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Ph.D. Evaluation Report

1. Name of Student

:-

Shri. B.V. Lonikar

2. Name of Guide :-

Dr. V.V. MahajanReader & Head,Department of Commerce,Nutan Mahavidyalaya, SailuDist. Parbhani.

3. Name of Thesis :-

A Study of FinancialManagement of SmallScales Industries in

Marathwada

4. Faculty :-

Commerce & ManagementScience

5. University :-

Swami Ramanand TeerthMarathwada University,Nanded

6. Ex.Refree :- Dr. Col. Ashok PalB-101, Time square,Fatheh GanjBaorda 390002

Report

I have carefully gone through the Ph.D. Thesis of

Shri. B.V. Lonikar, I offer the following comments

1. The objectives of research suit to the title of

thesis. These objectives in nutshell are as

follows :

(i) To study industrial Development ofIndia & its finances so as to bring out theimportance of small-scale industrial units.

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(ii) To critically analysis conceptual base forfinancial resource procurement by SIUs andtheir utilization.(iii) To verify various aspects of Working

capital, Borrowings, Subsidizes, institutionalfinances etc. and other related variablesaffecting financial management of SIUs

(iv) To know the facts of finances of SickUnits

(v) To suggest remedial measures forsound financial management of SIUs.

2. The research methodology used for the thesis is

appropriate and logical. The candidates deserves

special appreciation for the same

3. Each chapter covers all the significant

information, the chapter scheme is as follows

Chapter I Introduction, Objectives, Nature, Scope andResearch Methodology of Thesis

Chapter IIDevelopment of Small Scale Industries and theirFinances

Chapter IIIConceptualities of Financial Management inProposed and Established SIUs

Chapter IVManagement of Working Capital by SIUs

Chapter VBorrowings, Subsidies, Incentives & HirePurchasing

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Chapter VIInstitutional Finances to SIUs

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Chapter VIIFacts About Financial Facts About Financial FactsAbout Financial Facts About FinancialManagement of Sick SIUs

Chapter VIII The Four Case Studies Revealing A State ofFinances of Sick SIUs

Chapter IXSummary, Conclusions and Suggestions

4. The Ph.D. Thesis on A Study of FinancialManagement of Small Scales Industries in

Marathwadaprepared and submitted by Shri

B.V.Lonikar is a genuine piece of research work

completed under the guidance of Dr.

V.V.Mahajan . The various sources of

information have been properly acknowledgedand conclusions are drawn on the basis of data

collected by the candidate himself. On the whole

the thesis is genuine attempt to find out new

dimensions in the field of Financial Management.

The tabulation, interpretation of data and drafting

part of the thesis are impressive and useful to

others. Looking to the efforts of the candidate and

intensive work of research I recommend the thesis

of Shri B.V. Lonikar for the award of Ph.D.Degree

in the faculty of Commerce and Management

Science of Swami Ramanand Teerth Marathwada

University, Nanded

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(Dr. Col. Ashok Pal)

External Refree

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Chapter - IX

Summary, Conclusions and

Suggestions

Chapter I

Introduction, Objectives, Nature, Scope and ResearchMethodology of Thesis

Rational Behind Selection of Thesis Topic :The forgoing discussion shows that India, as comparedto era of pre-independence has made substantialprogress in Development of Industries. However therewere number of dynamics which affect industrialDevelopment. Amongst all these, financial managementat the level of individual industrial unit is worth to beconsidered. An Industrial entrepreneur besides his owncapital obtains the external finance in the form ofconcessional or non-concessional finance or Govtinvestment. The concessional finance assistanceincludes grant, subsidies, and loans at less than bankrate, with long maturity period. Such financialassistance in underdeveloped areas is generally

provided on liberal scale. This assistance is given forindustries to sustain high level of investment, tomitigate technological gap, to exploit natural resources,to face initial risk, to develop basic infrastructure, toimprove economic condition and so on. If industrialinvestment of the state needs success and fruitfulutilizations, there is a need to make constructivemanagement at grass root. At that grass root industriallevel, there exist a number of areas such as production,finance marketing personnel and so on. In these areas,the financial management is crucial one to decide the

fate of industrial unit. Considering this fact, it wasdecided to study financial management of Industrial unitrun on small-scale basis.

Objectives :

(i) To study industrial Development of India &its finances so as to bring out the importance ofsmall-scale industrial units.

(ii) To critically analysis conceptual base for

financial resource procurement by SIUs and theirutilization.

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(iii) To verify various aspects of Working capital,Borrowings, Subsidizes, institutional finances etc.and other related variables affecting financialmanagement of SIUs

(iv) To know the facts of finances of Sick Units

(v) To suggest remedial measures for soundfinancial management of SIUs.

Research Methodology :

Research methodology used for study is bothexploratory and descriptive.

Chapter -IIDevelopment of Small Scale Industries andtheir Finances

Small scale industry plays an important role in Indianeconomy, by generating employment and avoidingconcentration of economic power. It is grouped underthe general heading of Village and Small industries(VSI). In Industrial Policy Resolution 1956. It is sub-divided into eight sub-categories; viz. Khadi, village

industry, Handlooms, Sericulture, Handicrafts, Coir SmallScale industries, and Powerlooms. Of them, first sixbelong to traditional industries and latter two, themodern technologies and are mostly urban oriented.Traditional industries are mostly rural and semi-urban incharacter.

The small scale industry is defined in terms of capitalinvestment. The unit having capital investment upto Rs.60 lakhs is said to be small scale industrial unit. If it isancillary unit supplying components to the large scaleindustry and export-oriented unit, the limit of capitalinvestment is Rs. 75 lakhs. The Tiny sector industrialunit needs capital investment upto Rs. 5 lakhs. Thislimit of capital investment covers only investment inplant and machinery. Land and factory building areexcluded.

This small scale industrial sector is important as itgenerates employment next to agriculture. It hasforeign exchange earning capacity. It can be useful for

the decentralization. It is labour intensive productionunit.

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Small Scale Industries Under British Rule.From the early days, even from the days of the Mughalperiod India was famous for her craftsmanship. As earlyas the 17th century Indian cotton goods found a ready

market in Europe and South-east Asian countries. After1707, as there was political chaos and confusion in thecountry, the British established mastery over the wholecountry. The industries of 18th century may be groupedunder (i) rural industry (ii) urban industry. Villagersworked in their cottages, which were the centers of ruraland agricultural industries. They generally looked afterlocal needs, which were such utility goods asearthenware, coarse cloth, baskets, etc. These ruralindustries were primitive, lacked specialization, were

traditional and not affected by the outside world. As acontrast, urban industries were more closely organized. They manufactured luxury goods such as gold andsilverwares, and also silk and woolen fabrics and calicoto serve wider foreign markets. Guilds or middlemanmanaged the urban industries. They look after thequality of the work and the welfare of its members.

But the supremacy of Indian handicrafts declinedbecause of certain technological, economical andpolitical developments. The Industrial Revolution in

England was one the main cause for this decline. Theapplication of mechanical power to the manufacturingIndustries helped England to produce goods cheaply anddisplace Indian products in foreign markets and later oneven in the home market. The expansion of transportfacilities also helped British industry. But industrialdevelopment in India was deliberately discouraged tosuit the British economy. Indias internal economy wasupset by British imperialism. Indian industries decayed.It was difficult to set up new industries suitable to the

altered times, for want of knowledge and capital on thepart of the Indians. The British Industry, specially themills, developed while Indian manufactures declined.India was the main market for British manufactures, Sheexported only such raw materials as cotton, silk, hides,oilseeds, jute and dyes tuffs, which were necessary forthe progress of the Industrial Revolution in England.India, in fact, entered upon a period of de-industrialisation and increased her dependence onagriculture. Other cause also hampered thedevelopment of Indian industry. The decline of the

handicraft industry, too, was nearly complete by 1888.

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this plunder of India continued till the middle of the 19 th

century, preventing our own industrial development.

Small Scale Industries the Indian afterIndependence

The small scale industry has employment generatingcapacity without adding significantly to cost ofproduction. This can be achieved by reserving theindustry for the cottage and small scale sector. Thegovernment appointed an expert committee to identifyprovisions in tax laws which had an influence on theemployment of labour. The government had adoptedlabour intensive method of production.

The government intended to increase investment incottage, village and small scale industries along with

other supportive policies like increased areas ofreservation for these industries. The share of industrialproduction contributed by the small scale sector has tobe indicated declining trend.

In India there is very wide scope for of village industries,Total employment provided by this small scale industryincreased form 47 lakhs in 1950 to 188 lakhs in 1990-91. The total production was of the volume of Rs.167000 crores in 1990-91. Fifty percent of production inmanufacturing sector comes from small scale industry.

