“PROBLEM OF TIMELY AVAILABLILTY

OF
WORKING CAPITAL TO SME’S”

EXECUTIVE SUMMARY
Small and Medium Enterprises (SMEs) are a key factor in the economic development and
innovation. The core of the political and economic transformation of any country is the
creation of the private sector, the development of entrepreneurship and creation of SMEs.
They are considered to be one of the principal driving forces in economic development.
SMEs stimulate private ownership and entrepreneurial skills, they are flexible and can
adapt quickly to changing market demand and supply situations, they generate
employment, help diversify economic activity and make a significant contribution to
exports and trade. SMEs also play an important role in innovation and the high-tech
business, due to their flexibility and creativity many of them became large businesses.

But despite their significant role in the development of an economy they face many
problems and one such problem is the timely availability of working capital. Funds
employed in current assets constitute working capital. It is infact referred to as life-blood’
or ‘controlling-nerve’ of the unit. The concept used for working capital may be gross
working capital or net working capital. Gross working capital constitutes current assets,
whereas net working capital means current asset minus current liabilities.

The above stated problem arises mainly due to delay in payments made by the debtors.
The funds of many SME industrial units are blocked in receivables. As a result, recycling
of funds is affected and production suffers. In a competitive environment, it must be
ensured that receivable dues are realized with utmost expedition. The SME units will
have to make special efforts for collection of their dues for their growth.

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Another concern for the SME’s is to minimize their dependence on fund-based credit. In
order to fulfill the working capital requirements of the business, the entrepreneurs
normally take up various types of fund-based credit facilities namely cash credit,
overdraft, demand loan, bill discount/purchase etc. from banks, but this sometimes
increases their operating cost and hence makes them less competitive. The funds lent to
the unit get paid on realization of sale proceeds towards the end of the production cycle,
but it creates a problem for the unit in case payments are delayed from the debtors. Thus
working capital facilities are intended to finance current assets.

Other important components of working capital are cash and inventory. Cash is one of the most
important components of the working capital. It allows a business to meet its day-to-day
expenses and inventory is a list for goods and materials, or those goods and materials
themselves, held available in stock by a business. Problems related to the aspects are
discussed in the report.

The report also discusses about some of the initiatives taken by the Government of India
in this regard like setting up of SIDBI, NABARD and other schemes.

Finally the report concludes with the suggestions and conclusions.

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 TABLE OF CONTENTS
S.NO. PARTICULARS PAGE NO.
1 INTRODUCTION
I) NATURE OF THE STUDY 7
II) SIGNIFICANCE OF THE STUDY 7
III) SCOPE OF THE STUDY 7
2 SME’S
I) AN INTRODUCTION
II) COMMON CHARACTERISTICS OF SME’S
3 WORKING CAPITAL
I) AN INTRODUCTION
II) WORKING CAPITAL MANAGEMENT
UNITMELY AVAILABILITY OF WORKING
4
CAPITAL: REASONS
I) DELAY IN PAYMENTS
II) PROBLEMS WITH FUND-BASED CREDIT
III) PROBLEM WITH CASH MANAGEMENT
IV) PROBLEMS WITH INVENTORY MANAGEMENT
SOME INITIATIVES TAKEN BY THE
5
GOVERNMENT OF INDIA

3
 I) INFRASTRUCTURAL FACILITIES
II) VARIOUS CREDIT SCHEMES AVAILABLE
III) SMALL SCALE SERVICE & BUSINESS
ENTERPRISES
III) PRIORITY SECTOR LENDING
IV) NAYAK COMMITTEE (1991-92)
V) SEVEN POINT ACTION PLAN (1995-96)
VI) KAPUR COMMITTEE (1997-98)
VII) NABARD
IX) FINANCIAL INCLUSION

S.NO. PARTICULARS PAGE.NO.

X) NATIONAL EQUITY FUND SCHEME
IX) DIRECT CREDIT SCHEMES
X) TECHNOLOGY UPGRADATION FUND SCHEME FOR
TEXTILE INDUSTRIES
XI) DIRECT DISCOUNTING SCHEME-EQUIPMENT
XII) COMPOSITE LOAN SCHEME
XIII) SINGLE WINDOW SCEMES
XIV) NEED OF THE HOUR
6 LIST OF KEY FINANCIAL INSTITUTIONS
7 SUGGESTIONS
8 CONCLUSIONS
9 BIBLIOGRAPHY

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 INTRODUCTION
NATURE OF THE STUDY: STATEMENT OF THE PROBLEM

The problem which is addressed in this study is one of the most talked about issue i.e. the
problem of timely availability of working capital to SME’s. The above mentioned problem
will be addressed in this study by a detailed literature review from various available sources
and through a case study of an SME facing this problem.

