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INSTITUTIONAL FINANCE FOR THE DEVELOPMENT OF SMALL-SCALE INDUSTRIES
IN KARNATAKA
D.G. RUDRA MURTHY
A thesis submitted to the Bangalore University Injulmllment oJ the requlrementsJor the award oJ the degree oj
DOCTOR OF PHlWSOPHY In
ECONOMICS
Submitted through the Department oj Economics
Gnanabhamthl, Bangalore UniversIty BANGALORE
1994
DECLARATION
I hereby declare that the thesis entitled
-Institutional Finance for the Development of Small-Scale
Industries in Karnataka" is a result of research work
carried out by me under the guidance of Dr.Hemlata Rao M.A.,
Ph.D., Prof. of Economics, Institute for Social & Economic
Change, Bangalore.
I further delcare that this thesis has not been
submitted previously for the award of any degree in this
university or any other university.
Place: Bangalore Date : 23rd May 1994
1~fY1U'~ [ D • G . RUDRA MURTHY 1
CERTIFICATE
Certified that this thesis entitled -Institutional
Finance for the Development of Small-Scale Industries in
Karnataka" is a bonafide research work carried out by
Sri D.G. Rudra Murthy independently under my guidance and
supervision.
Place: Bangalore Date : 23rd May 1994
AI J - f) C.-!~;-AL~ t<a..o (Dr. Hemlata Rao)
Professor of Economics Institute for Social & Economic Change
Nagarabhavi, Bangalore - 560 072.
ACKNOWLEDGEMENTS
I place on record my heartfelt gratitude to my
Dr. Hemlata Rao, Professor of Economics, Institute
socio-Economic Change, Bangalore. She extended a very
guide
for
able
guidance, constant encouragement, helplful criticisms and
above all the moral support. But for her, the thesis would
not have seen the light of the day. I am very much indebted
to her.
I am grateful to Dr.D.M.Nanjundappa, Former Vice
Chancellor, Karnataka and Bangalore University, and Deputy
Chairman, Planning Board, Government of Karnataka, for
enabling me to complete this assignment. But for his support
and guidance, I would not have completed this work. I am
indebted to Sri B.S.Patil, I.A.S., Former Secretary &
Commissioner, Department of Industries & Commerce,
Government of Karnataka and Chairman & Managing Director,
KSIIDC, Bangalore, and to Sri Y.K.Puttasome Gowda, I.A.S.
Member, Karnataka Public Service Commission, for their
constant encouragement.
I will be failing in my duty, if I do not mention the
name of Sri H.G.Devaraj, Reader in Economics, Post Graduate
Department of Economics, Manasa Gangotri, Mysore. It was
his consistent encouragement that I ventured to do this
work.
I would also like to thank the Chairman of the
Department of Economics, Jnanabharathi, Bangalore
University, and the Chairman of P.G.Department of Economics,
Manasa Gangotri, Mysore, and also the Chairman of the P.G.
Department of Economics, University of Bombay (Kalina
Campus) for their kind co-operation in completing this work.
I acknowledge the help of the Librarian and Staff of
the ISEC Library - Bangalore, University Library - Mysore,
University Library (Kalina Campus) - Bombay, RBI Library
Bombay, American Consulate Library - Madras, Library of the
National Institute for Bank Management - Poona, University
Libraries of Karnataka & Gulbarga University, Administrative
Training Institute Library - Mysore, Library of the
Directorate of Economis & Statistics - Bangalore and Public
Library - Cubbon Park - Bangalore.
The Officers and officials of Syndicate Bank-
Manipal, Canara Bank - Bangalore, State Bank of Mysore-
Bangalore, KSFC Head Office - Bangalore and Zonal Office-
Mysore and also the General Managers of Districts Industries
Centre of Mysore, Bangalore and Dharwad Districts as well as
Small-Scale Industrialists of Mysore, Bangalore and Dharwad
have been very helpful in accepting many interviews and
providing useful information.
In addition, I would like to thank many individual
Researchers from whose insights, criticisms and intellectual
stimulation, I have been greately benefitted.
My thanks are also due to Sri Pavman and Sri Arif of
M/s.Symbiotic Ventures Mysore for helping me in
computerising the analysis of data and also to Sri
N.Venkataram and V.Prasanna Kumar of Sri Raghavendra
Enterprises & Mis. Surabhi Desktop Publishers,
Saraswathipuram, Mysore, for word processing and printing
and my special thanks to Sri H.S.Sadanand for helping in
administrative matters.
Good number of people made this work possible, but I
am solely responsible for its analysis and conclusions.
Place Date
Bangalore 23rd May 1994 ,~D. G. RUDRAMURTHY'
INSTITUTIONAL FINANCE FOR THE DEVELOPMENT OF SMALL-SCALE INDUS'11UES IN KARNATAXA
CHA.PTER I
INTRODUCTION
(1) Importance of the Study
(2) Industrial Finance in India
(3) Review of Literature
(4) Objectives and Hypotheses of the study
(5) Scope & Methodology for the Study
CHAPTER II
THE ROLE OF SMALL-SCALE INDUSTRIES IN DEVELOPMENT & SSIs DEVELOPMENT DURING FIVE YEAR PLANS
(1) Concept of Small-Scale Industry
(2) Development of SSIs during First Five Year to Eighth Five Year Plan - India and Karnataka
(3) An Evaluation of the Development of SSIs during the Plan Periods
Page No.
01- 29
30-107
CHAPTER III 108-135
FINANCIAL STRUCTURE: CAPITAL AND CREDIT NEEDS OF THE SSIs.
(1) Structural Features of SSI Units
(2) Sources of Finance for SSI Units
(3) Financial Structure of SSIs
CHAPTER IV
PATTERN, TRENDS AND MAGNITUDE OF INSTITUTIONAL FINANCE TO SSIs IN KARNATAKA.
(1) Industrial Finance before Nationalisation
(2) Commercial Banks Finance to SSIs - Pattern, Trends and Magnitude
(3) KSFC and SSIs
(4) A Comprehensive Analysis of Institutional for the Development of SSIs in Karnataka
CHAP'I'ER. V
AN EVALUATION OF THE FINANCIAL ASSISTANCE BY THE FINANCIAL INSTITUTIONS TO SMALL-SCALE INDUSTRIES -BASED ON SAMPLE STUDY
(1) Objectives of the Field Survey
(2) Profile of the Field Survey
(3) Analysis of the Survey Data
CIIAP'l'HR VI
SUMMARY AND CONCLUSIONS
Summary - Recommendations.
BIBUOGRAPHY
136-203
204-280
281-291
292-303
UST OF TABLES
Table Particulars Page No. No.
1.01 Growth of Small-Scale Industries 05
2.01 Actual Expenditure in the Third Plan 53
2.02 Annual Plan Outlay for Village and Small Industries 54 During Three Annual Plan Periods
2.03 Physical Progress of VSIs during 1973-74 to 1979-80 60
2.04 Growth of Small Scale Industries in India 67
2.05 Plan Expenditure for VSIs (I Plan to VII Plan) 73
2.06 Outlay in Fourth Plan of Karnataka 81
2.07 Financial Assistance to Backward Districts under State 83 Aid to Industries Act.
2.08 Sectoral Outlay for the Sixth Five Year Plan of 87 Karnataka
2.09 Sixth Plan Outlay by Major Heads of Development for 88 Industries
2.10 Growth of SSIs During Seventh Plan and 1990-92 Period 90
2.11 Plan Expenditure on VSIs in Karnataka 95
2.12 Yearwise Growth of SSIs in Karnataka in terms of 97 Numbers, Investment & Empoloyment (1969-70 to 1991-92)
2.13 Distrlctwise Growth of SSIs in Karnataka 98
3.01 Sources of Funds 123
3.02 Interest Rate Structure of Commercial Banks 131
3.03 Interest Rate Structure Of KSFC 132
3.04 Revised Interest Rate Structure of KSFC 134
4.01 Sectorwise Bank Advances as on 31.3.1968
4.02 Bank Branches, Deposits and Advances before Nationalisation
140
143
4.03 Classification of Loans and Advances according to size 144 of Accounts (Outstanding as on 31.3.68)
4.04 Public Sector Banks' Advances to priority sector (1969 150 to 1990)
4.05 Yearwise Financial Assistance to SSIs in Karnataka by 158 Commercial Banks (1969-1992)
4.06 District wise Financial Assistance to SSIs in Karnataka 161 by Commercial Banks as on 31.3.1992
4.07 Bank Assistance to SSIs in Karnataka as on 31.3.192 164
4.08 Performance of Major SFCs during 1990-91 172
4.09 Sanction to SSIs by Major SFCs 173
4.10 Sanction to Backward Areas by Major SFCs 174
4.11 Performance of KSFC since inception to 31.3.92 176
4.12 Decadewise Performance of KSFC 180
4.13 Assistance to SSIs by KSFC during 1987-88 to 1991-92 and 181 as on 31.3.92
4.14 Districtwise Analysis of loans sanctioned to SSIs by KSFC 183 (as on 31.3.92)
4.15 Industrywise sanctions to SSIs by KSFC (as on 31.3.92) 187
4.16 Constitutionwise Classification of Loans Sanctioned by 190 KSFC
4.17 Sizewise Analysis of term loans sanctioned by KSFC during 191 1990-91 to 1991-92 and as on 31.3.92
4.18 Disbursement Performance of KSFC 192
4.19 Recovery Performance of KSFC during 1987-88 to 1991-92 194
4.20 Trends in Recovery during 1987-88 to 1991-92 195
4.21 Default Ratio of the Loans Sanctioned by KSFC 196
4.22 Institutional Finance to 55 Is in Karnataka 198
4.23 55 Is and their Contribution to the State's Economy 200
5.01 Value-wise and Industry-wise Production Profile
5.02 Implementation of Micro Report
5.03 Source of Raw Material
5.04 Industry-wise Raw Material Problems
5.05 Industry-wise Production Trends
5.06 Profile of the Distribution of the Working Cost
5.07 Ratio of Employment
5.08 Pattern of Financial Assistance
5.09 Financial Assistance Profile (for Term Loans)
5.10 Financial Assistance Profile (for Working Capital)
5.11 Industry-wise Profile of time taken for Sanction (Macro Report)
5.12 Industry-wise Profile of time taken for Sanction (Micro Report)
5.13 Profile of Interest Rates
5.14 Profile of Repayment
5.15 Profile of Unit-wise Position of Amount Sanctioned, Recovered, Outstanding and Amount in Default
5.16 Profile of the Problems faced while obtaining Loan
5.17 Profile of Overall Experience with the Financial Institutions
5.18 Analysis of the Promoters' Education
5.19 Industry-wise Analysis of Implementation
5.20 Constitution-wise Analysis of Implementation
5.21 Industry-wise Analysis of Source of Raw Materials
;.22 Industry-wise Break Even Analysis
5.23 Constitution-wise Break Even Analysis
5.24 Analysis of Promoters' Contribution
•
207
212
218
219
223
225
227
229
231
232
233
234
241
242
244
249
251
253
254
255
256
257
258
258
I
5.25 Institution-wise Disbursement Analysis 261
5.26 Institution-wise Financial Assistance Analysis 261
5.27 Analysis of Constitutionwise Source of Funds 263
5.28 Analysis of Industry-wise Source of Funds 264
5.29 Analysis of Institution-wise Rate of Interest Charged 265
5.30 Industry-wise Default Analysis 266
5.31 Constitution-wise Default Analysis 267
5.32 Analysis of Institution-wise Problem faced while 268 obtaining Loan
5.33 Analysis of Overall Experience (Institution-wise) 270
LIST OF IU.lJSl1lA1'IONS
lA. Growth of SSI units in India
2B. Growth of Investment on SSIs in India
2C. Growth of Employment in SSIs in India
2D. Production from the SSI Sector in India (1960 - 1990)
2E. Share of SSI Expenditure during First Five Year Plan to Seventh Five Year Plan of Karnataka
2F. Trends in the Development of SSIs in Karnataka (1969-70 to 1991-92) - Number of Units
2G. Trends in the Development of SSIs in Karnataka (1969-70 to 1991-92) - Investment
2H. Trends in the Development of SSIs in Karnataka (1969-70 to 1991-92) - Employment
21. Dispersal of Industries in Karnataka - in terms of number of Units
2J. Dispersal of Industries in Karnataka - in terms of investment
2K. Dispersal of Industries in Karnataka - in terms of employment
4A. Spread of Bank Advances before Nationalisation
4B. Commercial Banks' Advances to Priority Sector (1969, 1980 1990)
4C. Trends in Financing of SSIs by Commercial Banks
4D. Districtwise Spread of the Assistance by Commercial Banks to SSIs
4E. Bankwise Assistance to SSIs in Karnataka
4F. Trends in KSFC's Assistance (Number)
4G. Trends in KSFC's Assistance (Amount)
4H. KSFC's Sanction to SSIs
41. Pattern of KSFC's Assistance to SSIs
4J. Industry-wise Sanctions of KSFC
4K. Flow of Institutional Finance to SSIs in Karnataka.
and
CHAPTER - I
INTRODUCTION
1.1 Importance· of the Study:
I The prominance for Small-Scale Sector emanates from
two basic premises of economic development policies viz.,
the 'balanced' development and 'sustainable' growth of the
economy which calls for certain minimum level of
diversification of the economy. In an economy with a
predominant primary sector and agriculture depending on the
monsoon, such a diversification has to be in the direction
of industrial sector in general and small-scale sector in
particular. Although agriculture is the backbone of our
economy and the largest contributor to GDP, too much
dependence on this sector is unwise. Inspite of the fact
that millions of people depend on agriculture, this sector
is unable to absorb all and provide productive employment.
There is a widespread disguised unemployment in this sector.
In view of this, there is a need to diversify economic
activities and shift the disguised unemployed from
agriculture to other sectors where they can be poroductively
employed. SSI sector is one such sector which is labour
intensive and hence provides scope to absorb such labours. /
The Nurksean proposal of transforming the surplus labour
2
from Agriculture to the allied activities like - the
development of infrastructure and employing them in less
technical jobs finds its relevance here. Due to the lack of
technical training, agrarian labour force cannot be employed
in capital intensive industries, hence providing employment
and encouraging them to seek their own jobs becomes a
crucial concern for a country like ours. It is apropos to
mention here Fredrick. List's comments - "a country devoted
to mere raw agriculture resembles dullness of mind,
awkwardness of body, customs, methods and processes for want
of culture. This condition of things can change entirely by
establishing a manufacturing power and the mental, moral and
physical stagnation of the people is broken and prosperity
and liberty prevai1.,,1 Therefore unlike other sectors of the
economy manufacturing is the only sector which has large
number of productive, backward and forward linkage effects.
Hence a balanced approach will give a fillip to the economy
and thus help in achieving the sustained overall growth of
the economy.
1. List FredricK - National System of Political Economy. Translated by Sampson S. Lloyd. (London, Longman's Green & Co. 1928) p. 167.
Modern Small-Scale Industries (SSIs) in India were
almost non-existant prior to the II World War. It was during
the war period that a number of SSIs were established to
relieve pressures (like - poverty, unemployment, depression,
trade deficit and etc.,) and to counteract inflationery
trends in the economy and also the post-war desire to become
economically independent.
After independence, organised efforts were made for
the development of SSIs on the basis of the report submitted
by a team of Ford Foundation experts. In view of the need to
step up production and counter inf1ationery tendencies, it
was essential to announce an industrial policy which could
create conditions of economic security. Hence, Industrial
Policy Resolution of 1948 was framed, which was the basis
for the First Five- Year Plan. Since then depending on the
need of the hour several Industrial Policy Resolutions were
framed in the years 1956, 1977, 1980 and 1991.
Industrialisation in India since independence has been
predominantly based on the development of large scale
industries. The policy of the government during the early
planning era was to develop import substituting heavy
industries as the 'key stone' with traditional SSI as an
4
'adjunct' to meet day to day demands. Gandhiji was among the
earliest advocates of small industry. But the focus of
Gandhiji was on the expansion of traditional and rural
manufacturing and not on the creation of a modern, small,
urban factory sector. It was Prof. Mahalanobis, who set the
pattern of the Second Five-Year Plan which conceived small-
scale sector as a supplier of consumer goods to support
workers in the large scale sector of heavy industry.
Industrial development becomes incomplete without
the development of SSIs, since this sector provides
opportunity to utilize the abundant manpower and unexploited
resources. Accordingly in the process of reshaping and
developing the Indian economy under the aegis of Five Year
Plans, SSI Sector is rapidly coming into' prominance.
Importance of the small scale sector can be gauged by the
account given by Small Industries Development Bank of India
(SIDBI). According to SIDBI, there were 19 lakh small-scale
units in the country where about 438 lakh persons were
employed in SSls where as just 45 lakh persons were engaged
in the large and medium scale industries 2 . It has also been
2. Press Notification issued by SIDBI vide Reference Indian Express dt.II.IO.1992.
5
estimated that the SSIs constitute around 49 to 51 percent
of manufacturing sector, 58 percent of total exports and 36
percent to the GDP. Nearly 7500 types of products are being
produced in this sector 3 . The Table below traces the growth
achieved by the SSI sector during the past three decades.
TABLE - 1.1
GROWTH OF SMALL-SCALE INDUSTRIES
Sl. Particulars Unit 1960 1970 1980 1992 No.
1. Investment Amt.Rs.in 279.58 697.00 5850.00 18196.00 crores
2. Production " 1426.50 4860.00 21635.00 143170.00
3. Number in lakhs 0.36 2.82 8.74 19.40
4. Employment " 21.59 36.70 71.00 126.26
Source: CMIE - Basic Statistics Relating to Indian Economy. Volume I, August 1992.
3. Patel. K. V . "Implementation of SSIs in the National Economy" Financial Express, April 4th, 1990.
6
It can be observed from Table-l.l that during the
course of planned era SSIs have shown an extremely healthy
growth. The investment in this sector which was Rs.280
crores by the end of 1960 and Rs.700 crores duting 1970 had
risen to Rs.5,850 crores by 1980 and by 1990 (March) it
touched the peak at Rs.18,200 crores. In terms of production
also the performance of this sector was appreciable, as the
production increased from Rs.l,426 crores during 1960 to
Rs.4,860 crores by 1970, it shot up to Rs.2l,635 crores by
1980. It was in the range of Rs.l,43,170 crores by March
1992. There has been an impressive performance even on
account of number of units and employment. There were hardly
24,000 SSI units during 1950 and 36,000 during 1960, about 3
lakh during 1970 and 9 lakh during 1980 and the number of
units increased to 19 lakh during March 1990. In the fifty's
hardly 9 lakh people were employed in the SSIs. This had
increased to 22 lakh during sixty's, to 37 lakh
seventy's to 70 lakh during eighty's and to 125 lakh
early ninety's. Development of SSI sector very much
on industrial finance available to this sector.
1.2 INDUSTRIAL FINANCE IN INDIA:
during
during
depends
Industrial finance in its broad connotation means, the
provision of funds needed by industry irrespective of the
7
period for which they are made available. A finely tuned
economy has certain bare necessities if it has to remain so.
A well developed capital market is one such pre-requisite.
The availability of finance in respect of both quantum and
time does have tremendous impact on industrial development.
until the nationa1isation of Banks in 1969, the
portfolio of commercial bank advances was largely geared to
finance trade and commerce. Starting essentially as an urban
based (and biased) financial service, real efforts were
begun only in 1956 through a'Pi10t' project scheme by S.B.I.
to look into the credit needs of SSIs. Further, since 1985,
as per the directives of the Government,
begun to provide 40 per cent of their
priority sector at concessional interest
Commercial Banks
total credit to
rates. This was
mandatory because the commercial banks had neglected the SS!
sector hitherto.
In 1951, the State Finanical Corporations (SFCs) Act
was passed in the Parliament empowering state governments to
set up financial institutions to cater to the needs of SSIs.
Then in 1969 and in 1980, 20 major commercial banks were
nationalised thereby opening up new horizons for the
financial operations of SSIs in particular. Clearly
8
financial support holds the key to entrepreneurship
development vis-a-vis the development of industries.
Saraiya Committee notes that - "during the pre-
nationalisation period, the SSI sector had to rely on the
resources of the disorganised money market for its credit
requirement partly because of the rapidly increasing demands
for credit from the large and medium scale industry and
partly because of lack of experience on the part of both
banks and borrowers" 4 . The committee therefore recommended
following measures.
(i) Establishing Credit Guarantee Scheme
(ii) RBI to provide additional rights to borrow from it at concessional rates in case commercial banks increased their quantum of lending to SSIs.
One of the Universal problems that hinders and
unhinges the SSIs is the paucity and non-availability of
adequate finance at right time. In India, SSI sector
4. Saraiya.R.G. - Report of the Banking Commission Finance Department, Govt. of India, 1972.
9
encompasses a diverse range of industries ranging from
handicrafts to ancilliaries and their financial requirements
also differ and hence their needs are to be met differently.
Though many other elements such as - technology, management
market etc., are important, adequate and timely finance is a
necessary pre condition for the promotion & development of
SSIs. Credit is the lubricant of production. In fact
financial assistance is more important than just the
Government incentives.
The Draft Fifth Five Year Plan also notes that "the
financial institutions are supposed to provide the mechanism
by which the savings generated in one sector or region could
be made available for investment in other sectors or
regions. The purposeful policies of the financial
institutions can playa leading role in the development of
an economy by controlling the allocation 0f finance,,5.
Commercial banks are very important for the promotion of
SSIs in the country. However, the distribution and regional
spread of banks were not even and satisfactory.
5. Government of India - Draft Fifth Five Year Plan. Planning Commission, New Delhi. P. 238.
10
The Wanchoo Committee observed that "82 per cent of all
branches of the banks are in the public sector and their
share in the aggregate deposits held by the organised banks
amounts to 84 per cent. Further 62 Per cent of their total
credit has gone to urban centres. The distribution system
6 was faulty."
The picture of Indian Banking changed rather
drastically after the establishment of State Bank of India
(SBI) and nationalisation of major commercial banks. There
were some regions which had a fairly developed banking
structure and at the same time there were regions where
banking was underdeveloped. Further bank offices were
concentrated in the metropolitan and urban centres. The
establishment of SBI and nationalisation of Commercial Banks
was felt necessary to expediate the spread of bank networks
to areas where banking services were woefully inadequate and
thus lay a foundation on which the superstructure of
Institutional credit could be erected. Inspite of the
establishment of SBI and nationalisation of twenty major
commercial banks, there remained a wide gap between the
6. Government of India - Fiscal & Financial Incentives for Starting an Industry in Backward Areas. Ministry of Finance, New Delhi. P. 123.
11
demand for and the supply of credit for the development of
SIs. This gap in the demand and supply of institutional
redit led to the realisation that the incentives and
:oncessions provided by the government are not adequate for
'urther expansion & development of SS1s and these should be
:omp1imented by Institutional Finance. Accordingly various
:teps were initiated to provide institutional finance to SSI
:ector.
The initial attempt in financing SSIs was under the
itate Aid to Industries Act which provides State governments 1
:0 help SSIs in the form of development loan. The next
,mportant attempt was the enactment of the State Financial
:orporations (SFCs) Act in September 28, 1951, to facilitate
:he State Governments to set up SFCs with the object of
)roviding medium and long term loans to SS1s. The S81, the
:irst major public sector commercial bank, which introduced
i 1iberalised scheme of financial assistance to SSIs in 1956
cor the first time. The credit guarantee scheme introduced
)y the Reserve 8ank of India constituted another milestone
Ln the history of financing of SS1s. The National Small
[ndustries Corporation (NSIC) introduced a credit guarantee
scheme in 1966 to ensure 100 per cent finance to SS1s
~xecuting Government orders. The introduction of the social
12
control on commercial banks by the Central Government in
1967 was another important measure
banks in lending to SSIs in an
to activate commercial
active manner. The
nationalisation of 14 major commercial banks in 1969 and 6
more major commercial banks in 1980 ushered in a new era of
financing SSIs in the Country. RBI had stipulated that
commercial banks should provide atleast 40 per cent of their
advances to priority sector, which included SSIs also, and
this was another significant step in financing of SSIs.
The refinance assistance scheme introduced by
Industrial Development Bank of India (lOBI) together with
the credit guarantee scheme provided a favourable climate
for the flow of finance to SSIs. In May 1988, lOBI
established the Small Industries Development Fund (SIDF).
The main objective of SIDF is to augment the flow of
financial assistance to SSIs and to provide a focal point to
co-ordinate at the apex level and availability of both
financial and non-financial assistance from different
agencies for orderly and healthy gorwth of Small-Scale
Sector. In August 1987, the Central Government introduced
National Equity Fund (NEF) Scheme with the objective of
providing support in the form of equity assistance to SSIs
which are engaged in manufacturing activities. The latest
addition is the establishment of an exclusive Apex Bank for
13
Small-Scale Sector known as Small Industries Development
Bank of India (SIOBI). SIOBI now administers SIOF, NEF and
other schemes of finance for SSIs which were hitherto being
administered by lOBI.
Further, to review the flow of institutional finance
to Small Scale Sector and to suggest measures for improving
the performance of the credit delivery system in securing
adequate financial assistance to the Small- Scale Sector, a
Standing Advisory Committee has been set up by RBI.
With the above backdrop, the institutional network for
financing SSIs can be drawn as follows.
(1) RBI
(2) IOBI/SIOBI
(3) Banks
(4) SFC's
(5) State Small Industries Development Corporation
(6) National Small Industries Corporation (NSIC)
Apex body controlling, regulating the flow of sector.
monitoring finance to
and this
Providing support institutions like refinance.
to major financial SFCs & Banks thro'
20 Nationalised Commercial Banks, Scheduled Banks, Co-operative Banks & RRBs mainly providing working capital.
KSFC in case of Karnataka.
KSSIOC in case of Karnataka - provides industrial sheds & supplies raw material.
Provides Plant and Machinery to SSIs on Hire Purchase basis.
14
The cumulative effect of the aforesaid measures
resulted in an increase in the flow of institutional sources
of finance to SSIs of the country. The financial institu
tions provide financial assistance to SSIs under various
schemes. Some of the important schemes are outlined below.
The broad schemes under which the above Financial
Institutions operate are:
(1)
(2)
Normally Financial Institutions grant
facilities against pledge/hypothecation of
credit
stocks
depending upon the nature of manufacturing operations
and other factors relating to the units. Generally
75 per cent of the value of the goods are financed.
25 per cent will be a margin to the promoter.
Differential Rate of Interest (DRI) Scheme The
finance provided to SSIs by the commercial banks are
covered under the RBIs 'Differential Interest Rate
Scheme.' The RBI provides concessional credit to
commercial banks to be passed on to the SSIs.
15
(3) Credit Guarantee Scheme - The RBI has introduced CGS
to stimulate the finance to this sector. Under the
scheme if any financial institution becomes the member
of the scheme, the loan given to SSIs is guaranteed by
the RBI. The scheme helps the financial institutions
to recoup the losses if any.
(4) Apart from these other major schemes of Financial
Institutions to the SSIs are special scheme for
Technocrat Entrepreneurs - Seed Capital assistance to
entrepreneurs who are otherwise unable to obtain
necessary equity capital -Foreign Currency Loan for
the purchase of imported Plant and Machinery and/or
technical know-how.
Inspite of the important role played by the financial
institutions in promoting the development
SSIs, very few studies are available both at
and state level, which examine the
and growth of
the national
link
institutional finance and small industries.
between
However,
plethora of literature is available on SSIs and their
problems. Some of the studies in this area are outlined in
the following section.
16
1.3 REVIEW OF LITERATURE:
The available literature on SSIs can be grouped under
three categories.
1. Studies relating to the importance of SSIs and its
advantage over large scale industries,
2. Studies concerned with institutional support to SSIs
and
3. Studies relating to finance to SSIs.
l ' 7 Hose 1tz deals mainly with the factors
differentiating between Large Scale Industries and SSIs like
employment, investment or power required. Further, by
analysing the formal structure of Indian Planning Process,
his study emphasises the need for greater importance for
SSls in the Five Year Plans. Trivedi 8 , stresses on the
7. Hoselitz Bert F.The Role of Small Industries Process of Economic Growth, Vol. Hague, Monton. 1968).
in the 7 (The
8. Dr.Trivedi.M.L. Government & Business (Bombay, Multitec Publishing Co., 1980J.
17
Industrial Policy Resolution and the priority accorded to
SSIs in the various policy resolutions. Shetty9, 10 Basu ,
Dhar and Lydall ll and 12 Inoue also analyses the various
measures undertaken by the Goverment for the promotion of
SSIs.
The studies mentioned above highlight only the
structural and policy aspects of SSI and do not deal with
the requirement of finance vis-a-vis the institutional
network available.
Sandesara13 analyses the industrial policies of the
Government and the measures taken by the Government to
protect and promote SSIs from 1948 Industrial Policy
9. Shetty.M.C.
10. Basu.S.K.
11. Dhar.P.N. & Lydall.H.F.
12.Inoue Kyoko
13. Sandesara.J.C.
Small Scale & House Hold industries in a Developing Economy (Bombay. Asia Publishing, 1963).
Place & Problems of Small Industries (Calcutta, Mukherjee & Company, 1959).
The Role of Small Enterprises in Indian Economic Development (Bombay, Asia, 1961).
Industrial development Policy of India. (Tokyo, Institute of Developing Economies, 1992).
Efficacy of Incentives for Small Industries (Bombay, Asia, 1978).
18
Resolution to 1977 statement. The author also briefly
analyses the investments made during the plan periods (upto
Fifth Five Year Plan). The studies which have dealt with
finance to SSIs are very few. Some of the studies are
mentioned here .
. 14 d 1 . h h f f· Desa1 , ea s Wlt t e sources 0 lnance for S5Is
and defines the assessee and the requirement of working
capital for SSIs. There is also a cursory glance on the
commercial Banks Finance to SSIs. Further Desai
traces the history of commercial banks' finance to this
sector from 1956 when SBI introduced the Pilot Project
Scheme. Desai also deals in detail the security approach of
banks and the terms and conditions of the banks to provide
finance. Ramakrishna 15 explains the capital and credit ,
needs of SSI by keeping the number of people employed as the
basis and analyses the role played by State Bank of India in
financing SSIs. Perhaps the effort of Ramakrishna is one of
the first in its attempt to assess the capital requirement
14. Desai.V. Organisation and Management of SSIs (New Delhi, Himalaya, 1979).
15. Ramakrishna.K.T. Finance for Small Scale Industries in India (London, Asia Publishing House, 1962) •
19
of SSIs. This study is entirely devoted itself on the
financial problems faced by the SSIs. Sinha 16 deals only
with the role of SFCs in financing the SSIs.
17 Upadhyaya gives the financial spectrum for the
industrial sector as a whole. This study gives information
on the source of finance for both large and medium sectors
as well as the SSIs.
Pareek18 illustrate the need for finance for SSIs,
problem of finance and the present institutional net-work to
provide finance. The study is devoted more towards the
operations of commercial banks and their schemes to provide
finance to SSIs.
There are many more studies which are listed in the
Bibliography, however, none of the studies examines the role
of financial institutions in promoting industrial develop-
ment or the problems faced by the entrepreneurs. Most of the
16. Sinha.S.L.N.
17. Upadhyaya.K.K.
18. Pareek.H.S.
Reforms of the Indian Banking Systems (Madras, Orient Longman, 1973).
Financing of Industrial Growth in a Developing Region. (Allahabad, Chugh Publishers, 1980).
Financing of Small Scale Industries in a Developing Economy (New Delhi, National Publishers, 1978).
20
studies are national level studies. An indepth study of the
problems pertaining to industrial finance as perceived by
the entrepreneurs and by the financial institutions at the
state level are very much lacking.
There are however some studies at the regional level 19 . 20
on SSIs like the one by Dhar and by Sandesara . These are
based on surveys and deal with the problems of SSIs with
regard to location, finance and raw material. Various other
studies which have dealt with financial aspects or
industrial finance are by Ramakrishna, Pareek and Upadhya.
These studies deal at the macro problems and are at national
level. An exclusive study of the role of the financial
institution has not been done. The above studies relate to
areas like Delhi and Bombay. There is no comprehensive study
covering the State of Karnataka about these aspects of SSIs.
19. Dhar.P.N. Some Aspects of Technological Progress in Small Scale Industries (Bombay, Asia, 1970).
20. Sandesara.J.C. Small Industries in Big City (Bombay, University of Bombay, 1969).
21
There are very few studies pertaining to Karnataka such as
Balakrishna21 (1940) or by Lakshman 22 (1966). These studies
do not focus on the financial aspects or on the role of
institutional finance for the development of SSI sector.
It is therefore necessary to undertake an independent
enquiry at the State level. The present study is an attempt
at analysing the financial problems of SSIs in Karnataka and
the role played by financial institutions in promoting
industrialisation in the state.
As brought out earlier, though a number of studies
have been undertaken regarding SSIs in general and
promotional activities undertaken by the Government and by
various developmental agencies in particular, much has not
been highlighted on financial problems.
21. Balakrishna.R. Industrial Development of Mysore (Bangalore, Bangalore Press, 1940).
22. Lakshman.T.K. Cottage & Small Scale Industries in Mysore: Case study of their pattern and role in the context of a developing economy (Mysore, Rao & Raghavan, 1966).
22
Hence, the present study is an attempt to fill the gap
that exists in the literature on SSIs in India and with
special reference to Karnataka.
1.4 OBJECTIVES OF THE STUDY:
Following are the objectives of the present study:
1. To analyse the pattern, trends and magnitude of
financial assitance given to the SSI sector in
Karnataka.
2. To analyse the change in attitude of the financial
institutions since 1969.
3. To evaluate the impact of institutional finance on
industrial development.
4. To assess the financial problems of the
entrepreneur and the nature of' dependency on the
financial institutions.
1.5 HYPOTHESES OF THE STUDY:
Following are the hypotheses of this study
1. The share of institutional finance and the
Financial allocation by the Government in various
23
plans is not commensurate with the contribution
of the small-scale industries to the economy.
2. Institutional finance in the distribution of credit
facilities to SSIs in Karnataka display regional
disparities which has led to concentration of
industries in certain parts of the state.
3. The approach of the financial institutions towards
SSIs is not conducive to rapid industrialisation as
the approach is very rigid and procedure oriented
with emphasis on security.
1 .6 SCOPE AND METHODOLOGY OF THE STUDY
State
The present study is a
of Karnataka. The
regional
State has
study
been
covering
one of
the
the
industrially forward States in the country and also the
growth of SSIs is rapid compared to other States. Karnataka
with an area of 1.92 lakh square kilometers, geographically
occupies the sixth place in India. Nature has blessed
Karnataka with bountiful resources of mineral wealth, forest
wealth and water-falls. These have been ingeniously
exploited for a long time to bring about economic
prosperity. For centuries the area has been well known for
its trade with its neighbouring areas and even in export and
import, well supported by its cottage and medium industries.
24
The recent economic history of Karnataka also reveals
that the State has in many ways been the pioneer in economic
planning and development. This State has set up planning
system even before any state in India had thought of
industrialisation, communication, electricification and
banking in rural areas, Karnataka was already ahead of other
states under the enlightened leadership of Sir
M.Vivsvesvaraya. Besides introducing planned development,
he had established the State Bank of Mysore at the beginning
of the century to cater the financial needs of the State.
The profile of Karnataka State is annexed to this chapter as
Annexure-I.
The
financial
study aims at covering
institutions engaged in
the following major
financing SSIs in
Karnataka Karnataka State Financial Corporation,
Nationalised commercial banks, Industrial Co-operative banks
and Regional Rural Banks.
The study intends to cover only those SSIs which are
in the organised sector and are registered.
The present study has both micro and macro approaches.
At the macro level the study highlights the role of
25
financial institutions in the promotion of SSIs. Besides its
limitations and other related problems will be dealt.
Further at the micro level, the study analyses the
impact of financial assistance, the problems faced by the
entrepreneurs. In this connection, to collect the first-hand
information a field survey is conducted with the help of
a questionnaire and personal interviews.
The present study makes use of both the primary and
the secondary source of data collected from published books,
reports, journals and periodicals.
In order to assess the impact of financial assistance
on SSIs, data has been collected from sample SSIs. The
enterpreneurs are selected on the basis of a purposive
sampling method. 100 SSI entrepreneurs are selected for this
purpose. Questionnaire method is adopted to collect
information.
