credit gap for small scale industries

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Credit Gap for Small

Scale IndustriesSubject: SME FinancingSubmitted to: Dr. C Kishan Rao

SUBMISSION DATE:18 th Nov, 2009


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Credit Gap for Small Scale Industries

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Introduction of SME:The micro, small and medium enterprises have lent a major hand in catapulting India to the

position of one of the fastest growing world economics. 45%of the countries manufacturing

output and almost 40% of its exports come from this sector. More important in this age of

inclusion centric growth mantra is the fact that MSMEs generate huge employment. The

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Submitted by: Group 3Ashmitha N.S

Kulkarni SarveshaRavi AgarwalSaket KhandeliyaShwetha RaghavanShweta RammohanVibish Parekh


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present figure is around 52 million and can promote balanced regional development along with a

more equitable distribution of wealth.

While policy support has always been provided to the MSME sector or the small scale industriesas it was called earlier, the early 1990s saw the beginning of a transition from a protection

centered regime to policies aimed at enhancing the vitality and competitiveness of the sector and

aiming it suitably to face the rigors of an open economy. The enactment of the MSME act 2006,

the amendments to the khadi and village industries commission act, announcement of a

comprehensive package for promotion of MSME, setting up of a national commission for

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enterprises in the unorganized sector, the national manufacturing competitiveness program the

Rajiv Gandhi Udyami Mitra Yojana, the MSME cluster development plan, and many other such

programs have helped to strengthen the sector and address many of its long standing problems

relating to credit, infrastructure, technology and marketing. The focus all along has been on

making the sector more and more competitive, and increasing its presents both in domestic and

foreign market. Efforts have certainly paid. The 13 million strong MSME sector produces more

than 6000 products and boast to a total size of Rs. 560000 crores. Having maintained a higher

growth rate than the overall industrial sector, MSMEs contribute about 6% to GDP.

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Its impressive performance notwithstanding, MSME in the country is faced with numerous

problems that need urgent attention. Despite doubling of credit flow to the sector in the last two

year most MSMEs are facing financial crunch. Then there are problems of marketing, infra,

access to latest technology and training. The current global meltdown has rendered a further

blow to the sector, as it has lead to the shrinking of the export market made banks more wary of

lending to small entrepreneur, slowed down the remittances from migrant workers and

aggravated the already severe problem of delayed payments from corporate clients. The govt. has

no doubt stepped in with stimulus packages and the RBI too has taken appropriate steps to soften

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the impact of the blow, but a lot more perhaps need to be done. The PM has set up$ an 11

member task force in august. To look into the problems being faced by the MSMEs sector the

report of the task force is awaited. The commitment that the government has shown in the

developing sector, the efforts that trade an industries association and many nongovernmental

organizations have put in, as also the resilience that are entrepreneur has shown in the face of all

oddities will definitely propel the sector to newer heights.

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Importance of MSME:

Manufacturing Enterprises: defined in terms of investment in plant and machinery (excluding

land & buildings) and further classified into:-Micro Enterprises Investment up to Rs. 25 lakh

Small Enterprises Investment above Rs. 25 lakh & upto Rs. 5 crore

Medium Enterprises Investment above Rs. 5 crore & upto Rs. 10 crore.

sectors 2005 2006 2007 2008 2009

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MSE amt in Rs. Crore 67643 82492 104703 148651 19096816% 22% 27% 42% 28.50%

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no in lakhs 17.71 18.86 20.02 39.12 42.1

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Net Bank Credit (NBC) 718722 1017614 1317705 1364268 1694313MSE Credit as percentage

of NBC 9% 8% 8% 11% 11.20%

Service Enterprises defined in terms of their investment in equipment (excluding land &

buildings) and further classified into:-

Micro Enterprises Investment upto Rs. 10 lakh.

Small Enterprises - Investment above Rs. 10 lakh & upto Rs. 2 crore.

Medium Enterprises Investment above Rs. 2 crore & upto Rs. 5 crore.

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MSME Sector in India creates largest employment opportunities for the Indian populace, next

only to Agriculture. It has been estimated that 100,000 rupees of investment in fixed assets in the

small-scale sector generates employment for four persons.