RATIONALE AND SIGNIFICANCE OF THE STUDY

SME’s form the back bone of any nation whether developing or developed. But the irony is
that the real issues and problems that SME’s have been facing are not addressed as they
should be. One such problem is the problem of timely availability of working capital.
Finance forms the life line of any business and if it not available when needed the most all
day to day operations are effected and this in turn leads to various other problems (the worst
result due to non-timely availability of working capital could be the closure of the
enterprise). So it is significant to understand the business environment and how it creates a
problem like scarcity of working capital of an enterprise. The study undertaken is also
important so as to ascertain the impact of non-availability of working capital in time to
SME’s, on SME’s, large enterprises and the economy as a whole.

SCOPE OF THE STUDY

The scope of the study is confined to study the reasons for non-timely availability of working
capital to SME’s and resultant impact it has on SME’s, large enterprises and the Indian
economy as a whole. The study will be undertaken based on literature review from the
available resources like national daily newspapers, financial newspapers, websites of various
entities like SIDBI etc, certain magazines like the analyst (ICFAI press) and any other

5
resource available. The study will also cover a case study of an SME which is facing the
above mentioned problem. The limitation of the study is that the study is based on only
literature review and no survey or field study will be conducted, hence limiting the scope of
the study.

SME’S

AN INTRODUCTION
Small is beautiful but is it Powerful? Yes, say the SMEs. SMEs have been stories that
happened away from the public eye, not seen and hence, not known. But can one ignore
the silent march of a multitude, relentlessly servicing the behemoths. The Report Card of
the SSI Sector reads thus:

The growth recorded by SSI in India is 2% more than any other sector; it accounts for
40% of the country’s GDP, 35% of Direct exports, 15% of Indirect Exports (through
Merchant Exporters, Trading Houses & Export Houses) and employs more than 20
million people. The SSIs needs just Rs. 60, 000 – 70, 000 to generate employment for one
man, while for the same a whopping 5-6lakhs is required for other sectors.

An investment of Rs.1 million in fixed assets can generate Rs.4.62 million of Goods or
Services with an approximate value addition of 10%, investment of Rs. 1Lakh can
provide employment to 4 people.

The exports from SSI sector has ridden on the performance of garments (readymade
garments, woollen garments and knitwear), leather and gems and jewellery, sports goods,
plastic products, processed food units from this sector. It is also pertinent to note that the
non-traditional products constitute a massive 95% of the SSI exports.

Small and Medium Enterprises (SME) sector in India is the key driver of the nation's
economic growth with a contribution of over 40 per cent to the country's industrial output
and around 35 per cent to direct exports. It accounts for over 90 per cent of the industrial
units in the country. In terms of employment, this sector plays a very crucial role, being
the second largest employer after agriculture. The impressive performance has been in
spite of the inadequacies in capital, technology and marketing. In the current economic

6
slowdown, SME sector has been hit very hard due to rising interest rates and financial
crunch.

As a result of this economic slowdown and global markets collapsing there is a decline in
the cash reserve and the working capital becomes more difficult and has resulted in cut
down on orders and piling up of pending payments. The severely affected sectors are
Gems & Jewellery, textiles, auto parts and handicrafts. SMEs in the country are facing
numerous problems relating to basic infrastructure facilities like uninterrupted power
supply, efficient rail-road connectivity, etc. This vital sector needs Government support
in terms of financial, regulatory, procedural reforms for sustaining its growth in the
current economic slowdown. Although SME’S can be defined in a number of ways but in
accordance with the provision of Micro, Small & Medium Enterprises Development
(MSMED) Act, 2006 the Micro, Small and Medium Enterprises (MSME) are classified
as:
(a) Manufacturing Enterprises- The enterprises engaged in the manufacture or
production of goods pertaining to any industry specified in the first schedule to the
industries (Development and regulation) Act, 1951). The Manufacturing Enterprise is
defined in terms of investment in Plant & Machinery.

(b) Service Enterprises: The enterprises engaged in providing or rendering of services

and are defined in terms of investment in equipment.