1.7 CHAPTER SCHEME:
The study comprises of 6 chapters. This chapter is
followed by 5 chapters. In the second chapter, after
examining the changes in the definition and scope of SSIs,
26
the role assigned to this sector in various Five Year Plans
both in the national and state i.e., Karnataka Plans are
examined.
Further, the aspects like structural features of 5SI
units, transition of capital and credit needs, what are the
various sources of finance available to the 5S1 sector, what
are the stipulations/regulations and conditions of the
financial institutions while providing financial assistance
to SSI sector and interest rate structure are discussed in
Chapter III 'Financial Structure, Capital and Credit Needs
of SSI'.
Chapter IV is the core chapter of the thesis, based on
the secondary sources of data like RBI and IDBI/SIDBI
publications, publication
publications of State Level
of Government of
Banker Committee
Karnataka,
and Annual
Reports of the nationalised commercial banks and KSFC. This
chapter covers the approach of commercial banks towards 5SI
sector before nationalisation and after nationalisation. The
pattern, trends and magnitude of assistance of commercial
banks since nationalisation (1969) are also analysed in this
chapter. Karnataka State Financial Corporation is a premier
term lending institution in the country. Its contribution
27
towards the growth and development of 55Is in Karnataka is
significant. The operations of K5FC are also
this chapter. In the end of this chapter a
picture of institutional finance to 55Is in
been presented.
analysed in
comprehensive
Karnataka has
Chapter V entitled 'An Evaluation of the Financial
Assistance by Financial Institutions' is structured based on
.he field survey and deals with the impact of assistance and
:he problems of 551 entrepreneurs. 100 small scale
lndustrial units are carefully selected based on parameters
Like location, industry type, type of unit and quantum of
financial assistance. An effort has been made in this
:hapter to assess the impact of financial assistance
running an 551 concern, the role of background
while
of the
entrepreneur in running the 551 unit and aspects like
problems faced by small-scale units while obtaining loan
from financial institutions, reception and the approach of
financial institutions towards small scale entrepreneurs are
also discussed.
~ere
The last chapter
the high-lights
provides
of the
summary and conclusions.
study and the policy
recommendations with regard to the institutional finance to
small-scale industries are spelt out.
ANNEXURE - I
PROFILE OF KARNATAKA STATE
GENERAL :
Districts
Sub Divisions
Talukas .. Hoblies
MandaI Panchayats
Villages
Towns and Cities
POPULATION (1991) :
Total Population
Rural
Urban
Density per sq.km.
INFRASTRUCTURE :
Electricity generated
Electricity imported
Villages electrified
Railway route length
Road length
Telephones
Motor vehicle population
Literacy rate
20
49
175
745
2532
27024
427
4.48 Crores
3.41 Crores
1.07 Crores
234
12131 mm
2509 mm
26363 (98% of the total)
2090 kms
130923 kms
3.75 1akhs
14.32 lakhs
47 per cent
•
29 INDUSTRIES :
Large Scale Industries 217
Small Scale Industries 126000
Number of Registered Factories 7768
Employment in Regd. Factories .• 777000
Empoloyment in Organised Sector 14.56 lakhs
Industrial Estates 104
Industrial Sheds 4286
MAJOR MINERAL RESOURCES :
SOURCE
Iron Ore, Manganese, Limestone, Dolomite
1. Karnataka at a Glance - Directorate of Economics and Statistics, Government of Karnataka, Bangalore, 1992.
2. CMIE, Bombay Basic Statistics Relating to Indian Economy, Vol.II - States, 1992.
CHAPTER - II
THE ROLE OF SMALL-SCALE INDUSTRIES IN DEVELOPMENT • SMALL-SCALE INDUSTRIES DEVELOPMENT
DURING FIVE YEAR PLAN PERIODS
2.1 SMALL-SCALE INDUSTRY : A CONCEPT
In India, there was no Official definition of SSI
units, until the Fiscal Commission (1949-50)
reference to them. According to this Commission,
"A small-Scale Industry is one which mainly with hired labour normally 10 to ___ II
This definition was not comprehensive as
is 50
it
made a
operated hands -
excluded
those industries which were operating by using family
members as the workers.
According to the Committee on Finance for the private
.ector - "Small-Scale Industries are those which are not
integrated with rural economy and in which the investment of
capital and labour are relatively small, i.e., units with
assets between Rs.10,000 and Rs.5 1akhs engaged largely in
the production of articles that are ancillary to or
compititive with the products of the so-called large-scale
industries".2
1. "Report of the committee on finance for the private sector". Reserve Bank of India. 1954 PP 80-81.
2. Virendra Kumar. Committees & Commissions in India (1947-73) (New Delhi DK Publishers 1979) P.109.
31
In 1953-54, the Ministry of Commerce and Industry
invited an international planning team through the courtesy
of the Ford Foundation to report on the measures that could
be adopted to develop small-scale sector. Accepting the
recommendations of the team, the Government of India in 1954
set up - Central Small Industries Organisation and the Small·
Scale Industries Board. While realising the need for
providing Governmental assistance for the development of
SSIs, the Board was initially be-set with the problem of
evaluating a definition of SSIs for the country as a whole
for administering various programmes. The small-scale
Industries Board, at its first meeting held on 5th and 6th
January 1955 adopted the first working definition for
overall planning, coordination and promotion of SSIs in
India. According to this definition an industrial unit
employing less than 50 persons using power and less than 100
persons without use of power and with capital assets not
exceeding Rs.5.00 lakhs was considered as small-scale. 3
As the tempo of the development of SSIs gathered
momentum the definition has been modified. In the year 1960,
the ceiling on labour was completely withdrawn, retaining
the ceiling on capital investment, thereby permitting a unit
irrespective of the number of persons employed to remain as
an S5I.
3. Development Commissioner, Small-Scale Industries, Government of India, "SSIs in India". 1968. P. 53.
32
This change was the turning point in the development
programme of SSIs. Due to this, number of SSIs could employ
a large number of workers and undertake a greater volume of
production with the same resources in equipment and capital
outlay. Further the period between January 1960 to December
1977 was marked with the introduction of a new
'ancillary units'. The units which were
concept
engaged
of
in
manufacturing components for specified industries needed a
seperate treatment in terms of higher ceiling of investment.
The need for introducing the latest technology in
small-scale sector to improve its competitive strength and
the growing increase in the cost of imported machinery
necessitated a change in the definition of SSIs which was
consequently adopted in 1966. Accordingly, an industrial
unit with a capital investment of not more than Rs. 7.5
Lakhs in plant and machinery is considered a small-scale
unit. For ancillaries, the maximum limit for investment in
plant and machinery has been fixed at Rs. 10 lakhs. In May
1974, the ceiling of investment was raised to Rs. 10 1akhs
for the SSI unit & Rs. 15 lakhs to the ancillary unit.
However, to make the definition as simple as possible
for operational purposes, the Small-Scale Industries Board
33
appointed a sub-committee to review the definit
and make recommendations. The committee rec
enlargement of the definition to cover small units with
capital assets ranging from Rs.5 lakhs to Rs. 10 lakhs.
Government of India again revised the definition in
1980, with respect to the capital investment on plant &
machinery. It has been increased to Rs.20 lakhs for SSIs and
Rs. 25 lakhs for ancillary units. The ancillary industries
has been defined as follows:
"A unit which produces parts, components sub-
assemblies and tooling for supply against known or
anticipated demand of one or more large units
manufacturing/ assembling complete products and which
is not a subsidiary to or controlled by any large unit
in regard to the negotiation of contracts for the
supply of its goods to any large unit."4
The government in view of the increase in the cost
again (during 1985) revised the definition of SSIs. The
limit on the investment in plant and machinery has been
increased from Rs.20 lakhs to Rs.35 lakhs and for ancillary
units to RS.40 lakhs from Rs.25 lakhs.
4. Ojha.P.D. "Finance Reserve Bank of India No.ll, P.934.
for small Bulletin.
industries in India," November 1982, Vol.3
34
Further owing to the persistent demand from the Samll-
Scale Industrialists and also due to increase in the costs
of the machinery, the definition has been further revised.
(in the year 1990). Now, the limit on investment in plant
and machinery has been increased to Rs. 60 lakhs and for
ancillary unit it is Rs. 75 lakhs. Further, another
classification has been made in respect of Export Oriented
Units (EOU). These units (undertake export to at least 30
per cent of the annual production by the end of third year
from the date of commencing production) will be in the SSI
sector if the investment on plant and machinery is Rs. 75
lakhs. 5
With the intention of emphasising how small industries
might differ from large sized undertakings, Bert. F.
Hoselitz lists the following functions of small industires. 6
1. Relatively little specilisation in management.
2. Close personal contact of top management with production workers.
5. Gazette Notification vide No.S.O. 232 (t) Dept. of Industrial Development Ministry Govt. of India, New Delhi.
dt. 2-4-91 of Industry
6. Hoselitz.B.F. The Role of Small Industry in the Process of Economic growth, Opcit. P.127.
R "632. (042 O£)S ~g"1 MUt:.
3S
3. No special bargaining strength in buying and selling.
4. Often a relatively close integration with the local community and
S. Lack of access to capital.
One of the drawbacks of the 1990 definition is that it
!bnly takes into consideration the .original value of plant
~nd machinery. As a result rich people and members of big I
houses and even the monopoly houses are in a
osition to form small-scale industrial units and get all
oncessions. Again the definition is not making any
~istinction between units manufacturing products which are
an keeping with the social and economic priority and the
~roducts which are luxury goods or harmful to health.
In the course of forty years (since the begining
~f planned era), the definition of small-scale industry has
been modified many times. First, it deleted the employment
factor from the point of view of promoting the official
programme under successive plan periods. Secondly, it
joubled the fixed capital by redefining it to include
machinery only in a phased manner. This change has
necessitated the need to off-set the higher cost of
machinery arising out of the rising prices and to a greater
extent the opportunities to small-scale enterprises.
IS [C lI8RARY B&NG&lORE
Aa:. N ~.9_~ Q ~ . __ :J.'1·6 95"
36
In the light of the above a SSI can be identified with
the following features:
(1) A SSI is one which is labour oriented.
(2) SSIs are those which are not integrated with the
rural economy and are producing normally those
products which are ancilliary to large-scale
industries and generally a non-competitor to the
LSIs.
(3) The major factor differentiating between LSI and
SSIs is the quantum of investment on fixed assets
like land, building and plant and machinery.
(4) The atmosphere in the SSI sector is informal,
close and personal.
(5) Normally the market for SSIs is limited to certain
geographical locations except for export oriented
SSIs.
(6) SSIs generally do not have bargaining strength in
the market and their share in the market and the
prices for their product are determined by the
forces of the market.
37
(7) Majority of the small-scale entrepreneurs are
first generation entrepreneurs.
(8) SSIs generally depend on external sources for
their financial requirements like financial
institutions and private money-lenders.
2.2 IMPORTANCE, NEED AND PLACE OF SSIs:
The balanced and sustainable growth of the economy
calls for certain minimum level of diversification of the
economy in the direction of the industrial sector. Hence,
SSIs have an important place in the economic life of a
developing country like India. Even in the most industrially
advanced countries like USA, Germany and Japan, these
industries occupy a significant position in their respective
economies. In France about 90 percent of the industrial
establishments employ less than 100 workers each and again
even of these more than 50 percent employ less than 60
workers each. 7 In Japan, 'the industrial hub of eastern
world', over 80 percent of the total number of
7. Buchanan.N.S.: International Investment & Domestic Welfare (New York, Hal! Publishers, 1980) p.84.
38
establishments employ less than 30 workers.Even in U.S.A.,
small business makes up 92 percent of the total business
establishment. These industries account for 54 percent of
workers and 34 percent of business volume. 8 In England 19
percent of the total out put is from the small-scale sector.
The importance and need of SSIs is all the more great
in a developing economy like India, wherein nearly three-
fourth of the population is depending upon agriculture which
is seasonal one and results in a large-scale unemployment
and underemployment. The best way of dealing with this is to
provide the cultivators with work through the development
of SSIs, so that seasonal unemployment and underemployment
could be minimised.
Along with this, small size of the farms keep the
villagers who own lands idle for about half the year. This
has largely contributed to the low standrard of living
among rural population. SSIs properly organised and
developed will provide profitable employment
8. Rastogi.K.M. "Employment Generation through and Village and Cottage Industries," in Employment. Ed. by Narayan. D.L. and others Sterling, 1980) P.308.
for the
Small Scale Planning for
(Bangalore,
39
agriculturists during the periods of their enforced idleness
and also make a vital contribution in maintaining their
standard of living. Prolonged and continuous employment of
the massess is the biggest crime against society. Even after
four decades of planned development efforts and massive
investment, there is wide imbalance in the development of
d . 9 rural an urban economles.
It has also been said that when work cannot be
provided through agriculture and migration to urban areas to
be discouraged, the only alternative is to seek avenues of
employment by way of encouraging and promoting village and
small industries on a viable basis. The importance of these
industries has been recognised by the Government of India in
the strategy for growth. Till the end of the Fifth Plan,
these industries were largely looked upon as suppliers of
wage goods. As such these were accorded a less Important
role in the heavy industry based strategy of development
adopted since Second Plan. Their placing in national economy
was further upgraded when it was realised that these
industries could help in solving the problems of poverty,
9. Ibid., P.310.
40
unemployment and acute shortage of basic necessities as also
in promoting exports.
Industrial policy Resolution of 1956 said - "the
(samll-scale and cottage industries) provide immediate
large-scale employment: they offer a method of
ensuring a more equitable distribution of the national
income and they facilitate an effective mobilisation
of resources of capital and skill which might
otherwise remain unutilised. Some of the problems that
unplanned urbanisation tends to create will be avoided
by the establishment of small centres of industrial
production allover the countryn lO
The significance of small-scale sector is one of the
keys to economic development hardly needs to be emphasised,
where motivation to development is present among the people,
the small sector acts as a stimulant. where motivation is
lacking, it acts as a lubricant.
10. INOUE.K. Industrial Development Policy of India Opcit, P.47.
41
Small-scale industries in India accounted for more
than 40 per cent of the country's exports which reflects the
significant position they occupy in the economy of the
~ountry. The Value of production in small and medium
.nterprises was of the order of Rs.143170 crores by
~mploying 438 lakh of people,ll Small industries
hanufactured wide spectrum of consumer and industrial
products numbering more than 7500 Small-scale industrial
i . lun1ts have contributed substantially to industrial
production. They have contributed about 45 percent of the
, . d . 1 d . 12 ~ountry s 1n ustr1a pro uct1on.
The promotion of small-scale industries has been
'widely recommended as one of the most appropriate means of
developing industry in over populated backward countries.
iJapan is usually held up as the great example of what can be
done in this way.
Hence for a backward region endowed with a typical
pattern of factor endowment. adoption of labour-intensive
11. SIDBI Annual Report. 1991-92, Lucknow.
12. Government of Karnataka. Department of Industries & Commerce. Kaigarika Varthe. September 1992, Bangalore.
42
techniques involving low capital cost can only increase
.employment opportunities, reduce regional imbalances and
check migration to urban areas. SSIs no doubt play all the
roles ascribed to it in a developing country, but there is
something more to it. In economies starved of capital and
echnical know how, naturally turn to small industries
hould not be looked upon as an economic compulsion of
ackwardness, but it should be an economic necessity.
Hence, there is no denying of the fact that SSIs play
vital role in activating the resources of the backward
lreas. There is urgent need for fostering the growth of
5mall industries which supplements the income of the
farmers, which is important in an over populated
agricultural economy with disguised unemployment.
l.3 SMALL-SCALE INDUSTRIES AND THE FIVE YEAR PLANS OF INDIA
It has been demonstrated that the SSIs have
received a step motherly treatment at the hands of British
rulers and have been made to disintegerate. But the national
movement, ever since its inception, strove to protect and
organize them. It was only natural that after independence
the 'paternalistic' and 'protectionist', outlook nurtured by
the national movement with regard to these industries was
43
~ade the core of the policy of the national government. The
~overnment considered the small-scale sector as an important
~ccessory instrument for attaining the economic and social
pbjectives and evolved a programme for the development of
~hese industries as an integral part of the development of
~he other sectors of the economy.
This approach was first laid down in the Industrial
IPOliCY Resolution (IPR) of 1948 and was later adopted as the
basis of policy in the First Five Year Plan. The same was
~eiterated and further elaborated in the IPR of 1956. It
Isubsequently became a part of the strategy for economic
Idevelopment in the consecutive plan periods.
2.3.1 SMALL-SCALE INDUSTRIES DURING PRE-PLAN ERA:
Moderen SSIs in India were almost non-existent prior
to the Second World War. It was during the war years that a
number of SSIs were established to augment and sustain the
war effort, to relieve pressure and to counteract
inflationary trends in the economy. A number of small-scale
units, especially light engineering job workshops were
established to supply manufactured goods for indigenous
consumption as well as for the allied forces.
44
After independence, organised efforts were made and a
aomprehensive programme for the development of SSIs was
conceived on the basis of the report submitted by a team of
Ford Foundation experts who were invited to the country.
In the first phase of development of SSIs the accent
.as laid on providing favourable climate conducive to the
.etting up of new units as well as the modernisation and
aationalisation of existing small-scale units. Manufacturing
units in this sector have been protected from competition by
~he better organised large-scale units by providing
ubsidies and preferential excise duties as well as by
Jmposing restriction on the production pattern in large
~cale units.
Industrial Policy Resolution 1948 and the Ford
toundation Team Recommendations are the other major events
~ith regard to SSIs during the pre plan era. IPR 1948 was
~he basis to frame the First Five Year Plan. It recommended
~ 'Common Production Programme' to ensure both LSI and SSI
bector make their contributions to the total requirement of
~he community. The Ford Foundation International Planning
ITeam on SSIs was invited to formulate plans for the
45
development of SSIs. It recommended for setting up of 4
regional institutions at Gauhati, Faridabad, Poona and
Madura.
2.3.2 SMALL-SCALE INDUSTRIES DURING FIRST FIVE YEAR PLAN:
During the First Plan, out of a total outlay of
Rs.2356 crores only Rs.33.57 crores (1.4 per cent) was
allocated to VSIs. Out of the total allocations to this
,ector the share of small-scale industires was only Rs.4.4
~r0res (13.10 per cent). A major share was given to khadi
136.63 per cent) and Handloom (36.4 per cent) industries,
village industries got only 8.63 per cent of the total
~.utlay to this sector.
The First Five Year Plan had two fold objective.
-Firstly, it aimed at correcting the disequilibrium in the
economy caused by the war and the partition of the country.
Secondly, it proposed to initiate simultaneously a process
of all-round balanced development which would ensure a
taising national income and steady improvement in living
~~tandards over a period.
~
46
2.3.3 SMALL-SCALE INDUSTRIES DURING SECOND FIVE YEAR PLAN:
The principle objective of the Second Five Year Plan
was to increase national income by about 25 per cent over
~he plan period and creation of employment opportunities for
about 10 to 12 million persons. And the emphasis placed on
heavy and captial-goods industries in this plan inevitably
raises the important question of the place of small-scale
sector. It was necessary to economise the capital
requirements of other types of industries and capital
investments in the consumer goods industries would have to
be severely restricted. Large investments in heavy
industries would cause an increased demand for consumer
goods by creating additional income (Mahalanobis Model of
Growth)13
The consumer demand from the increased expenditure in
these sectors of the national economy is to be met
substantially by the development of Village and Small
Industries which will not at all make any heavy demand on
the scarce capital resources available within the country
and on the other hand will provide increasing employment
opportunity.
13. Basu. S. K. Place & Problems of Small Industries (Calcutta/A.Mukherjee & Company, 1957). P.180.
47
The Planning Commission in its Resolution No. Fy/llCDI
'3/55 dated 25th June 1955, constituted a committee with
.rof.D.G. Karve as Chairman. The Committee was asked to
IIrepare a scheme, industrywise and wherever possible state
lise for the utilisation of the resources to be earmarked
lIor the purpose of development of VSls. The major
YJecommendations of the Karve C . 14 omm1ttee are to provide
~eans of non agricultural productive employment- to avoid
lechnological unemployment.
1NDUSTRIAL POLICY RESOLUTION - 1956 (OR AN APPROACH TO THE SECOND FIVE YEAR PLAN):
In the thinking and the formulation of the Second Five
tear Plan also the village and small industries assumed a
-~rominent role. Industrial Policy Resolution (1956) based on
the recommendations of the Karve Committee stated that lack
of technical and financial assistance and suitable working
accommodation, are among the serious handicaps of small
producers.
14. Government of India: D.G.Karve Committee Report, 1955, p. 25
48
The two paragraphs of the resolution dealing with this
~ector says that :
In relation to some of the problems that need
~rgent solutions, they offer a method of ensuring a more
.vinsable distribution of national
~acilitate an effective mobilisation
income and
of resources
they
of
capital and skill which might otherwise remain unutilised.
Some of the problems that unplanned urbanisation tends to
create will be avoided by the establishment of small centres
of industrial production allover the country. The State has
been following a policy of supporting SSIs by restricting
the volume of production in the large-scale sector by
iifferential taxation. The aim of the state policy will be
to ensure that the decentralised sector acquires
sufficient vitality to be self-supporting and its
development is integrated with that of large-scale industry.
A start has been made with the establishment of industrial
estates to make good these deficiences".15
15. Second Five Year Plan. Opcit. P.443.
49
OUTLAY :
During the Second Five Year Plan, out of the total
lIutlay of Rs. 4,800 crores, Rs.200 crores was earmarked for
Ihe development of VSIs (4.16 per cent). Out of Rs.200
.rores of targeted outlay, major share was given to Handloom
Industries of Rs. 59.5 crores (29.7 per cent) closely
loilowed by Small-Scale Industries on which Rs. 55 crores
(27.50 per cent) was allotted. The rest was towards Khadi
and Village Industries.
PROGRESS
The progress during the first and second plans of
village and small industries were reviewed in the middle of
the second plan by a number of working groups and
committees. A Special Study Team assessed the working of 25
industrial pilot projects, which were taken up in Community
development blocks. The programme evaluation organisation
also made a study of rural industries in selected community
development blocks. Data collected in the course of these
'tudies and the findings and conclusions reached have been
of considerable value in formulating programmes for the
third plan.
so
It can be seen from the foregoing paras that
importance was not given for SSI sector in
adequate
terms of
financial allocation etc. This is mainly because, during
the First Five Year Plan, agriculture got all the importance
and during the Second Five Year Plan large-scale industries
received the prominence. The thinking of the policy makers
at that time was to consider SSI as a supporter to LSIs.
The Planning Commission adopted the 'Mahalanobis Model of
Growth' which envisaged greater role to LSIs by providing
employment and through mass production contributing to the
GOP. SSIs were to play the supportive role by providing the
requirements of the employees of the large-scale sector
i.e., to say SSIs role was limited only to the production of
consumer goods.
2.3.4 SMALL-SCALE INDUSTRIES DURING THIRD FIVE YEAR PLAN
A total provision of Rs. 264 crores is being made in
the public sector for the programmes for village and small
industries as against
to offer government
industries.
Rs. 175 crores. It is
guarantees for bank
also proposed
loans to small
Of the total outlay of Rs. 264 crores, Rs. 141 crores
for schemes of the states and union territories and about
51
ks. 123 crores for the central and centrally sponsored
~chemes was made.
:REDIT AND FINANCE:
Credit facilities which are an essential requirement
)f all village and small industries have to be organised on
a larger scale. A substantial provision has been made for
loans under State Aid to Industries Act to meet the need
~or long and medium term capital as well as working capital.
lowever, the provision which can be made for loans in the
~lan is necessarily limited in relation to the requirements,
~nd the aim to be kept in view is that in increasing measure
~he credit required for village and small industries should
be available from normal banking and financial institution.
Under a pilot Scheme operated by the S8I for
coordinated provision of credit to these industries, the
credit limit sanctioned and in force by the end of March
1961, was nearly Rs.9 crores. A pilot credit Guarantee
Scheme under which government shares with certain specified
banks and other financial institutions risks on loans
granted by them to small industries was introduced in July
1960 and guarantees for loans amounting to Rs. 2 Crores were
issued by the end of 1960-61. To ensure that the credit
52
~eeds of artisans in rural areas are not overlooked while
~roviding loans under State Aid to Industries Act, it has
been agreed that a portion of the funds to be disbursed
~nder these Act should be earmarked for artisans in rural
lreas and an equal amount for the same purpose should be
~ade available from the budget of Community Development
Blocks.
pROGRESS:
Considerable progress was also made in providing
credit facilities to Small industries from institutional
~gencies. The credit limits sanctioned by the State Bank
increased from Rs. 8.85 Crores at the end of March 1961 to
Rs.70.33 crores by March 1966. Under the credit Gurantee
Scheme of the RBI guarantees for loans amounting to about
Rs.97.42 crores were issued by January 1966 as against about
Rs.2 crores in April 1961. In pursuance of the
recommendations of the Rural Industries Planning Committee
which was constituted in April 1962. 45 Rural Industries
projects have been taken up in selected rural areas. Actual
Expenditure spent in the third plan has been depicted in
Table.2.1.
53
TABLE - 2.1
ACTUAL EXPENDITURE IN THIRD PLAN (All India)
(Amount Rs. in crores)
~ctor Planned Expenditure
Actual Expenditure
Percentage of Actual Expenditure to Planned Expenditure
•• Agriculture 1068 1089 1.96
I· Industries 1520 1726 13.55
J. Village & Small Industries 264 240 ( -) 9.09
4. Total 7500 8577 14.36
Source: Commerce Annual Number on Industries, 1968, P.306.
It is evident from the above table that the actual
expenditure crossed the planned expenditure in both
agriculture and industrial sectors, but in case of a small
industrial sector actual expenditure is less than the
flanned expenditure.
~.3.5 SMALL-SCALE INDUSTRIES DURING ANNUAL PLANS 1966-69:
During this interim period from 1966-69, Rs.131 crores
~as provided for the development of village and small
~ndustries out of the total outlay of Rs.6800 crores. But
~he actual expenditure was Rs.126.1 crores only which is
54
l.9 per cent of the total expenditure. The annual plan
~utlay for village and small industries during the Three
~nual Plan Periods can be seen in Table - 2.2.
TABLE - 2.2
ANNUAL PLAN OUTLAY FOR VILLAGE AND SMALL INDUSTRIES DURING THREE ANNUAL PLAN PERIOD
(Rs. in crores)
I
Year
966-67
967-68
968-69
lTotal
I;ource
Total public Outlay for % to sector outlay VSIs total
2221 45 2.0
2242 45 2.07
2337 41 1.8
6800 131 1.90
Mimiographed from the book. "Efficiency incentives for Small Industries" (ed) Sundesara, lOBI, Bombay, P.6.
~REDIT AND FINANCE :
of J.C.
Under the State Aid to Industries Act the State
Governments disbursed loans amounting to about Rs. 7.56
crores by the end of 1968. The total loans sanctioned by the
SPCs to small scale unts as at the end of March 1968 stood
55
.t Rs.33.74 crores to 3806 applicants. The RBI issued 36,055
~urantees for loans amounting to Rs. 154.02 crores during
~he same period under its credit gurantee scheme.16
To increase the flow of institutional credit to the
~mall secotr, the RBI introduced in Feburary 1968, refinance
'facility to scheduled commercial banks and SFCs at
concessional rates. But after the establishment of lOBI
~nd SIDBI recently, the refinance facility to SFCs and
commercial banks is taken over by these institutions from ,
~BI. To boost exports Small Industries Service Institutes
I(SISIs) supplied information relating to overseas buyers and
~oreign markets to small units. The SSIs engaged in export
~ecause of their size are not in a position to independently
Jndertake overseas market survey. Hence SIS I was
=stablished in all the states with regional offices in
important cities of the state. The major task of the SSI was
to provide necessary information with regard to the
establishment of SSI like - source of machinery. technical
know-how etc .• and also to help SSI units after their
establishment by providing information on potential buyers,
source of raw-material etc.
16. Government of India - Annual Plan Progress Report Planning Commission, New Delhi. P.55.
56
2.3.6 SMALL-SCALE INDUSTRIES DURING FOURTH PLAN PERIOD:
The objectives and appoarch in the fourth plan were
drafted by keeping in view the wide range of industries that
are covered by village and small industries. This sector has
been designed to achieve the objectives of widening
employment opportunities, mobilising of resources of capital
and skill particularly in the country side and providing
more equitable distribution of national income.
OUTLAY:
A total outlay of Rs.370 crores in the public sector
has been suggested for the development of village and small
industries. This proposed provision of Rs.370 crores is
exclusive of the outlays made for the development of these
industries in the programmes for community development,
rehabilitation of displaced persons and development of
special areas. Further about Rs.400 crores are expected to
Ibe invested from Private Sources including banking
institutions. Thus, a total outlay of about Rs.800 crores
would be available for small-scale sector under the fourth
plan (of this Rs.120 crores was for SSIs and Rs.25 crores
for the development of industrial estates).
The allocation of Rs.370 crores allocated in the
Fourth Plan was revised to Rs.251.0l crores subsequently.
Finally, out of the total expenditure of Rs.15,779 crores
57
the amount spent towards the village and small industries
sector was Rs.243 crores (1.54 per cent to total)17.
CREDIT FACILITIES:
In the fourth plan a total outlay of over Rs.290
crores had been made in the public sector for the
development of this sector. Against this, the expenditure is
estimated at about Rs.25C crores. In addition to the outlay
in the public sector, about Rs.560 crores were expected to
be invested from private sources including banking and other
financial institutions. The credit extended by the
commercial banks to small industries (including term loans ""I .nd advances made to craftsmen and qualified entrepreneurs)
11 rose from Rs.286 crores by June 1969 to Rs.597 cores by June
(~
1972 and to Rs.64 crores by December 1972. It is estimated
that about 18 per cent of the credit advanced by the 1 commercial banks consisted of term loans. The advances by
the SFCs also increased from Rs.7 crores in 1969 70 to
Rs.20 crores in 1971-72. The National Small Industries
Corporation supplied machines on hire purchase terms valued
et Rs.20.8 crores, including Rs.I0.7 crores in 1971-72.
17. Government of India: Draft Fourth Five Year Plan: 1969-74,Planning Commission, New Delhi, P.22S.
58
The number of units (SSIs) registered on voluntary
basis with the industries directorates of the state and
union territories increased from nearly 2 lakhs in 1969 to
about 3.18 lakhs in 1972 and the total employment in these
units was estimated to be at 41.4 lakh persons. A further
list of 77 items was added to those reserved for exclusive
aevelopment of the small-scale sector bringing the total to
124.
And there was a substantial increase in the flow of
institutional credit for these industries. The Credit
Guarantee Scheme administered by the Reserve Bank was
further extended and liberlised. A total fo 183 credit
institutions including all the major commercial and co-
operative banks and the SFC's have joined the scheme.
2.3.7 DEVELOPMENT OF SMALL-SCALE INDUSTRIES DURING FIFTH FIVE YEAR PLAN:
The Fifth Plan emphasised that small industries had an
important role to play in the removal of poverty,
disparities in income and wealth and removal of regional
imbalances. The sector had definite potential for providing
increasingly large employment opportunities with relatively J
smaller capital investment. During the Fifth Five Year Plan, ~
59
the emphasis was on the development of SSI and their role as
ancilliaries to large undertakings. The combined development
programmes of the Centre, States and union territories were
expected to create additional jobs for 15-16 lakh persons.
For the purpose Rs.611 crores was earmarked. In addition to
this about Rs.I050 crores was expected to have been invested
from private sources including banking and financial
institutions. Thus, an amount of Rs.166 crores was provided
for the development of small-scale sector during the Fifth
Plan. The Fifth Plan emphasised that small industries have
an important role to play in the removal of poverty,
disparities in income and wealth and removal of regional
imbalances. The sector has definite potential for providing
increasingly large employment opportunities with relatively
.maller capital investment. The progress made during this
~lan period was not encouraging due to various facters
aainly due to inflation and political disturbances. But the
progress made in the field of providing infrastructural
facilities to SSI sector was satisfactory.
The Fifth Plan could not continue its full term due to
the changes that took place at the Union Government in
January 1977. The plan was scrapped by the Janata Government
in 1977 and in its place the Rolling Plan was introduced.
60
In the six years period 1974-80, the estimated value
of production registered a growth rate of 6.8 per cent p.a.
The gross value added at factor cost rose from around
Rs.2800 crores in 1973-74 to Rs.4100 crores in 1979-80 (at
18 1979-71 prices) registering a growth rate of 6.6 per cent.
Table - 2.3 below shows the physical progress of VSIs
during 1973-74 to 1979-80.
TABLE - 2.3
PHYSICAL PROGRESS OF VSIs DURING 1973-74 TO 1979-80
Output (Value in Rs.
Crores) 1973-74 1979-80
Employment (Lakh Persons)
1973-74 79-80
1.Modern SSIs 7200 19060 39.65 64.60
2.Traditioa1 Village Industries 2183 4419 102.21 132.84
Export (Rs.in
Crores) 1973-74 79-80
538 1050
362 1175
Source: Yojana. 31st July 1982 Vo1.23/13.8. P 17.
18. Basic Statistics Relating to the Indian Economy, Opcit. P.149.
61
It can be seen from the Table 2.3 that modern
~xercise during the plan period increased from 7200 to
L9060 and the employment in this sector rose from about 40
lakhs to 65 lakhs and the contribution to export doubled
from Rs.538 crores to Rs.l050 crores.
CREDIT AND FINANCE:
Inspite of the credit expansion (from about Rs. 250
crores in 1973-74 to about Rs. 600 crores in 1979-80), the
share of the 'tiny' units with investment of up to Rs. 1
lakh has been very little. According to a survey conducted
by the Reserve Bank of India, of the units financially
~ssited by the commercial banks up to June 1976, about 69
~er cent of the total credit flow was availed by 11 per cent
~f the bigger units in the small industries sector which
accounted for 55 per cent of the production. Taking into
account the units which could not have
~nstitutional credit the disproportionate supply
~ecomes more pronounced.
access to
of credit
Another important development during this period has
been the establishment of District Industries Centre (DICs)
~s an umbrella for the development of SSIs.
62
DISTRICT INDUSTRIES CENTRE (DIC):
The District Industries Centre programme was launched
~n first May 1978 by the Government of India as a focul
~oint for promotion of small, cottage and village industries
to provide all services and support to the decentralised
.ector under a single roof at pre-investment, investment and
lost-investment stages.
The District Industries Centre Programme as a
lentrallY sponsored scheme
, ttempts made in the field of
in contrast to the previous
rural industrialisation and
lural employment envisaged providing to the SSIs and to the
prospective entrepreneurs, all the asistance required for
developing existig industries or supporting the new one
under one roof at the district level itself so that the
delays and difficulties faced by the industrialists and
entrepreneurs were solved locally. Under this scheme of DIC,
the entrepreneurs were to get all special assistance from
one agency, suitable power was to be delegated by the
several departments of the State Government to the District
Industries Centre so that entrepreneur got all the
assistance from the DIC. Of the 420 districts in the country
380 were covered by DIC scheme during 1981-82.
63
~.3.8 SMALL-SCALE INDUSTRIES IN THE SIXTH FIVE YEAR PLAN:
Promotion of SSIs continued to be an important element
In the development strategy because of its favourable
capital out put ratio and the high employment intensity.
Loans advanced by commercial banks during the plan period
increased-from about Rs.686 crores in March 1973 to about
Rs.2633 crores by December 1979. The assistance from co
operatives increased from Rs.14 crores in 1973-74 to Rs.58
~rores in 1979-80. The RRBs granted loans to the extent of
Rs.45 crores. The SFCs had sanctioned term loans to the
tune of about Rs.702 crores by March 1989. The RBI continues
to operate the credit guarantee scheme for SSIs. The target
, __ .J-or priority sector for lending the commercial banks was
increased from 33 per cent to 40 per cent.'
A public sector outlay of Rs.1780.45 crores has been
provided for the development of VSIs during the Sixth Five
~ear Plan. The total outlay of the Sixth Five Year Plan was
Rs.97,500 crores. The outlay on VSIs constituted about 1.82
;per cent of the total outlay.
The production from the SSI sector increased from
Rs.33,538 crores in 1979-80 to Rs.63,790 crores in 1984-85
and exports from Rs.2,280.62 crores in 1979-80 to
64
Rs.4,557.56 crores in 1984-85 at current prices. With
regards to employment, it has increased from 233.72 lakh
in 1979-80 to 315 lakh in 1984-85. 19 Within persons persons
the manufacturing sector this represents about 80 per cent
of the total industrial employment. However, some of the
long-term objectives set for the VSI sector are still to be
achieved. The growth and development of this sector has been
constrained by several factors like technology obslescene,
inadequate ~nd irregular supply of raw materials, lack of
organised marketing channels, inadequate availability of
credit and defficient managerial technical skills, etc.