It produces new products like electronics, plastic non-edible oil etc. 45 percent of production in consumerelectronics, 75 percent production of instrumentation.

Marketing is one of the obstacle blocks for small scaleindustries. The many problems which they face inmarketing their products are enumerated below :

(i) Lack of standardization.(ii) Poor designing.(iii) Poor quality

(iv) Lack of quality control.(v) Poor finish.(vi) Lack of precision(vii) Poor bargaining power.(viii) Lack of service after sale.(ix) Scale of production.(x) Brand preferences.(xi) Distribution contacts.(xii) Lack of knowledge of marketing.(xiii) Competition.(xiv) Ignorance of potential markets.

(xv) Unfamiliarity with export activitiesprocedures and market know-how.

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(xvi) Financial weakness.

(i) Benefits of Small Scale Industry : The small-scaleindustries play a vital role in the economic growth ofdeveloping countries. The benefits of small scale

industries are as under .

(ii) Utilisation of Resources : Small scale industriesfacilitate the tapping of resources which otherwisewould remain unused. These resources includeentrepreneurship, capital, labour and raw materials. They can mobilize rural savings which may otherwiseremain idle, or which may be spent on luxuries orchanneled into non-productive ventures.

(iii) Employment generation : Since they are fairly labourintensive, small-scale industries create employmentopportunities at a relatively low capital cost. In India,there is the basic problem of absorbing the surplusmanpower in non-agricultural jobs and providingadditional employment opportunities for the increasingpopulation.

(iv) Generation of foreign exchange : Small scaleindustries facilitate substantial foreign exchange savingsand earnings. A wide range of consumer and simpleproducer goods, now being imported, can beeconomically produced domestically on a small-scalebasis as long as adequate facilities are provided.

(v) Diversification of industrial structure : Small scaleindustries contribute significantly to the strengtheningof the industrial structure, for many more articles can beproduced more economically on a small scale then on alarge scale.

(vi) Entrepreneurial development : Small-scaleindustries serve as seedbeds of entrepreneurship. Theyserve a developing economy not only by their output ofgoods but by functioning as a nursery of entrepreneurialand managerial talent. This role of small-scaleindustries is of decisive importance in any economy,where the industrial structure consists of a few largenumbers of traditional industries such as artisans,handicrafts and cottage industries, on the others.

Dimensions of Finance Demand from SmallIndustry in the Liberalisation Period

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Since quantifying the demand for capital from smallindustry is an extremely difficult task in view of tiesheterogeneity, the dimensions are discussed in the formof identifying areas/motives requiring finance and theirrelative importance.

Broadly, credit demand of small industry can be dividedinto two :

(1) Working Capital Demand, and(2) Investment Demand.

While the growth of working capital demand is directlyrelated to the growth of small industry sector, what is ofmore significance in the liberation period is investmentdemand. Investment demand can be subdivided into

several categories :

1. Replacement of obsolete machinery or TechnologicalUp-gradation and Modernisation

2. Expansion of the Unit by adding plant and machinery toproduce more

3. Quality improvement

4. New Ventures/diversification

5. Labour Saving Devices

6. Research and Development to constantly upgrade thecompetitiveness of the unit.

7. Environment related investments (industry specific).

The importance of each of these will vary fromone sub-sector to another and from time totime.

The gradual growth or expansion of enterprisescan be seen not only in the factory sector butmore importantly in workshop and householdsectors as well. This will be true in the short-run as well as medium-run. But in the long-run,the absolute decline of household sector andthe relative decline of workshop sector willresult in a decline in the investment demandfor expansion emerging from these sub sectors.

The decline of these sub sectors itself could bepartly due to their transformation/expansion in

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the organized sector and partly due to theirfailure to cope up with the competitivepressures from the organized sector.

In fact, in Korea expansion and modernization

together accounted for more than 50 per centof the total investment demand of small andmedium industries (SMI) for finance in the 80s,i.e., when the Korean economy was undergoingindustrial restructuring (Asian DevelopmentBank, 1987).

In the 90s, there has been an increasingawareness of quality, among others, due toliberalization and globalisation. As a result,

many a firm is going for ISO certification. Toimprove standardization and quality in smallindustry, Government has introduced subsidyto encourages small industry units to acquireISO certification (Financial Express, 1996). Thedemand for finance for quality improvementwill be steady and substantial in the short-run,medium-run and long-run from the factorysector while it will not be that significant fromthe workshop sector. The concept of qualitywill not be crucial in the household sector.

Financial Infrastructure for Small IndustryDevelopment

The existing financial infrastructure for small industry ispresented in Table 2.3. While each of theseinstitutions/banks have specific roles in terms ofmeeting the need of finance of small industry, amongthem it is SIDBI which has been playing a major roleinterms of meeting the diversity of investment demandsfor small industry development. However, consideringthe dimensions of investment demand which is likely toemerge in the near future, there is an absolutenecessity for promoting specialized institutions/agenciesfor overall small industry development, like in Japan andSouth Korea .

Considering the emerging competition in thelight of industrial liberalization, technology andquality have been identified as the two primeareas of concern for small scale entrepreneurs(NCAER, 1993). Therefore, promoting small

industry development through modernizationand technology upgradation is a major

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challenge to be faced by the Policy Makers.Though SIDBI does provide financial assistanceto this, there is a need for an exclusivefinancial institution to deal with the problem-small industry Technology Finance Corporation

(SITFIC). The SITFIC can promote thedevelopment of new technology by financingresearch and development, initialcommercialization of new technologies andinventions, and upgrading of manufacturingprocesses of small scale factories andworkshops.

Also, there is a need for financing theexpansion and transformation of small-size

household and workshop enterprises. Suchexpansion/transformation may emerge in theform of :

(i) Expansion and modernization of existing units by youngsters who have inheritedthe units from their elders,

(ii) Starting of new enterprises by thosewho have had prior job experience in a similarindustry, and

(iii) Technical qualified youngsters from afamily of entrepreneurs starting new units (byusing superior technology available domesticallyor externally).

The major objective of such aninstitution (Small IndustryDevelopment InvestmentCorporation) is to facilitate theexpansion and transformation ofsmall-size workshops/ householdenterprise into modern factories.

Industrial liberalization has made enhancementof competitiveness crucial for the developmentof small industry. Further, the changingcomposition of small industry in the 90sindicate that the sector is undergoingtransformation in the form or relatively fastergrowth of the non-household manufacturing

sector. Therefore, technology upgradation andmodernization, and expansion/ transformation

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of traditional small industrial unit will gainground in the future. These together willprimarily lead to a considerable increase in theinvestment demand of small industry forfinance.

Also, the trend of setting up of theirown R & D facilities will add to theincrease in investment demand.Quality improvement,diversification, labour saving andenvironment related investmentswill be the other dimensions ofinvestment demand.

To meet the diversity of investmentdemand requirements, it isessential to broaden the financialinfrastructure for small industrydevelopment. Exclusive financialinstitutions like SIDBI, are requiredsuch as Small Industry TechnologyFinance Corporation, Small IndustryDevelopment InvestmentCorporation, and Deposit Insuranceand Credit Guarantee Corporation

(DICGC), in addition to widening thescope of National ResearchDevelopment Corporation (NRDC). These steps would enable thedevelopment of an appropriatefinancial infrastructure which, inturn, would contribute to theoverall development of acompetitive small industry sector inIndia.

Chapter IIIConceptualities Financial Management in Proposedand Established SIUs

Introduction :Financial management is the life blood of any business.It is rightly termed as the science of money. Industry orBusiness need finance for the production of goods andservices as well as their distribution. The efficiency ofproduction and marketing operations of industrial unit is

directly influenced by the manner in which the financialmanagement of the enterprise is performed by the

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entrepreneur. Finance Management assumes animportant role in the industrial unit and it should begiven equal importance, as with production andmarketing management. Under the systems approachwe have an integration and co-ordination of these three

vital sub-systems of industrial unit going hand in handand offering jointly ways and means to accomplish theprofit or survival goal of the enterprise, along withproductivity and satisfaction. This chapter endeavoursto bring out significant variables of financialmanagement in SIUs from Marathwada. In order tosubstantial aerial observations, an experience survey ofSIUs was conducted to collect data on practicalities offinancial management.

Objectives of Financial Management :Funds are obtained for investment in industry.Entrepreneur protect and conserve these funds andmake 'maximum use of such funds. There are twinobjectives, which he keeps in mind i.e. profitability andliquidity of his funds. These, though are conflicting,entrepreneur has to secure the balance and optimisethe utilisation his funds. The major objectives for SIUsowners in his finance management entails the following:

1. Procurement of money needed by industrialunit;

2. Keeping and increasing the invested moneythrough sound financial policies and programme;and

3. Generating in-come or profit for theenterprise.

4. Rational financial planning, forecasting ofcash receipts and disbursements-cash

5. Raising of funds, either equity capital orfixed interest capital which includes both partnershare capital and loan capital (securing of funds);

6. Optimum use and allocation of funds(administration of funds); and

7. financial controls (budgets and other

controls).