The limit for investment in plant and machinery / equipment for manufacturing / service
enterprises, as stated as under:

MANUFACTURING SECTOR

Enterprises Investment in plant & machinery

Micro Enterprises Does not exceed twenty five lakh rupees

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 Small Enterprises More than twenty five lakh rupees but does not
exceed five crore rupees

Medium Enterprises More than five crore rupees but does not exceed
ten crore rupees

TABLE 1.1 CLASSIFICATION OF SME’S IN MANUFACTURING SECTOR

SERVICE SECTOR

Enterprises Investment in equipments

Micro Enterprises Does not exceed ten lakh rupees:

Small Enterprises More than ten lakh rupees but does not exceed
two crore rupees
Medium Enterprises More than two crore rupees but does not exceed
five core rupees

TABLE 1.2 CLASSIFICATION OF SME’S IN SERVICE SECTOR

The Industries Development And Regulation Act, 1951, defines SMEs according to
limits in Investment in Plant & Machinery. The small-scale sector, in India, comprises of:
The abstractness in defining a SME presents difficulty in identifying them , formulate &
implement suitable policies for them.

The limit on investment in Plant & Machinery and a plethora of laws governing (58 laws
in 7 different categories) them, some of the SSIs seek refuge in remaining small inspite of
opportunities to grow. The small size, opacity of the firms and their lack of awareness
have bred the following hindrances to their growth:

1. Under-utilization of Capacities.

2. Inadequate and Untimely Credit Flows.

3. Inability in Technology upgradation.

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 4. Inefficient raw material procurement.

5. Inability to Market Finished Goods.

6. Ineffective monitoring and feedback mechanism.

COMMON CHARACTERISTICS OF SMEs:

(a) Born out of individual initiatives & skills

SME startups tend to evolve along a single entrepreneur or a small group of

entrepreneurs; in many cases; leveraging on a skill set. There are other SMEs being set up
purely as a means of earning livelihood. These includes many trading and retail
establishments while most countries continue SMEs to manufacturing services, others
adopt a broader definition and include retailing as well.

(b) Greater operational flexibility

The direct involvement of owner(s), coupled with flat hierarchical structures and less
number of people ensure that there is greater operational flexibility. Decision making
such as changes in price mix or product mix in response to market conditions is faster.

(c) Low cost of production

SMEs have lower overheads. This translates to lower cost of production, at least upto
limited volumes.

(d) High propensity to adopt technology

Traditionally SMEs have shown a propensity of being able to adopt and internalize the
technology being used by them.

(e) High capacity to innovate export:

9
SMEs skill in innovation, improvisation and reverse engineering are legendary. By being
able to meet niche requirements, they are also able to capture export markets where
volumes are not huge.

(f) High employment orientation:

SMEs are usually the prime drives of jobs, in some cases creating upto 80%. Jobs SMEs
tend to be labor intensive per se and are able to generate more jobs for every unit of
investment, compared to their bigger counterparts.
(g) Utilization of locally available human & material resources
SMEs provide jobs locally and hence utilise manpower available locally. Since it is
available for them to transport materials over long distances, they often improvise with
materials which are available locally.

(h) Reduction of regional imbalances

Unlike large industries where divisibility of operations is more difficult, SMEs enjoy the
flexibility of location. Thus, any country, SMEs can be found spread virtually right
across, even through some specific location s emerge as ‘clusters’ for units of a similar
kind. Nevertheless, the spread of SMEs is a fact which enhances their attraction from a
national or regional policy.

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 WORKING CAPITAL

AN INTRODUCTION

Any industrial establishment requires broadly two kinds of funds. The first one is long-
term funds which are required for the purchase of fixed assets such as land, building,
machineries, electrical installations, start up expenses, development expenses, purchase
of goodwill, purchase of furniture, purchase of vehicles and other items to bring the
establishment into operation. The second kind is short-term funds. These are required to
meet the needs of day-to-day expenses such as raw-materials, stores, power and fuel,
salaries, wages, administrative expenses, interest, sales and distribution expenses and
other expenses to produce the saleable goods, upto the realization of the sale proceeds.
Till the sale proceeds are realized, the inventory is built up to facilitate smooth
production and outstanding bills i.e. debtors are also financed by the short-term funds. In
due course the establishment also gets some credit from their supplier which is indirect
financing of the short-term funds.