2.3.9 DEVELOPMENT OF SMALL-SCALE INDUSTRIES DURING THE SEVENTH FIVE YEAR PLAN:
The SSI sector has played a vital role in the
jevelopment of the economy and still there is scope for
increase in production and productivity in this sector. To
facilitate modernisation and achieve rapid growth in this
~ector, the upper limit on the investment on plant and
machinery has been raised in respect of small scale units
;19. Government of India: Draft Seventh Five Year Plan. Planning Commission, New Delhi. P 98.
65
from Rs. 20 lakhs to Rs. 35 lakhs and in the case of
auxilliary units from Rs. 25 lakhs to Rs. 45 lakhs.
Promotion of industries in this dispersed sector primarily
falls within the responsibility of the State Governments.
The centre, however, supplements their efforts.
Within the overall objectives of food", work
productivity laid down in the Seventh Five Year Plan,
and
this
sector would contribute towards improving the
occupational profile of rural, semi-urban
economic and
and weaker
sections of urban communities through promotion of VSls.
2.3.10 SMALL-SCALE INDUSTRIES IN THE EIGHTH FIVE YEAR PLAN:
The plan proposes a growth rate of 5.6 per cent p.a.
on an average during the plan period. The level of national
investment is proposed at Rs. 798 crores and Public Sector
outlay is proposed to be at Rs. 4,34,100 crores.
Acceptance of significance of Industialisation has
been a basic tenet of policy in India during all these years
since the Second Five Year Plan. But for this we would not
have had the capital goods base that we have, the highly
diversified nature of our industrial sector that we see and
the skills and the technical know-how that we possess to
day.
66
The outlay on VSls will be Rs.4778 crores (Rs.34,075
crores for large and medium industries)
departure in 8th plan is in respect of the
The significant
distribution of
investment in both the public and private sectors in view of
the shift in economic policy, placing greater reliance in
the market. The private sector is expected to shoulder a
greater responsiblity in investment.
After going through the approach paper on Eighth Plan
it appears that the Eighth Five Year Plan is less fussy
about targets and more about such industrial restructuring
as could automatically make for better use and enlargement
of resources in industrial sector through the spurt of
private enterprises and initiative including foreign
• investment.
67
2.3.11 AN OVERVIEW OF THE PROGRES S AND GROWTH OF SMALL-SCALE INDUSTRIES SINCE THE FIRST FIVE YEAR PLAN:
(1) Growth of SSIs:
The following table traces the growth of Small-Scale !
lndustries since 1960.
TABLE - 2.4
GROWTH OF SMALL-SCALE INDUSTRIAL UNITS IN INDIA
1960 1970 1980 1985 1990
1. Number of units (lakhs) 0.36 2.82 8.74 13.55 19.40
2. Investment (Rs. crores) 279.58 697.00 5850.00 9585.00 18196.00
3. Employment (lakh persons) 21.59 36.70 71.00 96.00 126.26
4. Gross output (Rs.crores) 1426.50 4860.00 21635.00 501520.00 143170.00
5. Exports (Rs.crores) NA* 393.00 1050.00 2350.00 9100.00
Source: CMIE. Basic Statitics Relating to Indian Economy Vol.I. All India. Aug.1992.
* NA Not available.
It is clear from the Table - 2.4 that there is a
phenominal increase in the number of registered units. The
number increased from 0.36 lakhs in 1960 to 2.82 lakhs in
1971 and to 8.74 lakhs in 1980 and 19.40 lakhs in 1990.
68
Similarly there has been an increase in respect of
~mp1oyees in this sector. In the year 1960 only 22 1akh
people were working in the Small-Scale Industrial units.
~his has increased to 36.70 lakhs in 1970 and 71 1akhs in
J980 and 126 lakhs in 1990. In case of investment there is a
~ompound average annual growth rate of 13.8 per cent. On
.ccount of increase in employment and investment the
production also went up. The production increased at a I ~ompound average annual growth rate of 20 per cent. The
~xport from SSIs also have shown an remarkable increase from
pust Rs.393 crores in 1970 to Rs.9lOO crores in 1990 with an
~verage annual compound rate of increase of 4 per cent.
A complete position of small industry's development
~dnnot be easily portrayed because registration with the
State Directorate of Industries and Commerce or with any
~ther authorities is not compulsory in the case of small
-Lndustries. It becomes obligatory only when the small
~ndustries sought some assistance or facility from the
~overnment. There are according to some estimates at least
~alf the number of registered small industries in the state
kunctioning without seeking any assistance from the
;overnment.
69
Illustration - 2A
Growth of 55I Units in India
Numbsl'll (in lalchl) 25~-------------------------------------------------,
20 ............................................................................................................................................... .
15 .................................................................................................................... .
10
5 ............................................................. .
o L--_______ _
1960 19)'0 1QBO
Years
1985 1GG0
70
Illustration - 2B
Growth of Investment on SSIs in India
A.mount (Rs. in 'Thousand Crores) 20r---------------------------------------------~
15 ..................................................................................................................... .
10
5 ........................................................... .
1960 19)10 1980
Years
19a5 1990
71
Illustration - 2C
Growth of Employment in SSIs in India
Penon. (in lakb.) 140r-------------------------------------------------
120
100
BO
60 ............................................................. .
40
20
o 1960 uno 1980
Years
1985 1990
72
Illustration - 2D
Production from the SSI Sector in India
Amount (RII. in Thoulland Crorall) 200.------------------------------------------------------.
150 ................................................................................................................................................ .
100 .................................................................................................................... .
50 ........................................................................................ .
oL-------~ .... --1980 Hno 1 gaO
Years
1985 1990
TABLE - 2.5
PLAN EXPENDITURE FOR VILLAGE AND SMALL SCALE SECTOR
1. Plan Expenditure
a) Village & Small Industries
b) of this SSIs
2 • Total Plan Expenditure
3.l(a) as % of 2
4.l(b) as % of 2
I Plan
31.2
5.2
1960.00
1.59
0.26
II Plan
180
44.4
4672.00
3.85
0.95
III Plan
241
86.12
8577.00
2.80
1.00
3 Annual IV Plans Plan
132.55 292.53
39.35 104.25
6625.00 15779.00
2.00 1.85
0.59 0.66
V plan
535.98
221.74
39426.00
1.35
0.56
(Rs. in Crores)
VI plan
1945.00
616.10
109292.00
1.77
0.56
VII plan
3249.00
1137.15
218730.00
1.48
0.51
SOURCE: The Second, Third,Fourth and the Sixth Five Year Draft Plan and also The Economic
...., w
74
(2) Financial Outlay in different Plan Period:
Table - 2.5 shows the actual expenditure towards SSIs
in different plan periods.
The table above shows, the share of plan
expenditure of village and small-scale sector for the entire
plan period. Eventhough t.here is gradual increase in the
total allocations to this sector over the period in absolute
figures from Rs.5.2 crores in the First plan to Rs.616
crores in the Sixth plan and Rs.1137 crores in the Seventh
plan, the percentage share of this sector to the total
expenditure is always less than I per cent (except during
the Third plan). This shows the difference in the ojectives
and principles spelt out and the actual expenditure.
2.4. CONCLUSION
All the plan documents express similar feelings and
specify the measures taken or intended for the small-scale
sector. These feelings, however, do not appear to be matched
~y the relative allocations for this sector. It may be
~oticed that the Second and the Fifth Five Year Plans in
terms of public sector outlay, were nearly 2.5 times each
Ithe size of their respective predecessors. The other plans
~ere each 1.8 times the size of their respective
75
Fredecessors. Of the plans for which the data on actual
expenditure on village and small industries are presented,
\he expenditure of 1.59 per cent is the lowest and 3.85 per
cent is the highest. The importance of public sector as
judged by the relative allocation of public sector outlay
and total outlay, including primary investment is, thus,
actually less in the draft plans than every earlier plans.
Eventhough the financial allocation were meagre, the
development of small sector gained momentum during these
period. Between 1956 and 1979 a number of committees were
formed to study various aspects of this sector. Based on
their recommendations several measures were taken for
improving the sector. The definition of a small unit was
revised from time to time to get more number of units into
fOld. There is a
rmall units, the
this sector from
considerable increase in the number
investment and employment opportunities
plan to plan.
of
in
2.5
76
DEVELOPMENT OF SMALL-SCALE INDUSTRIES DURING VARIOUS PLAN PERIODS OF KARNATAKA (FIRST FIVE YEAR PLAN TO EIGHTH FIVE YEAR PLAN):
Small-Scale Industries During First Five Year Plan of Karnataka:
In Karnataka First Plan was adopted only to old Mysore
and Bellary. During the plan period Heavy and Medium
Irrigation Projects were given first priority. Of the total
outlay of Rs.196.89 lakhsh only Rs.122.96 lakhs was spent
accounting to 60.2 per cent of the total outlay. The fund
provided for industries was 4.1 per cent of the total First
Plan outlay of which only 3 per cent was spent. 20 During the
plan period importanc was given for the development of
sericulture. Since the First plan was modest beginning and
"\s there was no complete reorganisation of the State,
industrial investment was very much restricted during the
period.
2.5.1 SMALL-SCALE INDUSTRIES DURING SECOND FIVE YEAR PLAN OF KARNATAKA :
The number of units with authorised capital of less
than Rs. 5.00 lakhs increased during 1957-61 by about 1160
20. Puttaswamaiah.K. Economic Development of Karnataka (New Delhi, Oxford and IBH, 1980), p.558.
77
in Karnataka. The programme for Small-Scale Industries as a
whole is estimated to have provided full-time employment to
about 3 lakh persons.
In Karnataka the Second Plan was inagurated on 1st
April 1956. The new state of Mysore was formed 7 months
later. It therefore, became necessary to draw the plan
afresh after integration. It could not fully integrate the
various development programmes in line with the needs and
potentialities of the State. The total outlay planned was
Rs.145.l3 crocres (reduced to Rs. 136 crores because of the
~duction of the National Plan size itself).
The plan outlay for the development of industries was
Rs. 10.39 crores and actual expenditure incurred was Rs.
7.36 crores. An amount of Rs. 12.25 lakhs has been provided
to Cottage and Small-Scale Industries under the State Aid to
Industries Act. 2l There were unavoidable delays
administrative difficulties and shortages of technical
personal and equipment owing to the reorganisation of State.
21. Government of Mysore: Finance and Accounts 1956-57, P.74.
78
2.5.2 SMALL-SCALE INDUSTRIES IN THE THIRD FIVE YEAR PLAN OF KARNATAKA:
The Small-Scale industries were provided Rs. 213.80
Lakhs during the Second Plan and this provision is raised to
Rs. 442 Lakhs for the Third Plan. The continuing scheme
involve an outlay of Rs. 297 Lakhs. They include the
aetting up of Industrial Estates with a provision of Rs. 135 !
Lakhs. It is expected that there will be 8 to 10 Industrial
~tate established during the period.
The total outlay on VSIs is Rs.13l5.20 Lakhs as
c,pmpared with the Second Plan provision of Rs. 680 Lakhs.22
On the basis of total expenditure incurred during the
third Plan Period on development of small industries
~cluding the investment from private sources, it is
~timated that part time and fuller employment was provided
for about 8 million persons and additional whole time
23 ~ployment for about 6.3 lakh persons. By March 1965, 154
Industrial Estates have started functioning providing
22. Government of Mysore: Third Five Year Plan, Planning Department. Bangalore, P. 43.
23. Government of Mysore: Fourth Five Year Plan. Planning Department, Bangalore, P. 228.
79
~commodation to about 2585 units with an annual turnover of
~out Rs. 60 Crores worth of products and
24 employment to nearly 46,000 persons.
providing
2.5.3 SMALL-SCALE INDUSTRIES DURING ANNUAL PLAN (1966-69) OF KJ\RNATAKA:
In Karnataka during the Annual Plan period, Industrial
Area Development Board (KIADB) was constituted and this was
with a view to overcome the procedural difficulties in the
lifquisition of lands.During the Three Annual Plan periods,
thdustrial Estate Programme was taken up vigorously. The
Gbvernment announced number of incentives like relief from
Octroi, reservation of Government purchases for products of
-tw industries.
2.5.4 INDUSTRIAL POLICY IN THE FOURTH PLAN OF KARNATAKA: • There is a feeling that the industrial development in
the State has lost momentum. This was partially due to the
shortage of power in the State. The shortage of power in the ,4 8tate being one of the reasons as to why Karnataka lagging
behind other States, and the other being the absence of the
clearly spelt out scheme of incentives to new industries. I ".~
24. Ibid.
80
Keeping these things in view the State Government
Innouced important concession and incentives which would be
.vailable to new industries.
I. Sales tax - A cash remission will be allowed on sales
tax paid by a new industry on rawmaterials purchased
by it for the first five years from the date the
industry goes into production.
II. Octroi - Government will urge all municiplities and
city corporations to exempt raw materials, building
materials and capital equipment needed by new
industries from payment of Octoroi for a period of
five years from the date industry goes into
production.
II. Power - All new industries will be exempted from the
payment of electricity tax.
II. Land - The fine leviable by the Revenue Department for
converting agricultural land to non-agricultural
purpose will be waived off. Land will be made
available by the Mysore Industrial Area Development
Board on Hire Purchase terms with the total value
being recovered in ten years time.
81
PLANNED DEVELOPMENT IN NEW MYSORE:
In pursuance of policy guidelines, the state t.i Iovernment drew up various promotional schemes within five
~ar plan frame work for improving the competitive strength
of small-scale sector in Karnataka. Table 2.6 shows the
total outlay for the Fourth Plan.
TABLE - 2.6
OUT-LAY IN FOURTH PLAN
fctor
ricultural ogramme
dustry and ning
of which VSIs
Total
Third Plan expenditure (actuals)
6668.80
1547.67
409.00
26413.25
(Amount in Rs. Lakhs)
Fourth Plan outlay
Approved outlay
1394.00
181.00
70.00
5071.29
Expenditure anticipated
1431.14
189.00
71.00
5546.97
Source: Fourth Five Year Plan; Government of Mysore. P.86
CREDIT AND FINANCE:
The credit facilities available to SSIs have increased
considerably during the past few years and it is the
declared policy of the State Bank of India and other
82
commercial banks with the support of the Reserve Bank to see
.rat no productive activity in this sector is handicapped
~r want of finance. As the need for organising and
developing VSIs on co-operative basis was emphasised by the
&Dvernment of India in Industrial policy resolution of 1948
Ihd 1956, the State Governments have accepted the three
major sources of financing viz., the co-operative banks the
commercial banks - the state financial corporatations.
Commercial banks after the State Bank of India's pilot
scheme have already started financing village and small
industries. The State Apex bodies like Small Industries
Development Organisation (SIDO) , National Small Industries
CQrporation (NSIC), and State Financial Corporations are
providing long-term finance to the small-scale industries.
The provision for village and small-scale ·industries
for the fourth five year plan underwent a revision and the
outlay which was initially at Rs.14 crores was brought down
to Rs.8.25 crores as the entire plan outlay was scaled down
to Rs.350 crores. 25
25. Government of Mysore: Draft Fifth Five Year Plan (1974-79) Planning Departm~e~n~t~,~-B~a~n~g~a~1-0-r~e~.~p~.-4~1~1~.~~~~
83
Under the State Aid to industries Act, financial
aSslstance by way of loans to these 11 backward districts
for 1970-73 is shown in Table below:
TABLE - 2.7
FINANCIAL ASSISTANCE TO BACKWARD DISTRICTS UNDER STATE AID TO INDUSTRIES ACT
laar
• ~70-71
a71-72
.72-73 I
No. of Cases
149
131
42
322
Amount
17,81,727
8,80,487
3,42,199
30,04,413
Furce: JC Sandesara-Efficiency of Incentives for Small Industries, lOBI, Bombay.1983. P.71
15.5 SMALL-SCALE SECTOR IN KARNATAKA' S FIFTH FIVE YEAR PLAN:
It has been stated in the strategy of the Fifth Plan
)r village and small industries that "these industries are
of considerable importance for expanding the opportunities
of productive employment to the underemployed, the very
84
1ly employed and unemployed, both in urban and rural
. . b k d " 26 is ~nclud~ng ac war areas.
The total outlay proposed for the village and small
~ndustries sector is Rs.21.S crores during the Fifth Plan.
tf this Rs.12S0. lakhs was towards SSIs and Rs. 100 lakhs
~owards the development of industrial corporations.
The main objectives of the programme for the
,evelopment of these industries during the preceeding plans
~ere to create large-scale employment opportunities, promote
lecentralisation and dispersal of industries, development of
Igro-based and
Infrastructure
ancillary
facilities
industries,
like credit
development of
and finance,
Improvement of the skills of artisans and the quality of
Iheir products and step up the production of consumer goods
Ind essential articles to the mass and those have large
lotential for export.
The main thrust of the programmes has been the
Ireation of infra structural and promotional facilities for
.he development of these industries.
~. Draft Fifth Five Year Plan, Opcit, P.4l4.
85
Inadequacy of complete up-to-date statistics for these
Industries particularly the traditional rural industries
1IuCh as Food products, Beverages, Tobacco and Tobacco
'roducts, Furniture and Fixtures, Wood products and Leather
Ind Coir products is a handicap for assessing physical
.rogress of the development programmes undertaken so far in
~chieving the objectives and strategy envisaged in the
Ireceeding plans. However, the progress of promotional
Itctivities of these industries in Karnataka during the plan
Iteriod was impressive.
1.5.6 SMALL-SCALE INDUSTRIES IN KARNATAKA'S SIXTH PLAN:
Karnataka's Sixth Plan has difficulties towards the
luller utilisation of the potential resources ~d
lapabilities, removal of regional imbalances and elimination
of unemployment.
The industrial progress in the state has been
adversely affected by the power and energy cuts as well as
by problems connected with raw-material and labour.
larnataka's performance in the industrial field does not
compare well with industrial states like Maharashtra, West
Bengal, Gujarath and Tamil Nadu. There is also a tendency in
the state to adopt highly capital and power intensive
industrial units.
86
Karnataka has the potential to grow at a faster rate
~ringing equitable income distribution. The magnitude of
;he addi tion to the labour force each year, the resource
fonstraints and the rate of inflation seems to prevent
letting our sights at much higher level. Against this
aackground and in order to achieve the above said
Ibjectives, it is estimated that the jtotal investment of
~s. 4545 crores would be necessary in the plan period of
~980-85. Of this Rs. 2500 crores will be the state public
~ector investment. The table below lindicates the sectoral
,utlay for the Sixth Five Year Plan of Karnataka.
87
TABLE - 2.8
SECTORAL OUTLAY FOR THE SIXTH FIVE YEAR PLAN OF KARNATAKA
51. R(> • ,
01.
02.
03.
04.
Sector
Agriculture and Alliied services
Co-operation
Irrigation & Power
Industry and Minerals
Social and Community Services
Others (Transport & Communication, General & economic Services)
Total
Amount Rs.in Crores
366.50 (14.66)
50.00 (2.00)
1149.55 (45.98)
164.00 (6.56)
612.00 (24.48)
157.95 (6.32)
2500.00
NOTE: Figures in bracket are the percentage share of the sector to the total.
It can be observed from the above that the top
priority has been given to power, irrigation and
agriculture.
The Table - 2.9 presents the outlay by major heads of development with regard to industries and minerals.
Sl. No.
01.
02.
03.
04.
88
TABLE - 2.9
SIXTH PLAN OUTLAY BY MAJOR HEADS OF DEVELOPMENT FOR INDUSTRIES
Head of development
Industries
VSIs
a) Industries Development b) Sericulture Development
Sub Total VSIs
Mining
Total (Industries minerals)
State Plan Outlay (Amt. Rs. in lakhs)
8000.00
3300.00
3300.00 4800.00
8100.00
300.00
16400.00
Of the above, the outlay for SSIs is Rs.lOS.OO lakhs
and the outlay for the development of industrial estates is
Rs. 400.00 lakhs.
2.5.7 SMALL-SCALE INDUSTRIES AND SEVENTH FIVE YEAR PLAN OF KARNATAKA
The state had started with a weak industrial base at
the time of re-organisation of states. But the state has
achieved significant industrial development over the years.
The long-term growth achieved in the industrial production
in the state is marginally higher than that of all India.
The industrial production (manufacturing) contributed nearly
89
one fifth of the state income in the state and the share of
Karnataka in the total income from the manufacturing sector
of all states stood at 6.7 per cent in 1988-89. There are
about 650 large and medium industries in the state with an
investment of Rs 4500 crores, and providing employment to
about 3.5 lakhs persons. In the Small-Scale Sector there are
more than a lakh of small-scale units in a wide array of
manufacturing activities with an investment of about Rs 858
crores and employing more than 7.5 lakhs persons. As per the
annual survey of industries, the share of the state in
registered factories in the country was 5.6 per cent in
1987-88, share in employment 5 per cent and the share in the
value of out put 4.3 per cent. The real percapitastate
domestic product in manufacturing sector in Karnataka in
1988-89 was Rs. 401.5 compared to Rs.325.2 for all the
states at 1980-81 price. 27 The major thrust in the 7th plan
for industrial development aims at the creation of
productive employment opportunities Government support for
this will focus on promotional measures, subsidies and
infra structural support.
Government of Karnataka : Draft Seventh Five Year Plan , Planning Department, Bangalore. P.37
90
A total outlay for this sector is Rs.268.26 crores
comprising Rs.147.l8 crores for VSIs and Rs.12l.08 crores
for Sericulture. This is against the total outlay of Rs.5500
crores.(6th plan outlay was Rs. 2265 crores and expenditure
was Rs 2678.14 crores).
In the small-scale sector more than 10,000 units were
set-up on an average per yer during the 7th plan period and
the same level is anticipated to be maintained during the
coming years. Table - 2.10 indicates the growth of Small-
Scale Industries in terms of number of units and employment
' 1uring the Seventh Plan period and during 1990-92.
~l. ~o.
TABLE - 2.10
GROWTH OF SSIs DURING SEVENTH PLAN AND 1990-92 PERIOD
Item Unit 7th Plan 1985-90 Annual plan 90-92
Target Achieve- Target ment
Achievement
-----------------------------------------------------------
~. Units setup Thousands 56.00
~. Employment Lakh persons 3.24
52.85
2.72
20.00 10.88
1.08 1.08
Source: Draft Eighth Five Year Plan 1992-97. Annual Plan 1992 93 vol.l Planning Department, Government of Karnataka. December 1991 P.I-18.
91
2.5.8 SMALL-SCALE INDUSTRIES IN KARNATAKA'S EIGHTH PLAN (1992-1997)
The approach of the Government of Karnataka towards
SSIs in the Eighth Plan is broadly based on the Industrial
Policy announced by the Government during September 1990.
The Policy has stressed the importance of curbing the
imbalance that have arisen and to exploit the strengths, the
state offers for industrial development. The policy
highlights the development of growth centre with
comprehensive infrastructure facilities. The policy has
further indicated that in order to achieve the desire goals,
package of incentives and concessions also will be
restructured suitably to ensure that the entrepreneurs of
the state are well placed and also oriented towards the
development of backward areas in the state. Accordingly, the
state has been divided into 4 zones (with taluk as a unit-
earlier for this purpose the district was considered as a
unit) ~,:;
viz. , Zone I-Industrially most forward taluks ':i\ .Bangalore Urban, Mysore City Corporation limits). Zone II
_~Industrially forward taluks (380 taluks of the state). Zone
III-Industrially backward taluks (128 taluks) Zone IV
Industrially most backward taluks (9 taluks including 3
c<'rowth centres at Raichur, Dharwar and Hassan) 28 .
28. Vide G.O.No.C&I.138.S0C-90 Dated 12.9.1990.
92
The special features of the new package of incentives
and concessions are:
a) Investment subsidy
b) Sales Tax exemption
c) Exemption of stamp duty
d) Concession to Special category of entrepreneurs.
This policy of the Government and the incentives
package adopted in the year 1990 were to have been valid for
a period of 5 years i.e. till 30.9.1995. But major
structural reforms have been brought about in the economic
industrial and trade policies by theGovernment of India. As
a fall-out of this, there is a necessity of revised
Industrial Policy. The major highlights of this policy are:
1. Reclassification of developed and developing areas
which are industrially developed and have concentrated
industrial activities have been classified as Zone I
developed areas (Bangalore South land North Talukas
and Bangalore Urban and Agglomeration area)29, all
other remaining parts of the state, will be treated as
Zone II developing areas, then 3 growth centres being
setup in the state viz., Hassan, Dharwad and Raichur
and has been classified as Zone III.
29. Vide G.O.No. C&I 140 SPC 93, Dated 12.7.1993.
93
2. Tiny and Small Units establilshed in the Zone II,
developing areas will get 25 per cent of investment
subsidy 30 and the value fixed assets with a ceiling
of Rs. 25.00 lakhs. Tiny and Small-scale industries
being established in the Zone III centres will get 30
3.
per cent investment subsidy with a ceiling of
Rs. 30.00 lakhs.
The thrust sector industries like Electronics,
Telecommunication, Informatics, Readymade Garments and
Sericulture based industry will get an additional 5
per cent investment subsidy subject to a ceiling of
Rs. 5.00 lakhs.
4. An additional investment subsidy of 5 per cent (a
ceiling of Rs. 1.00 lakhs) of the value of fixed
assets is offered to SC and ST, Minority community,
physically handicapped and ex-servicemen.
The total investment of Rs.18826 lakhs is envisaged
for the VSI Sector during the Eighth Plan Period.
30. Ibid.
94
2.6 AN EVALUATION OF THE DEVELOPMENT OF SMALL-SCALE INDUSTRIES IN KARNATAKA DURING THE PLAN PERIODS:
In the paragraphs below an effort has been made to
trace the financial allocations made towards VSI sector
compare to the growth in SSIs in the state in terms of
number of units, investment and employment.
(1) Financial Allocations:
Table - 2.11 depicts the financial allocations made to
VSls compared to other sectors like industry and agriculture
and also to the total expenditure.
One of the disheartening factor one can feel after
looking into the table above is that rarely the estimated
outlay towards SSIs has been completely spent and the
expenditure towards SSI is very negligible compared to other
sectors of the economy.
(2) Growth of SSIs in Karnataka:
The Table-2.12_ vividly presents the yearwise growth
of small scale industries since 1969-70.
The Table - 2.12 provides the trends in the growth of
SSI sector in the state in terms of number of units,
I II Plan Plan
1. VSIs 0.63 5.01
2. Industry 1.23 12.10
3. Agriculture 4.28 7.39
4. Total 40.54 145.13
S. (l)As , of(4) 1.55 3.45
PLAN EXPENDITURE on VSIs IN KARNATAKA
(With comparison to other Sectors)
(Amount Rs.in Crores)
III Plan
4.11
15.28
8.77
264.14
1.55
3 Annual Plans
7.29
8.41
4.17
179.78
4.00
IV Plan
5.70
16.95
10.17
287.94
1.97
V Plan
8.16
51.50
129.33
SS4.69
1.47
VI Plan
26.00
281.91
345.66
2652.73
0.98
VII Plan
26.80
340.58
353.68
2922.84
0.91
VIII + Plan
188.26
544.33
799.32
11000.00
1.71
SOURCE: 1. Karnataka State Gezetteer 1980 P. I. P 833
NOTE:
2. Karnataka State Draft Fifth FYP p. 6
3. Basic statistics relating to Indian Economy. 19S0-51 To 1980-81 Vol. 2 States p. 148-9.
Figures in brackets indicate the outlay.
+ Outlay
\D VI
I II Plan Plan
1. VSIs 0.63 5.01
2. Industry 1.23 12.10
3. Agriculture 4.28 7.39
4. Total 40.54 145.13
5. (l}As % of(4) 1.55 3.45
PLAN EXPENDITURE on VSIs IN KARNATAKA
(With comparison to other Sectors)
(Amount Rs.in Crores)
III Plan
4.11
15.28
8.77
264.14
1.55
3 Annual Plans
7.29
8.41
4.17
179.78
4.00
IV Plan
5.70
16.95
10.17
287.94
1.97
V Plan
8.16
51.50
129.33
554.69
1.47
VI Plan
26.00
281.91
345.66
2652.73
0.98
VII Plan
26.80
340.58
353.68
2922.84
0.91
VIII + Plan
188.26
544.33
799.32
11000.00
1.71
SOURCE: 1. Karnataka State Gezetteer 1980 P. I. P 833
NOTE:
2. Karnataka State Draft Fifth FYP p. 6
3. Basic statistics relating to Indian Economy. 1950-51 To 1980-81 Vol. 2 States p. 148-9.
Figures in brackets indicate the outlay.
+ Outlay
\0 VI
96
Illustration - 2K
Plan expenditure on VSls in Karnataka
800 .............................................................................................. .
600 e .................................................................. w •••••••••••••••••• •••••••••
400 ............................................................................................
200 ...................................................................
I Plan II Plan III PlanlV Plan V Plan VI PlanVIl PlaN1l1 Plan
~ VSls 0 Industry [SSS] Agriculture
NUMBER OF SMALL SCALE INDUSTRIAL UNITS REGISTERED, INVESTMENT AND PERSONS EMPLOYED DURING THE YEAR 1991-1992 IN KARNATAKA.
% Increase! % Increase! % increase! Year Number of units Decrease Investment Decrease Persons Decrease
(During) (Registred) over the (Rs.Lakhs) over the employed over the previous previous previous year year year
1969-70 3900 3456.70 47960 1970-71 1896 - 51.38 2199.30 - 36.37 42818 - 10.72 1971-72 2331 22.94 1302.96 - 40.75 21492 - 49.80 1972-73 2294 1.58 1375.88 5.60 22911 6.60 1973-74 3036 32.34 1628.66 18.37 22315 2.60 1974-75 1903 - 37.31 3517.56 115.97 46440 108.11 1975-76 1565 - 17.76 1581.19 - 55.04 12782 - 72.47 1976-77 1442 7.85 1495~70 5.40 15355 20.12 1977-78 1640 13.73 1531.74 2.40 25096 63.43 \0 1978-79 1840 12.19 1603.08 4.65 17088 - 31.90 ..., 1979-80 2910 58.15 3255.10 103.05 34366 101.11 1980-81 2776 4.60 3041.83 6.55 26164 - 23.86 1981-82 3396 22.33 4955.16 62.90 41375 58.13 1982-83 6096 79.50 6255.29 26.23 46420 12.19 1983-84 7479 22.68 6396.51 2.25 44282 4.60 1984-85 11962 59.94 632.31 - 90.11 55849 26.12 1985-86 11634 2.74 8787.09 1289.64 60796 8.85 1986-87 11179 3.91 9408.47 7.07 56888 6.42 1987-88 10530 5.80 10165.19 8.04 52498 7.71 1988-89 9811 6.82 10532.77 3.61 50448 3.90 1989-90 9700 1.13 11243.02 6.74 51521 2.12 1990-91 9884 1.89 11843.00 5.33 54000 4.81 1991-92 10588 7.12 18623.00 57.24 62000 14.81 As on 3l.3.92 126039 127490.51 870065
Source: 1. Karnataka State Gazetteer, Part I Government of Karnataka, Banga10re 1982, p.828
2. Director of Industries & Commerce, Government of Karnataka, Banga1ore.
TABLE - 2.13
CUMULATIVE PRESENT POSTION OF SSIs IN KARRATAKA AS ON 31.3.1992 (DISTRICT-WISE)
5l. Name of the Number % to Investment % to Employment % to No. District of SSIs Total (Rs.in lakhs) Total in SSIs total
Units
1. Banga10re (R) 4622 3.67 2851.11 2.24 23596 2.71 2. Banga10re (U) 23069 18.30 34251.74 26.87 219272 25.20 3. Be1gaum 11080 8.79 9172.65 7.19 51078 5.87 4 . Be11ary 5257 4.17 2589.05 2.03· 25522 2.93 5. Bidar 2826 2.24 3674.88 2.88 17864 2.05 6. Bijapur 4688 3.72 2814.06 2.21 28967 3.33 7. Chitradurga 4860 3.86 5516.86 4.43 27451 3.16 8. Chickmaga1ur 2293 1.82 1581.79 1.24 11555 1.33 9. Dakshina Kannada 8955 7.10 13458.51 10.56 59414 6.83
10. Dharwad 10506 8.34 10134.64 7.95 106242 12.21 \0 11. Gulbarga 4979 3.32 3064.89 2.40 23470 2.70 (»
12. Hassan 2791 2.21 1977.74 1.57 14778 1.70 13. Kolar 4709 3.74 4740.34 3.72 31262 3.59 14. Kodagu 1444 1.15 1441.89 1.13 14649 1.68 15. Mandya 2851 2.26 2275.39 1.78 16154 1.86 16. Mysore 11374 9.02 7550.83 5.92 67326 7.74 17. Raichur 4287 3.40 5144.87 4.04 35191 4.04 18. Shimoga 6410 5.09 5769.07 4.53 30711 3.53 19. Tumkur 7437 5.90 7784.95 6.11 48202 5.54 20. Uttara Kannada 2401 1.90 1675.25 1.31 17361 2.00
Total 126039 100 127490.51 100 870065 100
99
Illustration - 2F
'
Trends in the Development of SSIs 1-9" - No. of Units
in Karnataka (1969-70 to
Thouiland. 1.~~~~------------------------------------~-.
12 ................................................................................................................................................ .
10 ....................................................................................................................... .......:..:~ ___
, ................................................................................................................................................ .
e ................................................................................................................................................ .
8
OLL-L-L-L-L-L-L-L-L-L-L-L-L-L-L-L-L~~~~~~ ea '10 71 7Z 73 74 75 78 77 78 'nI 80 81
Years
-- No. of Untb
100
Illustration - 2G
Trends in the Devellopment of SSIs in Karnataka (1969-70 to 1991-92) Investment
- ThoUIiADd. ~r----------------------------------------------
20 .................................................................................................................................................. .
16 ................................................................................................................................................ .
10 ................................................................................................................. .
6 ............................................................................. .
O~~~~~~-L-L-L-L-L-L-L-L-L~-L-L-L-L-L-L-LJ '72 73 7-' 75 78 77 78 7'a eo 81 82 83 M 85 88 87 88 8V ao VI
Years
101
Illustration - 20
Trends in the Development of SSIs in Karnataka (1969-70 to 1991-92) Employment
Thoulilandlil 80,----------------------------------------------------,
00 ............................................................................................................................................ .
40
M 70 71 72 73 7~ 7& 7e 77 78 7V 80 81 82 83 ~ 85 8e 87 88 8i ~ it
Years
-4- EmplQ]1lM1nt
102
Illustration - 21
Dispersal of Industries in Karnataka - No. of Units
Fwd. Dir;te. 66.3%
Other Diste. 33.7%
NO. OF UNITS
103
Illustration - 2J
Dispersal of Industries in Karnataka - Investment
Fwd. Di8tl'. 65.4%
.................. , . -: -: -: -: -: -: -: -: . :-:-: -: -: . :-: -: -: /
... :.:::::::::::::::::::::::.:.: ... // ,/
--~ Other Diflt.8. 34.6%
IN'lESTMENT
104
Illustration - 2K
Dispersal of Industries in Karnataka - Employment
F~td. DiBtB. 69.6%
-......-~ Other DiBtB. 30.4%
EMPLO):'MENT
105
investment and employment are analysed for 23 years from
1969-70 to 1991-92. It can be seen from the above that there
is a negative growth rate in terms of number of units over
the previous year for 11 years. However, from the year
1977-78, there is consistency in the growth of SSI units
except for the period 1985-86 to 1989-90. In terms of
investment there is a negative growth rate over the previous
year for 6 years only. Compared to the number of units the
investment is increasing consistently from the year 1981-82
to 1991-92 except during the year 1984-85. There is also
considerable increase over the previous year in terms of
number of persons employed in SSI sector. During the last 3
years there is an average growth rate of 7.2 per cent in
terms of employment.
The Table - 2.13 provides the cumulative districtwise
present position with regard to the SSIs in Karnataka.
