Directors in case of Private

Limited Companies, or any other collateral by way of FDR, mortgage of

properties in the personal name of the relatives of Promoters, etc.

Margin:

25%. Higher margin if collaterals are inadequate

Rate of interest:

As per credit rating of the borrower.

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Baroda Laghu Udhyami Credit Card

Purpose:

To provide hassle free credit facilities to Small business units, retail traders,

artisans, village industries, small scale industrial units and tiny units,

professionals and self employed persons etc.

Eligible borrowers:

All existing customers in the categories of Small Business, Retail Trade,

Artisans, Village Industries, Small Scale and Tiny Units, Professional & Self

Employed persons etc. having satisfactory track record / dealing with the

bank for last 3 years.

Limit:

Maximum Upto Rs. 10/- Lakhs per borrower.

Period / validity:

The limit fixed under the scheme will be valid for a period of three years

subject to internal annual review based on the conduct / operations of the

account.

Security:

Hypothecation of stock in trade, receivables, machinery, office equipment

etc. as specified for existing limit.

Margin:

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25%.

Baroda Artisans Credit Card (BACC)

Purpose:

To provide adequate and timely assistance to the artisans to meet their credit

requirements - both investment needs as well as working capital - in a

flexible and cost effective manner. The scheme is implemented in rural and

urban areas.

Eligible borrowers:

All artisans involved in production / manufacturing process.

Preference given to artisans registered with Development Commissioner

(Handicrafts).

Beneficiaries of other Government Sponsored loan schemes will NOT be

eligible for coverage under BACC scheme.

Limit:

Maximum Rs. 2/- Lakhs per borrower.

Margin:

For limits Upto Rs. 25,000/- No margin

For limits above Rs. 25,000/- but Upto Rs. 2 Lakhs 15% to 25% margin.

Margin is subject to change as per RBI guidelines from time to time or the

48 | P a g e


bank's policy in this regard.

Security:

Hypothecation of assets financed under the scheme..

Conditions apply. Credit Linked Capital Subsidy Scheme (CLCSS) For SSI

Units

SME Medium Term Loans

Purpose:

To augment enterprise’s working capital gap and to help in improvement of

current ratio and also for meeting genuine business requirements. The

facility will also be available for repayment of secured and unsecured Loans

of other banks or institutions, but not for any purpose, which is not related to

the enterprises activity.

Enterprises group:

Micro, Small & Medium Enterprises as per Regulatory definition and all

other entities with annual sales turnover of Rs. 1/- crore to Rs. 150/- crores.

Eligibility criteria:

Satisfactory credit rating for the last three years

Latest Balance Sheet etc. should be available.

Satisfactory financial performance in terms of Sales/turnover and profits.

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Negative variance, if any, should not be more than 10%.

Total Debt-equity ratio should not be higher than 4.5:1 and total Term

Liability and equity ratio should not be more than 3:1.

Average DSCR should not be less than 1.75:1

Satisfactory dealings with the Bank for at least Three years.

Loan amount:

Upto 25% of the existing fund based Working capital limits (depending on

the Credit Rating), subject to a minimum of Rs. 25 Lakhs and maximum of

Rs. 500 Lakhs.

Period:

Not exceeding –36- months, to be repaid in equal quarterly or half-yearly

installments.

Security:

First charge / Equitable mortgage of fixed assets of the Company / firm or

extension of existing first charge/ equitable mortgage of fixed assets,

ensuring that there is a minimum asset cover of 1.25

Rate of interest:

As per credit rating for the additional loan

Prepayment penalty of 1%, if loan is prepaid within -24- months of

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drawdown

Processing charges / upfront fee:

25% concession in applicable charges.

Baroda SME Loan Pack

Baroda SME Loan Pack provides single line of credit for meeting SME

borrowers’ working capital as well as long term requirements within the overall

limit approved by the bank.

Purpose :

To provide hassle free credit for working capital (fund based and non-fund

based) as also long term requirements, taking into account nature of

business, cyclical trends, cash flow projections, peak time requirements and

any eventuality of unforeseen spurt in the business.

Eligibility:

All Enterprises, i.e. Micro, Small & Medium Enterprises, as defined under

MSMED Act, 2006, and other entities with annual sales turnover of Rs. 1/-

crore to Rs. 150/- Crores exclusively banking with our bank/new borrowers

desirous of having sole banking arrangement with our bank.