Funds employed in current assets constitute working capital. It is infact the life-blood’
and ‘controlling-nerve’ of the unit. The concept used for working capital may be gross
working capital or net working capital. Gross working capital constitute current assets,
whereas net working capital means current asset minus current liabilities. Working
capital, also known as net working capital, is a financial metric which represents

11
operating liquidity available to a business. Along with fixed assets such as plant and
equipment, working capital is considered a part of operating capital. It is calculated as
current assets minus current liabilities. If current assets are less than current liabilities, an
entity has a working capital deficiency, also called a working capital deficit. A
company can be endowed with assets and profitability but short of liquidity if its assets
cannot readily be converted into cash. Positive working capital is required to ensure that a
firm is able to continue its operations and that it has sufficient funds to satisfy both
maturing short-term debt and upcoming operational expenses.

The management of working capital involves managing inventories, accounts receivable

and payable and cash. How much working capital will be required by a particular
industrial undertaking will depend upon the production cycle i.e. from the time raw
material is purchased to the time goods are sold and cash is realized (operating cycle).
Therefore, the working capital for a unit would mean the total current assets it has to
hold.

Operating cycle depends upon the following actions:

• Seasonality
• Stock cut/safety
• Economy of purchases
• Bunched receipts
• Production process
• Disturbance in production process
• Disturbance in sales due to transport problems
• Disturbance in sales due to depression in market
• Terms of sale and
• Slow billing (slow collection etc.)

Many newly started units become sick or run into fatal problems due to defective
financial plan. The plan adopted may fail to provide adequate capital to meet the needs of
both fixed and working capital, particularly the later. There are instances where units
have been able to obtain sufficient funds to buy a plant but failed to equip the same and
conduct production operations successfully because of faulty assessment of working
capital needs.

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As far as the requirement of purchase of fixed assets is concerned, it is almost certain
what items are to be purchased and how much amount will be involved and usually the
decision for this expenditure is taken in the very beginning. If a borrower approaches for
funds for this purpose, bankers examine the technical feasibility, economic validity and
managerial competency before deciding to sanction the loan. There is not much problem
to sanction it, provided the banker is satisfied about the earning capacity and the
repayment schedule. Both the bankers as well as borrower have to decide about it only
once.

On the other hand, amount of working capital required by the concerned unit may vary
from time to time, depending upon various factors such as cost of raw material,
utilization capacity, marketing arrangements etc. It is on account of this fact that
entrepreneurs usually spend most of their time to manage working capital requirements.

Prior to nationalization, banks largely financed medium and large-scale industries and
traders. There was inequitable distribution of credit amongst different sector and
geographical areas. The security oriented-approach of banks resulted in credit being
available only to the well-to-do, thus leading to concentration of economic power in their
hands. Even upto 1973, industries did not have to plan their credits since it was easily
available against collaterals. Banks on their part did not think of credit planning because
banks were flush with funds.

WORKING CAPITAL MANAGEMENT

Decisions relating to working capital and short term financing are referred to as working
capital management. These involve managing the relationship between a firm's short-
term assets and its short-term liabilities. The goal of working capital management is to
ensure that the firm is able to continue its operations and that it has sufficient cash flow to
satisfy both maturing short-term debt and upcoming operational expenses. By definition,
working capital management entails short term decisions - generally, relating to the next
one year periods, which are "reversible". These decisions are therefore not taken on the
13
same basis as Capital Investment Decisions rather they will be based on cash flows and /
or profitability. One measure of cash flow is provided by the cash conversion cycle -
the net number of days from the outlay of cash for raw material to receiving payment
from the customer. As a management tool, this metric makes explicit the inter-relatedness
of decisions relating to inventories, accounts receivable and payable, and cash. Because
this number effectively corresponds to the time that the firm's cash is tied up in
operations and unavailable for other activities, management generally aims at a low net
count.

Guided by the above criteria, management will use a combination of policies and
techniques for the management of working capital. These policies aim at managing the
current assets (generally cash and cash equivalents, inventories and debtors) and the
short term financing, such that cash flows and returns are acceptable.

• Cash management. Identify the cash balance which allows for the business to
meet day to day expenses, but reduces cash holding costs.
• Inventory management. Identify the level of inventory which allows for
uninterrupted production but reduces the investment in raw materials - and
minimizes reordering costs - and hence increases cash flow.
• Debtor’s management. Identify the appropriate credit policy, i.e. credit terms
which will attract customers, such that any impact on cash flows and the cash
conversion cycle will be offset by increased revenue and hence Return on Capital
(or vice versa).
• Short term financing. Identify the appropriate source of financing, given the
cash conversion cycle: the inventory is ideally financed by credit granted by the
supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to
"convert debtors to cash" through "factoring".