Food products industry has ranked first in generating employment, providing employment to

0.48 million persons (13.1%). The next two industry groups were Non-metallic mineral products

with employment of 0.45 million persons (12.2%) and Metal products with 0.37 million persons

(10.2%).

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In Chemicals & chemical products, Machinery parts except Electrical parts, Wood products,

Basic Metal Industries, Paper products & printing, Hosiery & garments, Repair services and

Rubber & plastic products, the contribution ranged from 9% to 5%, the total contribution by

these eight industry groups being 49%. In all other industries the contribution was less than 5%.

The opportunities in the MSME sector are enormous due to the following factors:

Less Capital Intensive

Extensive Promotion & Support by Government

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Reservation for Exclusive Manufacture by small scale sector

Project Profiles

Funding - Finance & Subsidies Machinery Procurement

Raw Material Procurement

Manpower Training

Technical & Managerial skills

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Tooling & Testing support

Reservation for Exclusive Purchase by Government

Export Promotion Growth in demand in the domestic market size due to overall economic growth

Increasing Export Potential for Indian products

Growth in Requirements for ancillary units due to the increase in number of greenfield

units coming up in the large scale sector. Small industry sector has performed

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exceedingly well and enabled our country to achieve a wide measure of industrial growth

and diversification.

Different regulatory bodies concerned with SME financing:

SME Rating Agency of India Limited (SMERA) is a joint initiative by SIDBI, Dun &

Bradstreet Information Services India Private Limited (D&B) and several leading banks

in the country. SMERA is the country's first rating agency that focuses primarily on the

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Indian SME segment. SMERA's primary objective is to provide ratings that are

comprehensive, transparent and reliable. This would facilitate greater and easier flow of

credit from the banking sector to SMEs.

MSME Credit Monitoring Cell has been set up in the office of the DC(MSME) for

resolution of credit issues of MSMEs. Matters of MSMEs remaining unresolved with the

Banks-SME Helpline for more than a fortnight brought to the notice of Cell would be

taken up with the concerned bank for early resolution.

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The Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGMSE) was

launched by the Government of India to make available collateral-free credit to the micro

and small enterprise sector. Both the existing and the new enterprises are eligible to be

covered under the scheme. The Ministry of Micro, Small and Medium Enterprises and

Small Industries Development Bank of India (SIDBI), established a Trust named Credit

Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) to implement the

Credit Guarantee Fund Scheme for Micro and Small Enterprises. The scheme was

formally launched on August 30, 2000 and is operational with effect from 1st January

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2000. The corpus of CGTMSE is being contributed by the Government and SIDBI in the

ratio of 4:1 respectively and has contributed Rs.1754.05 crore to the corpus of the Trust

up to March 31, 2009. As announced in the Package for MSEs, the corpus is to be raised

to Rs.2500 crore by the end of 11th Plan.

In India, Micro-credit programmes are run primarily by NABARD in the field of

agriculture and SIDBI in the field of Industry, Service and Business (ISB). The success of

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Micro-credit programme lies in diversification of services. Micro Finance Scheme of

SIDBI is under operation since January, 1999 with a corpus of Rs. 100 crore and a

network of about 190 capacity assessed rated MFIs/NGOs. The Office of the Development Commissioner (Small Scale Industries) under Ministry of

MSME is launching a new scheme of Micro Finance Programme to overcome the

constraints in the existing scheme of SIDBI, whose reach is currently very low. It is felt

that Governments role can be critical in expanding reach of the scheme, ensuring long

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term sustainability of NGOs / MFIs and development of Intermediaries for identification

of viable projects. The Ministry of Micro, Small and Medium Enterprises has been implementing the

'Scheme of Surveys, Studies and Policy Research ' with a view to regularly/periodically

collect, from primary, secondary and other sources, relevant and reliable data on various

aspects and features of micro, small and medium enterprises (MSMEs) engaged in

manufacturing and services (whether in the category of tiny/small scale industries, khadi,

village industries or coir) as a composite group or specific segments thereof. It aims to

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study and analyse, on the basis of empirical data or otherwise, the constraints and

challenges faced by the MSMEs as well as the opportunities available to them, in the

context of liberalisation and globalisation of the economy. It further aims to use the

results of these surveys and analytical studies for policy research and designing

appropriate strategies and measures of intervention by the Government, by itself or in

public private partnership mode, to assist and enable these enterprises in facing the

challenges and availing of the opportunities with a view to enhancing their efficiency and

competitiveness as well as expanding generation of sustainable employment by them.