Composite limit :

4.5 times of borrower’s tangible net worth as per last audited Balance Sheet,

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or, Rs. 5.00 Crores, whichever is lower.

Margin :

25%.

Rate of interest :

As per credit rating of the borrower.

Security :

1. Exclusive charge on the assets of the enterprise.

2. Personal Guarantees of all promoter Directors / Partners.

3. Charge on the unencumbered personal properties of the partners, promoter

Directors, wherever applicable.

4. Third party guarantee in case of credit line above Rs.100.00 lacs to Micro &

Small Enterprises as per Regulatory definition.

5. Any other collateral for the credit line above Rs. 25.00 lacs in case of other

Enterprises, i.e. Medium Enterprises and Enterprises based on the turnover

criteria to maintain asset coverage ratio above 1.25.

Other features :

Loans Upto Rs. 100/- lacs to Micro & Small Enterprises will be covered

under Credit Guarantee Fund Trust Scheme.

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SME sector comes into sharp focus

After several decades, the focus on the small and medium enterprises has

shifted from offering sops, to assessing their creditability and debt repayment

capabilities. The government and RBI have announced policy packages to this

effect and rating agencies have spurted to help banks and financial institutions

make SME lending a profitable venture.

The small and medium enterprise (SME) sector has come into sharp focus

with a policy package announced by the government recently, envisaging public

sector banks to fix their own targets for funding this sector in order to achieve a

minimum 20 per cent year-on-year growth in credit to the sector. In addition, these

banks are required to follow a transparent rating system with cost of credit linked

to the credit rating of the enterprise. Further, the package requires commercial

banks to make concerted efforts to provide credit cover on an average to at least

five new tiny, small and medium enterprises per year.

Though it appears to be a tall order for the banking sector, the guidelines

have been embraced with enthusiasm. Several banks, including foreign banks like

Citibank and Standard Chartered Bank have set up special cells and branches

dedicated to SME lending.

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The SME sectors preferred by bankers for lending include bulk drugs,

knitwear and auto-ancillary goods. Textiles, pharmaceutical companies, chemicals

and dyes sectors also continue to find favour with banks as these businesses are

thriving.

Enterprises like gems and jewellery, seafood processing, sports good etc are

not preferred, as banks have suffered huge non-performing assets on account of

lending to these sectors over the past few years.

However, the new government package is accompanied by reworked

guidelines from the Reserve Bank of India on the debt restructuring mechanism for

SMEs with outstanding of up to Rs 10 crore. This can help banks assess the SMEs,

which they now perceive as untouchable.

According to the RBI guidelines, banks could decide the acceptable viability

benchmark, consistent with the unit becoming viable in seven years and the

repayment period for restructured debt not exceeding 10 years.

Accounts classified by banks as “loss assets” would not be eligible for

restructuring. Additional finance would be treated as a ‘standard asset’ in all

accounts up to a period of one year after the date when first payment of interest or

of principal, whichever is earlier, was due. RBI has also asked banks to formulate a

debt-restructuring scheme for SMEs. These guidelines are geared to help banks

renew their focus on this sector.

CRISIL has stepped in to provide a rating service for the SME sector.

According to this rating programme, SMEs would be rated on a scale of one to

eight, with scale one indicating the highest credit quality and the scale eight,

54 | P a g e


hinting at default possibilities. The ratings assigned to SMEs would also function

as a self-improvement tool for them.

To top all initiatives, SBI, ICICI Bank and Standard Chartered Bank, have

agreed to join hands with the Small Industries Development Bank of India (Sidbi)

to float a rating agency for the SME segment. The rating agency, Small and

Medium Enterprises Rating Agency (SMERA), inaugurated recently, will rate the

company’s overall strength; unlike most rating agencies whose core business are to

rate debt instruments.

While SIDBI will have largest share of 22 per cent followed by SBI, ICICI

Bank and international credit information company Dun & Bradstreet, which

would be at 10-13 per cent. Five other public sector banks hold about 28 per cent.

These are Punjab National Bank, Bank of Baroda, Bank of India, Canara Bank and

Union Bank of India. Credit Information Bureau of India (CIBIL) is also likely to

join the company shortly.