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The wise and integrated approach in financialmanagement by an entrepreneur alone can accomplishboth productivity (maximum wealth) and satisfaction.

Financial manager is called upon to take three major

decisions :

1. investment decision ; e.g., capital budgeting or financialplan :

2. financing decision or formulation of the best financingmix or capital structure of the enterprises; and

3. Profit sharing or using decision or profit policy. Financialmanagement involves the implementation of these

three major decisions. The decisions are inter-relatedand Financial manager or entrepreneur has toimplement jointly. Together, these vital decisionsdetermine the value of the SIU to its partners andinvestors. Financial manager makes use of analyticaltools in the analysis, planning and control of theenterprise involving funds.

Hence the SIU entrepreneur while managing financehas to take care the following factors :-

1. Discovering ideas for a product planning anddevelopment with the help of marketing research.

2. Procuring finance - cash and /or credit.

3. Acquiring fixed assets-bought/hired.

4. Acquiring current assets, e.g., raw materials,fuel, supplies, etc. on credit

5. Ensuring the release of goods to the marketas per marketing plans

6. Arranging the flow of material, (from the rawstate to till the disposal of finished goods,)

7. Arranging physical and financial controlssuch as production control, inventory control, costaccounting and so on.

8. Arranging the finances for production,

marketing, physical distribution, personnel,receipt of payments.

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9. Throughout the whole period of funds-flowcycle or manufacturing cycle, Arranging thepayment to suppliers and employees.

10. Arranging the payment to partners, and fortaxes.

The field survey observation & brings out the fact that inmajority of SIUs from marathwada that there was nofinancial planning and its absence has given to manyproblems. The following observation will make the factclear :-

(i) There was a waste of resources due to everchanging economy and Govt. policy.

(ii)The non-co-ordination of various functionalareas created over lopping and inadequacy offunds.

(iii) Funds for production and funds formarketing were never in co-ordination with fundsrealised after marketing.

(iv) There was absence of communication offinancial matters to different levels of supervisors& managers and which resulted in mis-management/non-coordination.

(v)There was no understanding of short Term &long term financial objectives.

(vi) Facts pertaining to Rational use of Capital,protection of capital, smooth cash flow, werefound overlooked and the same resulted intofunds shortages.

(vii) Financial matters were kept secret by ownerand the same could be obstacled in settlementafter demise of owner.

(viii) There was no proper financial procedure &forecasting.

A financial plan for a new project of SIU covers the

following expenses :

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(1) Cost of fixed assets.

(2) Cost of working capital requirements to runthe business.

(3) Promotion expenses.

(4) Organisation expenses.

(5) Cost of establishing the SIU business fromthe time company being operations until itsincome is sufficient to meet the expenses.

(6) Cost of raising initial capital such asbrokerage, underwriting commission, cost ofprinting, advertising and issue of prospects, etc.,

(7) Cost of goodwill patents, etc.

(8) Provision for contingencies.

When enquires made with SIUs entrepreneurs withregard to above almost more than two fifthentrepreneurs did not have knowledge of these( 1 to 8).

In devising the capital structure by the proposed SIU;the following shortfalls are noticed :-

(i) Inflated estimation capital expenditure withoutcaring business objectives.

(ii)No Provision for meeting un-for seen liabilities,expansion, depreciation, conservative liberalploughing back of profit, for bad debts, secretreserve, working capital etc.

(iii) In appropriate Balance between fixed &Working Capital as well as between owned capital& borrowed capital.

(iv) Overlook to liquidity of capital withprocurement capital at reasonable cost along withsafety.

(v)Keeping abnormal proportion in capital plan

(vi) Maintenance of complicated financialstructure

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(vii) Keeping ratio between current Assets &Current Liabilities frequently more than 2:1.

(viii) Unawareness of External Environment like

state of trade, Attitude of Investment market,General level of Interest Rates, Govt taxation,Govt. Policy & so on.

When the needs of growth capital be considerable, say,Rs. 1 crore., a SIU has the following sources :

1. Depreciation and free reserves,

2. loans from banks and finance corporations,

3. further collection from partners and

4. issue of convertible debentures partly as rightsissue to members and partly by prospectus. Letus assume that a SIU needs Rs. 100 crores. It canraise Rs. 37.50 Lakhs through free reserves anddepreciation. it may have loans from banks andfinance corporations to the extent of Rs. 12.50Lakhs. It may have Rs. 50 Lakhs. as convertibledebenture issue as Rights Issue to members. The

model Financial Plan for growth may be asfollows:-

Capital Outlay (Uses)(Rupees in Lakhs)

Sources of Finance(Rupees in Lakhs)

1. Additional FixedCapital

62.50

1.

Depreciation 18.75

2. Additional WorkingCapital

25 2.

Free ReceivesLoans from Banks and

18.75

3. Cost of RaisingCapital

7.50 3.

Financial Institutions 12.50

4. ContingencyProvision

05 4.

Convertible (7 year)Debenture issue(Right Issue0

50.00

Total Capital Outlay 100 Total Resources. 100

Note :

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1. The present equity share capital is Rs. 30Lakhs.

2. The free reserves are Rs. 30 Lakhs.3. There is no loan capital and proposed loan

capital for further expansion is Rs. 05 lakhs

(convertible debentures) and Rs. 12.50 M. frombanks and Finance Corporations.

4. Debt : Equity ratio of 2:1 is permitted.

Source : This model is derived after consulting experts andSIU

entrepreneurs.

In the formulation of a financial plan of a SIU,entrepreneurs has to make the decision relating to the

total amount of securities to be created. Capitalisationindicates the total par value of the outstanding amountof securities in the form of owned capital, debenturecapital and the face value of other long-termobligations. Short-term loans or temporary bank loansare usually excluded from the capitalisation.

Capitalisation = Ownership capital + long-term loancapital or

= Share Capital + free reserves +debenture

capital + long-term loans

Capitalisation of a SIU, i.e, the determination of theamount of securities to be created is not arrived at onthe basis of cost concept. Capitalisation should bebased on the earning power. In other words, theprocess of capitalisation begins with an estimate of thefuture earnings of the SIU. No one puts money into aSIU without expecting return on it in the shape ofdividend or interest. The value of a SIU is determinedby its ability to earn return on capital invested. Thehigher the rate and regularity of its earnings, thegreater the value of SIU and the greater the amount ofcapital which may be safely invested in it. Another wayof saying the same thing is that a SIU is worth thatamount upon which a fair return may be realised.

Causes of Over-Capitalisation of SIUs1. Promotion with inflated assets. Book value of SIU more

than its real value.

2. High promotion expenses, high remuneration ofpromoters; high price of goodwill etc.

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3. Floatation of SIU in inflationary period and when boomsubsides, earnings fall, leading to over capitalisation.

4. Inadequate owned capital, defective financial plan,

chooser of capital becomes beggar of capital, top heavyborrowing; high interest charges, shareholders starveddue to falling dividends, falling market value ofbusiness.

5. Defective depreciation policy, affecting adverselycompany's efficiency and leading to low profits -Depreciated assets.

6. Manipulation of accounts to inflate profits and declareliberal dividends and no retained profits.

7. High taxation policy.

Effects of Over-Capitalisation :(A) Effects on the SIU :

1. Low dividend rates,

2. Low market price of SIU and loss of investorsconfidence.

3. Manipulation of accounts to show prosperityon paper.

4. Inadequate provision for depreciation,replacement and reserves.

(B) Effects on the Partners(1) Depreciation in business value (2) Low, uncertainand irregular income. (3) Low loan value of shares (4)Unhealthy speculation and exploitation of real partners.

Causes of Under-Capitalisation of SIU(1) Under-estimation of future earnings byaccident.(2) SIU floated in recession find themselvesunder-capitalised during prosperity because theyhave unexpected increase in earnings.(3) Conservative dividend policy adopted by theentrepreneur providing liberal depreciation, liberal

retained profits and emphasis on self-financing forgrowth-Appreciated assets.

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(4) Latest process of production andtechniques, rationalisation, scientificmanagement, finance out of past savings,maximisation of productivity and efficiency,increase in profits.

(5) Built-up secret reserves.

According to Gerstenberg capital structure *[*The termcapitalisation is synonymous with capital structure or financialplan. Hence, requisites, of sound financial plan or capital planare equally applicable to sound capital structure.] or financialstructure of a SIU is the make-up or form or composition ofcapitalisation i.e., the type of securities to be created and therelative proportion of each type of securities in the totalcapitalisation.