It can be analysed from the Table - 2.13 that
industrially most forward districts of the state like
Bangalore, Belgaum, Dharwad, Dakshina Kannada, Mysore,
Tumkur and Shimoga constitute 66.21 per cent of the total
SSI units situated in the state. Remaining 34 per cent of
SSI units are situated in the rest of the 12 districts of
106
the state. In terms of investment also these industrially
forwrd district consitute 65.45 per cent of the total
investment in the State. Even in terms of employment 69.63%
of the total employment in the state is concentrated in
these forward districts. It can also be observed from the
above table that more than 25 per cent of the investment and
employment in SSI in the state is in Bangalore (Urban)
District only.
Thus there is a greater need to reduce the regional
disparities. The major reason for this is the non uniform
distribution of resources. It is evident from the data above
that financial institutions have tread a path of safety to
finance more units in the developed areas only. It is also a
case of a region already developed and the disparities
developed get accentuated due to the obvious advantages of
natural attraction.
Minimization of disparities does not mean " a
straight transfer of the fruits of proeperity from the
developed area or establishing new industrial units in those
areas where there is no adequate resource base which may
jeopardise the economic efficiency necessary for the
107
progress of the country"31. Regional disparities can be
brought down in the real sense when all regions are
encouraged to exploit their own development potentials and
formulate development plans suitable to the region. For this
the present policy of differential interest rate policy of
the financial. institutions and the incentives of the
Government should be vigorously implemented.
31. Dr.Hemlata Rao. Regional Disparities and Development in India (New Delhi. Ashish, 1984).
CHAPTER - III
FINANCIAL STRUCTURE : CAPITAL AND CREDIT NEEDS OF THE SMALL-SCALE INDUSTRIES
Finance is the life-blood of business in any
productive sphere and its vital need is more realised where
it is lacking as in small industry. The importance of
finance in this field is as fundamental as elsewhere. Every
problem of the small producer concerning production or
materials, quality or marketing is in the ultimate analysis
a financial one.
Adequate finance is a pre-requisite to proper
organization of production and the purchase of raw-materials.
Producer can convert his own profits into capital for
further investment after meeting his personal requirements.
The business if made remunerative can create itself the
means for its future sustenance in the way of capital
derived from profits. The producer will be self reliant up
to a degree in regard to capital, when capital is found,
credit will come. Capital is the basis for borrowing. In
case of small enterprises, entrepreneur himself has to
provide capital (in medium and large-scale industry capital
is provided by share holders).
109
capital is the amount of money or money's worth
required to run a manufacturing concern. Capital can be
divided as long term or fixed capital and short term or
working capital based on the purpose for which it is used.
Long-term capital is used to 'put the unit on the
ground'. In other words, this amount· is used to acquire
fixed assets like land, building, plant and machinery,
patents, designs, trade marks, etc. Generally, a major
portion of the total investment is used for this purpose.
Amounts needed to 'make the unit to run' are called
working capital. This is required to acquire the
needs of a unit viz., raw materials, payment of
day-to-day
wages or
working salaries, maintenance of machinery,
capital is used to run the business put
fixed capital.
etc.
on
Thus,
the ground by
3.2 Structural Features of Small-Scale Industrial Units:
Small-scale industries may be classified based on the
capital needs under three categories.
1. Some industries, started on a small scale, but are
likely to develop into medium sized units. Like
medium-scale industries; these are
and relatively large investment in
capital intensive
block assets and
110
are generally in the corporate sector. These units
will be organised as public or private limited
companies or as co-operative
concerns borrowed capital is
societies. In these
owned higher than
capital. The concerns in this group are comparatively
well-managed and have a good sales turnover; they can
be generally considered credit worthy for
institutional financing. The industries that come
under this group are - pens, paints, biscuits, oil
engines, automobile spares, etc.
2. Under the second category those units started on a
small scale and are likely to remain so for a long
time in view of the specialised nature of demand for
their products. Generally these are organised as non
corporate concerns, partnerships, proprietory
concerns. Their principal requirement
capital. Units producing Agarbattis,
is working
bolts, oil
stoves, wire nails, etc., come under this category.
3. The third category includes those concerns which began
as cottage industries but latter developed into small-
scale industries or as feeder units
industries. This group, however, forms
segment among the SSIs. Such concerns
to large~scale
the smallest
are mostly
III
organised as proprietory or partnership concerns.
Being more labour intensive, the tangible assets of
these units are limited-units producing Toys,
Confectionary, Coil springs etc., corne under this
category.
3.3 Capital and Capital Structure of Small-scale Units:
According to the latest definition (1990) -"a small-
scale unit is one whose fixed capital investment is at or
below Rs.60 lakhs, and for ancillary units it is Rs.75
lakhs. Thus, a small unit can have a maximum fixed capital
of Rs.60 lakhs or Rs.75 lakhs. "1
The working capital requirements vary according to the
production schedules and turn-over of each unit. While
determining their capital needs 'small entrepreneurs must
allow for a reasonable period of time to elapse (usually,
six to eighteen months) before income from the business will
cover regular monthly expenses. They must include in their
estimates a minimum salary sufficient to provide for their
living expenses.
, •. Vide Gazette Notification No. S.0.232, Department of
Industrial Development, Ministry of Industries, Government of India, New Delhi, dated 2.4.1991.
112
The capital structure of small-scale industrial units
is built on the feeble capacity of resource mobilisation of
the entrepreneurs which is inherently weak. 'The malady of
weakness is reflected in the entrepreneur's perpetual worry
to meet the day-to-day obligations of the factory and in
devoting most of his time and energy in manoeuvoring and
adjusting to find ways and means to meet the day's bill,.2
The degree of severity of d weak capital structure is also
felt more by smaller among the small units.
Industrial finance in its broad cannotation, means the
provision of funds needed by industry irrespective of the
period for which they are made available. The more the
process of production becomes complex, greater the need for
finance becomes pressing and larger are the opportunities
for banks and other financial institutions to render
assistance to them. Industries require block or long-term
capital to finance fixed assets like land, building, plant
and machinery, furniture and fixtures and for expansion,
modernisation and replacements. Working in short-term
capital is needed to finance floating assets i.e., for the
purchase of stores, payment of wages, purchase of
rawmaterials and the provision of funds to meet day-to-day
expenses.
2. Pareek. H.S. Financing of small-scale industries in a Developing Economy (New Delhi : National Publishers 1978) p. 54.
113
A finely tuned economy has certain bare necessities if
it has to remain so. A well-developed capital market is one
such pre-requisite.
The availability of finance in respect of both quantum
and time does have tremendous impact on industrial
development. Industries in developed countries have been
more fortunate in this respect than those in their less
developed counterparts. Their capital markets have been
successful to a large extent in meeting the medium and long-
term financial requirements of industry.
The major-term lending institutions restricted their
attention to the developmet of large scale enterprises.
Medium and longterm financial requirements of the small
industries were sadly neglected. 3
In 1951, the State Financial corporations Act was
Passed empowering state goverments to set up financial
institutions to cater to the needs of small units. SFCs were
meant to decentralise the activities of the major term
lending institutions. The development of the small scale
3. Government of India Report on small industries in India. International Planning Team. Ford Foundation.
114
sector was defined as a national objective. Disbursal of
assistance to numerous small units could be performed more
efficiently on a decentralised basis.
3.4 Capital and Credit Needs Before Economic Transition
In the days before independence, India was a land of
self-sufficient, tiny village communities. Every village had
its band of artisans which supplied the needs of the
community. The market did not extend beyond the confines of
the village. Demand was consequently limited. Little risk or
uncertainly was involved in production as it was based on
known needs of customers who were in close and personal. As
such, no problems of marketing as they exist now troubled
the sellers. The modest demand for capital and credit for
the production of goods was easily met by the local money
lender. The raw materials needed were provided by consumers
and with simple tools and native skill, the artisans
fashioned useful commodities for the use of his patrons
often payment for articles sold was in kind-l ike-rent free
land or proportion of agricultural produce given as the
price of the purchase. Under such a simple economic
organisation, no accute problem of finance could exist for
small-scale units.
115
Even in towns with larger populations and bigger
markets, the supply of industrial produces had of necessity
to be more and the need for credit and capital was greater.
But artisans and craftsmen depended for their credit on
guilds which could raise enough finance from their members
and if necessary they borrowed from money lenders. Thus,
both rural and urban industrialists were sufficiently
supplied with necessary resources to pursue their productive
activities without any hindrance. 4
The economic transition has, however, completely
altered the situation and has brought in its wake a
different economic organisation chanracterised by economic
dependance of each other, extention of markets, production
in anticipation of demand, separation of the buyer and the
seller by space and time, fierce competition of the factory
industry pushing out the small producer and the diverse
problems concerning him which hinge ultimately on finance
for his survival and prosperity. While organised large scale
industry has solved the problem of finance through corporate
business organisation, such a source is not open to small
scale sector.
4. Choudhuri. M.R. Indian Industries Development and Location. (Bombay, Oxford and IBH Publishing Company 1970) P.B.
116
In this context the problems of SSIs relating to
finance and how the necessities of finance arise for them
are discussed below.
The credit requirements of SSIs may be classified
according to their needs
a) for meeting the expenses incurred on account of-
i) the installation of Plant and machinery and
acquisition of land and buildings and
ii) a proper maintenance of machinery against depreciation,
obsolescence, renovation, modernisation and expansion
and
b) for the purchase and stocking of raw materials,
5.
inventories of goods and goods in the process of
manufacture. 5
Baumback C.M. & Kenneth operate a small Business.
Lawer: How to organise and (1979) p.~1~9l~.~~~~~~~=
117
The credit requirements of small scale sector is
represented with the help of a following chart.
CREDIT REQUIREMENTS OF SMALL-SCALE SECTOR
FIXED CAPITAL r
WORKING CAPITAL
, Preliminary Expenses like patents trade mark etc.
RawMaterial
Purchase of Fixed Assets like land building P & M
Inventories
I Establish-ment Expenses like furniture & fixtures
Goods in Process
Interest on loans
3.5 Fixed Capital and Small-Scale Units:
\. Working or short-term Capital
Others like stock in trade sundry debtors etc
Small manufacturers can usually borrow short term
money at a price. But long term loans are hard to get and
public stock floatation is almost impossible.
Fixed capital or long term loans are taken for the
purchase of fixed assets like land, building, Plant and
Machinery or to finance the expansion and modernisation
schemes. Initially, investment should necessarily be
provided by the proprietor of the small business since a
118
reasonable amount of venture or equity capital is always a
primary condition before requesting for credit. Mentioning
the financial position of small industry in India, the
International Team of Experts (1985) observed that in most
of the workshops visited, real finance did not seem to exist
at all. There was a severe lack of capital as well as credit.
They have little money for adopting independent business
methods of their own. They are compelled to sell every day's
or week's production to buy raw material in small quantities
at retail price and to work to the orders of the dealers
because of shortage of capital.
3.6 Working Capital and Small Scale Units:
It is the amount of funds which an S5! must have to
finance its day-to-day operations. It may also be
that portion of an industry's total capital
employed in short term operations. Included
regarded
which is
in these
operations are such items as stock of raw materials and
supplies needed for manufacture of finished goods, semi
processed items or components that will soon merge as final
products and short term investments.
Current assets, inventories, raw materials, etc., work
in progress, finished goods, loans and advances and other
debtor balances are integral and constituent parts of
119
working capital. The success of a SSI depends on the
availability of adequate working capital, which ensures the
purchase of raw materials at competitive prices and payments
for labour.
The working capital requirement of an SSI
one unit to another and from one type of unit
vary from
to another
type. Small scale units which are located in rented premtses
and are engaged in processing works, need a larger amount of
working capital than other units.
The size of the unit, process of production,
proportion of raw material to total cost, terms of purchase
and sales, the turnover of inventories will largely
determine the amount of working capital required.
The amount of working capital depends directly upon
the volume of business. The bigger the size of a unit, the
larger the amount of the working capital and vice versa. And
in the same way simple, short period process of production
require·a smaller amount of working capital. And if the
inventories are large and their turnover is low, an SSI will
need a bigger amount of working capital.
120
3.7 Estimation of the Total Investment Requirements:
A number of limitations arise in the estimation of
fixed and working capital requirments of small scale units.
Along with the problem of defining a SSI, there is a
difficulty in differentiating SSI with village and cottage
industries. Then, not all the small units are registered
with the State Directorate of Industries, and on the other
hand, amongst the units registered with the State
directorates, quite a large do not appear to be functioning.
It is understood that about 12 per cent of the schedules
sent by the Reserve Bank of India to SSI units for its
survey came back with the remark that the addressees were
6 not traceable. Moreover, many of the small units do not
maintain proper books of account. As a result, it is
difficult to estimate the credit requirements for fixed
and/or working capital purposes.
Nevertheless, attempts have been made by the
Administrative Reforms Commission (ARC) and the office of
the Development Commissioner for Small Scale Industries
(DCSSI) to give estimates of credit requirements of SSI
sector for the Fourth Five Year Plan. The ARC felt that the
6. Reserve Bank of India. "Report of the Procedings of the Seminar on Financing of Small-Scale Industries in India". p.66.
121
sector would need by way of additional fixed investment not
less than Rs.425-480 crores and by way of working capital
requirements Rs.700 crores by the end of Fourth Plan. But
this is conservative in view of the role and importance of
this sector. The DCSSI estimated additional fixed capital
requirements by the end of Fourth Five Year Plan at Rs.425
crores. On the basis of this estimate, additional working
capital requirements were estimated between Rs.700 crores
and Rs.lOOO crores by the end of the Fourth Five Year Plan
. d 7 perlo .
3.8 Sources of Finance :
In India, there are now several channels through which
small firms can obtain financial help. First, there is the
State aid to industries act, which enpower State Directorate
of Industries to give medium term loans to any small firm
which they judge to be worthy. The loans may be secured on
assets, or for small loans they may be covered only by bonds
or sureties.
The second source of finance for small firm is the
State Finance Corporation, which gives Term loans (5-8 years)
on the security of fixed assets (generally in the form of
7. Ibid, p.67
122
first mortgage) up to about 75 per cent to 90 per cent of
the net value of the assets (depending on the background of
the promoter). The loans are intended primarily for
financing fixed capital.
The third major source of Government sponsored credit
to small firms is the State Bank of India, its subsidiaries
and other commercial banks. State Bank of India has been
given a special responsibility of lending working capital
to small firms. Most of its loans are secured against raw
materials or finished goods, either on the lock and key
system or against hypothecation. The State Bank is also
acting as an agent for the 'Pilot' scheme for co-ordinating
the provisions of credit from different sources.
The fourth major source of finance is the facility of
buying machinery through the National Small Industries
corporation which was set up in 1955. SSIs can obtain
machinery through the Corporation on payment of 20 per cent
of the price as 'earnest money'. The period of repayment is
now standardised at seven years. Hire purchase finance
simple, self-securing and flexible method of
financial assistance. It would be useful if any firm
is a
giving
could
obtain a hire purchase loan on any machine, irrespective of
whether it was bought through the National Small Industries
Corporation or not.
123
Another major source of institutional financial
assistance is the provision of factory buildings in
industrial estates. This is of great and growing importance.
At the State level Small-Scale Industries Development
Corporations (SSIDCs) have been set up for this purpose.
Another form of financial assistance which has been
used only to a small degree is the provision of equity. It
persuades local people to go into industry and had offered
to subscribe upto 90 per cent of the equity. The various
sources of funds of SSIs vis-a-vis MS & LSI is given below.
TABLE - 3.1
SOURCES OF FUNDS
Sources
1. Internal Sources a) Capital and Reserves b) Provisions
Small Scale Units
32.7 14.2 18.5
2. External Sources 67.3 a) Capital issues and
Premiums on shares b) Borrowings
(including deposits) 36.8 c) Trade and other current
liabilities 29.7 d) Miscellaneous non-current
liabilities 0.8
(in per cent)
Medium and Large Public Limited
Companies
42.6 10.2 32.4
57.4
2.5
33.3
21.6
-----------------------Total 100.0 100.0
Source: RBI Bulletins.
124
It can be observed from the Table 3.1 that SSI
concerns are dependent more on external sources (to the
extent of 67.3 per cent) than on internal sources which is
only 32.7 per cent. Inter alia medium and large scale
concerns source of funds constitute as much as 42.6 per cent
through internal sources. This shows the internal weakness
of SSIs and its greater dependence on institutional finance.
3.9 FINANCIAL STRUCTURE FOR SMALL-SCALE UNITS:
The nature of financial assistance required and the
appex agency providing it is drafted in the following chart.
1. State Directorate of Industries
2. State Financial C9rporations (SFCs)
3. National Small Industries Corporation (NSIC)
4. State Bank of India and and its subsidiaries
5. Commercial Banks
6. Small Industries Service Institute (SISI)
7. Industrial Development Bank of India/Small Industries Oeveloplment Bank of India (IOBI/SIOBI)
Provides loans under State Aid to Industries Act.
Provide long term credit for the purchase of fixed assets.
Provide Hire Purchase finance
Sanction medium term and instalment credit loans for the purchase of machinery and the construction of factory buildings. They also provide working capital.
Sanction loans mainly working capital needs.
for
Furnish technical reports to the State Bank / SPCs on the applicant units.
Indirectly through SFCs.
125
8. Federation of Associations of Small Industries of India
Presents the problems faced by the small industries to the Government.
9. Chamber of Commerce and Industry
Discusses the problems represent them to appropriate authorities.
3.10 MAKING THE LOAN APPLICATION:
and the
The application for loan to a bank/financial insti-
tution should be made in the bank's/financial institution's
standard loan application form. And after scrutanizing the
application, if the banker is satisfied that the form is
properly completed and that the application deserves
consideration, will then forwarded for further processing.
An enterpreneur at the first stage has to submit the
following to the Financial Institutions:
1. Application in a prescribed format (priced)
normally in duplicate.
2. Project Report-in duplicate.
3. Details of promoters with regard to movable,
immovable properties and liabilities.
4. Relative records of rights pertaining to the firm.
126
5. A certificate of dues or no dues from other
financial institutions.
6. A proforma invoice showing the cost of the
machinery items along with the competitive
Quotations.
7. A confirmation by ~he applicant to the effect that
the machinery items against which loan may be
sanctioned will remain pledged to the financial
institution till all the installments of the loan
are repaid during the currency of the loan and the
applicant will insure it against theft, fire and
damages at his own cost.
8. A certificate from the approved dealer that he has
satisfied himself to the effect that if the loan is
sanctioned, he would install the machinery item,
provide required after sales service and look after
the maintennace of the machinery item regularly.8
8. Assistance to industry - A short guide to know how to obtain loan from financial institution (KSFC 1992) p.23.
127
3.11 SECURITY, MARGIN AND REPAYMENT:
Pledge/hypothecation of the stocks or the documents of
title to goods forms the primary security. The stocks or
documents offered to the bank/financial institution should
be free from encumbrances. Margin on working capital
advances varies from 25 per cent to 50 per cent. This is
however, relaxable to a reasonable extent where considered
necessary. In the case of unsecured advances, suitable
third party guarantee/collateral security is also
stipulated. Whereever considered appropriate. typical
margins for different type of loans (Term and working
capital loan) to small-scale units are given below:
TERM LOAN :
It can be defined as "the loan which has a final
maturity beyond one year from the date made for purpose of
providing the borrowers with long term capital and which is
dependent upon future earnings to provide funds for its
liquidation"9
A term loan is normally sanctioned for acquisition of
fixed assets such as land, factory buildings and machinery
to an industrial undertaking. Term loans differ conceptually
and functionally from working capital loans and they call
for different type of approach for assessment for the
following reasons:
9. Pareek. H.S. Opcit. p. 95
128
1. The role of banker is that of development banker
collaborator, guide, philosopher, friend and not
just commercial banker.
2. The finance is projected from the totality of the
project itself. Therefore, the total assets that
are going to be created has to be studied.
3. Realisation is not easy and poses problems since
much depends on the happening/not happening of
certain projections. Hence, there is ample need for
far-sighted approach.
Of all the ratios the Debt service coverage ratio is
very important in the context of Term loan finance. It is
arrived at as below.
Profit after tax + Depreciation + Interest on term loans
Instalments + Interest on Term loans
This indicates the capacity of the unit for repayment
of Term loan.
IOBI/SIOBI provides refinance facility on term finance
to specified industrial activities under its ARS (Automatic
129
Refinance Scheme) and NRS (Normal Refinance Scheme). Under
ARS, refinance of Term loans up to Rs.lO.OO lakhs are
covered. The percentage of refinance is 75 in case of
commercial banks and 90 in case of SFCs. But for loans
granted under composite loan scheme and loan granted to
persons belonging to SC/ST and physically handicapped,
refinance will be to the extent of 100 per cent.
WORKING CAPITAL LOAN
1. Cash credit against pledge or hypothecation or raw Materials finished goods, work in progress, etc.,
2. Letters of credit for import of raw materials
3. Letter of guarantee in lieu of security deposits, earnest money, etc., favouring Govt. Departments
4. Purchase/discounting of bills arising out of sale of products
5. Deferred payment Guarantees for purchase machineries
of
25%
10%
10%
Nil to 10%
10%
Credit limits granted for working capital purposes are
continuing advances, renewable annually, but repayable on
demand.
In case of the instalment credit, the margins retained
vary between 20 per cent to 30 per cent. Hypothecation of
machinery and equipment proposed to be acquired under the
130
loans may be considered as adequate security. The loanee is
required to make a down payment of 20 per cent to 33 per
cent of the cost of the equipment to be purchased while the
rest is financed out of the loans. These laons are repayable
over a period not exceeding five years in suitable monthly,
quarterly or half yearly instalments with convenient 'start
up' period where necessary.
3.12 INTEREST RATES :
Rate of interest charged by financial
insitution/banks are not fixed, but change from time to time.
Rate of interest also depend upon the amount of loan taken,
the location of unit (backward or rural area), type of
entrepreneur (skilled or unskilled), purpose for which the
loan is taken and such other factors. Rate of interest
charged by banks are regulated in accordance with the
parameters of interest structure laid down by the Reserve
Bank of India and or lOBI/SlOB!. The present interest rate
structure of Commercial Banks and SFC's is presented in
Table - 3.2 and 3.3 respectively. Further, as the Government
of Karnataka dispensed with the zone system for incentives
during its recent Industrial Policy, the KSFC also modified
its interest structure in tune with the Govenment's Policy
which presented in Table 3.4.
1-10.
1-
2.
3.
4.
a)
b)
c)
d)
5.
a)
b)
c)
d)
131
TABLE - 3.2
IN"fFR.EST RATE Sl'RUC'l'lJR.E OF COMMERCIAL BANKS
Particulars
Up to Rs. 7,500/-
Above Rs. 7,500/-up to Rs. 25,000/-
Above 25,000/- up to 2.00 lakhs
Aggregate limits * over Rs. 2.00 lakhs up to Rs. 25.00 lakhs
All working capital (like OCC:KCC:PL:BOOK: DEBTS:CDBS:SDBS:& Supply Bills except BEs
BEs
Clean DDs/DPN
Term loans ** For aggregate limits over Rs. 25.00 lakhs
all working capital like (OCC:KCC:PL:BOOK
Rate of interest Rate of interest for Working Capital for term loan to
S.S.I.
11. 5 (12) 11.5 (12)
13.5 (14) 13.5 (14)
16.5 (17.25) 16.5 (17.25)
19.5 (20.25)
18.5 (19.25)
22.5 (23.25)
19.5 (20.25)
DEBTS:CDBs:SDBs: & Supply 19.5-20.4-21. 5 Bills except BEs (20.25-21.25-22.25)
BEs 18.5-19.5-20.5 (19.25-20.25-21.25)
Clean ODs/DPN 22.5 (23.25)
Term loan 19.5 (20.25)
Figures in bracket indicates the interest rate inclusive of interest tax
:* Wherever SIDBI Refinance is available.
132
TABLE - 3.3
INTEREST RATE S11tUCTORE OF SFC' s KSFC REVISED INTEREST RATE (EFFECT FROM MAY 1992)
51-No.
Type of unit/ Quantum of loans
Zone I Zone II Zone III Zone IV
I. PROJECTS ELIGIBLE FOR REFINANCE FROM IDBI
a) Hotels/Restaurant/Small Hospitals/Nursing homes/ Tourism related projects where cost of project exceeds Rs. 45 lakhs
b) Loans sanctioned under RSR (Refinance for Rehabilitation scheme) excluding sanctions towards principal overdues to units at (a) above
c) for modernisation, expansion and diversification to units at (a) above
d) Loan sanctioned under ERS (Equipment refinance scheme)
20 19.5
17.5 17 .5
20 20
18.5 18.5
II. PROJECTS ELIGIBLE FOR. REFINANCE FROM SIDBI
19 18.5
17 .5 17.5
.20 20
18.5 18.5
i) All term loans including composite loan scheme and term loans under Single Window Scheme and SRTOs owning up to 2 vehicles.
a) Up to and inclusive of Rs. 7,500
b) Over Rs. 7,500 & up to Rs. 25,000
c) Over Rs. 25,000 & up to Rs. 2,00,000
d) Loans exceeding Rs. 2,00,000 to a) SSI Units b) Road Transport Operators
ii) Loans above Rs. 2,00,000 sanctioned under Equipment Refinance for SSI units
12.0
14.0
15.5
19.5 20.5
18.0
12.0
14.0
15.5
19.5 20.5
18.0
12.0
14.0
15.5
19.5 20.5
18.0
11.5
13.5
15.0
19.0 20.5
18.0
133
iii) All loans for following activities Where the total cost of the project is below Rs.45 lakhs
a) Hotels and Tourism related activities
b) Electro Medical Equipments
c) Hospitals & Nursing Homes 19.5 19.5 19.5
iv) For working capiUll loans under Sing.le-W:1ndov Sche.e:
a) Up to and inclusive of Rs. 7,500 12.0
b) Over Rs. 7,500 and upto Rs. 25,000 14.0
c) Over Rs. 25,000 and upto Rs. 2,00,000 17.0
d) Loans exceeding Rs. 2,00,000
v) Bridge loans against subsidy and other loans funded out of own fund of the
20.5
Corporation. 20.5
vi) Loans sanctioned for acquisition of second hand machinery (Indigenous/ imported) 21.5
12.0 12.0
14.0 14.0
17.0 17.0
20.5 20.5
20.5 20.5
21.5 21.5
19.0
12.0
13.5
16.5
20.0
20.0
21.0
134
TABLE 3.4
KARNATAXA STATE FINANCIAL CORPORATION Revision of Interest rates in refinanced cases
KSFC lending rates (including interest tax)
(w.e.f. 9.8.1993) ." per annum
IDBI REFINANCED CASES: I. Medium Scale Industries and Non-SSI where
project cost exceeds Rs. 45 lakhs 18.5 II. Modernisation, expansion and diversification 18.5
III. Loans sanctioned under RSR 17.5 IV. Equipment Finance Scheme 18.0
SIDBI REFINANCED CASES: (w.e.f. 16.8.1993) I.
a. b. c. d.
Term loans including composite loan shceme, term loans under SWS and SRTOs owning upto two vehicles Upto Rs. 25,000 Above Rs. 25,000 to Rs. 50,000 Above Rs. 50,000 to Rs. 2,00,000 Above Rs. 2,00,000
i. SSI ii. Road Transport Operators
iii. Loans under EFS
12.5 15.5 17.0
18.5 19.5 18.0
II. Non-5S1 where the project cost is below Rs.45 lakhs 18.5
III. Working Capital Loans under SWS a. Upto Rs. 25,000 b. Above Rs. 25,000 to Rs. 50,000 c. Above Rs. 50,000 to Rs.2 Lakhs d. Above Rs. 2 Lakhs
(w.e.f. 2.9.93) 12.5 15.5 17.5 18.0
NOTE 1. For additional loans to hotels/restaurants/small hospitals/nursing homes/tourism related projects, which are already refinanced by IDBI, the revised rates of IDBI shall apply even if the cost of the project is less than Rs.45.00 lakhs.
2. A concession of 1~ will be allowed in respect of SC/ST etreprenurs for all loans from the rates of interest indicated above.
3. In case of default of loans including soft loans 2.5% penalty will be levied for the amount in default and for the period of default.
4. Additional loans sanctioned under RSR which are eligible for refinance from SIDBI will attract interest at 1~ lower than the applicable rates of interest.
135
The distribution of credit to SSIs shows that, 54.05
per cent of the total credit was given on ~n interest of 12
per cent to 15 per cent, while 30.6 per cent of the credit
was offered at above 15 per cent and only 1 per cent of the
10 credit was advanced at less than 9 per cent. This
indicates that small scale sector was not shown any
consideration in so far as interest rates are concerned,
consequently production cost goes up and the margin of
profit may also fall.
10. RBI Report on Financing of SSIs Opcit. p.93.
CHAPTER - IV
PATTERN, TRENDS AND MAGNITUDE OF INSTITUTIONAL FINANCE TO SMALL-SCALE INDUSTRIES IN KARNATAKA
Poverty alleviation programmes are the major planks of
our planned development. During the four decades of planned
development these efforts have not yielded the desired
results. According to the latest estimates, the percentage
of population below the poverty line is 29.2 per cent. l This
is due to the failure of our fancy models in the reduction
of three major gaps in our economy-employment Gap -Income
Gap -Wealth Gap, the solution lies in the development of
small scale industries. Adequate and timely supply
of institutional finance at a reasonable rates of interest
is one of the essential pre-requisites for the development
of small industries.
It is also however, a known phenomenon of economic
history that entrepreneurs are scarce in most developing
1. Government of India: Draft Eighth Five Year Planning Commission, New Delhi, P.3
Plan
137
countries owing mainly to the usual concommittants of a
traditional value system, political instability, stagnant
social structure, illeteracy and orthodox relegious beliefs.
A remedy in such a situation is State action for changing
traditional institutions and provision of economic
incentives.
Developmental plans for SSIs have often floundered on
the rock of inadequate finance. The small scale sector is
usually unable to obtain its requirements of long term risk
capital or 'equity capital' through the organised security
market. In a country like India, where savings slowly
trickle to the organised capital market and the technique of
underwriting is not fully developed it is almost impossible
for small concerns to raise capital through the channels of
the new issue market. So they relied on friends, relatives,
local investors and money lenders for such funds.
The seventh Five Year Plan document
dismay that ------- the availability
also notes with
of institutional
finance to this sector has not been commensurate with their
needs nor in proportion to the volume of activity generated
by this sector. The studies conducted have revealed that
inadequate and delayed availability of bank finance has been
138
one of the major causes for sickness among small scale
industries"2
4.2 Commercial Bankk' Finance for the Development of SmallScale Industriclr.
4.2.1 COMMERCIAL B~ BEFORE NATIONALISATION:
Till the early ¥ears of the planned era, the portfolio
of bank advances wa~~argely geared to finance trade and
commerce. In March 1951, the share of industry in the total
bank credit extended~y commercial banks was only 34 per
cent. This increased'to 37.2 per cent in 1956, 52 per cent
in 1961 and 67 per dent in 1968. 3 The banking industry
catered mainly to th~ needs of large scale. It offered
umbrella to those whdiwere already well protected. The big
650 accounts in the ~untry were roughly controlling two-
thirds of total advances of the banking system. The
financial assistance to small scale sector by commercial
banks was negligible\in early sixties.
Bank credit ava~lable to small scale units by the end
of 1965-66 was Rs.90.8 crores or 4 precent of the total bank
credit to industries (which was only 1 percent in 1961),
though the relative contribution to the National income of
2. Government of Tndia: Draft Seventh Five Year Planning Commission, New Delhi, P.lOl.
Plan
3. Simha SLN Reform of the Indian Banking System (Madras orient longman 1973) P.345.
139
4 the small sector was 7.6 per cent whereas the large scale
sector received 66 per cent.
This was largely due to the fact that the development
Df the commercial banking in this country has been lop-
sided. Starting essentially as an urban-based financeial
service, banking has by and large confined itself to the
urban centres or industrial towns.
Certain sectors of our economy, though they occupied
critical position in the scheme of economic development and
social changes in our country were neglected or ignored by
commercial banks in the past, either because they were not
able to offer adequate security acceptable to commercial
banks or such advances were found less remunerative
and difficult to supervise and control. The major contenders
of bank credit were large scale and medium private
industries, resulting in considerable sectoral imbalance.
4. Ibid.
140
The following table will clearly depict the condition
Irevailing before nationalisation.
TABLE - 4.1
SECTOR-WISE BANK ADVANCES AS ON 31st MARCH 1968.
Sector
Industry
a) Large & Medium b) Small-Scale Sector
~. Agriculture
I. Internal Trade
a) Wholesale Trade b) Retail Trade
~. Other Priority Sectors
I. All other including Financial & Personal
Total
(Rs. Amount Percentage in crores) of Total·
2068 36.17
1857 32.48 211 3.68
67 1.17
588 10.27
541 9.45 47 0.82
NEGLIGIBLE
341 5.96
5720 100.00
;ource: Singh.S. - Performance Budgeting for Commercial Bank in India. RBI Bulletin. March 1977. p.12.
The gravity of sectoral imbalance can be seen from
:his table. It shows the imbalances with over 80 percent of
:he bank advances swallowed by larger and medium industries,
~holesale and retail trade. About 6 per cent was shared by
141
Illustration - 4A
Spread of Bank Advances Before Rationalisation
LSI & MSI 68.6%
Agricul t.ure 1.2% SSIs 3.7%
PerBon.,l Loan 6.0%
Trade 20.6%
142
influential persons for personal loans etc., only 3.7 per
cent was given to small-scale sector leaving hardly anything
for other sectors of the economy. Infact, security and
profit being the main considerations, purpose of credit,
economic and social benefits etc .• were not in the
dictionary of commercial banks at that time. As a result,
barring some advances allowed by State Bank Group to small
scale industries, commercial banks, by and large, extended
credit on commercial principles.
Development of banking in India came into its stride
in the sixties. Bank deposits began to increase much faster
than national income. The ratio of bank deposits to national
income rose from 14.7 in 1960 to 16.6 in 1969. Between 19S9
and 1968 the aggregate deposits of the first fourteen
largest commercial banks, which were later nationalised,
trebled from Rs.883 crores to Rs.2669 crores or at a
compound annual rate of 12 percentS. On the other hand, the
number of branches of these banks during this period doubled
from 1689 to 3708. The deposits per branch went up from
Rs.S2.3 lakhs to Rs.77 lakhs or by 38 per cent. Following
table illustrates these facts.
). The Banker. June 1979. p 47.
143
TABLE - 4.2
BANK BRANCHES, DEPOSIT & ADVANCES BEFORE NATIONALISATION
14 Largest Banks except SBI
SBI & Its subsidiaries
Branches 1959 1968
1689 ~708
831 2383
Deposits Advances 1959 1968 1959 1968
(Amount Rs.in Crores)
883 2669 542 1739
582 1236 167 936
Source: Compiled from Statistical tables relating to Banking in India. RBI Bombay.
And then there was the maldistribution of bank credit
which was heavily weighed in favour of the industrial and
trade sectors. Bank deposits were mobilised from many but
credit needs of only a few were catered to. At the end of
March 1968, there were 18 million deposit accounts, but
hardly 1 million borrowal accounts. In other words, for
every 18 persons who provided resources to the banking
system there was only one user of credit.
This was so because historically, commercial banking
in this country was organised and managed by a few
industrial and business houses in port and impartant
commercial centres. Credit needs of their enterprises had
prior claims. Therefore, even within the industrial and
business sectors, it was only a few large and medium
144
industrialists and/or businessmen whose credit needs were
promptly met by the banks. Even as late as in March 1968,
barely 474 loan accounts of over Rs. 1 crore each
appropriated Rs. 866.4 crores or 28.3 per cent of total bank
credit, while at the other end of the scale, there were 10
lakh loan accounts (88.9 per cent of the total) ~hich
received only Rs. 127.2 crores (4.2 per cent of the total
credit). The same can be seen from the table below.
TABLE - 4.3
CLASSIFICATION OF LOANS AND ADVANCES ACCORDING TO SIZE OF ACCOUNTS
(Outstanding as on March 31,1968).
Accounts with outstanding Amounts of
Upto Rs. 10000
Rs. 10000 - SOOOO
Rs.SOOOO - 1 lakh
Rs. 1 1akh-S lakhs
Rs.Slakh-l0 lakhs
Rs 101akh-SOlakhs
Rs SOlakh-l crore
Over 1 crore
Total
Number of Accounts
1001631
79133
18404
19123
3968
3480
613
474
1126826
% to Total
88.9
7.0
1.6
1.7
0.4
0.3
0.05
0.04
100.00
Amount (Rs. in Crores)
127.21
181.98
127.40
399.19
222.99
728.38
410.77
866.44
30S8.31
Source: RBI Purpose wise Survey of Bank Advances.