Most small and medium companies rely on extremely expensive funds

sourced from the unorganized financial sector. Part reason why bank credit is

denied to many small units, despite repayment capacity not being suspect, is that

lenders often do not have the capability to assess their risk. Rating agencies are a

step in this direction.

With a brand new government package, reworked guidelines for lending by

the RBI and the facility of rating enterprises not just for their creditability and debt

repayments, banks can now refocus on the SME sector.

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SME AS CREATOR OF THE JOBS

Small Scale Industries (SSIs) have always been regarded for their high

employment intensity. SSIs today employ over 192 lakh persons and this is

targeted to grow at 4% per annum during the 10th Plan period of 2002-2007.

Though often described as ideal vehicles for promotion creation of jobs in the

economy, at the same time, it is also true that the nature of employment in the

sector is undergoing change. Employment generation figure declined from 6.3

persons per SSI in 1987-88 (2nd Census) to 3.6 persons per SSI in 1999-2000

(Sample Survey). Expert committees which have looked at this issue have also

come up with different sets of recommendations. The Task Force on

Employment Opportunities under Shri Montek Singh Ahluwalia had

identified SSIs as an important source of employment and as an important

incubator for entrepreneurship. The Task Force however called for a shift in policy

from protection to promotion. The Task Force felt that almost 70% of the total

employment opportunities generated over the next 10 years were likely to be in the

services sector. On the other hand, a Special Group on15

Employment for creation of 10 million employment opportunities per year

over the 10th Plan under Dr. S.P. Gupta has recommended that since more than

92% of employment generation in the economy is coming from small and medium

enterprises, including agriculture - commonly defined as the unorganized sector,

56 | P a g e


there is need to give special focused attention for meeting the requirements of

small and medium enterprises to enable them to create more jobs in the future.

During the 1990s, jobs in the organized sector grew at less than 1% per annum

While jobs in the SSI sector increased by 3.5% every year. In the changing

scenario, on account of globalization and liberalization, what shall be the impact

on the creation of new jobs by SSIs? Does increase in capital intensity of SSIs, as

they go in for technological up gradation; imply that lesser jobs will be available?

You may perhaps like to pose such questions to the Hon'ble Minister of State

(SSI), Smt. Vasundhara Raje, who shall be joining us for an online chat session.

Avail of this opportunity to address your queries to the Minister and seek

clarifications on various issues.Topic for discussion:

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The Importance of SMEs in the Economy

1. Introduction.

SMEs are important to almost all economies in the world, but especially to

those in developing countries and, within that broad category, especially to those

with major employment and income distribution challenges. On what we may call

the “static” front, SMEs contribute to output and to the creation of “decent” jobs1;

on the dynamic front they are a nursery for the larger firms of the future, are the

next (and important) step up for expanding micro enterprises, they contribute

directly and often significantly to aggregate savings and investment, and they are

involved in the development of appropriate technology. In asking ourselves how

“important” the SME sector is we must of course go beyond simply looking at its

share of output, employment or any other aggregate variable to the key question

“how much difference does it make to overall economic performance whether the

SME sector is large or small, or whether it grows rapidly or slowly?”

A sector might have considerable weight in GDP, say, but be easily

substituted by other sectors, in which case its share of GDP could greatly overstate

its true importance; in other cases the opposite might be true.

It is a fact of life, at any level of a country’s development, that some needed

activities involve few or no economies of scale while others involve considerable

economies of that sort. The size distribution of firms within a country, and the

58 | P a g e


associated combination of technologies--from the very labour intensive to the very

capital intensive is of course influenced by these “givens”. That distribution can

also be influenced by international trade. An important challenge in many

countries is to assure that a significant share of output takes place outside the

overly capital intensive large scale sector. Achievement of this goal is more

difficult if SME activity in general is discouraged by policy or setting. It can be

facilitated when large firms (whose size may be necessary because some parts of

the process leading to their final goods have economies of scale) subcontract other

parts of that process to smaller more labour intensive firms. It can also be

facilitated by the phenomenon referred to as "clusters" in which small firms

collaborate together to handle those aspects of the business that are indeed

characterized by economies of scale. The ideal setting within which SMEs can

play their positive contribution to the maximum thus includes these structures and

their advantages.