Most of the SIUs in Marathwada prefer or adopt highgeared capital structure to meet inadequacies of funds.

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Mode of Finance :While devising a sound capital structure, SIU has

to lay more emphasis on the pattern of the capitalstructure, i.e., the relative importance to be given to the

ownership resources or creditorship resources. Ingeneral the determinants of mode of finance are :

(1) the volume of earning expected.(2) Stability of earnings.(3) Predictability of earnings.

If earnings of the SIU are highly unpredictable,irregular, uncertain and fluctuating, equity or ownedshare capital is always desirable. For a speculativebusiness, risk of loss is considerable, SIU has no

immediate prospects of profitability. Hence, such SIUcan raise only owned share capital. An equity or ownedshare of a prosperous SIU is better than a partner shareof a doubtful SIU or a borrowing from money lender.Hence, in the final analysis much depends upon thefinancial position of a SIU and its earning power. Bondsand partner shares have a greater appeal to theconservative investors and institutional investors likebanks, insurance company, provident funds, etc., whomay be legally debarred from going in for equity shares,Bonds and partner shares have also a special appeal in

a deflationary period. If investors demand safety,regularity and security of income and capital, bonds andpartner shares are suitable, in our capital structure.Partner shares depend upon financial position, andearning power of the SIU. Bonds and loan capitaldepend upon financial position, earning power andsecurity offered by the SIU.

Determinants of Capital Structure in SIU :Factors determining the capital structure or capitalgearing or the proportion of securities or the factorsaffecting the composition of capitalisation in SIU are asfollows

1. Trading on the Owned Capital2. Nature of Enterprise :3. Object of Finance :4. Control in Management :5. Attitude of the Investment Market.6. General Level of Interest Rates :7. Business Cycle :

8. Government Taxation Policy:9. Period of Finance :

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Chapter IVManagement of Working Capital by SIUs

Introduction :

Current assets are assets convertible into cash withinone year. Management of working capital usuallyinvolves management or administration; i.e., planningand controlling these current assets, namely cash andmarketable securities, accounts receivables andinventories, and also the administration of currentliabilities.

Cash and credit in the SIU is comparable to the blood ofthe human body. Like blood, finance gives life and

strength, i.e., profit and solvency to SIU. Financialmanagement is called upon to maintain always the rightcash balance so that flow of funds is maintained at adesirable speed not allowing any slow downs or,stoppages. Thus, the enterprise can have a balancebetween liquidity and profitability. Planning and controlof working capital naturally centres round sound cashplanning which includes setting of cash policies andprocedures, and the control over cash and credit. Cashis of course the major and very sensitive component ofworking capital.

The concept of gross capital is a financial conceptwhereas that of net concept is an accounting concept.SIU is interested more in the amount of current assetswith which it has to operate. If it can balance receiptsand disbursements perfectly, the business wouldoperate with maximum efficiency. To the managementof a company, the source of the working capital-owned/borrowed resources- is immaterial. However, inan ever-changing economy, it is very difficult to secureperfect equilibrium between inflow and outflow of cash.Hence, it is the objective of sound financialmanagement to always maintain enough supply ofworking capital. However most of the SIU are unable tomaintain enough supply of working capital.

Factors Determining Requirement of WorkingCapital There are so many factors that determine therequirement of working capital of a particular SIU. Eachfactor influences in its own way in determining the need

of the working capital of the SIU. It differs from firm tofirm and according to the nature of the business.

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However, in this chapter some of the above factors arediscussed.

(i) Nature and Size of SIU Business(ii) Manufacturing Cycle

(iii) Business Fluctuation(iv) Production Policy(v) SIUs Credit Policy(vi) Availability of Credit(vii) Growth and Expansion Activities

(viii) Profit Margin and Profit Appropriation7

(ix) Price Level Changes(x) Operating Efficiency

(xi) General Type of Business :(xii) Size of the Business Unit :

(xiii) Terms of Purchase and Terms of Sale :(xiv) Turnover of Inventories :

(xv) Process of Manufacture :(xvi) Importance of Labour :(xvii) Proportion of Raw Material to Total Costs :(xviii) Cash Requirements :(xix) Seasonal Variations :(xx) Banking Connections :(xxi) Growth and Expansion :

For normal rate of expansion in the volume of business,SIU may have greater and greater proportion of retainedprofits to provide for more working capital; but for fast growing SIU it shall require larger and larger amount ofworking capital. A plan of working capital should beformulated with an eye to the future as well as presentneeds of a corporation. Permanent working capital mustbe secured on a long term basis.

Concept of Operating CycleManagement of gross working capital of current assets

is sought to be measured with the help of operatingcycle of working capital.

Cash plays a vital role in lubricating business operation.It is needed to buy material inputs and incur otherexpenses in course of business operation. The outflowof cash that occurs in course of business operation isrecovered when sale-proceeds are realized. The cashwhich is thus recovered is used again on raw-materialsexpenses etc., and thereby, a cycle is created. In this

cycle cash becomes raw materials, work-in progressfinished goods in storage and sundry debtors before it

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resumes the form of cash. The flow from cash tosuppliers, inventories to receivables and back in to cashis called the operating cycle. Four distinct componentsof the operating cycle are :

1. Raw material cycle,

2. Conversion cycle,

3. Storage cycle, and

4. Collection cycle.

Duration of the components to operating cycleis measured in terms of number of days. When

average stock of raw materials is divided byaverage consumption of raw materials per dayduration of gross material cycle obtained.Subtraction of duration of trade-credit fromgross raw-material cycle yields net rawmaterial cycle. Duration of trade credit is equalto average balance of sundry creditors dividedby average amount of credit purchase per day.Conversion cycle is the quotient of averagestock of work-in-progress divided by averagedaily consumption of work-in-progress. Storage

cycle is obtained when average stock offinished goods is divided by average cost ofgoods sold per day. Collection cycle is equal toaverage balance of sundry debtors divided byaverage value of credit sales per day.

Practical Problems in Managing WorkingCapital

1. Terms loans are sanctioning by certain financialagencies to acquire plant and machineries. They arenot issuing working capital loans. The SIU owners haveto approach commercial and other private banks forworking capital. In this, there is a gap between theneed and the actual sanctioning of loan. Thisarrangement creates lot of time gap and this delaycauses more failures in new business ventures.

2. Term loans are purely for establishing fixed assets.Some time, due to delay in getting working capital,

business people are forced to divert some fund allottedfor purchasing machinery etc. to acquire current assets.

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This will result in either reduction in production orquality due to non availability of machines etc.

3. Some entrepreneurs may spend more in furnishing theoffice, residence and on personal conveyance, which in

paucity of funds for managing daily operations.

4. Improper inventory management may cause moreaccumulation of stocks on hand. Major share of workingcapital may be locked up in stocks.

5. Lack of proper stockist, and marketing network may alsocause problems in working capital.

6. Policy of purchasing raw materials on cash and sellingthe products on credit will certainly affect the liquidityposition of the firm.

7. Wrong estimation of requirement of working capital anddelay in making arrangement for getting the workingcapital will also cause problem.

8. Delay in issuing working capital from the financialagencies due to non-availability of required documents,security etc., will certainly affect the business. This isthe major problem faced by small business managed by

untrained managers.

9. All management functions are carried out by single ortwo persons in small business. They do not devotemuch time on this matter. They have to depend on theinformations given by their office staff. This may leadto wrong financial planning.

10. Another major problem is high rate of interest. Quickdisposal of loan is available from private money-lendersat higher rate of interest. In order to get rid of financial

crisis, business people get into the clutches of privatemoney-lenders. Most of them may not be in a positionto get out of the clutches of private financial agencies.Most of the small firms practically working to pay theinterest for the loan obtained.

11. Government fiscal policy, import export policy, will alsoaffect the financial position of the business. Change ofpolicy may either affect the business or cause delay ingetting loan from the banks.

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Suggestions for Effective Working CapitalManagementThe following suggestions are made to overcome theproblems in managing working capital.

1. No diversion of fund from one head to otherhead.

2. Follow scientific inventory management.

3. Seek the help of trained financial managers.

4. Adopt credit purchase and cash sales.

5. Delays the bills payable.

6. Expedite bills receivables.

7. Reduce the value of current assets at alltime.

8. Increase the marketing network.

9. Use own fund or go for zero capital as for aspossible.

Chapter VBorrowings, Subsidies, Incentives & Hire Purchasing

Problems Of Borrowing

Multiplicity of DocumentsEntrepreneurs found it difficult to fill up various formsrequired for seeking credit assistance. They often paidfor getting the forms filled up, besides spending a lot ofmoney on the preparation of required legal documentssuch as affidavits. Even with expenditure of money, itwas sometimes difficult (as stated by 18 entrepreneurs)to get the project report and other documents prepared.For a loan from the Maharashtra Financial Corporation,there were eleven documents to be furnished withapplication besides depositing the imprest money.Finding revenue records for the last 30 years forverification of security and getting permission from thecompetent authority under the Urban Land (Ceiling andRegulations) Act, 1976 to mortgage land and buildingswith the Corporation were other problems. While on therecommendations of the High Powered committee for

examining Bank Credit problems of small ScaleIndustries, and on the advice of the Reserve Bank of

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India, banks had adopted simple application forms forcredit facilities up to Rs. 25,000, but the problem ofmultiplicity of documents regarding term loans from theMaharashtra Financial Corporation was still there.