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 UNTIMELY AVAILABILITY OF WORKING
CAPITAL : COMMON REASONS

DELAY IN PAYMENTS BY DEBTORS

The funds of many SME industrial units are blocked in receivables. As a result, recycling
of funds is affected and production suffers. In a competitive environment, it must be
ensured that receivable dues are realized with utmost expedition. The SME units will
have to make special efforts for collection of their dues for their growth.

As India’s economy begins to slow after expanding by at least 9% for the past three
years, some large companies are delaying payments to suppliers, resulting in some of
these suppliers going out of business or laying off jobs, according to associations that
represent so-called small and medium enterprises, or SMEs. Even in normal course of
business and a stable economic environment, large enterprises always try to take
advantage of SME’s by delaying their payment. In fact they use this money to meet their
current working capital/finance needs in order to run their business.

Such defaults also highlight the violation of a law passed in 2006 to protect small
enterprises. According to the Micro, Small and Medium Enterprises Development Act,
large companies that source products or services from small enterprises have to pay them
within 45 days. While the law says SMEs can complain to centres in their respective
states in case of non-payment and that such complaints will be addressed within 90 days

15
of being filed, the associations claim that this is rarely the case as a matter of fact, most
entrepreneurs do not seem to have any information about the above stated law.

Few states like Tamil Nadu even have a complaints body. The complaints body in Tamil
Nadu received 500-600 complaints in the past year, mostly against companies in the
automobile, heavy equipment and power equipment businesses.

According to Gandhi Kumar, president, Tamil Nadu Small and Tiny Industries
Association, thus far, only 42-45 complaints have been addressed.

Maharashtra, which has at least 1,400 industrial estates out of which SMEs operate, is yet
to set up a complaints body. Such bodies exist in Uttar Pradesh, Andhra Pradesh, Gujarat
and the north-eastern states but they’re barely functional.

It is an established fact that in most cases payments are made after six months, and
sometimes after a year, exceeding the 45-day credit period stipulated by law. Large
companies are also required to mention payments to small enterprises according to the
Companies Act. A random survey of seven large companies based out of Uttar Pradesh
showed that this wasn’t being done, said Praveen Saldana, president of Indian Industries
Association, which has 45,000 direct and indirect members with representations from
handicraft, leather and glass manufacturers.

Such buyers conveniently blame quality, he added. “After receiving their material, many
big companies withhold payment saying the material is under inspection.” “If you want to
delay payment, you can have many reasons,” said Prithvi Raj, who runs a small
packaging firm, Bharat Printing and Packaging in Bangalore. “(Big) companies have
always delayed payments by 90-180 days. Such unjustified delay in payments can be
cited as one of the reasons for drying up the working capital of the SME’s. The economic
slowdown has now put them in a even tighter spot as the priorities of this sector are
pushed too far below the ladder.” India’s industrial landscape is dotted with SMEs. They
account for 40% of the country’s manufacturing output and almost half its exports. In

16
Maharashtra, for instance, SMEs produce around 8,500 products from plastic to scientific
appliances. They contributed 80%, or Rs30,000 crore, to the state’s tax revenue.

“Because the units do not get credit and payment on time, about 1.82 lakh units have
closed down in Maharashtra in the past eight years,” said Rakshpal Abrol, president,
Bombay Small Scale Industries Association, which has 4,600 individual members and 40
factory associations as its members.

“Since there is no council set up yet, we have nowhere to go to file complaints,” he

added. And the law is silent on several important aspects, said Damodar Avanoor, vice-
president, Kerala State Small Industries Association. “The Act explains how a respondent
can go on appeal but lacks clarity on how an award can be executed.” Almost all SME
associations agree to the fact that while cases of non-payment are rising, many people are
hesitant to go on record for fear of being boycotted by companies.

But a more serious problem, they maintain, is the lack of awareness about the law itself.
A sample survey of 250 small entrepreneurs conducted by Milagrow, a Noida-based firm
that assists small businesses, shows that between 62% and 80% of the respondents didn’t
know that a law exists to protect payment rights.

“The facilitation council (the complaints body) exists only in name, lacking both
competence and manpower. Big companies have the clout of purchasing power. On the
other hand, small players depend on their large customers, who constitute 60-70% of
their revenue base so they rarely want to lodge a complaint,” said Rajeev Karwal,
Milagrow’s chief executive officer.

