10 financing smes

8/4/2019 10 Financing Smes

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FINANCINGSMEs

Presented

by

Dr.S.C.Bihari


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M S M E

SHIVNADAR

Engineering graduate, worked as business trainee in DCM data systemsLaunched HCL in 1975 with 6 others out of a garageStarted with Calculators, Copiers & Computers

Now a $ 6 bn company


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M S M E

Dr K ANJIREDDY

Came from a middle class family, agricultural backgroundInitially worked for a PSU IDPLStarted with a cash of $ 40,000 and $ 120,000 loans

A LANDMARK COMPANY IN PHARMA SECTOR NOW


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M S M E

BABAKALYANI

A Mechanical Engineer

Now manufacturing facilities spread over eight locations

Asias largest forging unit already and still going strong


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Micro, Small and Medium

Enterprises (MSME) Sector in India

Total 13 mn SMEs which act for 80 pc of the Indiancompanies

manufactures about 8000 items, Contributes around 40 % of gross manufacturing

output, almost 34 % of Indias total exports Share in GDP 8 to 9 pc

Contributes 33 mn employment in the country & Offers the largest employment opportunity after

agriculture sector Mainly Garments, Leather, Auto components,

Gems/Jewellery, Pharma


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FROM SSI TO MSME DEFINING

THE NEW PARADIGM So far the Govt. policy and RBIs credit

policy have concentrated on

manufacturing units under the smallscale sector.

Worldwide, the micro and small

enterprises (MSME) have beenaccepted as the engine of economicgrowth for promoting equitable

development.


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Financing SMEs in India

SME financing has been a part ofdirected lending of commercial

banks. In India multiple institutions

operating in Public, Private and

Cooperative sector cater to thecredit needs of SMEs, both for longterm as well as working capital.


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Nayak Committee set up by RBI in 1991 to

ensure adequate and timely credit to SSIs.

The Committee, in 1992,recommended commercial banks to

provide working capital to SSI units @ 20% of their annual turnover

subject to a limit of Rs. 1 crore.

The limit of working capital hassince been raised to Rs. 5 crores.


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CREDIT ASSESSMENT OFSSIs

The working capital needs of SSI units isassessed as per

1. Turnover method,2. MPBF System or3. Cash Budget System. The extent of finance is called as

Maximum Permissible Bank Finance or

MPBF. Limits to the various borrowers are

assessed depending upon their Requirements and their

Line of activity


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Maximum Permissible BankFinance:

Under this method,

The borrowers requirements

are assessed based on the Past practice/holding levels.

While the projections should

Reasonably conform to the past trends,

Deviations can be accepted subject to

Satisfactory justification.

This method is also called

Tandon Committee Method of lending.


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Cash Budget System:

Under this method, the working capitalrequirements are determined on the basisof the Cash Gap after taking into accountthe monthly and quarterly projections ofcash receipts and outflow.

Requirements of borrowers and thestrength of their balance sheet are takeninto account.

The borrower is required to submit thecash budget to the bank along with actualas well as projected financial statements


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Maladies of SSIs

The incidence of sickness in thesmall-scale sector is alarming

While the industries may getregistered at the entry point, thereis no record of their exit.

Closure of such units leads to

unemployment and locking up ofcapital deployed


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Bottlenecks:

The major problems faced by theSSI sector relates to

Availability of loan withoutcollaterals, Delay in getting the loan, High cost of funds, Delayed payments, Marketing problems, Sickness etc.


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Sickness:

A unit becomes sick when it fails togenerate internal surplus funds to

honour its obligations towardsits suppliers and creditors in time.

An industrial unit is said to be sick

when the working conditions are sounsatisfactory that it threatens theviability of the undertaking


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Definition of Sick SSI Unit

An SSI unit should be considered sick if:

a. Any of the borrowal accounts of the

unit remains sub-standard for more thansix months

Or

b. There is an erosion in the net worthdue to accumulated losses to the extent of50 percent of its net worth during theprevious accounting year.


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RBI MEASURES

To address the incidence of growing

sickness in the sector,

In 2002, RBI issued

A complete set of revised guidelines

on the basis of the Recommendations

of a Working Group chaired by SS

Kohli.


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Rehabilitation Measures

Sickness can be classified into threecategories. They are:

i. Sickness at birth - due to in-feasibility of the project

ii. Induced sickness - incompetence of

the management iii. Genuine sickness - beyond the

control of the promoters in spite of the

sincere efforts.


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Revival of sick unit requires diagnosticsurvey in order to identify four Rs:

Reasons, Rationale, Risk and Requirements Reasons includes proper diagnosis to

cure the disease of sickness,

Rationale is justification forcategorizing, rationale is followed byrisk,

Revival is the re-establishment of theunit and

Requirements includes efficientmanagement, updated technology,

support from the government, etc.

INSTITUTIONAL SUPPORT TO


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INSTITUTIONAL SUPPORT TOSSIs

The Ministry of SSI, Govt of India, hasbeen playing a major role in developmentof the SSIs.

The Department of SSI and Agro andRural Industries, functioning under theMinistry of SSI, has formulated a citizenscharter which, states its mission as

To support the SSI by way of anadvocacy role, provide services to supportSSI growth and to organize programmesthrough Govt and NGOs for the benefit ofsmall, medium and tiny industries..

Small Ind st ies De elopment


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Small Industries DevelopmentBank of India

SIDBI was set up by an Act of Parliament,as an apex institution for promotion,

financing and development of industriesin small-scale sector and for coordinatingthe functions of other institutionsengaged in similar activities.

It commenced operations on April 2,1990. SIDBI extends direct/indirectfinancial assistance to SSIs, assisting theentire spectrum of small and tiny sectorindustries on All India basis.


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Small Industries Service Institute(SISI)-since converted to MSMEDI SISI with its network of 26 institutes and 30

branch institutes performs the followingfunctions:

i. Interface between state and centralgovernments

ii. Technical support and consultancy services

iii. Entrepreneurship development

programmes iv. Developmental efforts

v. Export promotion and liaison activities

vi. Ancillary development

d l


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Product-cum-Process DevelopmentCenters

Developmentof new processesAnd technology

Product designand innovation

Manpowerdevelopmentand training

R & D support

Technicalsupport

Six PPDCs established across the country provide thefollowing services:


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Time Norms

Time norms are the schedule adopted forthe disposal of the loan applications.

The time norms for SSIs are: 1. For loan applications up to Rs 25,000

1 week

2. For loan applications above Rs 25,000

and up to Rs 2 lakh 2weeks 3. For loan application above Rs 2 lakh 9

weeks


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Who will build IndiaIf we all go global

A M Naik

L & T

IN THE END


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Thanks for yourattention

Dr. S. C. Bihari Tell:08417-236660 to

65(Extn: 6214)

Mail:[email protected]

10 financing smes

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