% to Total
4.2
5.9
4.1
13.0
7.3
23.8
13.4
28.3
100.00
145
In short paradoxically enough, those who could afford
to pay more were charged less; and those who could not were
charged more. Thus the banking system willingly or
unwillingly, consciously or
instrumental in widening the gulf
different segments of the society.
unconsciously
of inequality
became
among
The historical perversities needed a corrective. The
scheme of social control of banks experimented during the
short period of one and a half year ended on june 1969 which
was too inadequate to counteract the invisible forces of
vested interests. A more drastic measure to impart a sense
of egalitarianism to the banking system to reiterate the
point that banking is a public servant was called for.
Hence, 14 major commercial banks were nationalised in mid
July 1969.
4.2.2 NATIONALISATION OF BANKS:
On 19th July 1969, fourteen major commercial banks,
each with deposits of Rs.50 crores and more were
nationalised. This step had changed, almost overnight the
very complex of the financial structure of the economy. With
this, more than four-fifth of the banking sector came
directly under government control. And then again on 15th
April 1980, the President of India promulgated an ordinance
146
for the nationalisation of 6 more banks. The ordinance
stated that - "to provide for the acqusition and transfer of
the undertakings of certain banking companies, having regard
to their size, resources, coverage and organisation, in
order further to control the heights of the economy and to
promote welfare of the poeple, in conformity with the policy
of the state towards securing the principles laid down in
clauses (b) and (c) of article 39 of the Constitution and
for matters connected therewith or incidental thereto".6
Even before this step to nationalise was taken, the
banking sector was brought under considerable government
supervision through, what was described as 'social control'.
This measure was calculated to make the administrative set
up of banks conform to certain norms specified by the
government and regulate the criterion by which banks
operation were to be governed. It was thought that the
distribution of credit has been largely in favour of
industry and what came to be regarded as priority sectors
such as agriculture, small-scale industry, export etc., had
been relatively neglected. The National Credity Council was
established in December 1967 to assess the credit needs of
the different sectors and to give directions to the banks'
6. Govt. of India: Gazetteer of India-1980 Vol.I. pp 75-76.
147
about credit allocation. The Board of Directors of the banks
were reconstituted so that more than one half of their
members represented specialised fields such as agriculture,
accountancy, rural-economy, small industries, co-operation,
finance, banking, economics and law. A
was required to be the full time
professional banker
chairman and his
appointment was subject to the approval of the Reserve Bank
of India. Social control legally came into force on 1st
February 1969. It could hardly work for six months when the
fourteen leading commercial banks were nationalised.
4.2.3 ACCORDING PRIORITY STATUS FOR SMALL-SCALE INDUSTRIES:
In 1968, the Government of India set up a National
Credit Council with a view to assess the demand for credit
from the various sectors of the economy and
priorities for lending and investment of bank
accorded priority status to hitherto neglected
determining
funds. It
sectors of
the economy consisting of borrowers in agriculture, small
scale industries, small retail business, professionals and
self employed persons, education, road and
operators. As a sequel, Reserve Bank
water transport
of India, held
discussions with twenty major commercial banks (which
accounted for 86 per cent of total bank deposits) and set
targets for them. It was subsequently decided that all the
commercial banks' lending to priority sector should reach a
148
level of 33.5 per cent of total advances by the end of
March 1979. The target has been subsequently raised to 40
per cent. With the recent policy emphasis on assisting the
'weaker' sections among the priority sectors, it has been
decided that advances to all small scale industrial units
with credit limits up to Rs. 25,000 should be treated as
advance to 'weaker sections' and the same should constitute
12.5 per cent of total advances to small scale industries. 7
The post-nationalisation decade has witnessed a
massive change in the entire spectrum of Indian Banking,
particularly in the Public sector. Security which was the
primary consideration is no more the sole basis of credit
appraisal. The most important aspect of this social
orientation has been to increase the supply of credit to
sectors which had been previously neglected by banks viz.,
the small-scale industries. One of the important
instruments through which banks can bring about
social change is lending to the priority sector.
Dr. H.S.Krishnaswamy, then chairman of the working group on
priority sector lending observed: "the concept of priority
sector lending is mainly intended to ensure that assistance
7. Reserve Bank of India. "Credit to Small Scale" Credit Information Review Sept. 1988. p.12.
149
from the banking system flows in an increasing measure to
those sectors of the economy which, though accounting for a
significant proportion of the national product, have not
received adequate support of the institutional finance in
8 the past" .
Now Commercial Banks are by far the largest
contributors of institutional finance in most of the
countries. In India also a place of pride can be assigned to
them in the extension of credit to various segments of the
economy. Commercial Banks in India comprise the State Bank
of India and its associate banks (8) other nationalised
banks (20) foreign banks (17) Private Sector Banks (38) and
Regional Rural Banks (102).
From a mere Rs. 441 Crores or about 15 percent of the
gross credit of Rs. 3013 crores just before nationalisation
in June 1969. the outstanding level of lending to the
priority sector by the public sector banks (excluding those
nationalised in 1980) rose to a height of Rs. 5233 crores or
32 percent of the gross bank credit at the end of June 1979.
This can be seen clearly from the following table.
8. Birla Institute of Scientific Research, Economic Research Division - Banks since Nationalisation. (New Delhi Allied 1981) p 7.
150
TABLE - 4.4
PUBLIC SECTOR BANK ADVANCES TO PRIORITY SECTORS (Amount Rs. in Crores)
1969
1. Total Advances 3037
2. Priority Sector Advances 442
3. Percentage to total 14.45
Source: Compiled from:
1980
22396
7906
35.30
1990
97990
39588
40.40
1. RBI Bulletin 1991 October. Supplement: Annual Report 1990-91
2. Centre for monitoring Indian Economy. Bombay Basic statistics relating to Indian Economy, Vol - I. 1991.
It goes to the credit of the commercial banks in
India, that they rose to meet the demands made on the
banking system by adopting themselves suitable to the
changed circumstances. Though the objective is laudable in
principle, it may produce some undesirable effects. In their
anxiety to reach the target, banks may resort to
indiscriminate lending which may result in a higher
percentage of bad advances. Added to this, it may also
reduce the quantum of credit available to other important
sectors of the economy. Hence steps must be taken to see
that there is no unnecessary diversion of credit for the
sake of fulfilling the targets.
150A
Total Advances 3037
1969
Totru Advonces .~~
22396 ,~(.~::::::::::::::::::::::>:::::::~::::::::::::: . ........ . ....... . ...... . ....... .
........ . ........ .
.......... . .......... . .......... . .......... .
Priority Advances 442
Priority Advnnce5 7906
1980
Totru Adveulces .~ .................... . N / ••••••••.•.. 9 c990 .......................... .
. ........................ ......... : ......... .
1990 Illustration ~ 4B
Priorit.y Advance 8
39688
Commercial Bank's Advances to Priori~y Sector
151
Institutional credit to small industries on a well
planned and national basis was essential for the growth of
small scale industries. Individual institutions handled
credit being given to small-scale industries till June 30,
1961. The biggest impediment on the way of the credit giving
institutions was the 'risk' involved in giving the credit.
In sincere credit seeking and irregularities connected with
the utility of the loans obtained and finally the difficulty
in recovering the dues and such other difficulties were
deterrents in extending credit facilities to small scale
industrialists.
The Reserve Bank of India, therefore with effect from
July 1960, started the 'Credit Guarantee Scheme' whereby the
lending institution was automatically protected to the tune
of 50 percent of the unrealised credit. As an experiment,
the scheme was introduced in 22 selected districts spread
over the whole of India. 93 credit institutions (43 schedule
banks, 21 state co-operative banks, 14 SFCs, SBI and its 7
subsidiaries and the Madras Investment Corporation Ltd. ,)
in the country were selected and declared eligible for
operating the guarantee scheme.
Credit Guarantee Scheme popularly known as CGS is one
of the earliest measures taken to enlarge the flow of credit
152
to small scale sector. This scheme provided the degree of
protection to the institutions against possible losses. For
this purpose RBI is operating this scheme for small scale
industries since 1960. The Redcliff Committee in England
expressed the view that consideration should be given
establishing an Industrial Guarantee .Corporation
for
with
Government support to facilitate the commercial exploitation
of technical innovation. In India, they are ahead by a step
and established the Credit Guarantee Organisation of India
with Central Government support to guarantee almost all
types of advances to small scale industrial units.
Under the guarantee scheme. generally the guarantee
organisation pays 75 percent of the amount in default after
an account becomes sticky and recalled, subject to a certain
fixed maximum. Commercial banks/SFCs can join the scheme
executing the agreement. They have to submit quarterly
statement of advances to small scale industries in
prescribed form and remit prescribed guarantee fees. Claims
can be lodged after recall of the advances even before the
security is realised or a shift is filled on the principle
that the scheme contains an element of refinance too.
4.2.4 STATE BANK GROUP AND SSIs:
The State Bank of India has been a pioneer in the
field of financing small scale sector. The bank's entry into
153
this field dates back to April 1956, when a pilot Scheme for
financing small scale industries was introduced.
During the period after nationalisation, a number of
innovations have been made by the bank to suit the changing
needs of the time. Under the Liberalised Scheme, the bank
for the first time in the country introduced the concept of
need based approach in financing SSIs. It was revolutionary
becaue a radical departure from the security oriented
approach was followed by the banks.
In 1971, in the wake of the Thacker Committee Report,
the bank undertook the task of generating employment
potential in the country through formulatin9 and financing
employment oriented lending schemes. The objectives of it
was that anyone particularly the educated unemployed,
approaching the bank with a proposition that gives evidence
of a sincere desire and effort to venture on gainful and
profitable self employment will receive sympathetic and
objective response.
A study conducted by the bank in 1975 on the causes of
sickness in SSIs brought into focus the need for providing
counselling and consultancy assistance to small industries
right from the appraisal stage of a project. The total
154
strength of the consultancy cells of the bank now exceeds
150. The officials of the cell provide consultancy services
free of charge. In addition, the cells also undertake
industry-wise studies for the preparation of Data Bank
Dossiers on important industry groups in the small sector.
These Data Bank Dossiers provide data. to both the bank's
operating staff and to prospective entrepreneurs in their
project formulation stage.
A maiden attempt was made by the State Bank of India
which launched a Pilot Project Scheme in 1956 and introduced
at nine of its branches, which was extended to all branches
from the 1st January 1959. The scheme of assistance which
came to be knwon as the 'Liberalised Scheme' is operated in
close co-ordination with the other financial and promotional
agencies like SFCs, Small Industries Service Institute,
National Small Industries Corporation.
State Bank Group has come a long way from the day it
entered this field by providing working
to a few small industries. Now the
capital
range of
facilities
assistance
covers all aspects of small industries promotion and
development from identification of entrepreneurial potential
to the development of entrepreneurial motivation, training,
equity support, counselling and consultancy assistance in
155
all stages of development of a small industry and finance
both short and medium term not only for acquisition of fixed
assets and working capital but also for various other
purposes like research and development, testing and quality
control, market development etc.
4.3 COMMERCIAL BANKS • FINANCE TO SSIs POSITION IN KARNATAKA Karnataka has been fortunate from the beginning to
have a good banking system compared to many other states.
Dakshina Kannada district in the State has earned the
sobriquet of 'Cradle of Banks' having given birth to four
major banks viz., Canara Bank, Syndicate Bank, Vijaya Bank
and Corporation Bank, all of them are in the public sector
today. Among the other banks born in the State are State
Bank of Mysore which is subsidiary of State Bank of India
and two other banks viz., Karnataka Bank Ltd .. and Vysya
Bank Ltd.
The major commercial Banks were nationalised on 19th
July 1969 by the Government of India with the objective of
making them prime movers and pace setters for the socio-
economic progress of the country. They were expected to
extend their branch net work to the rural unbanked areas and
channelise more and more saving of the community for meeting
the credit needs of the priority sectors and other national
156
priorities. When judged by these criteria, the commercial
banks have shown remarkable performance in the State. The
Banking development in Karnataka from 1969 to 1992 in terms
of bank branches deposits and advance is annexed to this
chapter vide Annexure - I.
The deposits mobilised by the banks in the State,
which stood at Rs. 255 crore in 1969, have increased to
Rs. 10784 crores in 1992. registering an average growth of
18.6 per cent per year. The share of Karnataka in the Bank
deposits in the entire country is around 4.6 per cent. The
average deposit per capita has increased from Rs. 78 to
Rs. 1796 during these 20 years. It is heartening to observe
that the Banks in Karnataka have mobilised 17.1 per cent of
their deposits in rural areas which is higher than the share
of rural deposits (14.8 per cent) in the entire country.
The most striking feature of banking development in
the State is the branch expansion of commercial banks. In
1969, there were only 850 branches. After ~e
nationalisation of Banks (1969) and the introduction of the
Lead Bank Scheme (1970), there has been a big leap forward
in branch expansion by commercial banks. As a result, at the
end of March 1992, the banks had 4316 branches. 9 . Of the
9. CMIE. Basic Statistics Relating to Indian Economy. Op cit. p 36.
157
3375 new branches opened during the last two decades, more
than 3,000 branches were opened in rural and semi urban
areas. This vigorous branch expansion has resulted in
reduction of average population served per bank branch in
the State from 41,000 in 1969 to 10,400 at the end of March
1992; where as the corresponding figures for the country as
a whole are 69,000 and 13,800 respectively.lO
The development of the financial sector of a region is
closely related to the development in its real sector. The
development of banking - most important segment of financial
sector - is an important indicator of the development of the
region. The development of financial sector spurs the
development in real out put and employment in a region. This
is especially so in case of our state where banks should act
as an instrument of balanced economic development of
regions, functional diversification of banking business as
per plan priorities and as an instrument of economic change
reserving a part of financial resources for the development
of the neglected sectors of the economy like Small-Scale
Industry.
In the paragraphs below the pattern, trends and
magnitude of Commercial Banks assitance to
Karnataka is analysed.
10. Ibid. P 42.
the SSIs
158
4.3.1 TRENDS IN FINANCIAL ASSISTANCE TO SSIs BY COMMERCIAL BANKS:
The table below indicates the financial assistance
provided by Commercial Banks in Karnataka to the Small Scale
Indstries from 1969 to 1992.
TABLE - 4.5
YEARWISE FINANCIAL ASSISTANCE TO FROM 1969-1992
SSIs IN KARNATAKA
(Amount Rs. in Crores)
During the Year
1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 (March)
Advances to SSIs
15.44 24.62 28.32 32.07 59.65 64.90 85.15 82.61
108.33 119.92 143.67 186.00 230.00 285.00 310.00 400.00 430.00 560.46 666.55 842.66 928.50
1038.00 1063.18 1123.65
Total Advances
185.55 235.19 275.41 356.30 443.35 549.13 695.64 859.33 906.89
1130.62 1268.20 1331.00 1747.07 2125.37 2504.94 2738.26 3676.84 4326.92 5244.90 6316.98 6472.54 7228.35 7995.23 8973.00
% of S5I Assistance to Total
8.32 10.46 10.28
9.00 13.45 11.82 12.24
9.61 11.94 10.61 11.33 13.97 13.16---13.41 12.37 14.60 11.69..........-12.95 12.71 13.34 14.34 14.36 13.29~
12.52
Source: 1. Several issues of "Institutional Finance Hews· published by Institutional Finance and Statistics Department, Vidhana Soudha, Bangalore.
2. Annual Economic Survey Reports published from the Planning Department, Government of Karnataka.
159
Illustration - 4C
Trends in Financing of SSIs by Commercial Banks
Amount (RR. in Crone) ~.----------------------------------------------------,
1000 ............................................................................................................ ····················T~·
800 ................................................................................................................................................ .
~oo ................................................................................................................................................ .
• 00 ............................................................................................................................................. .
o~cx~~~~~~~~~~~~~~ e~ 70 71 ~ 75 7. 76 7e 77 78 7~ 80 81 82 8:J 84 86 U 87 68 8~ ~ ~1
Years
160
The Table - 4.5 provides the year-wise financial
assistance provided to SSIs since nationalisation of
commercial Banks to the year 1992 (March). It can be
observed from the above table that the average share of
assistance provided to SSIs is 12.96 per cent. During the
past two decades the share of financial assistance obtained
by SSIs is in the range of 8 per cent to 14 per cent only.
161
4.3.2 PATTERN OF FINANCIAL ASSISTANCE BY COMMERCIAL BANKS IN KARNATAKA:
In the table below the pattern of finance i.e.
District-wise financial assitance provided by Commercial
Banks to Small Scale Industries in Karnataka is depicted.
TABLE - 4.6
DISTRICT-WISE FINANCIAl .. ASSISTNCE TO SSIs BY COMMERCIAL· BANKS AS ON 31.3.1992
Sl. Name of Districts No.
1. Dakshina Kannada 2. Bangalore (U) 3. Mysore 4. Belgaum 5. Dharwad 6. Tumkur 7. Chitradurga 8. Bellary 9. Shimoga 10.Gulbarga ll.Raichur 12.Kolar 13.Bangalore (R) 14.Mandya 15.Bidar 16.Bijapur 17.Hassan 18.Chickmagalur 19.Uttara Kannada 20.Kodagu
TOTAL
Assistance to SSIs by Commercial Banks-Outstanding
As on March 1992 (Rs. in Crores)
252.62 112.24 104.58 103.86
84.94 57.44 47.96 44.28 38.06 36.16 34.97 32.55 31.29 27.75 27.70 22.03 20.00 19.26 18.27
7.69
1123.65
% to Total
22.48 9.98 9.30 9.24 7.55 5.11 4.26 3.94 3.38 3.21 3.11 2.89 2.78 2.46 2.46 1.96 1.77 1.71 1.62 0.68
100.00
Source: State level Bankers Committee - Karnataka. Lead Bank section. Priority Sector Credit and Rural Division. Syndicate Bank. Manipa1.
162
Illustration - 4D
District-wise spread of the assistance by Commercial Banks in SSIs
Six Fwd. Dists. 56.1% ____ ~
~ ............... ~ ~:; .................... ~
I{ •••••••••••••••••••••••••• ~ ............................ .
•••••••••••••••••••••••••••••••• ••••••••••••••••••••••••••••••••• •••••••••••••••••••••••••••••••••• ........... ~ .......... : .. : ........ -:-:-:-:-:-: .. ...... ~ .... : ................ : ...... . ~S::::/::;:::::::::::/\:j0?
• • • • • • • I
Ot.her .. DiBt.B. (i ~ ) 43.9%
163
Dakshina Kannada District has obtained more assistance
from Commercial banks with 22.48 per cent followed by
Bangalore Urban, Mysore and Belgaum districts with 9.98 per
cent, 9.30 per cent and 9.24 per cent respectively.
Industrially forward districts of the state like Dakshina
Kanada, Bangalore, Mysore, Belgaum, Dharwar and Tumkur
Districts together have availed as much as 56~11 per cent.
The remaining 14 districts have availed only 43.89 per cent
of the total assistance.
This indicates that Commercial Banks have displayed
regional disparities. In fact this is one of the reasons for
agglomeration of industries in Bangalore, Mysore, Mangalore,
Tumkur and industrial backwardness in some other districts
like Coorg, Karwar, Chickmagalur and even potential
districts like - Shimoga, Hassan, Gulbarga have remained
backward industrially for want of finance.
4.3.3 BANKWISE FINANCIAL ASSISTANCE TO SSIs IN KARNATAKA (AS ON 31.3.1992):
There are 20 nationalised banks in Karnataka, 13
RRBs with 1068 Branches and the industrial Co-Operative
Bank. Table - 4.7 depitcs the bankwise assistance to Small
Scale Industries in Karnataka.
164
TABLE - 4.7
BANK-WISE ASSISTANCE TO SSIs IN KARNATAKA AS ON 31.3.1992
Amount (Rs. in Crores)
------------------------------------------------------------S1- Advances outstanding % to No. Name of the Banks under SSIs as on Total
March '92
1- State Bank of India 130.39 11.60 2. State Bank of Mysore 129.21 11.50 3 . Other State Bank Group Bank 10.73 0.95 4 . Canara Bank 182.36 16.23 5. Syndicate Bank 116.58 10.37 6. Union Bank of India 68.30 6.07 7 . Vijaya Bank 66.36 5.90 8. Corporation Bank 40.11 3.56 9. Indian Bank 33.31 2.96
10. Bank of Baroda 22.86 2.03 II. Central Bank of India 24.86 2.21 12. Indian Overseas Babnk 18.43 2.96 13. Punjab National Bank 16.92 1.50 14. UCO Bank 12.01 1.07 15. Other Nationalised Banks 39.41 3.07 16. Industrial Co.Op Bank 106.95 9.52 17. RRBs 68.30 6.08
--------- --------
TOTAL 1123.65 100.00
Source: State level Banker's Committee Karnataka Lead Bank Section. Priority Sector Credit and Rural Development Division, Syndicate Bank, Manipal.
Canara Bank stands first among other banks in
financing Small Scale Industries in the State, followed by
State Bank of India and State Bank of Mysore. Other banks
active in financing Small Scale Industries in the state are
165
Illustration - 4E
Bankwise Assistance to SSIs'in Karnataka
C'.anara Bank j6.~
•••••• ~H-f"'t-'L ~ •••••••••• 'f-t-~~+f'" oth~r Btm1m. 22. m
~""'.""'~HHHH~~~ S.B1 II 6% ....... ~. • .... • • 'l+-l-Hf+I~~-++-+' . . ............. ~~ ..... .
.. ..... ... ~···~HH44++++~HH~ ............ ~ .............. ~ f+l-Hf+I-++-++-++~
S1lldioat..e Bank I 0 .4~ fitm. 6.1~
Indl. Coop. Bank 9.5~
6.1~
166
syndicate Bank, with an outstanding advance of Rs. 116.58
crores and Union Bank of India with Rs.68.30 crores and
vijaya Bank with Rs.66.36 crores. The Contribution of
Industrial co-operative Bank and the recently established
Regional Rural Banks are also considerable. They have the
outstanding advances to the extent of Rs.106.95 crores and
Rs.68.30 crores respectively.
The performance of Commercial Banks in the state in
providing credit facilities to the priority sectors in
accordance with the RBI's stipulations is quite
satisfactory. But geographically speaking, the spread of
commercial banks credit has been uneven. Mangalore,
Bangalore, Mysore and Belgaum districts are the major
beneficiaries, where districts like Raichur, Bijapur,
Hassan, Karwar and Coorg is less. But SSIs in the non-
backward districts of Mandya, Chitradurga, Bangalore
(Rural), Kolar and Bellary districts is also less. Hence
there is a need to commercial banks to step up their
sanctions to SSIs in these districts.
4.4 KARNATAKA STATE FINANCIAL CORPORATION AND SMALL-SCALE INDUSTRIES :
Karnataka State Financial Corporation popularly known
as KSFC was established in the year 1959 under the SFCs Act,
167
1951, for promoting industrial entrepreneurship in the State
of Karnataka. As a premier Regional Industrial Development
Bank, the Corporation gives special attention to the
backward districts to bring about balanced growth of
industries in the state.
Karnataka State Financial Corporation offers long and
medium term financial assistance in the form of :
- Loans and advances with a liberal repayment period (normally not exceeding 8 years) including moratorium.
Loans in collaboration institutions.
with other
- Subscription to share capital of companies by small entrepreneurs (Special capital scheme) by soft loan.
financial
promoted way of
4.4.1 CONCERNS ELIGIBLE FOR FINANCIAL ASSISTANCE KARNATAKA STATE FINANCIAL CORPORATION:
FROM
Assistance from the Corporation is available to the
industrial concerns engaged or to be engaged in
a) Manufacturing, processing or preservation of goods.
b) Maintenance, repair, testing, servicing of
machinery of any description or vehicles or vessels
or motor boats, trailer or tractors.
168
c) Assembling, repairing or packing articles with the
aid of machinery or power.
d) Providing special or technical knowledge and other
services for the promotion of industrial growth.
e) Generation or distribution of electricity or any
other form of power.
f) Mining or development of mines.
g) Transport of goods or passengers by road, water or
by ropeway.
h) Development
estates.
of industrial areas or industrial
i) Fishing or providing shore-facilities for fishing
or maintenance thereof.
j) Small Hospitals/Nursing Homes
k) Concerns engaged in Research and Development of any
process or product in relation to any of the
industrial activities.
169
1) Providing weigh bridge facilities
m) Telex/telecommunication facilities, providing rig
drilling facilities, power laundries, xerox/photo
copying, hiring out of heavy material handling
equipments, cranes, earth moving equipments and
other similar equipments etc.
n) Setting up or development of tourism related
facilities including amusement parks, cultural
centres, convention centres, hotels, restaurants,
travel, transport and tourist service agencies.
0) Assistance to marketing entrepreneurs and assitance
for purchase of mobile sales van for improving the
marketing infrastructure of the products of
cottage and village industries and SSI units.
p) Assitance is also provided for construction,
development and maintenance of roads.
q) Assisance for Tissue Culture activities.
KSFC will provide term loan assistance to projects
costing upto Rs. five crores. (Independently and jointly
170
with Karnataka State Industrial Investment and Development
corporation(KSIIDC)/Banks wherever necessary) .
NOTE: The expression 'Processing of goods' includes any part
or process for producing, preparing or making an article by
subjecting any material to a manual, mechanical, chemical,
electrical or any other like operation).
4.4.2 CONCERNS INELIGIBLE FOR FINANCIAL ASSISTANCE FROM KARNATAKA STATE FINANCIAL CORPORATION:
Assistance is not provided for concerns:
a) engaged in trading activity,
b) developing farms like Poultry, dairy etc.,
c) in which directors of the Corporation or their
relatives have any interest.
The maximum amount that can be availed from Karnataka
State Financial Corporation is Rs. 90.00 lakhs, in case of
Registered Co-operative Societies and Companies, whether
public or private limited and Rs. 60.00 lakhs in other cases
like proprietory or partnership concerns or Hindu Joint
family. This excludes the soft loan/seed capital/bridge loan
(against subsidy).
171
Financial assistance is also available to the existing
industrial concerns for expansion and/or renovation and/or
modernisation or diversification in the line of manufacture
apart from the financial assitance to the new industrial
concerns.
The Corporation is operating with 29 schemes. These
schemes are framed depending on the various needs of the
entreprenuers and also to help various sections of the
society. They are
1. Technicians' scheme
2. Scheme for women entrepreneur
3. Mahila Udyama Nidhi Scheme (MUNS)
4. Composite loan scheme
5. Scheme for Rural Industrialisation
6. Scheme for Ex-servicemen
7. Single window scheme (working capital is available
under this scheme)
8. Physically Handicapped scheme
9. Scheme for Educated unemployed
10. National Equity Fund Scheme
11. Finance to Qualified Professionals
12. Scheme for finance to Transport Vehicles
13. Computer Loan Scheme
14. Finance for Research & Development Activities
172
15. Scheme for the acquisition of indigenous or
imported second-hand machinery
16. Scheme for Rehabilitation of Sick Units
17. Finance to Hotel Industry
18. Finance under lOBI Seed Capital Scheme
19. Scheme for Hospitals and Nursing Homes
20. Scheme for Modernisation
21. Finance for Quality Control Equipments
22. Finance for Generators
23. National Equity Fund Scheme
24. Fiance for Electro Medical Equipments
25. Equipment Finance Scheme
26. Assistance to Tissue Culture Activity
27. Scheme for Finance of Mobile Sales Van
28. Assistance for Marketing
29. General Scheme.
4.4.3 AN EVALUATION OF THE OPERATIONS OF KARNATAKA STATE FINANCIAL CORPORATION:
A comparative analysis of the performance of leading
State Financial Corporations has been done in the following
paragraphs to evaluate the operations of Karnataka State
Financial Corporation. The comparison has been in the key
areas of operations viz., Sanctions, Disbursements,
Recovery, sanctions to Small Scale Industries and Backward
areas.
173
During the year 1990-91 seven State Financial
corporations have registered a sanction of above Rs.125
Crores. They are:
Sl. No.
01.
02.
03.
04.
05.
06.
07.
TABLE - 4.8
PERFORMANCE OF MAJOR STATE FINANCIAL CORPORATIONS DURING 1990-91
State Financial Corporations
Andhra Pradesh SFC
Karnataka SFC
Gujarat SFC
Uttar Pradesh SFC
Tamilnadu Industrial Investment Corporation
Maharashtra SFC
Rajastan SFC
Sanctions (Arnt.in Crores)
265.30
250.89
215.34
199.69
187.49
167.33
126.61
Source: Annual Reports of respective State Corporations for the year 1990-91.
Financial
Karnataka State Financial Corporation occupies the
second place in sanctions. KSFC has graduated from the third
place during the previous year. Since 1984-85, in terms of
cumulative sanctions KSFC occupies the third place with
Rs.127l.84 crores. UPSFC is in the first place with
Rs.1578.07 crores followed by APSFC with Rs.15l7.95 crores.
174
(a) SANCTIONS TO SSIs:
APSFC with an assistance of Rs.193.27 crores as
against Rs.156.25 crores in '89-90 occupies the first
position in sanction to SSIs. Karnataka State Financial
Corporation occupies the second place with sanctions of
Rs.166.98 Crores to SSIs as against Rs.125.70 Crores in
'89-90. The KFSC has graduated from the fourth to second
place compared to the year 1989-90. The position of other
State Financial Corporations is as follows:
TABLE - 4.9
SANCTION TO SSIs BY MAJOR SFCs (Amount in Crores)
Sl. Name of the SFC No.
01. Uttar Pradesh SFC
02. Gujarat SFC
03. Maharashtra SFC
04. Rajasthan FC
05. TIle
Year
1989-90 90-91
1989-90 90-91
1989-90 90-91
1989-90 90-91
1989-90 90-91
Sanctions to SSIs
147.16 142.99
149.40 145.23
76.40 144.75
101.22 123.20
106.15 142.05
Ranking
3 5
2 3
7 4
6 7
5 6
Source: Report on Development Banking in India 1990-91 lOBI, Bombay.
175
(b) SANCTIONS TO BACKWARD AREAS:
Karnatataka State Financial Corporation occupies the
first place by sanctioning Rs.113.65 Crores to backward
areas during 1990-91. It has graduated from third to first
place during the year 1990-91. The position with reference
to other State Financial Corporation is as follows:
TABLE - 4.10
SANCTIONS TO BACKWARD AREAS
Sl. Name of the SFCs No.
01. Uttar Pradesh SFC
02. Andhra Pradesh SFC
03. Gujarat SFC
04. Maharashtra SFC
05. Rajasthan FC
Sanctions to Backward Areas
(Amt. in crores)
97.07
108.19
82.41
45.58
84.98
Ranking
3
2
5
6
4
Source: Report on Development Banking in India 1990-91 lOBI, Bombay.
As can be seen from the above table that Karnataka
State Financial Corporation has carved a niche for itself
when compared to other State Financial Corporations. Its
growth during the last decade, especially during the last 5
years, is phenominal. Hence it has been rated as the number
176
one SFC in the country by lOBI and SIDBI. It has been a
premier term lending institution in the State with almost 50
per cent of the existing units being financed by Karnataka
State Financial Corporation. The growth of SSIs in State is
commensurate with the growth of Karnataka State Financial
Corporation. Even the field survey conducted for this study
revealed that the Small-Scale Industrialists could not have
established their units but for the financial asistance from
the financial institutions like Karnataka State Financial
Corporation.
4.4.4 OPERATION OF THE CORPORATION SINCE ITS INCEPTION
The Table - 4.11 indicates the performance
. . of
Karnataka State Financial Corporation since 1959-1960 to
1991-1992.
177
TABLE - 4.11
PERFORMANCE OF KSFC SINCE INCEPTION TO 31.3.92 (Amount Rs.in Crores)
Sanctions during the year -----------------------------------
Sl. Year Number % increase/ Amount % increase/ No. decrease over decrease over
the previous the previous year year
------------------------------------------------------------1 2 3 4 5 6
1. 1959-60 11 0.28 2. 1960-61 21 90.9 0.44 57.1 3. 1961-62 46 19.4 0.55 25.0 4. 1962-63 33 (-) 28.2 0.29 ( -) 47.2 5. 1963-64 38 15.1 0.68 134.48 6 . 1964-65 49 28.9 1.11 63.2 7. 1965-66 59 20.4 1.49 34.21 8 . 1966-67 44 ( -) 25.4 0.81 ( - ) 45.60 9 . 1967-68 88 100.0 1.03 27.10
10. 1968-69 65 26.1 1.78 72.80 11. 1969-70 64 ( -) 1.5 1.64 ( -) 7.80 12. 1970-71 151 135.9 3.37 105.40 13. 1971-72 292 93.3 5.05 49.80 14. 1972-73 292 5.70 12.80 15. 1973-74 345 18.1 8.51 49.20 16. 1974-75 319 (-) 7.5 10.47 23.00 17. 1975-76 242 ( -) 24.1 9.66 ( -) 7.70 18. 1976-77 291 20.2 11.06 14.40 19. 1977-78 226 ( - ) 22.3 10.13 ( - ) 8.40 20. 1978-79 322 42.4 10.61 4.70 21. 1979-80 817 153.7 17.33 63.30 22. 1980-81 1022 25.0 21.17 22.10 23. 1981-82 1292 26.4 32.49 53.47 24. 1982-83 1871 44.8 43.78 34.70 25. 1983-84 2680 43.2 58.26 33.00 26. 1984-85 4002 49.3 75.62 29.70 27. 1985-86 4795 19.8 103.57 36.90 28. 1986-87 4910 2.3 111.79 7.90 29. 1987-88 5053 2.9 125.59 12.30 30. 1988-89 6178 22.2 144.66 15.10 31. 1989-90 7641 23.6 186.20 28.70 32. 1990-91 8284 8.4 250.89 34.70 33. 1991-92 10611 28.0 332.88 32.60 34. Sanctions
As on 31.3.92 62154 1588.88
Source: 1) Annual Reports of KSFC 2) Assistance to Industry - A short guide detailing
how to obtain loan from KSFC 1992. 3) KSFC News - Vol. 14, NO.2 & 3, Aug. Sept. 1992.
178
Illustration - 4F
Trends in KSFC's Assistance (Number)
N .~u=m~b=e=n~ ______________________________________________ 1 80..-
.co ................................................................................................................................................
80 ..................................... , ................................................................ : ......................................... .
0L---6g--~~-O~--~=~g=-~7=O~==~~~-~8~0----~8~g~-~QO~----~g~1~-:g~2~ Years
-+- No. 01 Urub
179
Illustration - 4G
Trends in KSFC's Assistance (Amount)
2000~----------------------------------------------------'
1500 ............................................................................................................................................... .
1000 ............................................................................................................................................... .
500 ................................................................................................................................................ .
59-80 89-70 79-80
Years
89-90
.Amount In Crores
180
This table is synchronised as below.
TABLE - 4.12
DECADE-WISE PERFORMANCE OF KSFC
Year Number Amount (Rs. in crores)
1959-60 11 0.28
1969-70 518 10.09
1979-80 3815 101.98
1989-90 43259 1005.11
1991-92 62154 1588.88
It can be analysed from the above Table that almost
80 per cent of the sanctions is during the last 7 years
i.e., to say the sanctions during the first 26 years is only
20 per cent of the total sanctions. There is a spurt in the
sanctions of the Corporation since 1985-86. From that year
for the first time the sanctions have crossed Rs.100 Crore
mark during one financial year and during 1990-91 it crossed
Rs.200 crore mark and during the year 1991-92 it even
crossed Rs.300 crore mark. Even in terms of number of units
sanctioned more than 75 per cent of the total units
sanctioned by the Corporation is during the last 7 years.
51. Particulars No.
1. Total Sanctions
TABLE - 4.13
ASSISTARCB TO SMALL-SCALE INDUSTRIES DURING 1987-88 TO 1991-92 AND AS ON 31.03.1992
(Amount Rs. in crores)
1987-88 1988-89 1989-90 1990-91 1991-92 As on 31.03.92
No. Amt. No. Amt. No. Amt. No. Amt. No. Amt. No. Amt.
5053 125.58 5984 140.99 7369 181.80 7898 243.10 10300 325.25 57684 1433.39
2. Sanctions to SSIs 4232 94.93 5078 106.72 6060 128.70 6185 166.97 7597 232.84 44751 987.68,
68.90 3. 2 as % of 1 83.75 75.59 84.85 75.69 82.23 69.14 78.31 68.68 73.75 71.58 77.57
Source Annual Reports of KSFC from 1987-88 to 1991-92.