InspectionsIn connection with loans from the Department ofIndustries, 30 of the 39 applicants stated that theInspector harassed them at the time of verification ofparticulars of the unit and even later. According to theRules, the Director of Industries or officers authorized byhim, were to inspect the premises, books, machinery,stocks, shares and other belongings connected with theunit in respect of which the loan was to be granted. Toask for a loan from the Department of Industries was

thus to invite an army of Inspectors. For a loan from thebanks against stocks, monthly statements of stockswere to be sent which was again a problem for small-scale units.

Valuation of SecurityAnother problem mentioned by the entrepreneursconcerned the valuation of security. In the MaharashtraFinancial Corporation or commercial Banks the valuationof old plant and machinery was made after deductingdepreciation at the income-tax department rates from

the price mentioned in the suppliers invoice, and fornon-standard fabricated machinery, the assessorsvaluation was taken; this did not take inflation intoaccount and hence resulted in under valuation. Thevaluation of new machines did not include freight anderection charges which in some cases formed asubstantial part of the cost of machinery.

As regards banks, entrepreneurs said that the marginbetween the value of the security and the loan was verylarge particularly if the former consisted of raw-materials or finished stocks. Commercial banks otherthan the State Bank group retained a margin of 30 to 40per cent and it increased all the more on account of theway material was evaluated. Stocks of raw materialswere valued at the market price or controlled price,whichever was lower. This would have no adverseeffect if materials were available at controlled prices.However, often small entrepreneurs had to purchase 80to 90 per cent of their requirements at black-marketprices which were much higher than controlled prices.

Thus if the controlled price of iron sheets was Rs. 2,700per metric ton and the market price Rs. 4,200, the

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banker would value the stock of iron-sheets at Rs. 2,700and would sanction a loan of Rs. 2,025 under theliberalized scheme by retaining a margin of 25 per centon the controlled price. Thus, the effective margin foran entrepreneur who had actually purchased iron-sheets

from the market amounted to more than 50 per cent. Itwas fairly well known that wider disparities existedbetween the fair and the market prices of most of theindustrial raw-materials such as iron, lead, zinc andcopper. This obviously had an adverse effect on theborrowing capacity of small entrepreneurs. Similarly, amargin of 30 to 40 per cent was required againstfinished stocks which were valued at the cost ofproduction. This also affected the borrowing capacity ofthe small entrepreneurs. They maintained that thefinished goods ought to be valued at wholesale prices.

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Multiplicity of LimitsUnder the current practice, different limits existed forpurchase of raw-materials, retention of finished stocksand supply of goods on credit. Multiplicity of limits

caused hardships when there were seasonal variationsin demand and supply. In order to solve this problem,the State bank introduced a Special HypothecationScheme under which an integrated credit limit to meetthe various needs of entrepreneurs was sanctioned andthe collateral was left to the possession of the borrower.This facility was available for credit limits up to Rs. 1lakh, which was too low.

Delay

The grant of a loan was made in two stages-the sanctionand the disbursement. Sanctions were often accordedafter long delay and disbursement also took a fewmonths. Of the 28 entrepreneurs who got loans throughthe Department of Industries, only two managed to getin less than a month, nine in six months and seventeenin more than six months. For one units, it took as manyas four years to get the sanction. This problem of delayhad been faced all over India. It was estimated that fora Bank loan up to Rs. 10000, the time taken was at leastthree months and a half. More time was taken in the

case of bigger loans. For a loan between Rs. 100000and Rs. 5,00000 the time taken was about nine months.In a study of Vidharbha also inordinated delays hadbeen found.

Repeated VisitsThirty-five of the 39 entrepreneurs who applied for aloan to the Department of Industries said that they hadto visit the District Industries Centre many times ( anentrepreneur, even mentioned fifty visits) before theycould secure a loan. In the bureaucratic set-up as itexisted, the applicant had to meet and bribe the officialat every step- the receipt clerk, the inspector, the officerand the issuing clerk. In a small-scale unit, theentrepreneur had often to play multiple roles asentrepreneur, manager, worker and messenger. Evenone trip to the District Industries Centre requiringabsence from work for three to four hours cost him a lotand he preferred to borrow from private sources at ahigher rate of interest.

Corruption Economic and Political

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In our sample, of the total of 28 entrepreneurs whosecured loans from the Department of Industries, 15declared that they had paid bribes, six that they hadused political influence and two that they had dependedupon kinship with officials for obtaining loans. The

amount of the bribe varied with the position of theofficial in the hierarchy. An Inspector had to be paid Rs.1000 to 2000 and a clerk (who processed theapplication or who issued the cheque) had to be paid Rs.125. The messenger also expected from Rs.50 to Rs.100. A jargon had grown around this passage of money;speed money, Sewa (service) and tea were someof the terms used for consideration money. The smallerentrepreneur was likely to be hit harder. An artisanentrepreneur of Paithan stated that his loan had beenpocketed by the Inspector himself and that he had beenasked to repay it. About 75 percent of theentrepreneurs stated that the treatment depended uponwhether one had the patronage of influential persons. Itwas found that even the addresses of some of the unitswhich had obtained loans were not available in therecords of the Department. Two inter-related factorsleading to non-payment of loans were faultymaintenance of records and bribery. The entrepreneurswho received loans from the Maharashtra FinancialCorporation stated that they had to bribe the revenue

officer for getting the revenue records verified for thelast thirty years and also to bribe the officer under theUrban Land (Ceiling and Regulation) Act for seeking thepermission to mortgage property. For loans from banks,only three per cent of the entrepreneurs stated thatthey had paid bribes.

Subsidies The Department of Industries provided financialassistance in the form of subsidies for helping thegrowth of small-scale industries in Maharashtra (i)under the Maharashtra State Aid to Industries Act, 1935;(ii) by subsidizing the rate of interest; and (iii) forspecial purposes.

Interest SubsidyThe Entrepreneurial Training Programme was started byGovernment of India in 1971-72 to provide employmentto un-employed engineers. In 1974-75 the UnionGovernment lunched a programme of providing financialsubsidy to these engineer entrepreneurs for setting up

industrial units. Under this programme they were to begiven a subsidy on interest payable on loans taken by

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them from banks, the State Financial Corporations andother financial institutions15. Only those engineers whohad undergone training under the various schemes ofassistance to the educated unemployed sponsored bythe Government of India or the Planning Commission

were eligible for this assistance.

Subsidy for Special Purposes The programme of providing subsidy on purchase ofgenerating sets was announced by the Government ofMaharashtra in 1983 with a view to counteracting theshortage of power and encouraging the industrialists topurchase their own generating sets. Under it, a loan of75 per cent of the cost of a generating set was to begranted by the Maharashtra Financial Corporation or a

bank, 20 per cent was to be given as subsidy by theDepartment of Industries, and the remaining 5 per centwas to be contributed by the entrepreneur.

Incentives The Government provided fiscal and monetaryincentives to promote the establishment of newindustries and to encourage expansion in establishedindustries. Some additional incentives were provided tothe small-scale sector. Incentives were also provided toencourage the locational dispersal of industries in rural

and backward areas. We shall deal with these one byone.

The incentives offered by the Central Governmentwere : income-tax concessions, exemption from exciseduty and the capital subsidy in backward areas.

In our sample, only 34 units were eligible for the 5-yeartax holiday, because the other units did not fulfill therequirement relating to the number of workers. None of

the rural industries fulfilled this condition. The benefit ofdeduction of depreciation was availed of by the eligibleunits. In our sample, 42 entrepreneurs installed newmachinery and they availed of the investmentallowance.

The Government of Maharashtra announced a packageof incentives for industries, after the formation of thereorganized Maharashtra. These incentives wereannounced as part of the New Policy of IndustriesDevelopment, and were aimed at attracting industry to

a few selected Focal Points of growth, sustaining anddeveloping industries in selected cities and development

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of industries in the State as a whole. In 1973, a fewmore incentives were announced, and the rulesgoverning old ones were changed. In 1998 theMaharashtra Government issued an Industrial PolicyStatement providing for further incentives. These were

to be available to units set up after April 1990 in FocalPoints, Industrial Areas, Industrial Estates, backwardareas, sub-mountain areas, Bet areas, and to those setup by qualified engineers. Industries of all sizes couldavail of them. These are being discussed below.