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Micro, Small and Medium Enterprises Development Act, 2006 has been enacted to

facilitate the promotion and development as well as enhance the competitiveness of

micro, small and medium enterprises and for matters connected therewith or incidental

thereto. For this, it included the establishment of specific funds, notification of particular

schemes/programmes, progressive credit policies and practices, preference in

Government procurements to products and services of these enterprises, following more

effective mechanisms for mitigating their problems, etc. It provides the first-ever legal

framework for recognition of the concept of 'enterprise' which comprises both

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manufacturing (those engaged in the manufacture/production of goods pertaining to any

industry) and service (those engaged in providing/rendering of services) entities. Under

the Act, three tiers of enterprises, namely 'micro, small, and medium' have been defined

for the first time. The Act also provides statutory consultative mechanism at the national

level with balanced representation of all sections of stakeholders, particularly, these

enterprises, and with a wide range of advisory functions. The progressive de-reservation of products in the MSMEs aimed at providing

opportunities for technological upgradation, promotion of exports and economies of

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scale, with a view to encourage modernisation and enhance competitiveness in the sector.

As on 13 March 2007, 125 items were dereserved. As on 8th February, 2008, 79 items

more were dereserved. At present, the total number of items reserved for exclusive

manufacture in the micro and small scale sector is 35. The National Manufacturing Competitiveness Programme (NMCP) has been launched to

provide support to the manufacturing sector, particularly small and medium enterprises

sector, in their endeavour to become competitive. It consists of 10 components and

programmes as the initiatives for development and promotion of MSMEs.

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Credit is one of the critical inputs for the promotion of small and medium enterprises. It

is a part of the priority sector lending policy of the banks. Accordingly, several schemes

and policies have been undertaken to provide adequate credit to such enterprises. One of

such scheme is the Credit Linked Capital Subsidy Scheme (CLCSS) which was launched

to facilitate technology upgradation by upfront capital subsidy to small, micro and

medium enterprises, including tiny, khadi, village and coir industrial units, on

institutional finance (credit) availed by them for modernisation of their production

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equipment (plant and machinery) and techniques in specified sub-sectors/ products

approved under the Scheme.

Besides, the State and Union Territories (UTs) Governments are executing several promotional

and developmental projects/schemes as well as providing a number of supporting incentives for

development and promotion of MSME sector in their respective States/UTs. These schemes/

projects are executed through State Directorate of Industries , who have District Industries

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Centers (DICs) under them to implement Central/State level schemes. Around 30 MSME-

DIs and 28 Branch MSME-DIs have been set up in State capitals and other industrial cities all

over the country, with a view to provide assistance/consultancy to prospective entrepreneurs as

well as to existing units; conduct EDPs, Management Development Programmes, Skill

Development Programmes, etc. Also, the State Industrial Development and Financial Institutions

and State Financial Corporations look after the needs of the MSME sector.

The financial assistance in India for SSI unit is available from a variety of institutions. The

important ones are:

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SIDBI: Small Industries Development Bank of India (refinance and direct lending)

SFCs: State level Financial Corporation e.g. AP State Financial Corporation.

NSIC: National Small Industry Corporation. Small Industry Development Corporations of various states.

Commercial/Co-operative Banks.

DIC: District Industry Centre.

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State Financial Corporations, SIDBI and State Industrial Development Corporations provide

long and medium term loans. Banks also finance term loans. This type of financing is needed to

fund purchase of land, construction of factory building/shed and for purchase of machinery and

equipment. The term loans are secured against mortgage of assets such as land, building,

machines, equipment and other stocks. The short-term loans are required for working capital

requirements, which fund the purchase of raw material and consumable, payment of wages and

other immediate manufacturing and administrative expenses. Such loans are generally available

from commercial banks.