In states such as Kerala, about half the defaulters are government-owned companies; in
Tamil Nadu, government firms account for 15% of defaulters. The number is a high 80%
in the north-eastern states, said Ram Swaroop Joshi, chairman of Federation of Industries
and Commerce of the North East Region.

17
Government-owned companies can get away with this, said Bhardwaj, because “the
executive machinery in states, including the development commissioner, district
magistrate and police, hesitate to take action against their fellow officers in public sector
undertakings, even after judgements by facilitation councils”.

SMEs that are brave enough to take on state-owned firms suffer the consequences. A.V.
Johnson, owner of an SME in Kerala, was forced to shut shop when several customers
delayed payments. He was able to restart operations last year when the Kerala Road
Transport Corp., one of the defaulters, paid a claim of Rs22 lakh. Since then, the
stateowned firm has blacklisted him.

Rama Devi Kanneganti’s battle with a state-owned firm is far from over. The managing
partner of Hyderabad-based Shivani Engineering Industries, which assembles buses, filed
a case against the Andhra Pradesh State Road Transport Corp. over non-payment of dues
running into a few crores of rupees.

Even before her complaint could be addressed, the corporation struck Shivani
Engineering’s name off a list of authorized suppliers. Subsequently, Kanneganti, who
also heads the Association of Lady Entrepreneurs of Andhra Pradesh, managed to get a
favourable order from a state court allowing her to continue supplies to the corporation.

“It’s a vicious cycle,” said Kanneganti over the phone from Hyderabad. “The government
wants to encourage this sector through various schemes, but the implementation of the
law is very poor. We need a mechanism where our grievances are addressed
immediately.”

As discussed in the above sections, debtors form a sizeable portion of the working capital
of a company but delay in payments by debtors of the firm, make the task of managing
working capital for a firm very difficult, as the money is not there when needed. This
results in a sudden requirement of funds for the company and hence leads to a mismatch
between demand and supply.

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FUND BASED CREDIT FACILITIES

In order to fulfill the working capital requirements of the business, the entrepreneurs
normally take up various types of fund-based credit facilities namely cash credit,
overdraft, demand loan, bill discount/purchase etc. from banks. The working capital
requirements relate to the processing, production and sale of goods/services and are
granted for bridging the financial gaps in the production cycle of the borrower unit. The
funds lent to the unit get paid on realization of sale proceeds towards the end of the
production cycle. Thus working capital facilities are intended to finance current assets.
These facilities are granted for a short period, generally up to one year, and renewed or
rolled over from year to year depending upon fresh assessment of working capital
requirements of the unit.

Working capital loan funds provide a business the cash it needs to keep growing until it
can cover all operating expenses out of revenue. Without a working capital loan most
businesses are unable to generate enough revenue to stay afloat. These funds provide
access to cash which can be used to pay rent or mortgage payments, utilities, marketing
expenses, inventory, employees, etc. Obtaining capital through this method can be
difficult for many businesses, so it is essential to have good business credit scores
established.

Building solid business credit scores are the key to obtaining substantial working capital
loan funds that can be used to grow a business. Not all types of working capital require
19
business credit history, but it is important to have that in place. Lenders use the business
credit scores just like they use personal credit scores when evaluating whether the
businessman is worthy of receiving capital. Making sure that the lines of credit help build
one’s credit will put him in the right direction to getting the loans that a business needs to
succeed.

There are five common types of a working capital loan. They include:

Equity: Obtained from personal resources like equity in your house, funds from friends
or family members, or from angel investors.

Trade Creditor: A trade creditor will extend a loan to the buyer so that he can purchase
a large quantity from the creditor’s place of business. They will often check your
business credit history before extending credit to you.

Factoring/Advances: You can sell future credit card receipts for instant capital if your
business accepts credit cards. Another option is to sell your accounts receivable to a
factoring company who handles the collection.

Line of Credit: Your business can apply for a bank line of credit, giving you the ability
to borrow for short term needs. Good business credit scores will assist with your approval
for a line of credit.

Short term loan: A bank can also extend credit to allow you to purchase inventory for a
season. This note will typically be less than a year. Again, good established business
credit scores will nearly guarantee access to this kind of funding.