Investment Loan for Priority IndustriesInvestment loan was to be granted to priority industriesto supplement the promoters contribution for thepurchase of land, construction of factory building and

purchase of plant and machinery. The loan was to beequal to the amount of interest-free loan to which theunit would be entitled. A project report was to beprepared by a consultant on the panel approved by theDirector. The entrepreneur was to apply in theprescribed form (H) to the Director of Industries. Theapplication was to be accompanied with the following (i)a copy of the project report, (ii) an attested copy of theconstitution of the firm or an affidavit to the effect thatthe applicant was the sole proprietor of the firm, (iii)documentary proof regarding acquisition and possession

of land acquired for the project, (iv) an attested copy ofthe confirmation of the order for machinery placed bythe firm with the suppliers along with copies of letters ofcredit in the case of imported machinery, and (v)certificate from a registered architect regardingprogress of construction of the building.

In our sample tiny units were eligible but it was difficultfor them to complete the formalities such as getting theproject report and the certificate of a registered

architect. None of the entrepreneurs applied for theloan.

Cost of Feasibility ReportIn 1966 the State Government announced that 50 percent of the cost of the feasibility report prepared byapproved consultants would be paid by the Governmentto be converted into equity capital if the project wasestablished. In 1978 the Government announced thatthis assistance would be given in the form of a loan atthe rate of interest fixed by it for loans under the State

Aid to Industries Act. The amount of loan admissiblewas 75 per cent of the cost of feasibility report up to a

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maximum of Rs. 75,000. In case the cost of the reportwas not considered reasonable by the Director, he mightdetermine the reasonable cost. The amount was to berecovered in five annual installments. An entrepreneurwas to apply for the grant of loan to the Director in the

prescribed form (I). The application was to beaccompanied with a copy of the feasibility report andoriginal receipt of payment to the consultant.

During six years (1974-1980) only five units inMaharashtra had received the loans amounting to Rs.64,000. The whole of this amount went to the large andmedium-scale industries. Small-scale units could notafford to pay for feasibility studies. In our sample noneof the entrepreneurs got a feasibility report prepared

even though it was required for applying to banks orGovernment Corporations for loans.

Concessions to Non-Resident IndiansThe special facilities and incentives available to non-resident Indians included the following :

(i) import of machinery up to a value (CIF) ofRs. 25 lakh purchased out of the applicants ownforeign exchange savings abroad without goingthrough import licence formalities; only thecustoms clearance permit was necessary for this

purpose;

(ii) import of permissible raw-materials andcomponents for meeting the requirements for oneyear up to Rs. 10 lakhs purchased out of theapplicants own foreign exchange earningsabroad;

(iii) priority in allotment of plots and in issuingletters of indent for land where regular allotmentwas delayed;

(iv) assistance to get applications to theGovernment of India for import of machinery andraw-material expeditiously processed;

(ii) higher level of concession than those towhich they were entitled on the basis of thebackwardness of the area.

There were no non-resident Indians in our sample.

Chapter VI

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Institutional Finances to SIUs

Finance is not only the simple requirement alone to anyproject but also to be considered as a blood circulationof that project as it is required till winding up the

enterprise. One of the key problems in this area in thatthe enterprise should not be over financed as well asunder finance. Due to inadequate financial assistance,there was a big hamper to the industrial development.However, after independence the specialized network offinancial institutions with a fairly big capital base wasestablished to provide financial assistance to small scaleindustries.

Procedure for Getting Financial Assistance

The new SIU entrepreneurs find it difficult to getfinancial assistance from the funding agencies as theydo not know the procedures. A sort of brief guidance isvery essential for them. The guidelines are to bepointed to their purpose of assistance needed. Thefollowing points may enlighten the new SIUentrepreneurs to get assistance for their smallenterprises.

1. The long-term loans are required for acquiring fixedassets like land, building, plant and machinery, other

installations, fitting, fixtures etc.

2. The short-term loans are required as working capital forday-to-day requirements, for procurement of rawmaterials, wages for workers, and for transport costs.

3. The rate of interest may vary according to the categoryof beneficiaries/entrepreneurs (SC/ST), Ex-servicemen,physically handicapped persons etc.

4. The promoters contribution varies from 10 per cent to25 per cent depending upon the category ofentrepreneurs /location of the units.

5. The security of the term loan would normally be bymortgage of land and building and by hypothecation ofmachinery and equipment acquired through financialassistance and / or personal guarantee / surety.

6. The collateral security limit is at the discretion of thefunding agency.

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7. The repayment of loan usually be on installments,spread over 5 to 10 years depending upon the cashgeneration and the profitability of the project.

8. A moratorium for repayment of installments of the

principal amount ranging from 12 months to 24 monthsis allowed from the date of the first release of the loan.However the interest is to be paid on quarterly basisfrom the date of first release of the loan amount.

9. In respect of cases where there has been considerabledelay in implementing the project due to factors beyondthe control of the promoters, rescheduling of repaymentof loan and extension of time for repayment of interestmay be allowed on request.

10. The short-term loan for working capital is extended for(a) Purchase of raw materials

(b) Consumable stores/spares

(c) Ready stock in process

(d) Payment of wages

(e) Administrative and manufacturing expenses

11. Normally the entrepreneurs approach commercial banksfor working capital requirements.

12. The working capital facilities could be classified asadvances on

(a) Lock and key pledge of stocks

(b) Factory/Godown type hypothecation of stock

(c) Advances against stock in process

(d) Advances against bills (when finished goodsare supplied on credit)

(e) Clear advances (contingent needs)

(f) Packing credit to exporters to executeexport orders. Working capital loan is sanctionedin the form of cash credit, overdraft facility and

bills purchase and discounting facility.

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13. The Dept. equity norm for SSI is 3:1 for Khadi andVillage Industries 9:1.

14. The promoters contribution is fixed in relation to thecost of the project (based on location and category of

beneficiary)

15. The investment subsidy is available from the State andthe Central Governments.

16. The scheme of support and incentives to theentrepreneurs are administered by the Government andpromoting Central agencies.

Institutional Framework :

To provide financial assistance to entrepreneurs thatGovernment has set up a number of special financialinstitutions besides commercial banks. They may beclassified into two categories.

1. All India Financial Institutions2. State Level Financial Institutions

The list of financial Institution andpercent of SIUs owners availing financesfrom them are given against each of

institution

All India Financial Institutions are :

Industrial Financial Corporation of India IFCI(40%)

Industrial Credit and Investment Corporationof India ICICI (12%)

Industrial Reconstruction Bank of India IRBI(16%)

EXIM Bank of India EXIM BANK (6%)

Unit Trust of India UTI (6%)

Life Insurance Corporation of India LIC(12%)

General insurance of India GIC (8%)

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National Small Industries Corporation NSIC(12%)

Small Industries Development Bank of India SIDBI (16%)

National Bank for Agricultural and RuralDevelopment NABARD (14%)

Housing Urban Development Corporation HUDCO (12%)

Housing Development Financial CorporationHDFC (16%)

National Co-operative DevelopmentCorporation NCDC (14%)

Export Credit Guarantee Corporation ECGC(10%)

Khadi and Village Industries Commission KVIC (22%)

Commercial Banks - SBI, IOB, CB, PNB,

UCOB, etc. (86%)

State Level Financial Institutions

State Financial Corporation SFCs (34%)

State Industrial Development Corporation SIDCs (12%)

Small Industries Promotion Corporation ofMaharashtra SIPCOM (12%)

Of the above, except a few all India financialinstitutions, all others cater to small enterprises.

Schemes of Assistance to Small Enterprises andpercentage of entrepreneurs availing assistancefrom them are given ahead.

Technical Schemes (12%)

Special Capital Scheme (14%)

Seed Capital Scheme (14%)

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Composite Loan Scheme (8%)

Disable Entrepreneurs (4%)

Modernization (8%)

Electro-Medical Equipment (12%)

Nursing Home/Hospital (4%)

Equipment Finance (42%)

Quality Control Equipment (2%)

Assistance to Ex-Servicemen (6%)

Single Window Scheme (4%)

Tourism Related facilities (4%)

Mahila Udhyam Nidhi Scheme (4%)

National Equity Funds Scheme (2%)

Assistance for Marketing (2%)

Refinance Scheme for Acquisition of ISO9000 by SSI unit (RISO9000) (12%)

Prime Ministers Rozgar Yojana (28%)

Integrated Rural Development Plant etc.(42%)

Lead Bank Scheme for Facilitating InstitutionalFinanceFor the purpose of facilitating institutional financefourteen commercial banks were nationalized in theyear 1969. Among the commercial Banks the State Bankof India pays special attention to the need of smallenterprises. A Lead Bank Scheme is operated amongcommercial banks to co-ordinate the funding to smallenterprises at the District level.