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HURDLES TO GROWTH OF SMES IN INDIA:1. The major hurdle is that the credit availability is low for this sector. It is estimated that

the unorganised sector comprises 95% of the total industrial units, employing more than

65 million people. Yet only 8% of the total bank credit finds its way into this sector.

Though credit to MSMEs fall under the category of priority sector lending, but with the

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expansion of the priority sector lending to accommodate fast growing areas such as home

loans, education loan, the percentage share of credit to MSMEs is falling.

2. Arranging collateral security, documentation etc makes clearance of the loan all the more

difficult and as a result the business of the local money lenders continues to flourish.

Inevitably, many of these small units fall into the vicious cycle of debt and poverty and

eventually many of them perish. Banks therefore should be encouraged to ensure that all

loans upto Rs 5 lakh to MSMEs are given free of collateral and at a low interest rate.

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3. Another major hurdle is the lack of technological innovation and the knowledge of

market demands. This is true particularly in the textiles sector. Most of the household

units still work on obsolete technology because of which not only the cost of production

remains high but the product also fails to meet the demand of the market in terms of

quality. Because of liberalization and opening up of the economy, the MSEs are now

facing stiff competition from imports and therefore need technological upgradation to

manufacture better quality products at cheaper rates.

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4. Another major hurdle is the lack of market accessibility for the poor artisans, weavers,

household unit owners, etc. Most MSMEs do not have money to invest in market

research and are unable to carry out design and technical improvements to keep up with

market demands. It is because of this lack of information that the middlemen are able to

take advantage of and exploit the poor artisans, weavers by paying a paltry sum for their

products and selling those products in the international market at exorbitant prices.

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5. Another hurdle is that of Inspector Raj and corruption. If an MSME has to deal with so

many inspectors, when are they going to work? Unlike big corporate houses, MSMEs

have less manpower dedicated wholly to looking after the inspectors. So what do they

do? They are losing quality production time in complying with the inspectors. And when

there are some many inspectors to deal with, corruption goes hand in hand. Thus the

MSMEs are not only losing time, but are also losing additional money.

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6. Another hurdle was the difficulties in assessing the credit worthiness of the units because

of the lack of accounting records or financial statements and enlarging business plans.

7. Another hurdle due to monetary constraints; MSMEs are not cut out for technological

upgradation. This is a major hurdle that is affecting their productivity. The authorities

should take steps to enhance managerial skills and knowledge of prospective markets.

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8. Another hurdle faced is of infrastructure. The government should immediately look into

providing infrastructure in respect of power, water, roads, etc.

9. The high interest rate at which MSMEs are borrowing from banks - if at all they are.

Banks ask for collateral and thus don't come forward to lend to MSMEs.

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Initiatives taken by the government to further MSME

development:

Though SMEs are being touted as the priority sector within the economy, they continue to face problems pertaining to finance. When it comes to banks, they have a very traditional way of

lending to this segment against collateral and SMEs end up being under financed. Evidently, the

biggest challenge before the SMEs today is to have access to non debt based and non-traditional

financial products such as external commercial borrowings, private equity, factoring etc.

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Investments in the SME sector are not only by PE funds but this sector is also attracting FDI. In

this respect the government has removed the 24 per cent cap on FDI in the SME sector. Foreign

entities are also keen on promoting traded and cooperation between SMEs of different countries.

Genesis Initiative, an UK-based organisation consisting of entrepreneurs, policy makers and

SMEs, is trying to forge mutual cooperation between SMEs in India and UK for in terms of JVs

and partnerships in sectors such as textiles, IT, infrastructure etc.