In developing countries with large informal or micro enterprise sectors,

SMEs constitute the middle of the size range, a fact that explains much of their

strategic importance. In terms of organizational structure, SMEs are, on average,

considerably more complicated than microenterprise, which involve largely the

self-employed, sometimes accompanied on the job by a few family workers and

hence usually having fewer than 5 workers. On the other hand SMEs are, on

average, a good deal less complicated structurally than are corporations and other

large firms, with their layers of management, high division of labour, etc. In the

past the weight of the non-agricultural SME sector in output and employment has

traditionally reached its peak in the upper income tier of developing countries,

where agriculture no longer constitutes a large part of the economy. At still higher

59 | P a g e


levels of development its share tended to wane in favour of larger firms (and the

public sector), but the last 2-3 decades appear to have seen an alteration in this

pattern, at least as far as employment is concerned associated partly with an at

times dramatic fall in the share of total employment found in the manufacturing

sector (Palma, 2005) in both industrial and (nearly all) developing countries.

Depending on the case, the output share of SMEs may be greater or smaller

than its employment share. Labour productivity rises monotonically with size

across broad groups of firms, so whether the SME sector has above or below

average labor productivity depends, among other things, on the relative size of the

large firm and micro enterprise sectors.

As with any other component of an economy, the size and importance of the

SME sector varies from country to country; the last few decades have seen an

increasing recognition of the role it plays in industrial countries, something already

more obvious for developing nations from the 1970s or so. The SME sector, of

course, includes firms in all of the major types of economic activity outside

agriculture, from manufacturing to services. Despite the natural differences

associated with the nature of the final product, SMES across these activities still

share quite a few features.

Policy, including tax policy, can make a considerable difference to how well

the SME sector fulfils its potential role in contributing to a healthy economy

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SMEs IN INDIA: WILL THEY BE ABLE

TO JOIN “GLOBAL CHAINS”?

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Small & Medium Enterprises:

(SMEs) play a major role in global economic growth in terms of their

contribution to industrial employment, output and exports. SMEs occupy a place of

strategic importance in the Indian economy as well. However, since the early 1990s,

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Indian SMEs have been exposed to intense competition due to the accelerated

process of globalization. Therefore, the survival as well as growth of SMEs is under

strain. However, globalization has also brought, in its wake, newer opportunities for

SMEs.

Importance of SMEs to Indian economy:

SMEs are officially defined and exclusively identified for promotion in the

manufacturing sector of most national economies. The most important justification

for the exclusive promotion of SMEs is their potential for employment intensity. In

general, a SME generates more jobs per unit of capital investment than a large

enterprise. A SME has much other benefit: it can be started with relatively less

capital; it facilitates nurturing of entrepreneurship, which could emerge from within;

it can be used as an instrument for alleviating regional disparities in development etc.

Further, a SME is flexible in production, has the potential to be a training ground for

managerial skills, promotes individual initiatives, and encourages rich personal

relations. Therefore, it is often promoted as a source of technological innovations in

industrialized economies. However, there is no uniform definition of a SME in the

global economy. Different countries have defined SMEs in different ways. In Japan,

a SME in the manufacturing sector is defined in terms of upper limit of paid-up

capital of 300 million Yen or 300 employees (Small & Medium Enterprise Agency,

2004). In South Korea, SMEs are defined as firms, which are independently owned

and employ less than 300 persons in the manufacturing, mining, transportation and

construction sectors (Back, 2002). In the European Union, SMEs are defined in

terms of employment and turnover/balance sheet total (Table 1). To be classified as a

SME, an enterprise must satisfy the criteria for the number of employees and one of

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the two financial criteria, that is, either the turnover total or the balance sheet total. In

addition, it must be independent. There is no official definition of a SME in India.

Future Importance of SMEs?