The Ninety Per Cent Guarantee scheme

The scheme was introduced in the year 1957. Underthe scheme the losses arising out of repayment of loans

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are shared by the Central, State Governments and thebanks in the ratio of 50:40:10. The maximum aggregateamount payable by the Government of India shall notexceed five per cent of the total funds disbursed andoutstanding under the scheme in the state as on 30th

June or 31st December proceeding. The first scheme forhandloom co-operative was introduced in1957 in orderto cover ninety percent of the losses incurred by thebanks. The scheme is implemented in all the states. Itcovers all advances to handloom cooperatives comingunder the Reserve Bank of India scheme for handloomfinance. The scheme does not cover the default, butonly the ultimate losses.

In the year 1961, the scheme was modified. Under the

second scheme, defaults arising from loan providedunder the guarantee scheme to the co-operative aremet. The share of guarantee of the CentralGovernment, State Government and the Bank is50:40:10. In 1962 the scheme was extended to loansand allowances sanctioned by the State Bank of Indiaand its subsidiaries in areas where cooperative bankswere unable to finance industrial co-operatives. Thescheme covers all types of industrial co-operatives. Thestates like Gujarat, Maharashtra, Madhya Pradesh andPunjab were first to take advantage of the scheme.

Chapter VIIFacts About Financial Management of Sick SIUs

Small scale industry occupies an important position inthe economy of Marathwada but the growing sickness insmall scale units has created an alarming situation.

The growing sickness in small scale units in Marathwadahas created an alarming situation not only forentrepreneurs but also in financial management. Manyunits come up, utilise finances both of project promotersand outsiders, struggle through out for completion ofproject and its operation, meet with financial failure anddisintegrate finally. It results in loss of finances toproject promoters, loss to financial institutions,unproductive use of the community's scare savings andfinally adds to the already serious unemploymentsituation1. Hence, it is essential to analyse themagnitude and the causes of this sickness so as toensure to have proper financial management.

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The RBI has defined a sick unit as one which hasincurred financial or cash loss in the last year and islikely to incur cash loss in the current year as well as inthe following year. Sickness is characterised further bya worsening debt/equity (total outside liability/tangible

not worth) ratio and an imbalance in the financialstructure such as the current ratio (currentassets/current liabilities) being less than one2. A smallscale unit is sick when the unit accounts with the banksare irregular continuously for six to nine months, therate at which the unit is eating away its capital is morethan 10 per cent per annum, there is continuing defaultin the payment to the creditor and the unit hasremained closed for the previous six months3.Irrespective of size, a sick unit is one which works well

below its break-even level or which fails to generateinternal surplus on a continuous basis to meet itsobligation and depends on external funds for itssurvival.

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What is Industrial Sickness ?An industrial unit is said to be sick when it is nothealthy. The health of an industrial unit can bemeasured on the basis of a number of criteria, among

which the more important is the return on capital andreserves after providing for depreciation. The StudyTeam of the State Bank of India, in its report on SmallScale Industries Advances, 1975, defines a sick unit asone which fails to generate an internal surplus on acontinuing basis and depends for its survival upon afrequent infusion of external funds. The Reserve Bankof India defines an industrial unit as sick"if it hasincurred cash loss for one year and in the judgement ofthe Bank, it is likely to continue to incur cash loss in the

following two years and it has imbalance in its financialstructure such as current ratio being less than 1:1 andworsening debt equity ratio.

It would be seen that industrial sickness is not an overnight phenomenon. It develops in course of time.Before a unit actually gets sick, a number of symptomsappear on the financial sides that indicate theimpending sickness. A few important symptoms directlyor indirectly related to finance are as follows : (i) slowturnover in the account of the unit; (ii) frequent

requests for overdrafts or drawing beyond thesanctioned limit, sometimes even without priorintimation to the bank; (iii) failure to honour its bills onmaturity ; (iv) return of bills drawn by a unit on itsbuyers ; (v) slow off-take of stocks ; (vi) inexplicabledelays in the submission of stock statements ; (vii)tendency to draw less by cheque than in cash; and (viii)over-valuation of stocks, diversion of stocks or failure toensure stocks ; etc.

Why Units Become Sick ?The financial management has direct concern to knowabout exact reasons of sickness or has to answer thequestion Why unit is sick? Units become sick becauseof mistake made by the banker or by the SIU owner or insome cases due to reasons beyond the control of boththese parties. We can classify the various factorsresponsible for sickness under these three heads,namely, the bankers, the SIU owner borrowers andenvironment, i.e., situation beyond the control of both.

The Bankers. The bankers may commit the followingmistakes & affect the finances of units :

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Permitting location of the project at an ill-suited place causing to need of more overhead forup-keep;

Inadequate credit or too much credit leadingto over or under capitalization ;

Accepting over ambitious and unrealisticsales projections for assessing the financialrequirements;

Laxity of control by not ensuring a properway of disbursal resulting into diversion of funds;

Ineffective financial supervision due to lackof adequate and trained staff to supervise credit ;

No casual inspection of stocks ;

Permitting delay in submission ofstatements, returns and financial accounts ; and

Deficient or defective documentation.

An apparently unbelievable fact is that, in some cases,the manager may himself be responsible for thedifficulty in recovery of advances. Lack of integrityapart, laxity in the matter of follow-up and control mayspoil many good accounts. Some of the followingactions of the managers directly contribute for makingfinancial account sick :

Non-compliance with the terms of sanction ;

Allowing excess drawings in too many

accounts too frequently ;

Inspecting godowns in a casual mannerwithout any element of surprise ;

Confining to cabin and building an ivorytower attitude ; and

Thinking that for advances sanctioned byhigher authorities he is not responsible.

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The SIU Owner Borrowers. The mistakes onthe part of SIU owner - borrowers can befurther classified into categories, namely,honest and dishonest mistakes concerning tofinances.

Honest mistakes. These are those financialmistakes which occur not because of mal-intention on the part of the borrower butbecause of his ignorance to plan thingsproperly. The following area a few suchexamples :

Wrong choice of products leading to wasteof finance;

Inadequate equity base;

Over-investment in fixed assets notimmediately required for purchase ofunproductive fixed assets;

Deficiency in managerial financial skills ;

Defective purchase policy resulting in piling

up of stocks;

Uneconomic pricing policy ;

Poor credit collection system ;

Excessive borrowings;

Incorrect estimation of demand of theproduct and the competitive position ;

Inadequate marketing arrangements orimproper distribution system ; and

Obsolete plant and machinery resulting inhigh costs of production and inferior qualityleading to cash loss.

A until will seldom become sick overnight. Although onecan not have a mechanical device for giving an alarm inthe case of a danger signal, the fact remains that all

units growing sick invariably give out adequate alarmingsignals. These signals are like the early warning

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Borrowings from market at excessive rates.

Diversion of funds from the existingbusiness to new industrial lines.

Rumours of emerger or amalgamation.

The borrower being involved in legalproceedings for recovery of amount due from him.

Loss of major product lines or distributionrights etc.

Plants obsolescence.

Product obsolescence.

Incapacity or death of the key person,disturbing finances.

Non-payment of mandatory dues such astaxes, provident funds, etc.

Utilising short-term funds for long-termuses.

avoiding to see the bank manager orbecoming over hospitable to him.

Manipulative accounting, e.g., change inmode of stock valuation, revaluation of assets andreluctance to set up depreciation provisions

Dissatisfactory operation of the bankaccount.

Based on the above alarming signals, SIU owner mayfollow the following norms to detect such signals inadvance and take suitable action.

Adherence to fundamental principles oflending.

Utmost care should be exercised when theowner wants to leave one bank and come toanother bank.

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Monthly stock statements should be closelyexamined with regard to valuation and movementin and out of stocks. Some physical verificationon a random basis should be done at regularintervals.

Stock inspection should be done frequentlywith an element of surprise.

A dialogue should be held if the accountoperations indicate any sign of sickness.

A regular contact with the debtor should bemaintained and frequently, in an informal manner,information should be gathered about various

parties from various sources including theircompetitors.

A break-up of books debts age wise shouldbe obtained every month to ensure thatreceivables are regularly moving.

Financial statements must be preparedwithin six months of the close of the accounts.

Some information system, on the lines ofthe Chore Panel suggestions, should be introducedto throw up signals of incipient sickness well intime. The information system should have inbuiltchecks to ensure the reliability of the datafurnished. Banks should have counseling andconsultancy services which may render help in theselection of a product, inventory control,production planning, costing and pricing, andfinancial planning.