A stock exchange purely dedicated for SMEs seems to be the next big thing. A SME-focused

stock exchange is likely to boost the confidence of SMEs planning to tap the capital market to

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raise low cost capital. Currently only companies with a minimum paid up capital of Rs 100

million and a market capital of Rs 250 million are eligible to list on NSE while those with a post

issue capital of Rs 30 million and a minimum market cap of Rs 50 million are eligible to list on

the BSE. Thus SMEs which in spite of having a good track record of growth but do not meet this

criteria are kept away from the listed category. Some examples of SME dedicated stock

exchanges include AltX, Africas first alternative exchange for SMEs, a partnership between the

Johannesburg Stock Exchange Ltd and the Department of Trade and Industry and AIM, a sub

market of the London Stock Exchange that allows smaller companies to float shares with a more

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flexible regulatory system as compared to the main market. Although BSE IndoNext, an

alternate national platform, a joint initiative by The Stock Exchange, Mumbai (BSE) and the

Federation of Indian Stock Exchanges (FISE) exists, a separate exchange exclusively for SMEs

might prove helpful for the SMEs to raise equity and debt as well as facilitate trading in such

companies.

Micro, Small and Medium Enterprises (MSMEs) in India now have reason to feel upbeat, if

some recent steps taken by the Government of India are to go by. In order to boost MSME

productivity and encourage exports, the government is reportedly considering a hike in the sub-

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limit within priority sector lending for the micro sector, from 4.9 per cent to 6 per cent. To top it,

a credit monitoring cell is also being set up to resolve issues that MSMEs face in their dealings

with banks.

The government has also decided to start a specially designed training course on export

management in order to educate SMEs on various domains like institutional set-up for export

promotion, export trade correspondence, export incentives, INCOTERMS export documentation,

export finance/credit, export credit guarantee scheme/policies etc.

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The relaxation in lending limits will help an additional funding of Rs 17,000 crore for the MSME

sector, according to estimates by the Federation of Indian Small and Medium Enterprises

(FISME). On the other hand, the credit monitoring cell would step in to resolve pending cases

which have not been resolved by the bank within 14 days. The governments latest decisions

have been longstanding demands of the SME sector. Getting help has always been a complicated

process and remained a big entry barrier for the not-too-savvy small entrepreneur.

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SUGGESTIONS: One stop shop kind of mechanism in financial services should be introduced where the

potential MSME borrower can be provided with all solution to his problems. This should

include all management disciplines like personnel management , financial problems etc Technology should be adequately leveraged by the banks and financial intermediaries to

cater to the needs of MSMEs. Now that there are more demand for credit from MSMEs

The banks should ensure that it is adequately supported by technology to increase the

efficiency of services provided

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MSMEs should improve their book keeping and record management to enhance the

confidence of the financial intermediaries. This increase their accessibility to finance There should be revitalization of institutions, particularly the state level institutions such

a s direct industries centers, technical consultancy orgs, etc. it may be mentioned that the

business development centers (BDC), facilitation centers may be promoted at district

and taluka level on public and private partnership bases to provide the solution to

potential entrepreneurs. In order to improve the competitiveness of MSME sector the national manufacturing

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competitiveness program will have to be implemented in the right earnest with the

corporation of industries association, technical bodies and all other stake holders. In order to facilitate the access of MSMEs to capital market there is a need to promote a

separate exchange exclusively for the MSME sector. A separate stock exchange will

help the entrepreneurs to deal with major issue like raising funds from capital market.

This will strengthen their market position and increase their competitiveness Factoring services should be provided for MSMEs in the economy. This will facilitate

working capital for the MSMEs as well as help reduce the credit risk of MSMEs

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There should be a drive towards development of Credit Scoring and Credit rating

Agencies for MSMEs in India

Conclusion:In India, MSMEs are the second largest source of employment after agriculture. In the presentscenario of global recession, where several large industries are on the verge of collapse, the role

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many measures taken by the government and regulatory bodies to enhance the availability of credit to this sector but the perceptions of the banks have not changed which iis need to beaddressed very soon if India has to prosper.

Many developed countries and developing countries are taking measures to promote the work of MSMEs and India is also concentrating in this sector but there is some kind of gap between whatthe MSMEs want and what they are getting. So as soon as these gap can be filled the prosperityof the MSMEs sector and of an India whole can be achived with the people having higher standard of living.

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credit gap for small scale industries

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