182
Illustration - 48
KSFC's Sanctions to SSIs
SalloW. to NonSS .. «5.71
Sanot. .t~ Non...~I 12~
Amount (Rs. in Crores) Number of Units
183
'l2\BIE - 4.14
DIS'JRIC'l'-WISE ANALYSIS OF UlANS SAR:TIOOFD 'ID SSIs AS Cfi 31.3.1992 (Arrount Rs. in Crores)
S1.No. Nane of the District Number % to Total Anount % to Total ----------------------------------------------------------------------
1 2 3 4 5 6
I. BAC'IQIiARD DIS'IRICl'S 1. Bidar 1167 2.6 36.31 3.6 2. Mysore 3264 7.2 73.56 7.4 3. Dharwad 3871 8.6 66.75 6.7 4. Raichur 995 2.2 24.44 2.4 5. Be1gaum 3734 8.3 52.24 5.2 6. Bijapur 3637 8.1 22.31 2.2 7. Dakshina Kannada 2396 5.3 54.50 5.5 8. 'fumkur 3223 7.2 52.80 5.3 9. Gulbarga 1464 3.2 22.00 2.2
10. Uttara Kannada 788 1.7 11.58 1.1 11. Hassan 1114 2.4 17.73 1.7
-----------------------------------------'lUI'AL - I 25653 59.32 434.42 43.98
-----------------------------------------II. amm DIS'IRICl'S
1. Bangalore 8147 18.2 390.46 39.5 2. Shinoga 4519 10.0 27.68 2.8 3. Kolar 1058 2.3 34.02 3.4 4. Chi tradurga 1789 3.9 40.75 4.1 5. Mandya 1096 24.4 20.36 2.0 6. Chickrtaga1ur 700 1.5 7.09 0.7 7. Be11ary 1329 2.9 28.51 2.8 8. Kooagu 460 1.0 4.37 0.4
-----------------------------------------TCYrAL - II 19098 42.67 553.26 56.01
-----------------------------------------State Total 44751 100.00 987.68 100.00
Sooroe : Annual Report of KSFC for the year 1991-92.
184
Illustration - 4.1
Pattern of KSFC's Assistance
Anlount (Hs. in Crores) Number of Units
185
During its existence of more than 25 years it has sanctioned
only 14,722 units. Whereas, during the last 7 years it has
sanctioned almost around 50,000 industrial concerns.
During the first twenty years (1959-60 to 1979-80) of
the operations of KSFC, the total sanctions we~e only Rs.I00
crores whereas during the succeeding four years i.e., during
1980-81 to 1983-84, another Rs.I00 crores were sanctioned.
Since then every year the corporation is sanctioning more
than Rs.I00 crores. During 1990-91 and 1991-92, the annual
sanctions were Rs.250 crores and Rs.333 crores respectively.
It can be observed from the ,Table 4.13 that as on
31.3.92 almost 69 per cent of the sanctions (amountwise) and
77 per cent (Numberwise) is towards SSI sector. It is also
observed from the trends between 1987-88 to 1991-92 that the
share (Numberwise) towards SSI Sector to the total sanctions
has declined during 1990-91 and 1991-92. It was 84.85 per
cent during 1988-89 and has declined to 78.31 per cent
during 1990-91 and has further declined to 73.75 per cent
during 1991-92. However, in terms of amount-wise sanctions
the share of SSIs to total sanctions is around 70 per cent
and above except during the year 1989-90.
The financing plan has given priority to backward
region as may be seen from the Table - 4.14 that in terms of
186
number 57.32 per cent of the sanctions have gone to backward
districts and in terms of amount it is 43.98 per cent.
However, if we carefully analyse, the major portion has gone
to 6 districts namely Bangalore, Mysore, Dharwad, Mangalore,
Tumkur and Belgaum. These 6 districts have availed 70 per
cent of assistance. Remaining 13 districts have availed 30
per cent of the total sanctions. There is an agglomeration
of Industries in these districts. This corroborates the
statement that th financial institutions
regional disparity in financing. This has
the concentration of industries in certain
state like -- Bangalore, Mysore and Tumkur.
have displayed
contributed for
pockets of the
187
4.4.5 INDUSTRY-WISE CLASSIFICATION OF LOANS SANCTIONED:
Table - 4.15 indicates industrywise classification of
loans sanctioned by KSFC since inception to 31.3.1992.
TABLE - 4.15
INDUSTRY-WISE SANCTIONS AS ON 31.03.1992 (Amount Rs. in Crores)
51. Industry Number % to Amount , to No. Total Total
1. Food 8138 18.18 170.15 17.22
2. Textiles 13594 30.37 58.57 5.93
3. Paper 496 1.10 143.77 14.55
4. Leather 449 1.00 2.71 0.27
5. Rubber 500 1.11 19.25 1.94
6 . Chemical 1658 3.70 82.08 8.30
7. Engieering 2087 4.16 138.90 14.06
8 . Electrical 1686 3.76 95.80 9.69
9. Others 16143 36.07 276.45 27.98 ------------------------------------------
TOTAL 44751 100.00 987.68 100.00
Source: Annual Report of KSFC for the year 1991-92
It can be observed from above that in terms of
number, textiles sector has availed more assistance followed
by Food Industries. In terms of amount Food Industries have
availed more financial assistance followed by Paper,
Engineering and Electrical Industrial Sector. Karnataka's
economy being predominantly an agro based one has resulted
in more agro based food industries like rice mill, oil
188
mill, floor mill, oil refineries etc. Further Karnataka is
known for its textiles like handloom, powerloom and
weaving. Then the solubrious climate in the state provides
scope for the establishment of electrical and electronic
industries.
189
Illustration -4J
Industry-wise Sanctions of KSFC
, d 1N .~O* ~ Otherrs 28.0% 00 ( . r.,,?1) -4'J .... '-H-H-H-t+t-H'1''''''
,."
/.t" • ••••••• ~++-H4++-H-t++1"\. 01 ••••••••••• U4-+-1-~-++~f-t++io.
14.6% Rubber 1.9%
Textilers 6.9%
leering 14.1% Chemical 8.3%
Elect. & Electronics 9.7%
_ _ _ _ _ _ ____ ~ _.-. _.-. __ ..... • .. __ ..... ~ .......... " ..................... L.L.JII ........ .I.'U" '-- •
In the Table below KSFC's sanction during 1989-90 to 1991-92 and since inception upto 31.3.1992 (Constitutionwise is presented :
Sl. No.
Type of Constitution
TABLE - 4.16
CONSTITUTION-WISE CLASSIFICATION OF LOANS SANCTIONED (Amount Rs. in Crores)
Sanctions Since Inception up to 31.3.1992
1989-90 1990-91 1991-92
Number Amount Number Amount Number Amount Number 'to Total Amount % of Total --------------------------------------------------------------------------------------------------------------
1 2 3 4 5 6 7 8 9 10 11 12
1. Public Ltd. , Companies 41 11.11 20 8.39 18 6.30 367 0.63 65.73 4.58 2. Private Ltd. , Companies 355 59.79 411 82.35 346 84.64 3347 5.80 500.28 34.90 3. Partnership Concerns 714 39.02 958 58.97 1069 85.80 7214 12.50 334.28 23.32 4. Proprietary Concerns 6528 76.08 6892 100.78 9170 155.33 46563 80.72 527.45 36.79 5. Others (Co-operative
Societies and Joint Hindu Family 3 0.20 3 0.39 8 0.80 193 0.33 5.65 0.39
----------------------------------------------------------------------------------TOTAL 7641 186.20 8284 250.88 10611 332.87 57684 100.00 1433.39 100.00
Source : Annual Report of KSFC for the year 1991-92
It can be seen from the above that in terms of number and amount more finance has been availed by the proprietory concerns (as much as 80.72% interms of number and almost 37% in terms of amount). In terms of of amount, Private Ltd., Companies have availed about 35% of the total amount sanctioned by the KSFC followed by Partnership concerns to the extent of 23%. It can also be observed that the sanctions to Co-operative Societies is very less. This is because these Societies can obtain finance along with concessions from Governmental Agencies.
I-' 1.0 0
•••• 1 ~~ze w~se ana~ys~s .o~ KSFC operation
TABLE - 4.17
SIZE-WISB ANALYSIS OF TERM LOAR SANCTIONED (DURING 1990-91 TO 1991-92 AND AS ON 31.03.1992) (Amount Rs. in Lakhs)
51. 1990-91 1991-92 Since Inception up to 31.3.1992 No. Size of Loan -----------------------------------------------------------------------
Number Amount Number Amount Number % to Total Amount % to Total ----------------------------------------------------------------------------------------------------
1 2 3 4 5 6 7 8 9 10
1. Upto Rs.0.50 lakhs 3531 865.36 4643 1074.21 28048 46.38 5305.66 3.98 2. Rs. 0.50 - Rs. 2.00 lakhs 1910 2426.77 2265 3097.43 17665 29.19 21032.11 15.80 3. Rs. 2.00 - Rs. 5.00 lakhs 1711 5330.15 2277 7491.36 9116 15.07 29503.98 22.17 4. Rs. 5.00 - Rs. 7.50 lakhs 259 1647.99 313 1993.38 1959 3.23 12475.04 9.37 5. Rs. 7.50 - Rs.I0.00 lakhs 263 2418.51 354 3185.23 1326 2.19 11712.81 8.80 6. Rs.I0.00 - Rs.20.00 lakhs 160 2394.92 254 3608.17 1277 2.11 17588.38 13.22 7. Rs.20.00 - Rs.30.00 lakhs 96 2320.65 117 2803.18 661 1.09 14755.99 11.09 8. Rs.30.00 - Rs.45.00 lakhs 35 1308.10 50 1881.00 217 0.35 8114.96 6.09 9. Above Rs.45.00 lakhs 28 1782.38 61 4071.28 194 0.32 12552.77 9.43
----------------------------------------------------------------------Total 7993 20494.83 10334 29205.24 60463 100.00 158888.19
Source : Annual Reports of KSFC for the years 1990-91 and 1991-92
It is clear from the above, that in terms of number, more sanctions are towards between Rs.0.50 lakhs to Rs.5.00 lakhs. But in terms of amount more finance is in the Rs.I0.00 lakhs to Rs.45.00 lakhs and above Rs.45.00 lakhs.
100.00
the loan range of
..... ~ . .....
192
4.4.8 THE RATIO OF DISBURSEMENT TO SANCTIONS:
'Sanctions' is only a paper work. Only through the
process of disbursements the sanctioned amount is released
and the Fixed Assets created. Normally, the disbursements
will be in stages depending on the progress of the project.
In the table below the disbursement of KSFC during the
last 5 years and as on 31.3.92 and the corresponding ratio
to sanctions has been workedout.
Sl. Year No.
l. 1987-88 2. 1988-89 3. 1989-90 4. 1990-91 5. 1991-92 6. As on
31.3.92
TABLE - 4.18
DISBURSEMENT PERFORMANCE OF KSFC (Amount Rs. in Crores)
Disbursements Sanctions % of disbursement to sanctions
104.79 125.59 83.43 124.60 144.66 86.13 147.02 186.20 78.95 190.71 250.89 76.01 246.34 332.88 74.00
1206.52 1588.88 75.93
Source: Annual Reports of KSFC from 1987-88 to 1991-92.
194
TABLE - 4.19
RECOVERY PERFORMANCE OF THE KSFC DURING 1987-88 TO 1991-92 (Rs. in Crores)
Years
1
1987-88
1988-89
1989-90
1990-91
1991-92
Arrears at Current Total Total the beginning Demand Recover- Recovery of the year able
2
75.92
71.28
84.90
103.16
134.19
amount
3 4 (2 + 3)
45.30 121.22
114.93 186.21
141.78 226.68
155.19 283.35
224.06 358.25
5
75.48
95.05
117.71
137.61
174.60
% of 5 to 4
. 6
62.26
51.04
51.92
48.22
48.73
Source: Annual Reports of KSFC from '87-88 to '91-92.
Recovery is normally a hard job. It is the tendency of
the people to postpone the payments. Apart from this, there
will be genuine reason for not keeping the repayment
schedule from the SSI entrepreneurs like raw material
problem, stiff competition, labour problem, power problem
etc. If we carefully analyse the Table above, the recovery
against current demand is increasing and the recovery
against arrears is decreasing. The recovery against arrears
is normally a long drawn process involving the procedures
like - referring to concerned Deputy Commissioner, invoking
personal guarantee if any. auctioning of the collateral
security etc.
1~5
TABLE - 4.20
TRENDS IN RECOVERY DURING 1987-88 TO 1991-92 (Amount Rs.in Crores)
51. Year Recovery % increase over the No. previous year
1. 1987-1988 75.48
2. 1988-1989 95.05 25.92
3. 1989-1990 117.71 23.84
4. 1990-1991 137.61 16.90
5. 1991-1992 174.60 26.88
It can be seen from the above Tables that the recovery
performance of KSFC is quite good. Even though the recovery
against recoverable is decreasing from 62 per cent in '87-88
to 49 per cent in '91-92. This is mainly because of the
factor that the Corporation is providing facilities like
reschedulement of term loan, rehabilitation to sick units
and other facilities to help the ailing industries. The same
has not affected the overall recovery performance of the
corporation which can be seen by analysing the percentage of
overdues to the loans outstanding. (i.e., Default Ratio) In
the table below the Default Ratio (corporate) is given.
Sl. No.
1
2
3
196
TABLE - 4.21
DEFAULT RATIO OF THE LOANS SANCTIONED BY KSFC
Year
1989-90
1990-91
1991-92
Default Ratio , 16.93
18.80
20.02
Source: Press note prepared by Planning and Development Department of KSFC June '92.
The Default Ratio during the previous year was only
20 per cent. This is to say 80 per cent of the units
assisted by the corporation are regular in repayment. But
the default ratio is increasing. During the three years
under review, it has risen from almost 17 per cent to 20 per
cent. This is mainly because of the abnormal increase in the
operations of the KSFC and actually not matched by the
required administrative staff and the delays like legal
impediments in taking stern against the defaulters are the
main reasons for the increase in the default ratio.
197
4.5 THE COMPARATIVE ANALYSIS OF INSTITUTIONAL FINANCE TO SSIs IN KARNATAKA:
As detailed in the previous paras of this chapter,
the institutional net-work to provide financial assistance
to SSIs is as follows :
1. Nationalised Commercial Banks
2. Karnataka State Financial Corporation
3. Industial Co-operative Bank and
4. Regional Rural Bank
The development of Small Scale Sector is the aggregate
result of combained inputs of technological skills, labour,
finance and Managerial efficiency. The process of providing
financial input is also a combined effort in the sense that
normally those who require long term capital approach KSFC
and for meeting working capital requirements for short
periods are hleped by commercial Banks. Small industries run
by Co-operative societies naturally look to the co-operative
credit organisation like Industrial co-operative Bank for
assistance. The smaller units in the Small Scale Sector
located in the villages normally look for Regional Rural
Banks.
198
The Table - 4.22 provides present flow of institu
tional finance to Small Scale Industries in Karnataka.
TABLE - 4.22
INSTITUTIONAL FINANCE TO SSIs IN KARNATAKA AS ON 31.3.1992 (Amount in Crores)
Sl. Financial Institution Assistance % to No. provided to SSIs Total
1. Commercial Banks 1123.65 49.15
2. Karnataka State Financial Corporation 987.68 43.20
3. Industrial Co-operative Banks 106.95 4.67
4. Regional Rural Banks 68.30 2.98
TOTAL 2286.58 100.00
It can be seen from the table above that almost 50 per
cent of the present institutional flow of credit to SSIs is
from the Commercial Banks. This is closely followed by KSFC
with 43.20 per cent. Industrially Co-operative Bank normally
concentrating itself in the Co-operative Sector has a share
of 4.6 per cent. The latest entrants. RRBs have a share of
2.98 per cent of the total institutional finance to SSIs in
Karnataka.
199
Illustration - 4K
Flow of Institutional Finance to SSIs in Karnataka
C On"lmerci ~l B ftnk 8 1123,65 ---" , .... "----................... -
~ ................. . ~ ....................... . •••••••••••••••••••••••••••
....... : ............................ : ......... .:/." ~
.................... . ~ ........................ /
........... ~ ....... :-/'/
RRBs 68.3
KSFC 987.68
Amount (R&. in Crore&)
106.96
200
Now, let us analyse the contribution made from the SSI
sector to Staters economy in terms of production, investment
and employment vis-a-visa the institutional finance
received. The table below presents production, total
investment total number of persons employed in State in the
SSI sector in the State as on 31.3.92.
Sl. No.
1
2
3
4
TABLE - 4.23
SSIs & THEIR CONTRIBUTION TO THE STATE's ECONOMY AS ON 31.3.92
SSIs Contribution
Production
Investment
Exports
Employment
Unit
Arnt.Rs.in Crores
do
do
Number
Value
2527
1274.90
105.44
8,70,065
Against this the institutional finance for this sector
is not adequate. This clearly indicates that the
availability of institutional finance to this sector is
neither commensurate with their needs and growth nor in
proportion to the volume of activity generated by this
sector.
201
4.6. CONCLUDING REMARKS
"A Banker-a fellow who lends you his umbrella when the
sun is shining and wants it back the minute it begins to
rain"ll -a familiar observation of the banker's role by Mark
Twain. At a time when small enterprises are complaining that
they are not getting enough umbrellas the explanation
possibly given is, why the sun is not shining.
Banks should develop a new credit strategy: CREDIT
MUST LEAD TO DEVELOPMENT AND NOT MERELY FOLLOW IT. This
involves change in attitude or perspective. Credit has been
following centres of development where large industries are
concentrated and society in general has been starved of
institutional finance.
Banking need not be inordinately concerned with the
maximising of profits. Banking must be an important lever
for socio-economic changes. Banking must become plan
oriented, priority minded and socio-economic motivated. The
profitability of the business of financing small scale
industries should not be thrown overboard. Small industries
do throw open enormous scope for profitable employment of
11. Birla Institute of Scientific Research. Opcit. P 182.
202
funds by banks. Any developmental activity does involve
initial expenditure and losses, but the returns would
flowing in later, and in the longer run the business
begin
would
become profitable. In any case, presently the total advances
of banks to small industries form a small percentage of
their credit profolio and as such the effects on
profitability will be minimum.
Even in financing large industries, security is not
regarded in isolation. The repaying capacity and the
potential for cash accruals is deemed more
same principles and techniques should
important.
be applied
The
to
financing small-scale sector is undisputed. Bankers have to
take with a firm conviction that small-scale sectors playa
large part in contributing to the GNP and deserve the
required financial aid by banks. Therefore, banking at the
outset may look as an economic dimension, but it has in it a
social utility and a creative activity.
ARNBXURE - I
BANJCING DEVELOPMENT IN KARNATAKA (1969-1991) (Amount Rs. in Crores)
Karnataka All India Year --------------------------------------------------------- -------------------------------------------------------
Branches Deposits , Growth Advances , Growth C.D. Ratio Braches Deposits , Growth Advances , Growth C.D.Ratio
1969 850 255.22 188.55 72.7 8832 5148.37 3716.70 72.2 1970 1034 300.91 17.9 235.19 27.1 78.3 11006 6027.87 17.0 4578.50 23.2 75.9 1971 1190 369.18 22.6 275.41 16.8 74.5 12850 7243.10 20.1 5051. 3 6 10.3 69.7 1972 1415 403.16 9.2 356.30 29.3 88.3 14587 8359.65 15.4 5613.81 11.1 67.1 1973 1580 483.36 19.8 433.35 21.6 89.6 16385 10084.01 20.6 7091.10 26.3 70.3
I\J 1974 1692 556.83 15.1 524.56 21.0 94.2 17938 11610.53 15.1 8245.41 16.3 71.0 0 1975 1847 670.88 20.4 670.95 27.9 100.0 20050 13710.73 18.0 10073.45 22.2 73.5 w 1976 2049 876.19 30.6 859.33 28.1 98.0 23485 17595.45 28.3 13553.10 13.5 77.0 1977 2282 1111.74 26.8 906.89 5.5 81.5 26958 21364.52 21.4 15327.25 13.1 71. 7 1978 2478 1356.22 21.9 1130.62 24.6 83.3 29476 26491. 53 23.9 18310.09 19.5 69.1 1979 2669 1598.23 17.8 1268.20 12.2 79.3 32219 31274.80 18.0 21559.02 17.7 68.9 1980 2750 1933.51 20.9 1459.67 15.1 75.5 34385 36997.04 18.2 24760.40 14.8 66.9 1981 2914 2292.75 18.5 1747.07 19.7 76.2 37935 44010.13 18.9 29381.79 18.7 66.7 1982 3057 2713.00 18.3 2125.37 21. 7 78.3 40787 52279.55 18.7 35679.14 21.4 68.2 1983 3359 3127.02 15.2 2504.94 17.9 80.0 44294 61492.83 17.6 41292.23 15.7 67.2 1984 3462 3229.02 3.2 2738.26 9.4 84.8 45537 65056.49 5.7 45093.44 9.2 69.3 1985 3905 4245.47 31.4 3676.84 34.3 86.6 52721 85867.57 31.9 56325.94 24.9 65.6 1986 3937 5046.41 18.8 4326.92 34.3 85.7 53364 102625.00 42.3 64677 .42 14.8 63.0 1987 3998 5784.97 14.6 5244.80 21.2 90.6 54431 119022.57 15.9 72549.43 12.2 60.9 1988 4087 6732.75 16.4 6316.98 20.4 93.8 56282 141822.92 19.2 87745.71 20.9 61.9 1989 4130 7066.29 4.96 6857.99 8.56 97.0 56960 144890.50 2.16 96008.52 9.41 66.3 1990 4234 8422.10 19.18 7228.35 5.40 86.0 59388 185722.00 28.18 97990.00 2.06 52.76 1991 4279 9665.35 14.76 7995.23 10.60 83.0 60190 210812.00 13.50 130071.00 32.73 61. 7
Source RBI Publications on Banking Statistics.
CHAPTER - V
ruN EVALUATION OF THE FINANCIAL ASSISTANCE BY THE FINANCIAL INSTITUTIONS TO SMALL-SCALE INDUSTRIES
In order to assess the magnitude, impact of
financial assistance on the SSIs and also to know the
problems of SSIs, a detailed field survey has been
conducted. The field survey brings out the experience of
SSIs with financial institutions and the problems faced
while obtaining loan. The findings are aimed to provide
certain guidelines to both financial institutions as well as
the loanees (SSIs).
The survey covers a sample of 100 units. Following
parameters were kept in view before selecting the unit for
the field survey. The first parameter is the background of
the entrepreneurs. Normally, it is the effort of the
promoter which plays a major role in the successful running
of an industrial venture. Hence, while selecting the units
for survey those SSI units are selected which are promoted
by both technically qualified and those concerns which are
run by non-technical persons. It is also a parameter while
selecting the unit for the field survey, whether the unit is
a proprietory, partnership, private or public limited
company. The representative SSI units representing all the
above types have been selected to make proper conclusions
based on the constitution of the unit.
205
As it is known that SSI sector is an heterogenous
group consisting of several types of industries and hence,
sample units from various industrial sectors like
Electrical, Electronics, Food, Enginering, Rubber, Leather,
Textiles have been selected.
The SSIs located in Bangalore, Mysore, Hubli have been
selected for the field survey. Bangalore is an industrially
forward area, Mysore is a developing area whereas Hubli is
one of the industrially backward areas of the state. In view
of this, the industries located in these areas have been
selected for field survey. The units established during the
late 1970's and 1980's have been selected so that the latest
position/picture about the working of an SSI concern can be
projected. Due care is taken before selecting the SSI units
for the field survey about their performance. The 100 units
selected for the survey are the samples from the following
types of SSIs.
(1) Type of Entrepreneur -
(2) Type of Unit
(3) Nature of Industry
Whether technically qualified or having experience in the chosen line or not.
Properietory, Partnership, Private Limited or Public Limited Company.
i.e.,Electrical, Electronics, Food, Engineering, Rubber, Leather, Textiles etc.
(4) Location of Industry
(5) Year of Establishment -
(6) Performance of the units
(7) Quantam of Assistance -
206
The industries located in and around Bangalore, Mysore and Hubli have been selected.
The SSIs established during late seventies and eightees have been selected.
While selecting the units for field survey care has been taken to see whether the unit is running profitably or running under loss or sick.
The units financed in the range of Rs.0.50 lakhs to Rs. 60.00 lakhs have been selected.
Further due care has been taken while selecting the
units that they do not fall under tiny category or in the
verge of transforming into MSI category. The units with a
turn over from Rs.IO lakhs to Rs.50 lakhs have been given
more stress. The same can be seen in the Table-5.1.
207
TABLE - 5.1
VALUE-WISE AND INDUSTRY-WISE PROFILE
(Production)
51. Range INDUSTRY TYPE No.(In Lakhs)----------------------- ________________________ _
FOOD E&E CHEM TEXT HTL LEATHER RUBBER PAPER OTH
1 < = 5 0 0 3 0 0 1 0 1 3
2. 6 - 10 1 2 0 1 0 1 1 2 1
3 . 11 - 15 0 6 1 1 0 0 1 1 2
4. 16 - 20 1 0 1 0 0 1 0 2 0
5. 21 - 25 5 2 3 1 1 0 1 0 4
6. 26 - 30 6 0 0 0 0 0 0 2 1
7 . 31 - 40 1 0 1 1 1 1 1 1 1
8 . 41 - 50 0 1 1 1 1 O· 0 2 2
9 . 51 & 1 0 0 0 1 1 0 3 2 Above
5.2 OBJECTIVES OF THE FIELD SURVEY:
The survey is to assess the impact and magnitude of
financial assistance provided by the Financial Institutions
to the SSIs. The utilisation of finance depends on various
aspects like promoter - his background, raw material and the
availability of the same at a reasonable price and on time.
Hence the survey apart from the above mentioned major
objectives have also made an effort to -
208
- assess the background of the promoters education as
well as experience,
- constitution of the unit and its bearing on the
running of the unit in terms of source of funds and
the working of the unit,
- to analyse the time taken for implementing the
project Vis-a-visa the time taken for obtaining the
loan from the Financial Institutions as well as the
time taken for the complete release of the loan,
- source of raw-material, its availablity and its
impact on the running of an SSI concern,
- securing finance, both term loan and working capital
loan at an appropriate time,
- the total cost of project, total financial
assistance obtained and the analysis in terms of
profit or the working of the SSI concern,
- the problems faced to obtain the loan,
208A
what are the major heads of working cost of an SSI
concern?
The format of the questionaire is enclosed as an
annexure to this chapter.
The findings of the field survey are presented in the
form of the profile and then an integrated analysis of
various factors like - promoters' background and its impact
on the running of the concern, time taken for
implementation, Ratio of employment - office to factory and
its effect on the working cost of the unit are given. The
data collected have been analysed with the help of the
computer.
Hence, in this chapter an effort is made based on the
field survey to present the impact, nature of financial
assistance and the problems faced while obtaining the loan.
5.3 PROFILE OF THE FILED SURVEY:
The profile of the surveyed units based on the
promoters' background, Industry type and unit type is as
follows:
209 : 1 ) Type of Promoter
(a) Below SSLC 9
(b) SSLC - 13
(c) Graduates - 24
(d) Post Graduates 7
(e) Technically Qualified - 46
( 2 ) Unit type
(a) Proprietory - 22
(b) Partnership 24
(c) Private Limited - 10
(e) Public Limited - 44
(3 ) Industry type
(a) Food - 15
(b) Electrical and Electornics - 14
(c) Chemical - 10
(d) Textiles 5
(e) Engineering - 14
( f ) Hotel 4
(g) Leather 5
(h) Rubber 4
( i ) Paper - 14
( j ) Others - 15
210
It can be seen from the above that as much as 9
industrial groups are covered in the field survey. These are
major industrial groups. Majority of the SSI units
established are in this area and is the true representation
of SSI industries group.
(1) Promoters' Education and Background: Of the 100
units surveyed, the educational backgound of the promoters'
is as follows 46 are Technically qualified, 24 are
Graduates, 7 are Post Graduates, 13 have studied upto
Matriculation, and 9 are below Matriculation. Of the 100
entrepreneurs, 87 have changed their profession i.e. to say
there is no relation between their earlier profession and
the present profession and only 10 people have continued in
the same profession i.e., they have started the present
concern based on their previous concern. We could not
ascertain the background of the remaining 3 entreprenerus.
This clearly indicates that the promoters' education or
background should not be an over riding factor while
deciding about a project. More than anything else it is the
promoters' commitment and motivation that matters in the
successful running of an industrial concern.
211
(2) Implementation - a Micro Report:
Of the units surveyed an effort is made to know the
time taken for implementing the project. This is further
linked to the problems with Financial Institutions in delay
in implementation if any. The table below shows the time
taken for implementing the project among the surveyed units
which ranges from 1 month to 63 months. The average time is
12.65 months.
After having carefully observed the Table- 5.2 the
following points crop up . .
( i ) 39 units have taken time ranging from 1 to 6 months.
(ii) 30 units have taken time ranging from 7 to 12 months.
(iii) 8 units have taken time ranging from 13 to 18 months.
(iv) 4 units have taken time ranging from 19 to 24 months.
(v) 17 units have taken time ranging from 24 months and above.
The reasons cited for the delay in implementation are :
a) Problems with machinery suppliers with regard to
quality and installation. It has been observed during
the field survey that majority of the machinery
suppliers do not adhere to the delivery schedule and
IMPLEMENTATION MICRO REPORT
YEAR OF DATE OF COMME- DIFF. UNIT NAME ESTABLISH- NCEMENT OF COMML. (MONTHS)
MENT PRODUCTION
1 2 3 4
PAVITHRA FABRICATORS 01/02/89 07/09/89 7 MORZARIA PRODUCTS PVT LTD 01/12/69 01/01/70 1 KARNATAKA ELECTRONICS 01/05/80 01/01/81 8 SMAK PHARMACEUTICALS LTD. 01/01/88 01/01/89 12 SUDARSHANA AUTOMOBILES 01/01/76 03/01/77 12 SUSHRUTHA ELCOMA PVT LTD. 01/12/79 04/01/85 62 COZY POLYSTONE LTD. 01/12/89 01/01/91 13 APPOLLO FOOTWEAR PVT. LTD. 01/09/82 11/11/83 15 B.L.L.C. PVT. LTD. 01/12/77 01/01/80 25 SUSHRUTHA NURSING HOME 01/02/87 01/01/88 11 SUNIL ROLLER FLOUR MILL PVT LTD 01/08/89 05/01/90 5 I'V
I-'
GREARS & TRANSMISSIONS 01/01/74 04/04/74 3 I\J
KUKREJA ENTERPRISES 01/01/88 01/01/88 9 PERIWAL PLASTICS PVT LTD. 01/03/70 01/01/71 10 SRI SAl COIR 01/01/89 31/05/89 5 LEWIS NATURAL FOODS 01/12/87 01/01/91 38 NAPTHA RESINS & CHEMICALS 01/09/74 01/05/75 8 BINFO ELECTRONICS 01/11/87 01/01/88 2 AGRO CHEM INDUSTRIES 01/06/85 01/01/86 7 SHRINIDHI CONTAINERS 01/08/90 07/03/91 7 THYLI INDS PVT LTD 01/01/75 01/02/75 1 ULTRA FABS PVT. LTD. 01/04/82 06/01/83 9 ASHWINI INDUSTRIES 01/06/82 01/01/83 7 HIGHLAND GRANITES 01/03/88 01/01/91 35 GANESH CONSULTANCY & ANALYTICAL SERVICES 01/02/85 01/12/86 22 HOTEL POORNlMA RESTAURANT 01/01/91 01/10/91 10 SRI GAJANANA GRANITES 01/04/86 01/08/86 4 S.P.S. GRANITES 01/12/84 01/01/89 50 VARADARAJA SILK THROWING FACTORY 01/10/90 08/01/91 3 DAVANGERE WIRE ROPES 01/08/86 11/06/87 10
TECNO TOOLS 01/08/83 01/09/85 25 GEMINI DISTILLERIES 01/05/84 01/02/85 9 AUTOMATION TECHNOLOGIES 01/08/86 01/09/87 13 SUSHMA PVC VERISERS 01/10/85 01/04/86 6 NATURAL & ESSENTIAL OILS 01/07/80 01/02/81 7 GANESH ENTERPRISES 01/08/88 15/02/89 7 DURO TRADES & RUBBERS 01/05/86 01/12/86 7 PIONEER PLASTICS INDUSTRY 01/08/83 01/02/84 6 ALOIS PRINTRONIKS (P) LTD 01/07/88 01/03/89 8 FALMA LABS PVT LTD 01/02/88 02/11/88 9 VENUS FISHERIES PVT.LTD 01/01/86 01/08/86 7 KARANATAKA VENEERING IND. 01/01/73 01/09/74 20 SEQRONICS (I) PVT. LTD. 01/01/84 01/01/86 24 KHOBA CHEMICALS & SYNTHETICS 01/11/87 11/06/91 44 ADVANCED COMPONENTS 09/10/75 01/01/79 39 ALUMINIUM TRANS PRODUCTS 01/02/78 01/08/81 43 MYSORE MACHINE AIDS 01/05/85 01/08/85 3 AGRO THERM PVT LTD 01/02/87 01/09/87 7 DUTTA INDUSTRIES 01/02/86 14/09/86 8 N
...... KINGSLY EXPORTS 01/01/88 01/04/88 3 w
NILGIRI DIARY FARM LTD 01/01/89 01/03/89 2 VIGIL FILAMENTS PVT LTD 01/04/84 01/11/84 7 DIXIT'S ENGS COMPONENTS 01/08/90 01/11/90 3 SKANDA OFFSET PRINTERS 01/12/88 01/06/89 6 HOUSY FABRICATION 01/04/84 01/09/84 5 MARl GOLD FOOD INDUST. 01/10/85 01/01/86 3 PRINCESS RANJU ELECTRO 01/03/82 01/10/82 7 KODAGU FOODS P LTD. 01/10/80 01/01/81 3 MBM POP RIVETS 01/12/78 01/10/86 22 KARNATAKA RUBBER INDS. 01/12/80 01/01/83 25 METALLIC SOAPS & CHEMICAL 01/12/78 01/01/81 25 KANVA INDUSTRIES 01/11/74 01/01/75 2 HOYSALA FASTNERS 01/12/84 01/09/85 9 PERFECT ENGG. WORKS 01/10/70 01/12/70 2 CIRCUITRON PVT. LTD. 01/11/88 01/01/90 14 MYSORE NAILS & FASTNERS 01/09/79 24/04/80 8 SYNTHORG (P) LTD 01/08/77 01/01/78 5 WOLROM MULY PRODUCTS 01/12/85 10/01/87 14 SPARELLI DAPHNE LABS LTD 01/12/86 01/05/90 42
SUKUMAR SOFT DRINKS 01/05/88 12/02/91 34 CLASSIC LAB 01/06/87 12/12/89 31 AMARNATH ENTERPRISES 26/07/87 01/08/88 12 NILGIRI CANCER CENTRE 01/02/86 07/08/90 55 SPECTRO COLOURS 01/11/79 07/01/85 63 SHANTHI ENTERPRISES 01/08/89 04/02/90 6 FUE PROS 01/12/88 01/05/90 17 AKSHAYA RUBBERS 01/12/88 01/06/90 18 VINEETHA ELECTRICALS 01/08/86 01/11/86 3 SANKETH ELECTRONICS P LTD 01/01/85 15/08/85 8 CHANDRA PRAKASH AGARABHATTI WORKS 01/08/90 03/12/90 4 ARIAN AGRO AGENCY 01/01/81 15/04/81 3 SHEKAR AUTOMOBILES 01/09/83 02/04/84 7 APCO HAND LOOMS 01/02/84 21/08/84 7 UNITECH APPLIANCES 01/11/82 10/01/83 2 SYSTAMASTIC ENTERPRISESS 01/09/89 13/02/90 6 THE MYSORE CONSLTANTS 01/11/89 10/02/91 16 !\J
SUNDER AGENCIES 01/10/79 10/04/80 6 ..... ~
RAMCO ENTERPRISES 01/01/82 10/02/82 1 TERMOTIC INDUSTRIES 01/11/78 01/03/79 4 ZAN-TECK LUMBERS 01/01/81 03/04/81 3 PALAVI TRADES 01/09/81 02/01/82 4 MSORE BOX COMPANY 01/01/82 01/03/82 2 SYSCON ENTERPRISES 01/05/81 01/12/81 7 KALPANA ENTERPRISES 01/05/83 09/09/83 4 SHAH ENTERPRISES 01/12/85 12/04/86 4 HONEY PRODUCTS 01/11/90 03/04/91 5 RAJ INDUSTRIES 01/01/82 12/02/82 1 RAJ GARNITIES 01/08/89 01/02/90 6 RUPESH ENTERPRISES 01/01/85 09/03/85 2 MAHAVEER INDUSTRIES 02/05/81 01/06/83 25
215
poor after-sales service. The machineries once
installed normally will not function smoothly in the
teething initial stages. There will be some initial
problems in the smooth running of the
Generally all the leading manufacturers
machinery.
of various
machineries required for the industry will have Sales
Engineers who take care of the problems arising during
the initial time or the problems arising
intermittantly. But in case of the machineries
supplied to SSIs, it has been observed that the
suppliers have rendered poor after-sales service.