Main Causes of Sickness The T.I.S.C.O. Bombay took up this challenging

task (1999) and conducted a study in certain selectedpockets in the Marathwada to gauge the impact ofsickness in the small scale sector regarding its balancedgrowth. The basic causes which have been known areanalysed below :Causes of Sickness Impact in terms of

percentage(a) Financial difficulties 35.2(b) Inadequate power supply 3.80(c) Management problems 24.0

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(d) Technical problems 5.40(e) Delay in payment from Government

Dept.5.40

(f) Marketing problems 5.40(g) Diversification of funds 3.80

(h) Paucity of raw materials 1.90(i) Labour problems 1.90(j) Quarrels among partners 1.90(k) High incidence of taxation 1.90(l) Other problems 9.40

100.00

According to the survey report submitted, delay insanction of loans, lack of market facilities, acute powercrises, ambivalent government policy, inter-unit rivalryand unrealistic targets have been telling upon the health

of the industrial units.

The factors such as Finance, Marketing, governmentpolicy, power crisis, inter unit rivalry, raw material &gestation period are discussed ahead to point out theirconcern to sickness of ISU and subsequent effect onfinancial management.

Most of the entrepreneurs allege that concessions andincentives given by the government are only on paper.It is thus felt that they want no new facilities, but

implementation of various schemes and incentivesalready announced. No doubt, the Bihar Governmenthas laid full emphasis on accelerated development ofsmall scale industries and has announced a number ofnew incentives and concessions. However, it is felt thatbecause of communication gap and a host ofimplementing agencies for different kinds of assistanceand their complicated procedures, most of theseschemes have remained on page without being ofsubstantial use to the entrepreneurs.

It is also experienced that level of managerialeffectiveness in the sick units remains very low. Theentrepreneurs themselves have to perform all themanagerial functions, viz., organisation, production,sales, purchases, general control and externalrelationships. Only one or two clerks are appointed tokeep the books and records of the business. To performthese managerial functions, the entrepreneurs have toremain 3-4 days a week outside the enterprise. Notechnical or qualified persons are appointed mainly for

fear of additional overhead costs.

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Remedies And RehabilitationHaving realised the gravity of the problem emanating onaccount of industrial sickness in small scale units, thefollowing suggestions may be put forth to prevent thesmall units falling sick and also to revive the sick units

of the State :

1. Taking financial assistance from the banksshould be free and frank and should not hesitatein divulging the actual position of theperformance of the unit, just as a patient shouldnot conceal anything to doctor. This is possibleonly with the generation of mutual trust andconfidence.

2. Lack of scientific management is also one ofthe causes of sickness and as a preventivemeasure it is suggested that before theentrepreneur enters into any industrial venture ofa biggest magnitude, he should undergo shortterm training in modern management techniqueso as to equip himself with the techniques ofmodern management.

3. The entrepreneurs must strive to build areserve fund of its own to strengthen its equity

base to fall back upon in times of needs.

4. The small scale entrepreneurs must refrainfrom making unproductive expenses and shouldutilise the funds for the same purpose for which ithas been granted.

5. Management deficiencies should beovercome by inducting professionals on the Boardof Directors and by appointing competenttechnical and managerial personnel in keyposition in production, finance and marketing.

6. All the bills of SSI units is respect of suppliesmade to the Govt. Dept/public sectorundertakings/corporations should be paid within aperiod of 30 days failing which interest at the ratecharged to the unit by the bank should be paidfrom the date of supply till the date of payment.

7. The government should grant legislative

protection to the sector for assured market andprocess of quality control should be modified.

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8. The single window delivery system shouldwork in co-ordination with different wings tominimise the work of time.

9. Keeping in view the weak equity base in all-sick units, it is suggested that all identified sickunits have inadequate owned funds should begiven equity assistance in the form of interest-freelong term loans on cash basis.

10. There should be co-operation between termlending institutions and commercial banks.Commercial banks, by and large, provide workingcapital finance. They are more in the know ofthings as compared with term lending institutionsbecause of their daily contacts with the borrowers.

11. The Government can merge a sick unit witha financially sound unit in order to make both ofthem work.

12. The Government can simply take over a sickunit and operate it as a State enterprise.

13. All the financial institutions of the State,

especially Bihar State Financial Corporation andother commercial banks should be asked toprovide additional financial assistance to the sickunits including granting moratorium on interest,reduction in the rate of interest and moratoriumon repayment of principal amount. The B.S.F.C.should also organise a special cell to provide thetechnical, financial, and managerial training andguidance to the entrepreneurs of sick units.

14. The entrepreneurs allege that working

procedure of District Industries Cen'res (DIC) is notfavourable towards sick units. So, it is suggestedthat DICs should take special care of the sick unitsand should adopt a generous view regardingsanction of quota of raw material to sick units andshould assist them in solving their variousproblems in the field of production, marketing andmanagement.

15. The State Government should direct the

Maharashtra Electricity Board not to chargearbitrarily on the basis of machines horse power

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capacity despite its own failure to supply theadequate power.

16. The sick units should be provided subsidisedgenerator sets of high power and there should be

exemption from sales tax on their products.

17. Having experienced the under utilisation ofproduction capacity in small sick units, it may besuggested that two or more sick units be merged,so that there may be better utilisation of existingplant and machinery, and to provide a soundequity base and to reduce the overhead charges.

18. Unless a sick unit becomes viable and startsgenerating surplus, no penal rate of interestshould be charged till such time.

19. At present the nursing plan is not uniformand it differs from bank to bank. So, all the banksshould frame the nursing programmes in theinterest of uniformity in the approach to theproblem.

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Sickness In Industries Inviting Sickness InBanksAny effort to keep the sick industrial units artificiallyviable would show luke-warm response, if the

commercial banks or other financial institutionswithdraw their support. it is attempted in this chapter toexamine the credit facilities extended by commercialbanks to the sick industrial units, the extent of recoveryof loans and to highlight the growing impact of industrialsickness on the recycling of deposits of the commercialbanks.

If the diagnosis is wrong. the medicines would be ineffective.

If the diagnosis is delayed. the medicines would be least pro-active. And if the diagnosis is time-honoured and right, the medicines would be highly sensitive.

Unlike other countries, we have beeninstrumentalising redundant measures to keep the sickindustrial units artificially viable. RBI has been framingthe liberal credit policy and the commercial banksnaturally come in the trap of the sick units. Particularlyin the industrial economy of Marathwada wrong viabilityand techno-economic studies have been found to be theroot-and-branch cause for the present state of affairs.No doubt, the sick units have been getting in adequatefinancial assistance from the commercial banks but untilthey adopt the practice of eating up their own capital,the locking-up of funds would continue vis--vis the re-cycling process would be reversed. The statisticalreports of the DIC, A'bad reveal that Rs. 150 crores ofthe deposits of the commercial banks from Marathwadaand other financial institutions have been locked-up with

the sick industrial units.

The present chapter studies the problem underthe following heads ; with reference to Marathwada

(i) Financial facilities extended by thecommercial banks to the sick industrial units.

(ii) Recovery of loans by the commercialbanks.

(iii) Cases of locking-up funds and theirimpact on the re-cycling of deposits.

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While announcing credit policy forthe year 1999. The chairman, Bank of Maharashtrarightly observed that the problem of industrial sicknesswould not have become so serious, if banks had been

alert. He was of the view that the greater and timelyinvolvement of banks in monitoring the sick units wouldhave warded-off much sickness. He suggested that thebankers should have in depth knowledge of the day-to-day happenings to their assisted units. Crux of theproblem is that they have not been showing theirinterest, particularly in respect of establishingrelationship with the assisted units. If bankers shownew ethos, the cases of sickness in banks would beavoided as the recovery of loans would establish sound

milieu for the re-cycling of funds. To accelerate the rateof re-cycling, the RBI has also to check the one-wayprocess. it would be of immense use that the RBI givesdue weightage to the view points of the commercialbanks, in respect of formulating and implementing thecredit policy.

Undoubtedly enough, the re-cyclingof funds would evidence deceleration until the assistedunits adopt the practice of diverting funds to the non-productive heads.

Participating in the Session on'Industrial Sickness and its effects on banks' profitability,the deputy Governor, RBI, Mr. A. Ghosh, advocated thatif a sizeable portfolio of industrial units is allowed toremain sick, banks' profitability is bound to slump.

And if the assisted units do not giveup their softness for non-productive investment ; the locking-up of funds would be

perennial, the recovery of loans would bepoor, the re-cycling of funds would beinjured, the sickness in banks would bepossible and the sick industrial units wouldwitness pre-matured death.

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Supervision of Bank Credit andRehabilitation of Sick Units forbetter financial Management

Bankers appraise the loan applica