What do present trends in the world and in developing countries suggest about

the future role of SMEs? There are several reasons to think that this role will not

wane in most developing countries, at least in the short and medium term. These

include:

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i) The end, at least in some parts of the world, of the observed upward trend in the

share of employment found in large private firms plus the government in

those countries achieving healthy GDP growth; (such increase has rarely

occurred in slow growing countries). For reasons still in need of further

research, it appears that this gradual increase, once thought of as a stylized

aspect of the development process and a process by which the employment

structure of developing countries would gradually approach that of

developed ones, may no longer be present. When this is the case, we know

that the share of employment found either in the informal or the SME

sector is not falling, so unless the SME employment share is rising, that of

the informal sector cannot be falling, though that decline is an important

goal if employment quality is to rise in a country. To illustrate the problem,

in Latin America, even after the return to modest growth in the 1990s, the

informal sector’s share of employment had not fallen as of about 2003, nor

that of the large scale sector risen. Probably the reasons for the levelling off

or decline of the large firm employment share include the near worldwide

trend towards more flexible labour contracts and towards subcontracting

out of some auxiliary functions previously carried out within the large firm.

The falling role of manufacturing employment probably also plays a role

since the large firms account for a higher share of manufacturing

employment than that in most other sectors of the economy. Globalization

may be playing a role by inducing increases in labour productivity in large

firms operating in international markets or having access to very low cost

capital in the international market; that increase in labour productivity

accounts for the cases in which this sector’s output has grown at a good

clip but employment has stagnated or fallen. Chilean manufacturing was a

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notable case of this during its 1990s boom as has been the non-maquiladora

part of Mexican manufacturing.

ii) The information revolution may increase the relative competitiveness of

smaller firms. Informational monopolies often underpin large size and

monopoly. Some, of course, are based on patents. We know that the

accoutrements of information technology have diffused first among larger,

more sophisticated firms, then among SMEs. What we cannot yet judge is

how this revolution will have affected relative competitive positions after

the dust has settled and the diffusion is more nearly complete.

iii) More generally, it may be that small firms will play a larger role in

technological advance in the context of the information revolution and the

rising role of services than was earlier the case under the dominance of

manufacturing.

iv) Most developing countries have achieved large increases in the share of the

population completing primary education and in the share with a

considerable amount of secondary as well. This, together with the large

microenterprise sectors that server as a training ground in business

management for some of those located there, suggests a widening of the

pool of entrepreneurial talent. Healthy SME sectors require such a pool (for

which Taiwan, for example, has always been noted).

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Conclusion

Thus I would conclude that banks are playing major role in development of

small and medium scale Enterprise. Thus various benefits are arising from financing

of SME. From the view point of the national economy, the benefits arising from

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higher order focus of SME financing may be classify as : Increasing the contribution

of the SME sector in the GDP of the country, Entrepreneurial interest would be

encouraged and growth in the number of SME may be possible. New product ,

services would be increasingly available for consumer. Competitiveness in business

will increase. The government of India has taken many measure for growth and

development of the SME sector.

Globalization has been affecting every economic activity in almost every

country across the world. Indian SMEs are no exception. The performance of SMEs

has a determining significance for Indian economic growth due to their substantial

share of enterprises, employment, production and gross value added in the industrial

sector. However, in general, Indian SMEs lack technological strength to access and

exploit the benefits emerging from the intensifying process of globalization.

Therefore, technological transformation of SMEs should attract the focus of

attention of policymakers. In addition, FDI and TNC entry should be used to

promote inter-firm linkages for the benefit of SMEs. They need to be “consciously

guided” to enter the ever expanding global value chains of TNCs, both in the

manufacturing and retail sectors. Further, technological innovation and orientation

of SMEs should be promoted and information access be made easy. On the whole,

SMEs should be enabled to achieve self-sustainable competitiveness and reap the

fruits of globalization for their own growth and the growth of the Indian.

SIDBI has also floated several other entities foe related activities. Credit

guarantee fund trust for micro and small enterprise provides guarantee to banks for

collateral free loan extended to SME. SME rating agency of India Ltd (SMERA)

provides composite rating to SME.

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STATE BANK OF INDIA

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Date: 1/10/2010

To whomsoever it my concern

This is to certify that Miss. Foram Navin Dedhia student of N.E.S Ratnam

College of Arts, Science & Commerce, Bhandup (West), Mumbai-78, visited our

Bank in relation to project work of Semester V, Third Year, Banking & Insurance,

Mumbai University (“ROLE OF BANK IN DEVELOPMENT OF SMALL &

MEDIUM SCALE ENTERPRISE” – Catch them young, watch them grow...)

We found her very Sincere & dedicated towards her project work. We wish

her luck in her future Endeavour.

Signature

(Chief Manager)

R. B. Khare

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