These problems at the initial stages of
will further compound the problems. The
more pronounced if the machinery is
supplied through the dealer.
production
problem is
imported or
b) Too many formalities, procedures, clearances from
various government agencie~ike FPO licence for
food based industry and if more than 20 persons are
employed the unit will come under the Factories Act
and the PF regulations, ESI regulations have also to
be followed. These types of problems after the
installation of machinery and construction of building
will put heavy burden on the successful running of the
216
unit in the form of unneccessary interest burden, loss
of production, losing to competitors in the market
etc.
c) The procedures of the financial institutions before
the first release like documentation is cumbersome and
costly. Before the first release, the loanee has to
sign several documents like, Hypothecation Deed,
Guarantors Deed, Loan Agreement and if the loanee is
offering a collateral security, the original documents
of the property like Title Deed have to be deposited
with the Financial Institution. Apart from this the
entrepreneur has to provide, No Encumberance
Certificate on the property from the Sub-Registrar,
Tax Paid Receipt on the property from the Municipality
etc.
d) It was also expressed during the
Financial Institutions charge
field survey that
interest during
implementation period which causes a lot of heart burn
and leads to cash crunch as the unit will have
teething problems during the implementation stage, and
217
e) Unhealthy competition through under or over invoicing
(i.e., inflating or selling the product at a lower
rate) and selling without proper bills. There is a
provision in the Sales Tax Act if the particular
commodity is used for industrial purpose, there is
differential tax rate. The normal Sales Tax at present
is 8 per cent. But for industrial use it is 4 per
cent. The traders use the 'e' form (which certifies
the use of the product for industrial use) to buy the
product at a lower rate and sell it at an higher rate.
If a trader is selling without legitimate bills, he
will not charge the taxes to the buyer and hence will
be selling at a lower rate. This will certainly affect
genuine and honest manufacturers.
(3) Raw Material: Raw material is an integral part of the
production process in a manufacturing industry. It is the
quality of the raw material that will determine the quality
of the product and then the sales. It is a vital element in
the production process in terms of quantity, quality,
availability, delivery schedule. Therefore an effort has
been made in the field survey to know the source of finance
for raw material i.e., whether the raw material is procured
through working capital or through internal accruels or
218
other means and also to know the source and the nature of
problems faced by the entrepreneurs while obtaining the raw
material. (See Table-5.3).
Sl.No.
1.
2.
3.
4.
TABLE - 5.3
SOURCE OF RAW MATERIAL
Source
Open Market
Governmental Institution
Imported
Scarcity
Number
30
17
21
32
It can be observed from the table above that 30 per
cent of the units got their raw material through open
market, 17 per cent through government institutions and 21
per cent of units got their raw material through import. The
implications are that majority of the SSI concerns are
obtaining their raw materials from the open market which is
costly. Whereas the supplies from the government
institutions are cheap but cannot be relied on quality and
timely delivery.
219
TABLE - 5.4
INDUSTRY-WISE RAW MATERIAL PROBLEMS
51. Industry Scarce High Imported Seasonal Others No. Price
1 Food 8 2 0 2 0
2 Ele. & Elect. 0 1 1 3 2
3 Chemicals 3 2 1 2 4
4 Textiles 5 3 1 1 10
5 Engineering 1 0 9 6 11
6 Hotel 8 14 4 1 0
7 Leather 9 0 7 2 3
8 Rubber 3 2 2 0 13
9 Paper 17 1 2 9 12
10 Others 2 2 19 10 17
The table - 5.4 shows that 56 units to be dependent on
scarce raw material, 26 units faced the problems with the
price, 36 units faced seasonal availability of the raw
material. There are certain raw materials like, Wax, Special
Steel, Wood, Asbestos, which are scarce and controlled items
and the 5SI units have to plan their purchase in advance.
This will affect their production schedule. There are
certain other industries like Fruit processing, Food/Agro
based industries which are dependent on those raw materials
whose availability is seasonal like fruits and agro based
articles.
220
It was also observed that majority of units obtained
the raw material through working capital assistance.
(4) Marketing Problems:
The concept of marketing begins even before
conceieving the product and continues hence. The successful
marketing efforts has a bearing on the successful working of
the industrial concern. During the field survey it has been
tried to assess various marketing problems like severe
competition, pricing, distribution, awareness etc. Most of
the units surveyed have expressed that they are facing
severe competition. As much as 37 units have stated that
they have problems with pricing i.e., to say they are not
getting remunerative prices for their product. 22 units have
informed that they have problems with the distribution
network. i.e., higher lead-in-time for payments from
distributors. The remaining units do not have any
distribution problem because they are handling the marketing
themselves. Surprisingly as much as 55 units have struggled
in the initial stages to gain the awareness of the endusers
both in terms of product and the company.
(5) Capacity Utilisation, Break-even Analysis and Trends in Production and Profit:
The utilisation of funds from the SSI units financed
by SFCs/Commercial Banks or other Financial Institutions
221
reflects from the capacity utilised (utilization of various
factors of production like land, labour, capital and man
power), Break even point (the point at which the costs are
equal to revenue) and the production. Hence, an effort has
been made in the field survey on these lines.
It is pertinent to note that 26 of the units surveyed
have achieved the capacity utilisation in the range of 81-90
per cent. The capacity utilisation is below 50 per cent for
only 13 units. 14 units have achieved the capacity
utilisation of more than 90 per cent. Rest of the untis (45)
have utilised capacity in the range of 51-80 per cent.
In order to know the health of the units, a question
was asked during the field survey on the Break-Even Point
(BEP). It is the point at which revenues are equal to costs.
In the sense at a particular level of production, the
at which the unit will break-even the cost and
production beyond that point will be the profits for
point
any
the
unit. Interestingly, 6 units have revealed that their BEP is
at 98 per cent, because these were sick units with
accumulated losses. The BEP in the majority of the units
surveyed is in the range of 34 per cent 65 per cent.
Higher the BEP; lower will be the profit margins for the
entrepreneurs. Hence it is always the concern of a
222
successful entrepreneur to keep the BEP level at the minimum
by cutting down the unneccessary costs. The BEP for 27 units
is in the range of 66 per cent to 85 per cent. This is
mainly because, these units are highly raw-material oriented
and the prices of these mateirals are subject to frequent
fluctuation. This has affected the Break-Even Point of the
unit. It is pertinent to note here that these are the
industries which are based on scarce and seasonal raw
material whose availability is subject to fluctuations and
the price is also subject to wide variations.
The production figures of the last 3 years viz
1988-89, 1989-90, 1990-91 have been collected from the
units. 13 units have registered negative growth rate and 27
units have registered positive growth ranging from 2.05 per
cent to 12.13 per cent. In case of remaining units either
there is no change in production trends or the trends are
not available for 3 complete years.
The industry-wise production trends are given in the
Table - 5.5.
223
TABLE - 5.5
INDUSTRY-WISE PRODUCTION TRENDS
SL.NO. INDUSTRY POSITIVE NEGATIVE
1.
2.
3.
4.
5.
6 •
7.
8 .
9.
*
**
VARIANCE* VARIANCE**
FOOD 05 01
ELECTRICAL AND ELECTRONICS 04 02
CHEMICALS 04 04
TEXTILES 00 00
ENGINEERING 06 02
LEATHER 01 01
RUBBER 02 00
PAPER 02 01
OTHERS 03 02
The production trend in these cases for the three years assessed indicates the increase over the previous year.
The production trend in these cases for the three years selected indicates decrease over the previous year.
The negative trend is more pronounced in Chemical
Industrial Sector and positive trend is more pronounced in
the Engineering Sector. This can be attributed mainly to the
factor that the chemical industries are more prone to
variances in the availability of raw materials and wide
fluctuations in the prices of both raw materials and
finished products. Normally in the Engineering industry it
is more job work oriented and hence there are less
224
fluctuations. The market for Engineering industry is vast
whereas the market for chemical industry is limited. There
is also considerable manufacturing risk and loss due to the
rejections in the chemical industry. Coupled with this there
are problems with effluents and pollution. The Engineering
industry has greater scope for diversification and with
little investment and minor adjustments it can diversify
its production as per the market requirements. The chemical
industry is dependent more on raw material whose prices are
subject to greater fluctuations whereas the Engineering
industry is dependent on limited raw materials like iron and
steel and depending more on the skill of labourers.
225
(6) Profile of Working'Cost of the Surveyed units:
In the table below, industry-wise working cost of the
SSI units is presented.
TABLE - 5.6
DISTRIBUTION OF WORKING COST IN PERCENTAGE C%)
Sl. INDUSTRY RAW LABOUR TRANS- ELEC. ADMN SALES OTHER No. TYPE MATERIAL COST PORT CITY COST COST COST
COST COST COST
1. FOOD 19 11 13 7 21 15 12
2 . E & E 23 12 11 12 07 24 11
3. CHEMICALS 31 21 9 13 13 10 12
4. TEXTILES 20 13 19 10 11 14 13
5. ENGG. 28 10 1 10 22 19 10
6. HOTEL 13 13 0 41 1 11 0
7 • LEATHER 15 15 1 3 24 11 31
8. RUBBER 26 17 11 22 14 10 0
9. PAPER 21 10 10 31 10 17 10
10. OTHERS 10 11 9 11 22 26 11
In case of Food Industry the major cost is towards
raw-material, transport, sales interest payments and
226
administration cost which together constitute 68 per cent of
the total costs. In case of Electric and Electronics
Industry major costs is towards sales followed by raw
material cost and then labour and electricity. In case of
chemical industry the major cost is towards raw-material
followed by labour cost and the other costs including the
servicing of the loan. In the textile sector sales and raw
materials are the major components of the working cost. Raw
material and adminstrative cost are the major working costs
in case of enginering industry. The administrative cost is
more in case of leather industry. In Rubber industrial
sector raw-material and electricity costs are more. In paper
industry majority cost is towards electricity. Over all raw
material, selling, administrative cost and servicing the
loan are the major costs.
(7) Ratio of Employment:
The ratio of employee in the office to that of the
factory will give an indication of the overhead costs of the
industrial unit. By collecting this information in the field
survey, an effort has been made to assess this factor. The
Table - 5.7 presents the industry-wise ratio of employment.
227
TABLE - 5.7
RATIO OF EMPLOYMENT
SL. INDUSTRY TYPE FACTORY OFFICE RATIO NO. STAFF STAFF [OFFICE . FACTORY] .
1. FOOD 210 31 1 6.77
2. E & E 88 37 1 · 2.38 · 3. CHEMICALS 208 164 1 1.27
, 4. TEXTILES 10 2 1 5.00
5. ENGINEERING 116 45 1 2.58
6. LEATHER 88 86 1 · 1.02 · 7 RUBBER 31 10 1 · 3.10 · 8. PAPER 19 10 1 · 1.90 · 9. OTHERS 649 105 1 · 6.18 ·
The ratio of employment in office to factory is
higher in food industrial sector. The lowest ratio is in
leather industrial sector, (See Table-5.7).
(8) Financial Assistance Profile:
Another parameter for selecting the unit for field
survey is the Financial Institutions which have financed.
KSFC and Commercial Banks are the major financial agencies
providing credit to SSIs in Karnataka. Hence, 46 units are
228
those which are financed by KSFC, 32 units are those which
are financed by Commercial Banks and 22 units are those
which are financed by other Financial Institutions like
Industrial Corporative Banks.
It is also observed that only in 19 cases the term
loan lending institution is providing working capital
facility. In 81 cases they have obtained term loan and
working capital loan from different financial institutions.
It is pertinent to note that normally SFC's do not lend
working capital and commercial banks mainly provide working
capital facility. They provide term loan where they will get
refinance from IDBI or SIDBI. It is generally felt that the
units after obtaining term loan and the unit is put into
operation they apporach for working capital loan and there
will again be another appraisal.
Hence it is convenient for the SSI entrepreneurs if
the term loan lending institutions provide working capital.
(9) Pattern of Assistance:
An effort has been made in the field survey as to the
pattern of Financial Assistance i.e., whether the finance is
more towards land or bulding or plant and machinery. The
229
table below shows that of the surveyed units more loan has
been given to land and bulding and very less on plant and
machinery. For miscellaneous purposes as much as 22 units
have obtained the loan. More loan towards land and building
indicates that it is an un-productive expenditure whereas an
investment on the plant and machinery will be a productive
one.
TABLE - 5.8
PATTERN OF FINANCIAL ASSISTANCE
SL. INDUSTRY TYPE LAND BUILDING P & M MISCELLENEOUS NO.
1. FOOD 04 08 06 02
2. E & E 03 07 06 01
3. CHEMICALS 03 04 04 02
4. TEXTILES 04 05 05 01
5. ENGINEERING 03 03 10 04
6. HOTEL 02 04 01 00
7 LEATHER 02 04 05 01
8. RUBBER 01 02 03 02
9. PAPER 05 07 09 04
10. OTHERS 02 06 01 06
230
(10) Assistance Profile (Term Loan and Working capital):
As can be seen from the table below, majority of the
units have availaed Term Loan ranging between Rs.IO-20
lakhs. It can also be observed that more food units have
obtained less loan (i.e. within Rs.IO lakhs) and good number
of Engineering and Electrical and Electronics units have
availed more loan in the range of Rs. 40-60 lakhs. In the
sense food industry is less capital intensive compared to
other industries.
In other words the expenditure on fixed assets for
food industry is less because they are raw material oriented
industries and are more capital intensive industries.
Whereas in case of Engineering and Electronics industries
the investment on fixed assets is on an higher side. In
order to house the sophisticated machineries, they require
to construct building at considerable expenditure.
• 231
TABLE - 5.9
FINANCIAL ASSISTANCE PROFILE (TERM LOAN)
SL. INDUSTRY TYPE UPTO Rs 10 - 20 Rs 20 - 40 Rs 40 - 60 NO. Rs. 10 lakhs lakhs lakhs
lakhs
1 . PAPER 5 1 4 1
2. CHEMICALS 2 4 3 1
3. FOOD 8 3 2 2
4. RUBBER 1 1 0 1
5. LEATHER 1 3 1 0
6. ELE. & ELECT. 4 6 1 3
7 ENGINEERING 1 6 4 3
8. HOTEL 0 1 2 1
9. TEXTILES 3 2 0 0
10. OTHERS 2 5 6 2
232
TABLE - 5.10
FINANCIAL ASSISTANCE PROFILE (WORKING CAPITAL LOAN)
INDUSTRY TYPE
FOOD
ELE. & ELECT.
CHEMICALS
TEXTILES
ENGINEERING
HOTEL
LEATHER
RUBBER
PAPER
OTHERS
WORKING CAPITAL LIMIT UPTO Rs 10 - 20
Rs. 10 lakhs lakhs
03 08
05 06
05 03
03 02
09 02
01 00
02 02
02 02
08 03
10 03
SANCTIONED Rs 20 - 40
lakhs
01
03
02
00
02
01
01
01
03
02
It can be observed from the Table-s.lO, that
Engineering industral sector has availed less working
capital loan compared to other industrial groups. The
working capital intensity is more in food, paper and
Electrical & Electronics industrial sector.
(11) Promoters' Contribution:
The success of the project hinges mainly on the stake
of the promoter especially the financial stake in the
project. Normally the means of finance is 75:25, i.e.,
minimum promoter's contribution should be to the extent of
233
25 per cent of the cost of the project. But in case of
technically qualified entrepreneurs it may be 90:10. But
after implementing the project we have tried in the field
survey to assess the exact stake of the promoters. Of the
surveyed units there are 13 units with 10 per cent
promoter's contribution, 14 units with 15 per cent, 35 units
with 20 per cent, 14 units with 25 per cent and 14 units
above 20 per cent.
(12) Time taken for Sanction and Release of the Loan:
In the following table, average time taken for
sanction (Industry-wise) is presented.
SL. NO.
1.
2.
3.
4.
5.
6.
7.
8.
TABLE - 5.11
INDUSTRY-WISE PROFILE OF TIME TAKEN FOR SANCTION (MACRO REPORT)
INDUSTRY Average No. of Days taken for Sanction
FOOD 254
ELECTRICAL AND ELECTRONICS 137
CHEMICALS 165
ENGINEERING 121
TEXTILES 338
HOTEL 141
LEATHER 133
RUBBER 180
234
TABLE - 5.12
lNDUS'.l1l.YWISE PROFILE OF TIME TAXEN FOR SANCTION (MICRO REPORT)
Unit Name Date of Date of No.of Days Application sanction Taken
1 2 3 4
Sri Sai Coir Consumer 01/04/89 01/05/89 30
Lewis Natural Foods 04/10/89 01/12/89 58
Naptha Resings & Chemicals 06/11/74 01/01/75 56
Binfo Electronics 11/08/87 01/09/87 21
Agro Chem lndistries 01/12/85 01/01/86 31
Srinidhi Containers 10/09/90 13/09/90 3
Thyli Inds.PVt Ltd. 05/10/89 01/11/89 41
Sudharshan Automobilies 12/03/87 18/08/87 159
Davanagere Wire Rope Ind. 15/02/91 06/07/91 141
Techno Tools 01/01/83 14/04/83 103
Automation Technology 01/04/90 03/08/90 124
Sushma Pulverisers 01/10/85 01/01/86 92
Natural & Essential Oils 01/12/79 01/01/80 31
Ganesh Enterprises 01/05/91 09/09/91 131
Duro Treads & Rubbers 13/03/82 09/09/82 180
Poineer Plastics Inds. 01/02/88 01/05/88 90
Alois Printroniks P Ltd 01/10/89 01/06/90 243
Falma Laboratories Pvt. 27/10/87 05/05/88 191
Karnataka Vennering lnds. 13/09/88 02/02/89 142
Seqronics (I) Pvt. Ltd. 01/12/84 01/01/85 31
Khoba Chemicals & Synthecis 18/07/87 01/06/88 312
Advanced Components lnst. 01/11/90 09/06/91 221
235
1 2 3 4
Aluminium Trans Products 09/12/80 01/04/81 113
Dutta Industries 08/04/86 01/09/86 146
Kingsley Exports 01/01/88 01/11/89 300
Nilgiri Dairy Farm Ltd 01/10/89 - 03/08/91 671
Vigil Filaments P Ltd 01/10/84 01/11/84 31
Dixit Eng. Components 01/07/88 14/10/88 327
Skanda Offset Printers 04/03/79 09/08/79 158
Housy Fabrication Comb. 02/12/85 04/04/86 123
Mari Gold Food Printers 13/02/87 19/09/87 218
Princess Ranj Electro 01/01/89 01/10/89 273
Kodagu Foods P Ltd. 01/01/88 01/10/88 274
MBM Pop Rivets & Fastners 01/01/85 01/01/86 365
Karnataka Rubber Inds. 01/01/85 01/01/86 365
Metallic Soaps & Chemicals 11/11/88 01/04/89 141
Kanva Industries 04/10/80 05/03/81 152
Haysala Fastners 01/01/85 01/02/85 31
Perfect Engg. Works 12/02/90 14/06/90 122
Mysore Nails & Fastenrs 09/11/83 10/04/84 153
Synthorg (MYSR) Pvt. Ltd. 09/12/89 18/07/90 221
Woltrom Muly Products 01/14/86 01/07/86 91
Sparelli Daphne Labs Ltd 25/05/87 25/11/88 550
Sukumar Soft Drinks 09/12/90 10/03/91 91
A J Bantex (p) Ltd. 01/02/88 21/06/88 141
Mysore Polimers Rubbers 20/09/82 21/10/82 31
Classic Lab 06/05/89 01/09/89 118
Amarnath Enterprises 01/11/89 15/01/91 75
236
1 2
Nilgiri Cancer Centre 13/04/90
Harry's Food Producrs 13/04/90
Spectro Colors 01/12/90
Ganesh Consultancy 07/01/87
Hotel Poornima Restaurant 12/11/83
Varadaraja Silk Throning 01/01/90
S P S Granites 11/01/82
Sri Gajanana Granites 01/01/89
Pavithra Fabricators 03/01/91
Smak Pharmaceuticals Pvt. 11/01/86
Cozy Polystone Ltd 31/03/85
Applo Footwear Pvt. Ltd 01/01/83
Sushautha Nursing Home 01/07/88
Sunil Roller Mill Pvt. Ltd. 01/01/90
Gears & Transmiss 01/01/74
Kukreja Enterprises 01/01/87
Peruwal Plastics P.Ltd. 06/01/87
Amrut Food Product 14/01/86
Harison Allied industries 18/03/84
Amar Traders 10/12/83
Star Glass & Tiles 07/05/83
Dyana Diesels 15/10/82
Trikaya Adds 07/06/86
Madan Hardware 02/09/85
Sudhir Steels 01/07/89
Deepak Tools 08/09/87
3
31/03/91
26/07/90
05/03/91
31/03/81
01/04/84
01/01/91
17 /05/82
23/06/89
10/07/91
01/08/86
09/12/85
31/03/83
31/12/88
01/06/90
31/03/74
01/01/88
09/03/87
16/02/86
20/05/84
17/01/84
08/07/83
09/12/82
16/08/86
06/12/85
02/12/89
06/01/88
4
352
104
94
83
141
365
126
173
188
202
984
89
183
151
89
365
62
33
63
38
62
55
70
95
154
120
237
1 2 3 4
Manjula Furniture 09/12/83 10/04/84 123
Swagath Agencies 26/02/89 31/03/89 6
Darla Sales & Agencies 10/01/89 11/05/89 121
Bhavasar Enterprises 12/12/86 14/04/87 123
Rupesh Silk Weaving 03/03/90 05/01/91 308
Malothra & Sons 07/03/91 10/04/91 34
Kumar Chemicals 08/12/87 01/01/88 24
Raghu Pharmaceuticals 10/07/88 01/02/89 206
Venlon Ployster Film Ltd 13/09/89 14/01/90 123
MSR Poultry Farm 02/06/79 03/10/79 123
Pavithra Fabricators 09/01/80 10/05/80 122
Morzaria Products Pvt. Ltd 04/02/80 06/06/80 123
Karnataka Electronics 09/02/80 10/04/80 61
Smak Pharmaceuticals Ltd 12/12/82 09/04/83 118
Sudarshana Automobiles 09/05/78 10/10/78 154
Sushrutha Elcoma Pvt Ltd 05/09/81 10/12/81 96
Pavithra Fabricators 04/12/85 05/05/86 152
Syscon Engineering 09/04/88 10/07/88 92
Kalpana Enterprises 02/03/91 06/07/91 126
Raj Granites 10/01/87 09/06/87 150
Shah Automobiles 09/01/86 10/05/86 121
Honey Products Pvt. Ltd 02/12/81 13/03/82 101
Raj Industries Equipments 12/12/86 01/04/87 110
Landmarks Associates 09/05/83 12/12/83 217
Pavithra Fabricators 02/03/81 04/06/82 459 ------------------------------------------------------------------
238
It can be observed from the Table - S.l~a maximum of
338 days has been taken for sanction in case of a textile
industry and a minimum of 133 days in case of a leather
industry.
If we look at the micro level as presented in the
Table-S.12, it is with a minimum of 3 days to a maximum of
550 days. Here in case of micro analysis, the average time
taken is 157 days which is on the higher side. This is
because the reception of the officers towards the project
is not encouraging and the red tapism. Apart from this the
clearance for sanction for the project is reciprocal. The
entrepreneurs also should show keen interest in providing
required papers to the financial institutions at the right
time. The delay at one stage will have cascading effect.
Financial Institutions are of the opinion that the delay is
mainly due to the legal impediments and other related
clearances from other departments of the government.
An analysis has been made to know the time taken for
the release of the loan. Normally sanctioning is only a
paper work and actual disbursement of the term loan happens
in stages. This will have a greater bearing on the
implementation of the project. It has been observed during
the field survey that the Financial Institutions have taken
239
time ranging from I month to 45 months. The average time
taken for the complete disbursal of loan is 8.68 months.
However, some of the entrepreneurs during the field survey
felt that the Financial Institutions' procedures of
disbursement are hard and rigid. The clauses like FIC (First
investment clause), (i.e. difference between Fixed assets
and loan sanctioned or 50 per cent of the promoters
contribution which ever is higher), security created, margin
money, income tax clearance certificate, Bankers opinion,
CA's certificate (for investment and ource of funds), ULC
clearance (including approved building plan), commitment
charges, clearances from other governmental agencies like
pollution control Board, KEB etc., are hard to obtain at a
reasonable period of time and running around from pillar to
post is required.
We have also interviewed the officers of Fianancial
Institutions about the grievances of the entrepreneurs. They
are of the opinion that for the successful implementation of
the project and for the proper utilisation of public funds
these norms are necessary.
240
(13) Profile of the Interest Rate Charged:
Servicing a loan is a crucial element to run an
industrial unit. The development banks are entrusted with
the objective of industrialisation of backward areas. Hence
depending on the location of the project different rates of
interest are charged. The rate of interest has a greater
bearing on the project financing, pricing and profitability
of an SSI unit.
In the field survey an effort has been made to
assess the rate of interest paid by the SSIs and its impact
on running the unit. The Small Scale Industrialists
expressed during the field survey that interest for the loan
is the major Component of their working cost. If the
utilisation of funds is not proper and the unit is not
running on sound lines, the interest gets accumulated along
with the penalty for default and thus leading the unit to
sickness.
The interest rate charged for the surveyed units range
from 10 per cent to 16 per cent. Majority of the units are
paying interest in the range of 13 - 14 per cent (37 per
paying cent of the surveyed units). There are 20 units each
interest in the range of 11-12 per cent and 15-16 per cent,
as seen from the Table-S.13.
241
TABLE - 5.13
PROFILE OF INTEREST RATES
SL. INDUSTRY RATE OF INTEREST NO. TYPE UPTO 10% 11%- 12% 13%- 14% 15%-16%
1. FOOD 1 1 8 5
2. ELE.& ELECT. 3 3 6 2
3. CHEMICALS 0 1 5 4
4. TEXTILES 1 3 0 1
5. ENGS. 2 5 6 1
6. HOTEL 0 0 3 1
7. LEATHER 1 1 1 2
8. RUBBER 1 02 0 1
9. PAPER 4 3 5 3
10. OTHERS 11 1 3 0
The differential interest rates followed by the
Financial Institutions from time to time will be in tune
with the policies of the Government to boost
industrialisation and entrepreneurship in backward regions.
(14) Repayment Analysis:
The repayment period for the term loan is between 5 to
8 years and stretchable upto 10 years. It is based on the
productivity and profitability of the particular concern.
242
The SSI units financed should get breathing time
Defore they start repaying the loan. The repayment period
should also be comfortable to the SSI enterprises. 27 Units
surveyed have been given repayment period upto 60 months. 21
units have availed repayment period between 61-72 months. 22
Units have a repayment period of 73-82 months. 12 Units have
been given 83-92 months. The same can be seen from the table
below.
TABLE - 5.14
PROFILE OF REPAYMENT
SL.NO. INDUSTRY REPAYMENT PERIOD (In Months) TYPE UPTO 60 61 - 72 73 - 82 83 -92
1. FOOD 8 2 ·3 2
2. ELE.& ELECT. 4 5 3 2
3. CHEMICALS 2 3 2 1
4. TEXTILES 0 3 2 0
5. ENGINEERING 6 3 3 2
6. HOTEL 3 1 0 0
7. LEATHER 3 1 1 0
8. RUBBER 1 1 1 1
9. PAPER 3 2 5 4
243
It can be observed that Food, Hotel, Engineering
Electrical and Electronics have got least repayment period
between 5 to 6 years. Because the cash generation capacity
is more in this industrial sector. The repayment period is
longer in the other industrial sectors because the
gestation period is more.
(15) Profile of Default/Regular Units:
In the Table-S.lS unit-wise details of amount
sanctioned, recovered, outstanding and the amount in default
is given.
It can be observed from the above that as much as 26
units are in default to the financial institutions. The
financial institutions during the time of sanction fix the
repayment period depending on the cash generation of the
project. The repayment period for the term loan varies from
5 years to 9 years. There are projects which involve time
for building construction or may be getting the imported
machinery wherein the project requires more time for
implementation. In these cases the repayment period will be
longer. If the project is being housed in a leased
accommodation and the machineries can be acquired in short
notice and there will also be sufficient cash generation
once the project goes on stream, the repayment period will
244 TABlE - 5.15
FR(FllE <F lMT WISE ~ITI~ <F AKUfl' SAR::TICNED RFX:lJ\.1mID, CUrSTANJIN:i AN) NUJNl' IN DEFAULTS
~ AM:XMl' NOJNT PMXJNl' AMXJNI' SANCI'IONID RFXXNERED OOI'STANDIN:; DEFAULT
tCUtron P. Ltd. 33.50 8.50 25.40 1.10
giri cancer Centre 35.00 6.32 28.46 5.80
rctr0 Colors 4.54 3.85 0.80
resh Consultancy 3.00 2.10 0.95
J:P. S. Granites 5.85 1.94 3.91
. Gajanna Granites 16.30 3.30 13.00
~ Po1ystone Ltd. 60.00 60.00
shrutha Nursing Hare 20.00 3.00 17.00 17.00
. 1 Roller Flour Mill 57.70 8.20 51.50
~eja Enterprises 10.00 1.80 12.20 2.20
~iwal Plastics Pvt Ltd. 60.00 41.90 18.10
J. Bantex Pvt Ltd. 8.12 2.56 5.56
IrO Treads & Rubbers 14.00 1.00 15.00 0.20
rrnataka Rubber Inds. 9.45 7.82 3.42 1.80
'sore Polymers Rubbers 31.12 21.50 9.62
.ngs1ey Exports 26.00 4.36 22.72
lradaraja Silk Throwing 8.10 2.25 5.90
.tra Fags Pvt Ltd. 17.80 11.20 4.80
nus Fisheries 25.00 22.50 2.80
neetha E1ectricals 8.80 8.95
mini Distilleries 30.00 12.96 17.04
sore Machine Aids 3.71 1. 72 2.52 1.80
LC Pvt Ltd. 52.00 37.33 14.67
tit Engg. Ccrrq:lonents 55.00 3.20 53.42 4.56
245
I~ AM){JNI' AM:XJNI' AM:XJm' AMJUNI'
SANCl'IONED REOJVERED OOI'STANDIK; DEFAULT
Ivitra Fabricators 1.00 1. 70 0.30
trzaria Prooucts Pvt Ltd 25.00 25.00
irrnataka Electronics 2.00 2.00
fA!< Phannaceuticals Ltd. 59.00 4.00 65.66 6.6
bdarshana Automobiles 31.87 21.92 9.95
!tshuutha Elcana. Pvt Ltd. 15.00 15.00
~ptha Rasins & Olanicals 60.00 50.00 10.00
l:Ro Chan Industries 25.00 7.00 18.00
~ Laboratories Pvt 60.00 11.00 49.00
fEA Olanicals and Shynthecis 40.00 43.45 3.45
~llic Soaps and Chanica1s 19.29 20.50
:are11i Daphne Labs Ltd. 23.25 4.85 18.70
NFD Electronics 11.00 1.21 9.79
rIa-1ATION Technology 23.00 3.02 20.00 1.80
DIS Printroniks Pvt. Ltd. 38.70 1.20 37.50
QRONICS (I) Pvt Ltd. 4.50 4.50
IIJANCEI) Canponents 24.00 26.50
GIL Filaments Pvt Ltd. 25.50 19.00 6.50
incess Ranju E1~ 7.93 1.18 6.75 0.40
iarshan Automobiles 31.87 22.02 9.95
::hno Tools 14.45 3.00 11.88 3.61
1esh Enterprises 22.00 4.00 18.00
rnataka Veneering Inds. 33.75 29.85 3.90
:ta Industries 10.00 7.35 3.10
246
•
f AM:XJNT AlOJNT N-UJNT AM:XJNI'
SANCTIONED REXXNERED OlJI'STANDIN:; DEFAULT
~ Offset Printers 4.11 3.80 0.75 0.40
~sy Fabrication canbines 3.90 3.90
pd. Gold Food Products 2.25 2.00 0.42 0.25
~ Pop Rivets and Fasterns 10.00 10.00
tmva Industries 11.00 4.50 8.80 4.58
~sala Fastners 4.00 2.32 3.80 1.80
sore Nails and Fastners 4.65 3.00 2.10 0.85
s and Transmissions Ltd. 30.00 24.85 6.53 0.41
is Natural Focds 30.00 36.00 6.00
2.50 0.65 2.00
11.00 8.00 3.25
ilgiri Diary Fann Ltd. 24.90 9.50 15.10
:dagu Foods Pvt Ltd. 17.00 7.95 11.05 2.32
Jlcumar Soft Drinks 25.20 1.20 26.20 4.80
~th Enterprises 30.00 17.10 13.90
:rr-ry' s Food Products 3.90 2.80 1.20
:Jtel Poornima Resturant 10.00 0.18 9.82
[0110 Footwear Pvt Ltd. 29.32 11.58 21.63 8.54
ri Sai Coir Consurrer 59.35 1.25 59.33 13.00
!lrinidhi Containers 24.60 0.70 23.90
lyli Industries Pvt Ltd. 10.00 2.80 6.00 6.00
ivangere Wire Rope 1005. 57.00 47.50 10.20
loneer Plastics Inds. 18.00 14.00 4.20 0.72
II'lthorg (MYS) Pvt Ltd. 3.70 3.85
l1.fran M=>ly Products 13.80 10.00 3.95
247
be less. For example, food industry, readymade garments
etc. Further the principal repayment for these industries
will be once in a month and the interest once in a quarter.
For those units who have longer repayment periods will get
both principal and interest repayments on a quarterly basis.
Therefore the units in default mean, they have failed
to keep up the schedule of repayment which will attract
penal rate of interest. The reasons cited are delay in the
implementation of the project, management and/or labour
problems, problem of availability of raw material - at right
time at reasonable prices.
(16) Problems faced while obtaining Loan:
The problems faced by the entreprefteurs are classified
as follows.
(a) Too many Formalities and Procedures:
Before sanction and relaese of loan, the small-scale
industrialists have to comply with several formalities like
incometax clearance certificate, Chartered Accountant's
certificate etc. Generally majority of the SSI entrepreneurs ,
are not incometax assessees. Inspite of that they are asked
to comply with a certificate from the Incometax Authorities.
Further the financial institutions insist on the Chartered
248
Accountants" certificate for source and utilisation of
funds. But source and utilisation of funds are physically
visible in the form of fixed assets like land, building etc.
(b) Reception of the Officers towards the Project not encouraging:
There are instances where officials of the financial
institutions not showing desired reception/encouragement
towards the small-scale entrepreneurs. This is either
because of the pressure of work or in some cases because of
the negative attitude of the personnel of the financial
institutions.
(c) No Proper Guidance:
Normally an entrepreneur has to contact several
departments when he enters a financial institution like loan
advance section, disbursement department, accounts section
etc. The entrepreneur may not be aware of the several
departments within the institution to obtain loan. Hence in
the field survey an effort has been made to assess the
problem of the entrepreneurs on these lines.
(d) In-ordinate Delay in Clearnace of Loan Proposals:
This may happen because of several formalities or
because of no proper guidance or both. Further before the
loan clearance, several approvals have to be obtained
249
from competent authorities within a financial institution.
There is a cause and effect relationship between the
factors mentioned above. These problems have been assessed
and has been presented below.
The following table indicates the industrywise
problems faced by entrepreneurs. It is relevant to note that
only 59 entrepreneurs have desired to comment/opine on this
count.
TABLE - 5.16
PROFILE OF THE PROBLEMS FACED WHILE OBTAINING LOAN
SL. INDUSTRY A B C D NO. TYPE
1. Paper 10 4 I- I
2. Chemical 2 4 1 1
3. Food I- I 2 3
4. Rubber 5 3 0 1
5. Leather 2 4 1 1
6. Ele & Elect 2 1 1 0
7. Engg 1 1 2 2
8. Hotel 2 5 1 1
9. Textile 6 2 1 1
10. Other 2 1 1 1
A - Too many formalities and prodecures B - Reception of the officers not encourging C - No proper guidance D - Inordinate delay in clearance.
250
As can be seen from the Table-5.16, 33 entrepreneurs
have expressed that there are too many formalities and
procedures and 26 have expressd that the reception they
received towards their project was not encouraging. As much
as 20 per cent are feeling that there is an inordinate delay
in clearing their papers and 17 per cent are of the opinion
that there is no proper guidance from the financial
institutions.
It can be analysed from the above that more than 90
per cent of the borrowers have complaints towards the
financial institutions. This calls for qualitative change in
the approach of the financial institutions towards
entrepreneurs. There is a need for more transperency in the
operations of financial institutions. It is also high time
to reconstitute the present procedures and formalities of
the financial institutions. In this direction a welcome step
has been taken by the Government of India by asking lOBI to
suggest amendments to the SFC's Act of 1956.
~17). OVERALL EXPERIENCE WITH THE FINANCIAL INSTITUTIONS:
The Table-5.l7 shows the industry-wise experience of
the entrepreneurs with the fianancial institutions.
251
TABLE - 5.17
OVERALL EXPERIENCE WITH FINANCIAL INSTITUTIONS
SL. INDUSTRY FAIR GOOD BJIlD NO. TYPE
1. FOOD 13 9 10
2. E & E 2 21 II
3. CHEMICALS 0 0 (1
4. TEXTILES 7 0 '11
5. ENGG. 1 3 F2
6. HOTEL 1 3 i4
7. LEATHER 1 0 '0
8. RUBBER 0 0 k9
9 • PAPER 3 1 'I
10. OTHERS 4 2 -0
As can be seen from the table above 32 units have
expressed that their experiences, the treatment they
received from the financial institutions is fair. 39 Units
have indicated that their experience with the financial
institutions are good. However, as much as 29 entrepreneurs
feel that their experience with the financial institutions
is bad.
2S2
5.4. ANALYSIS OF THE FIELD SURVEY DATA
Now in the second part of this chapter an effort has
been made to analyse the data in the following manner:
1. How the surveyed units are fairing on the basis of the
a) Promoters' background
b) Industry-wise
c) Constitution-wise
d) Financial Institution-wise.
2. The various parameters like education, implementation
period, (Industry wise and constitution wise), Break even
analysis (Industry wise and constitution wise), Time taken
for disbursement of loan from the financial institutions are
also analysed in an integrated analysis.
I. Educational Background of the Promoters:
It is to note that 46 per cent of the units
belong to the technically qualified category either
qualification or service. It is important to note
surveyed
through
that as
much as 22 per cent of the units were run by people with an
educational background of even below SSLC. The same can be
seen from the Table-S.18
253
TABLE - 5.18
. ANALYSIS OF THE PROMOTERS' EDUCATION
SL.NO. PARTICULARS NO.
1. TECHNICAL 46
2. GRADUATES 24
3. S.S.L.C AND 22 BELOW S.S.L.C
4. POST GRADUATES 07
II. Industry-wise Implementation Analysis:
a) The time taken for implementation in majority of the
units is either 1-6 months or 12-24 months. 61 per cent
of the units are in this range. As much as 24 per cent
of the units have taken implementation time of more
than 24 months. The gestation period is less among
engineering and chemical industrial sector. Whereas it
is too long in the case of electronics. The same can be
seen from the table-5.19
254
TABLE - 5.19
INDUSTRY-WISE ANALYSIS OF IMPLEMENTATION
SL. INDUSTRY 1 - 6 6 - 12 12 - 24 24 MONTHS NO. GROUP MONTHS MONTHS MONTHS & ABOVE
1. Paper 11 0 1 1
2. Chemical 5 0 1 2
3 . Food 1 6 2 3
4. Rubber 2 2 0 0
5. Leather 0 1 1 1
6. Ele & Elect 2 2 3 3
7. Engg 5 2 3 2
8. Hotel 0 0 0 0
9. Textile 1 0 1 0
10. Others 3 5 1 1
b) Constitution-wise Implementation Analysis:
It can be observed from the Table-5.20 that private
limited units have taken more time i.e., 24 months and
above, compared to other units. 47 per cent of
surveyed proprietory firms have taken 1-6 months
implementation period. Even partnership concerns have
also faired in the same manner. 43 per cent of the
partnership concerns have taken 1-6 months time for
implementation.
255
TABLE - 5.20
CONSTITUTION-WISE ANALYSIS OF IMPLEMENTATION
SL. NO.
1.
2.
3.
4.
PARTICULARS
PROPRIETORY
PARTINERSHIP
PRIVATE LTD
PUBLIC LTD
1 - 6 MONTHS
7
9
11
1
6 - 12 MONTHS
1
2
7
o
12 - 24 MONTHS
2
7
12
o
III. Analysis of Source of Raw-Material:
24 MONTHS & ABOVE
5
3
11
2
Obtaining raw-material continously at a reasonable
price plays a crucial role in the running of an industrial
concern especially so if it is an SSI concern. This depends
mainly on the nature and source of the raw material. It can
be noted that Food, Rubber, Engineering & Electronics
industries faced scarcity in obtaining the raw-material as
per the Table-5.2l.
256
TABLE - 5.21
INDUSTRY-WISE ANALYSIS OF SOURCE OF RAW MATERIAL
SL. INDUSTRY NO. GROUP
1. Paper
2. Leather
3. Textile
4. E1e & Elect
5. Food
6. Hotel
7. Engg
8. Rubber
9. Others
SCARE
2
1
1
6
7
0
9
5
15
OPEN MARKET
0
0
1
1
0
0
1
0
2
IMPORTED THROUGH GOVT. INST.
0 1
1 0
0 1
3 0
4 1
1 0
0 0
0 1
2 2
IV. Industry-wise Break-even Analysis:
As much as 4 units are breaking even in the range of
85-98 per cent. This is in chemicals, foods and rubber
industrial sector. This is mainly due to the extreme delay
in implementation and raw-material problem coupled with
marketing and management problems. The break-even is very
low in engineering sector which can be seen from the
Tab1e-5.22.
257
TABLE - 5.22
INDUSTRY-WISE BREAK EVEN ANALYSIS
SL. INDUSTRY 34-45% 46-55% 56-65% 66-75% 76-85% 85-98% NO. GROUP
l. Paper 1 0 1 1 0 0
2. Chemical 4 0 3 2 3 1
3. Food 4 2 1 3 0 1
4. Rubber 2 1 1 1 1 1
5. Leather 1 0 1 1 0 0
6. Ele & Elect 0 0 0 0 1 0
7. Engg 9 2 1 0 2 1
8. Hotel 0 0 0 1 0 0
9. Textile 2 0 0 1 0 0
10. Others 8 1 2 2 1 0
V. Constitution-wise Break-even Analysis:
It can be observed from the Table-5.23 that even
though private limited concerns have taken more time to
implement but are breaking even at a lower level of 34-45
per cent. This is mainly because of the low overhead costs.
Nearly 90 per cent of the units break-even in the range of
34-45 per cent which are private limited companies.
258
TABLE - 5.23
CONSTITUTION-WISE BREAK EVEN ANALYSIS
SL. INDUSTRY < 34% 34-45% 66-55% 56-65% 66-75% 76-85% 85-98% NO. GROUP
1. Proprietry
2. Partnership
3. Private Ltd
4. Public Ltd
VI. Analysis of
3
1
5
2
2
7
9
1
Promoters'
2
3
4
o
o
o
9
9
Contribution:
3
1
2
2
'0
1
1
2
2
I
1
o
(Constitution-wise)
TABLE - 5.24
ANALYSIS OF PROMOTERS' CONTRIBUTION (CONSTITUTION-WISE)
S1. Constitutions 10% 15% 20% 25% >25% No.
1. PROPERIETORY 2 1 4 3 9
2. PARTNERSHIP .. 2 3 2 7
3. PRIVATE 3 0 1 1 4
4. PUBLIC LTD 5 6 5 7 8
259
Depending on the type of entrepreneur, whether
technically qualified, experienced or the promoter belongs
to the weaker section of the society and the location of the
project - whether situated in a backward or forward area,
the promoter's contribution varies from 10 per cent to 25
per cent. No financial institution provides 100 per cent
finance. There should be some stake of the entrepreneurs to
run the industry with commitment and interest. Normally the
promoters' contribution will be in the form of initial start
up expenses, preliminary and pre-operative expenses, margin
towards machinery and working capital. Normally the
financial institutions insist for FIC (First Investment
Clause) before the actual disbursement of the loan. The
promoter before asking the release from
institutions has to show proof towards the
by him from a Chartered Accountant.
the fiancial
investment made
It can be observed from the Table-5.24, that 54 per
cent of the proprietory firms have invested more than 25 per
cent of the project as their contribution. Almost similar is
the case of partnership concerns. Whereas more than 75 per
cent of the public limited companies have managed to invest
less than 25 per cent. But 50 per cent of the private
limited companies have invested only 10 per cent of the
project cost.
260
VII. Institution-wise Disbursement Analysis:
As mentioned earlier the present study is concentrated
more on the operations of KSFC and Commercial Banks.
Karnataka State Financial Corporation popularly known as
KSFC was established in the year 1959. More than 50 per cent
of the SSI concerns in the state are financed by KSFC. It is
considered as the premier term lending institution in the
country. KSFC has been rated as the best SFC in the country
by the national level financial institutions like lOBI and
SIDBI. KSFC has so far financed more than 75,000 industrial
units to the extent of around Rs. 1,100 crores.
Regarding commercial banks, Karnataka has given birth
to several commercial banks like Canara, Syndicate, Vijaya
and Karnataka Bank. There are about 4,300 Bank branches in
the state with a deposit of Rs.lO,OOO crores. The advances
are to the extent of Rs.8,000 crores
Coming to the more particular point of financing, KSFC
scores over other financial institutions in the time taken
(minimum) for disbursement. The average time taken from KSFC
is 10 months (of the surveyed units). Commercial Banks have
taken 18 months and that of other financial institutions is
21 months.
261
TABLE - 5.25
INSTITUTION-WISE DISBURSMENT ANALYSIS
SL. NO.
INSTITUTION AVERAGE TIME TAKEN FOR DISBURSEMENT (MONTHS)
1.
2.
3.
K.S.F.C
COMMERCIAL BANK
OTHER F.I'S
10
18
21
VIII. Institution-wise Finacia1 Assistance Analysis:
In the following table, an effort is made to trace the
share of financial institutions in the financial pattern
provided to SSIs.
TABLE - 5.26
INSTITUTION-WISE FINANCIAL ASSISTANCE ANALYSIS
SL. FINANCIAL UPTO RS.5 5-10 10-20 NO. INSTITUTIONS LAKHS LAKHS LAKHS
1. K.S.F.C 5 10 15
2. COMMERCIAL BANKS
3. OTHER F.I'S
9
4
5 2
5
20-40 LAKHS
07
2
3
40-50 LAKHS
7
1
o
262
It is Commercial Banks which score over KSFC in the
loans provided in the range below Rs. Five Lakhs. Above
third range KSFC has provided more loans.
The inferrence from the above analysis is that KSFC
being a development bank and its major operations are being
refinanced by lOBI and SIDBI, there is no scarcity of funds
on the sanctions to the SSIs. But in case of commercial
banks there are several restrictions from the RBI in the
form of SLR (Statutory Liquidity Ratio), CDR (Credit-Deposit
Ratio), Credit Squeeze etc. The Government of Karnataka is
also involved in the funding opertions of KSFC and thus the
sanctions of KSFC are much higher. The commercial banks
being commercial in nature look towards the security of the
loan whereas KSFC being a development bank aims at the
development of industries in the backward region. The
operations of KSFC are target oriented whereas that of
commercial banks is security oriented and guided by various
regulations of the RBI.
IX. Ananlysis of Constitution-wise Source of Funds:
Now an effort is made to understand as to how the
untis (SSI) depending on constitution mobilised funds?
263
TABLE - 5.27
ANALYSIS OF CONSTITUTION WISE SOURCE OF FUNDS
SL. CONSTITUTION OWN "FUNDS FRIENDS AND BORROWED NO. RELATIVES FROM OTHERS
1. PROPRIETORY 21» 4 1
2. PARTNERSHIP as 4 "1
3. PRIVATE LTD 213 4 7
4 . PUBLIC LTD. PIJ 4 0
It can be seen from the Tab1e-5.27 that majority
of the private limitedhconcerns (31 per cent) were able to
manage with their own funds. It can also be observed that 50
per cent of the propriQtory firms have borrowed money from
friends, relatives andnothers.
264
X. Industry-wise Sources of Funds
TABLE - 5.28
ANALYSIS OF INDUSTRY-WISE SOURCE OF FUNDS
SL.NO. TYPE OF OWN FUNDS FRIENDS & BORROWED INDUSTRY RELATIVES FROM OTHERS
1. FOOD 5 3 1
2 . E & E 3 0 0
3 • CHEMICALS 7 0 1
4 TEXTILES 2 0 0
5. ENGINEERING 9 2 ·1
6. HOTEL 2 0 0
7. LEATHER 2 0 0
8. RUBBER 5 1 0
9. PAPER 2 0 0
10. OTHER 11 8 6
It can be observed from the Tab1e-S.28 that
majority of the food units have managed from their own
funds. It can also be observed that the entrepreneurs 'in the
Engineering industry were able to borrow from their friends
and relatives to a considerable extent. In general they are
running the show from their own funds.
265
XI. Analysis of the Rate of Interest Charged (Institutionwise) :
The interest rate charged by KSFC is more ranging from
13-14 per cent and that: of Commercial Banks, in the range of
below 10 per cent an&r above 16 per cent. The rate of
interest charged by ot!her financial institutions is more in
the range of 15 -16 par cent. The same can be seen from the
following table. o'
TABLE - 5.29
ANALYSIS OF INSTI~TION-WISE RATE OF INTEREST CHARGED
RATE OF INTEREST CHARGED
SL. FINANCIAL NO. INSTITUTIONS UPTO 10% 11-12% 13-14% 15-16% ABOVE 16%
1. K S F C 4 7 22 5 4
2. COMMERCIAL BANKS 13 5 4 2 9
3. OTHER F.I'S 1 2 5 8 3
The rate of interest charged by other financial
Institutions is more in the range of 15 - 16 per cent.
266
XII. Industry-wise Default Analysis:
TABLE - 5.30
INDUSTRY-WISE DEFAULT ANALYSIS
SL.NO. INDUSTRY TYPE REGULAR DEFALUT
1. FOOD 10 3
2. E & E 08 1
3. ENGINEERING 09 4
4. PAPER 07 3
5. CHEMICALS 07 2
6. TEXTILES 03 2
7. LEATHER 02 1
8. HOTEL 04 0
9. RUBBER 03 1
10. OTHERS 06 2
The above table depicts that the default is more in
food and paper industry. The ratio of regular to default is
more in Engineering Hotel Industries. Overall 32 per cent of
the units are defaulters. This is on an higher side. The
main reasons quoted for default are delay in implemention,
working capital problem, management problem, etc.
267
XIII. Constitution-wise Default Analysis
TABLE - 5.31
CONSTITUTION-WISE DEFAULT ANALYSIS
SL. NO. INDUSTRY TYPE
1. PROPERIETORY
2. PARTNERSHIP
3. PRIVATE LTD
4. PUBLIC LTD
REGULAR DEFAULT
19 5
14 4
07 3
20 7
PERCENT
26
29
43
35
As can be seen from the above table, the default is
more in private limited companies followed by public limited
companies. It can therefore be concluded that proprietory
and partnership concerns are more reliable to financial
institutions.
268
XIV. Analysis of Problem Faced While Obtaining Loan:
TABLE - 5.32
ANALYSIS OF INSTITUTION-WISE PROBLEM FACED WHILE OBTAINING LOAN
SL. NO. FINANCIAL A B C INSTITUTIONS
1. K.S.F.C 50 6 0
2. COMMERCIAL BANKS 18 4 1
3. OTHER F.I.S 1 0 0
A Too much formalities and procedures B Reception of the officers towards the project
not encouraging C No proper guidance 0 Inordinate delay in clearance.
It can be observed from the Table-5.32 that 85 per
cent of the entrepreneurs feel that the formalities and
procedures are too many. The process of simplifying the
procedure is slow. There is an urgent need for change in the
approach of the institutions. 12 per cent of the people feel
that the reception of the officers towards the project is
not encouraging. There are no such complaints on the
guidance and movement of the files. It can be seen from the
above table that the major grouse of the loanees is towards
the procedures and formalities. The entrepreneurs during the
survey expressed that considerable time and money is being
0
2
0
0
269
spent to procure the various documents, legal papers,
clearances from other agencies like No Encumberance
Certificate, Tax Paid Receipt, Title Deed or Sale Deed or
Partitition Deed or Gift Deed (depending on the case) etc.
Additively it is strongly felt that there is not much
coordination between the various departments within the Bank
or SFC. The entrepreneurs during the field survey have
expressed their problems in handling variou~ departments
within a bank like Sanctions, Disbursement, Recovery,
Finance and Accounts Departments.
xv. Analysis of Overall Experience with the Financial Institutions
It can be observed from the Table-5.33, that only 22
per cent of the clients of financial institutions are happy
with their transactions. As much as 75 per cent of them have
expressed that their dis-satisfaction with the financial
institutions.
SL.NO.
1 .
2 .
3.
270
TABLE - 5.33
ANALYSIS OF OVERALL EXPERIENCE (INSTITUTION-WISE)
FINANCIAL INSTITUTIONS
K.S.F.C
COMMERCIAL BANKS
OTHER F.I.S
FAIR GOOD
15 42
2 15
o 1
BAD
1
1
o
5.S SUMMARY OF THE FINDINGS OF THE FIELD SURVEY AND ANALYSIS THEREON
The SSI units selected for the field survey are based
on the following parametres.
The first parameter in selecting the unit for field
survey has been the 'type of entrepreneur' i.e., based on
the background of the promoter - whether he is technically
qualified or not, educational background, experience in the
particular line he has ventured. The second parameter
considered for selecting the unit for the field survey is
the constitution of the unit i.e., whether the unit is a
'proprietary' or 'partnership' or 'public' or 'private
limited company'.
271
There are several types of industries as for
instance, Engineering, Electrical and Electronics, Food,
Hotel etc. Due care has been taken while selecting the unit
for the field survey to see that all the major industrial
groups are represented. The units situated in Bangalore,
Mysore and Hubli have been selected for "the survey.
The objective of the field survey is to know the
problems of the SSI entrepreneurs while obtaining loan,
while running the unit and the impact
assistance on the SSI concerns.
of
The major findings of the field survey are :
financial
(1). The educational background of the promoters is of
little consequance while running an industrial
enterprise. As much as 54 per cent of the
concerns are run by the entrepreneurs who are not
technically qualified.
(2). It has been found in the field survey that the
implementation period for the SSI units is
relatively longer. The major reasons being too
many formalities and procedures to be followed,
delay in sanctioning and release of the loan from
the financial institutions. Several clearance
from the various agencies, no proper planning on
the part of the entrepreneurs etc.
272
(3). The role of Governmental agencies in providing
scarce raw-material at a reasonable price to the
SSI sector is minimum. Majority of the SSI
concerns depend on open market or imports for
raw-materials.
(4). Even though the capacity utilisation of the SSI
units is relatively on an higher side, the break
even point is not low. This is again due to raise
in prices of raw-material, labour, power,
transport and etc.
(5). While analysing the production trends in the
three years, it has been found that majority of
the units have registered either a negative
growth or no change in their production trends.
(6). It is also found that the ratio of employees in
the office to the factory is higher leading to
more overhead costs.
(7). The results of the survey reveals that marketing
is a major draw-back for the SSI units. Most of
the units have problems like severe competition,
pricing, distribution, awareness etc. The role of
273
the governmental agencies in furthering the
interests of SSI units in marketing is minimum or
not effective.
(8). The promoters' contribution in majority of the
SSI units is less than 25 per cent.
(9). The time taken for sanction and release of loan
to the SSI concern is too long. This will have a
cascading effect on running an SSI unit.
(10). The financial assistance on land and building to
house the SSI unit is more compared to the plant
and machinery. It has been observed in the field
survey that to house Rs. Three lakhs worth
machinery as much as Rs. Five lakhs is spent on
land and building. Instead, the entrepreneur
would have gone either for rented premises or
leased premises in the initial stages to house
his unit. More investment on land and building
will affect the profitability of the unit.
(11). It has been found out during the field survey
that food and chemical sectors are more prone to
the vagaries of market. Engineering and Hotel
274
industries are running on sound lines. In the
same way partnership and proprietary concern are
running on a sound basis compared to private and
public limited concern.
(12). 26 per cent of the units are in default to the
financial institutions.
(13). Majority of the SSI concerns are not happy with
the procedures followed by the financial
instutions as the Small Scale Industrialists
broadly agree with the major policies of the
financial institutions.
(14). Karnataka State Financial Corporation is
providing better services compared to other
financial institutions both in terms of quantity
and quality.
ANNEXURE 1
QUESTIONNAIRE FOR THE RESEARCH STUDY ON nINSTITUTIONAL FINANCE TO SSIs IN KARNATAKA"
GENERAL :
1. Name of the Unit
2. Address of the Unit Factory
Office : Phone No.
3. Name and Designation of the Respondent
4. Chief Promoter's Education
5. Previous Occupation
6. Year of establishment of the unit
7. Constitution of the Unit
8. Date/Year of the Commencement of Commercial production of the unit
9. Name of the product being produced
10. Any other by product being produced
11. Licenced/installed capacity
· ·
Phone No.
: Below SSLC/SSLC/Graduate/ Post Graduate/Technically Qualified.
· · · ·
· · · · · · • ·
Proprietary/partnership/ Private Ltd.,/Pub1ic Ltd.
276
12. Capacity utilisation (Average during the last 3 years)
13. Production during the last 3 years
1987-88 1988-89 1989-90
14. Break even point of the unit
15. Availability of raw materials
16. Any problems faced while
obtaining raw material
17. Total No. of persons employed
a) Factory b) Office
18. Major end-users (either name of the unit or major industrial sectors)
19. Sales during last: three years
1987-88 1988-89 1989-90
· ·
· · • · · ·
Qty. (Tonnes per annum)
Value (Rs. )
Open market/Government Institution/Imported/Scarcity
a)
b)
c)
d)
e)
a) b) c) d)
Scarce
High Price
Restrictions in importing
Seasonal Availability
Other (if Yes I please specify
Quantity (TPA)
Yes/No
Yes/No
Yes/No
Yes/No
Yes/No
Value (Rs)
277
20. Problems faced in market-ing :a) Server competition Yes/No
Yes/No Yes/No Yes/No
21. Assistance for marketing either by Government or private agencies (Tick whichever is applicable)
22. Marketing Strategy
23. Export/Import oriented unit (Tick whichever is applicable)
24. SPECIAL INFORMATIONS
1. Name of the Financial Institution providing term loan
2. Date of sanction
3. Date of Realisation of Loan (complete Disbursement of Loan)
4. Total Financial assist-ance obtained
5. Financial assistance to:
Land · · Building · · Plant and Machinery · · Others Total · ·
6. Whether term lending
institution is providing working capital facility
7. Whether financial assistance is provided under any special scheme :
b) Pricing c) Distribution d) Awareness e) Others (If Yes,
please specify) Yes/No
Government/Private Agencies
Through Dealers/Retailers/Both/Directly.
Export/Import
Rs. lakhs
Rs. · . . . . lakhs Rs. · .... lakhs Rs. · .... lakhs Rs. · . . . . lakhs
Yes/No
Yes/No
278
8. If yes, please name the scheme and the reason for obtaining finance under special scheme
9. Problem faced while obtaining loan
a) Too much formalities and procedures Yes/No
b) Reception of the officers towards the project was not en-couraging Yes/No
c) No proper guidance Yes/No
d) Inordinate delay in clearance .: Yes/No
e) Others (If yes, please specify) : Yes/No
10. Rate of interest charged
11. Repayment period
12. Present amount outstanding with the financial institution
13. Amount in overdues if any
· ·
14. If yeas, your difficulin clearing the overdues:
15. Name of the Bank provi-ding working capital
16. Date of application · · 17. Date of sanction of
working capital · · 18. Working capital
required for (Tick whichever is applicable:
• • • •• %
1) 2) 3)
Years/months
Rs. ..... lakhs
Rs. ..... lakhs
a. To buy raw material b. To meet administrative
expenses c. For bill discounting d. Others (please specify)
279
19. Working capital limit sanctioned by the Bank
20. Any problems faced while obtaining working capital or being faced while drawing working capital:
21. Promoter's contribution in the project
22. Source of funds for the
Rs. . •.. lakhs
(1 ) (2) (3 )
Rs. •.... lakhs
promoters contribution : Own funds/Friends and Relatives/Borrowed from others.
23. Tax structure of the unit
a) Sales Tax paid during last three years
b) Whether the Unit i) Comes under Excise
Duty purview
~o ii) If yes, what is the Excise Duty paid during the last 3 years
c) Whether the promoters:
i) Are income tax assessee
ii) If yes, How much is the Income tax paid during the last 3 years
• •
· ·
1987-88 Rs. 1988-89 Rs. 1989-90 Rs.
Yes/No
1987-88 Rs. 1988-89 Rs. 1989-90 Rs.
1987-88 Rs. 1988-89 Rs. 1989-90 Rs.
lakhs lakhs lakhs
lakhs lakhs lakhs
lakhs lakhs lakhs
24. Working cost of the unit : (Can also be furnished in
terms of percentage) a) Towards raw material b) Labour cost c) Towards Electricity d) Towards Transportation : e) Administration cost f) Handling cost g) Selling cost h) Other costs (Please
specify)
· · · •
· ·
280
25. Profits/loss made during the last three years
26. Your opinion on the loan scheme of the financial institutions
27. Your overall experience with the Financial Institutions
28. What alternative you could have found if financial institutions have not helped
: 1987-88 1988-89 1989-90
Rs. Rs. Rs.
· ·
· ·
a) Good enough b) Needs modification c) Any other (If yes
please specify)
a) Fair b) Good c) Bad
1) 2) 3)
Yes/NO Yes/NO
Yes/NO
CHAPTER - VI
SUMMARY AND CONCLUSIONS
SUMMARY
The present study, beginning with the evolution of
modern SSIs in India, its importance and role in the
economic development deals mainly with the institutional
support - financial support in particular its trends
pattern and magnitude and reveals the contributions of SSI
sector in terms of production, employment and investment
vis-a-vis the financial support it received from financial
institutions.
The contribution of the small-scale sector to the
fully nation's economy has often been underplayed or
recognised. This sector provides the largest
both skilled and unskilled and is a source for
large scale industry by providing ancillaries.
not
employment
supporting
It has
repeatedly met the domestic demand in areas like consumer
durables and has created a niche for itself on the export
front.
An effort has been made in this thesis to trace the
growth of modern SSI concept in India. During the 1950's it
282
was the employment aspect which determined the scope of an
551. Then during the 1960's when the tempo of the
development of SS1s gathered momentum, the labour concept
gave way to capital investment. Since then the definition of
an SS1 is revised continuously based on the investment on
plant and machinery.
It has also been analysed in this thesis, the approach
of Government towards the SSI sector. Since the IPR 1948,
several changes have been effected through the IPR-1956,
1977, 1980 and 1991. To a greater extent the 'protectionist'
policy adopted by the Government contributed to the growth
of SS1s in the present scale. Further an assessment has also
been made in order to know whether the financial allocations
made towards this sector during various plan periods are in
proportion to the contribution of this sector to the
economy.
The importance, role and place of SSIs to the economy
has also been analysed. In terms of creation of employment
opportunities to the economy which is characterised by
unemployment and underemployment, contribution of 551 sector
to the G.D.P., contribution towards the export front are
also dealt.
283
There is also an effort in this thesis to dig into the
features of capital and credit structure of an SSI. How
there has been a transition of capital and credit needs of
SSIs over the years. The thesis also deals with the present
financial structure through which the credit needs of the
SSIs are met and what are the procedu~es, terms and
conditions, security to be provided, percentage of
and rate of interest of the Financial Institutions
providing financial assistance to SSIs.
margin
while
It has been substantiated in the thesis with facts and
figures that the financial support, the 551 sector received
is not in proportion to the contributions made from this
sector.
It can also be seen from the foregoing
there is agglomeration of industries in the
analysis that
districts of
Bangalore, Mysore, Tumkur, Dakshina Kannada and Belgaum and
deglomeration of industries in the remaining districts of
the state. This factor is also corroborated by looking at
the financial assistance (District-wise) provided by the
financial institutions like KSFC and nationalised commercial
banks.
284
Karnataka is one of the states known for sound
banking system. There has been a considerable growth in
branch expansion in the state after 1964. The performance of
KSFC compared to commercial banks in financing SSIs is
impressive. SSI finance constitutes 69 per cent (as on
31.3.92) of the total financial assistance provided by KSFC
whereas in case ~f commercial banks it is around 13 per
cent.
There is a detailed account of institutional finance
to SSIs in Karnataka in this thesis since nationalisation.
The year wise account of financial assistance provided by
commercial banks to SSIs is recorded. This analysis shows
that the average share of finance that SSIs have obtained
since 1969 to 1992 is 13 per cent of the total advance of
the commercial bank. Then an analysis of District wise and
bank wise advances to SSIs as on 31.3.92 has been made. This
analysis shows that there is concentration of industries in
certain pockets of the State where well developed
infra structural facilities, proximity to market and other
facilities are there. There is an agglomeration of
industries in places like Bangalore, Tumkur, Mysore,
Mangalore, Belgaum and Dharwad. Bankwise analysis reveals.
Canara i SBI, SBM and Syndicate Bank are in the forefront of
financing SSIs in Karnataka.
285
KSFC today is the premier term lending institution in
the country. It has played a catalytic role in the promotion
of SSIs in Karnataka. Its operations since inception to
31.3.92, share of its assistance to SSI, District wise and
Industry wise assistance, Ratio of disbursement to
sanctions, Recovery performance are also dealt in detail.
The study based on the field survey of 100 selected
SSI units reveals that - but for the financial assistance
from the financial institutions they have not established
the industries. The field survey also revealed that there is
no much relation between the qualification of the promoter
in running the unit. It was also found out during the field
survey that proprietory and partnership concerns are running
on a sound basis compared to private and public limited
concerns. The impact of financial assistance on the SSI in
terms of production, employment have also been analysed in
the field survey. The points like more investment on land
and building than the plant and machinery, more empolyment
in office compared to factory resulting in more overhead
costs, major working cost of the majority units is towards
servicing the loan have also emerged in the field survey.
286
RECOMMENDATIONS:
One of the major issues to be addressed primarily is
the availability of adequate and timely f1 j·c.:\;ce for the
growth of this sector. Finance as is well accepted should be
available at right time and delayed finance is no longer a
finance at all. As detailed in the previous chapters the
present institutional finance available to this sector is
inadequate. Hence SSIs should have access to new avenues of
finance like Mutual funds. It. is also recommended that since
SSIs find it difficult to raise finance the 'SSI Mutual
Fund' should be set up. There is also an urgent need to
restructure the interest rates on a scientific basis. The
interest rates are different from one financial institution
to the other.
The existing branch net work of financial institutions
is ill equipped with handling financing of SSIs effectively.
On the lines of the establishment of a separate financial
institution for the SSIs, the SIDBI, it is recommended that
special branches may be set up to exclusively deal with the
SSIs. This will help new units for speedy sanction and
release of loan as well as old units for rehabilitation.
287
In order to make SSI units - self sustaining in terms
of source of funds and also to avoid sickness in Small Scale
Sector 'Promopt Payment Act' should be implemented
vigorously. For a majority of the SSI units - public sector
undertakings and LSIs are the major customers. The
Government should prevail on these by effecting payments not
only within the time limit but also as early as possible.
Obviously this is a major source of funding for the SSIs and
it would be rejuvenated by a positive stand in this
direction.
In view of the globalisation of trade it has become
essential for SSI units to have access to technology for
manufacture of variety of products of acceptable quality at
competitive prices. Hence, financial institutions apart from
lending on traditional lines should also think of providing
some sort of 'Technology Development Assistance Fund' for
easy flow of technology transfer.
SSIs constitute 40 per cent of the total exports, 60
per cent of the total employment in the manufacturing
sector, 45 per cent of the total industrial production and
36 per cent of the G.D.P. Whereas the finance it is getting
is less than 20 per cent of the total advances of the
288
financial institutions. !t has also been assessed by the
Nayak Committee appointed by the Finance Ministry -
Government of India that large scale units borrow upto 19
per cent of their turnover from banks as working capital.
55! units however get only around 8 per cent. Hence, the
share of lending of the financial institutions should be
increased at least by another 10 per cent.
The question now is not of reviewing the situation but
of implementing a step by step programme for vitalising this
sector and removing all impediments in the path of this
objective. !t can be mentioned here the impediments that SS!
entrepreneurs facing are in the form of elaborate and
cumbersome procedures. They impose considerable difficulty
on the borrowing of the SS! entrepreneurs. Special and
simple application forms and simplified procedural
requirements will go a long way in promoting SS!s.
An important point to be kept in view is that the SS!
sector is not homogenous. Some of the units use 'state of
the art! technology while quite a few are carrying on with
technology as well as equipment which is several decades
old. We have 55! units catering essentially to the domestic
export
289
The recent policy change with reference to SSIs is the
"New Industrial Policy of 1991". The highlights of this
policy are 'liberalisation' and 'the opening up of
economy'. The policy aims at removing 'Licence-Raj', direct
foreign investment, automatic approval for foreign
technologt agreements. These measures will make SSIs more
competitive and if implemented properly should help for the
pomotion of SSIs. But through the process of liberalisation,
it has also been the thinking of the government to move away
from tax and credit concessions to SSIs which may result in
'giving' from one hand and 'snatching' from the other.
Small-Scale Industries are normally exposed to the
cross currents of economic policies. There is
need to consider the policies to be pursued with
an urgent
regard to
SSIs in the context of overall strategy for industrialisa
tion. That is to say the reliance or stress should be on
the 'package approach'. Even though some efforts have been
made to promote SSIs through package approach, the benefits
have not perculated.
The major achievements of banks since nationalisation
has been successful geographical coverage, with expansion
problems like rigidities, defective lending, overdues have
290
creeped in. Therefore the Government has set up the
Narasimhan Committee to examine these aspects. The committee
has submitted its report recommending reforms. The
highlights of the recommendations are :
liberlising the financial institutions,
healthy competition between public and private sector,
no further nationalisation,
phasing out of concessional credit,
prudential regulation and supervision in a free
financial environment,
no bar on private banks,
four tier system of banking organisation SBI, its
subsidiaries at the helm including international character -
8 -10 national banks with universal character - local banks
confining to a specific region - RRBs in the bottom at the
rural areas.
To implement these recommendations the Government has
to make far reaching changes like mergers, amalgamations
which may not be possible. But other recommendations like
free competition between public and private sector banks in
the areas of branch expansion will open new vistas for
small-scale entrepreneurs.
291
Another major recommendation of the Narasimhan
Committee is the phasing out of concessional credit and
bringing down the credit target of 40 per cent to 10 per
cent to the priority sectors and also redefining the
'priority sector'.
Keeping in view the dependency of the economy on the
priority sector (like agriculture and SSI sector) one
wonders how this is realistic. Moreover the sudden reduction
of advance on priority sector will jeopardise the interests
of people involved in this sector unless the number of
people dependent on them reduced.
There is also an urgent need for better co-
ordination between commercial banks and the state financial
corporation apart from the co-ordination between branch and
regional offices of these institutions for improving the
credit delivery system. In this regard the establishment of
SIOBI is a welcome step. SIOBI will be the Apex Bank of
small industry finance. It will also be a focal point to co
ordinate and thereby step up the flow of financial
assistance to the Small-Scale sector. SIOBI will also
operate a special fund 'the small industries development
assistance fund' for financing those activities which are
expected to yield return over a very long period and involve
high degree of risk.
BOO K S:
~garwal. A.N. & Singh. S.P.
~garwal. B.R.
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