Some of the fund-based loans provided by banks to the needy SME’s in order to
fulfill their working capital requirements are:

Overdraft: Overdraft means drawing from the current account, over and above the credit
balance therein. A limit for overdraft is sanctioned for a specific purpose and period.
Overdraft facility may be secured (against government securities, company shares/bonds,
banks own fixed deposits etc.) or unsecured. Drawings can be made upto the sanctioned
20
limit and interest is charged at a mutually agreed rate on the daily debit balance in the
account.

Cash credit: It is a running account for drawing within a specified credit limit sanctioned
by the bank against the security of stocks (raw material, stock-in-progress, finished
goods, stores) and book debts which are pledged/hypothecated by the borrower. The
borrower submits the statements of charged assets at periodic intervals (mostly monthly)
and the bank permits the borrower to draw cash/cheques within the drawing power (value
of the charged assets less stipulated margin) that the cash credit account can sustain. The
borrowing unit uses the cash credit account for meeting the working capital requirements
and also deposits his sale proceeds in the account. Interest at an agreed rate is charged on
the daily debit balances, which varies from day to day as per withdrawals and deposits of
funds in the cash credit account.

Demand loan: A fixed amount is advanced to the borrower initially for a specific
purpose for a short period. No subsequent withdrawals are allowed to the borrower as the
loan is a one time facility subject to periodic or lump-sum repayment along with the
interest applied to the account monthly or quarterly. Another loan may be granted by
opening a fresh account and obtaining fresh documentation.

Bills purchase/Discount: Bills of exchange are drawn by a seller upon the purchaser, as
per the credit terms agreed upon. Following are the typical features of bills
purchase/discounting facility:

• The seller submits the bills alongwith the transportation receipts

(railway/lorry/air/bill of lading) to his bank.
• The bank sends the documents to the drawee through the banking channel for
presentment for payment (demand bill) or presentment for acceptance (usance
bill).
• The seller’s bank purchases the demand bills and discounts the usance bills by
crediting the seller’s account with the amount of the bills minus the interest
discount and handling charges.

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 • Advances against bills are adjusted on recipt of the proceeds of the relative bills.
In case of non-payment of the bills on the due date additional interest is charged
to the seller and the amount of the bill is also recovered if it remains unpaid.
• The bank ensures that bills purchased or discounted are genuine and represent
actual movement of goods from the seller to the purchasers.
• Accommodation bills are the bills that are drawn without any movement of goods
from the drawer to the drawee, with a view to obtain bank finance fro non-trading
purpose. Banks do not fianance such bills and also take care extreme care in
financing clean bills which are not accompanied by documents of title to goods
and transport receipts evidencing movement of goods.

PROBLEMS ENCOUNTERED WITH CREDIT FACILITIES

Although there are various options available to the entrepreneur as stated above to
finance the working capital requirements, it does not often help the entrepreneurs to
meet the working capital requirements in time because some of the following
reasons:

• One of the most common reasons is that many entrepreneurs are not even aware
of the ongoing schemes and methods to finance the working capital requirements.
• Secondly, it ultimately increases the cost of their products and thereby making
them less competitive.
• Sometimes the businessman is unable to furnish one or more details required by
the banks in the form of documentation for the approval of the credit facility.
• Most of the banks, want to have with them less number of productive customers
who are sufficient to give them more business volume rather than having a large
number of small customers. This approach of the banks also acts as a hindrance
for the entrepreneurs to obtain credit. Hence, the large enterprises are in win-win
situation as even the banks favor them.

22
 • One of the common reasons of untimely availability of credit is that when a
company is unable to satisfy the bank on its ability to repay, creditworthiness and
such related criterion.
• Economic conditions such as prevalent now days coupled with high rates of
interest, create a problem even for creditworthy companies to obtain credit as
banks are over-cautious in lending to borrowers and this lack of confidence
among the borrowers and lenders makes it very difficult for the companies to
finance working capital requirements in time.

PROBLEMS RELATED TO CASH MANAGEMENT

Cash is one of the most important components of the working capital. It allows a business
to meet its day-to-day expenses. Companies cannot be entirely run on cash basis as credit
also forms an indispensable part of a business. But companies do not have enough cash
generation so that it becomes sufficient to meet their cash related working capital
requirements. Another point to note here is that cash has no substitute. SME’s mostly
operate on low volumes and thin margins and hence they require cash regularly and often
face cash related problems mainly because of the following reasons:

• Cash is required on daily basis i.e. for day-to-day expenses like conveyance bills,
stationary, tea and snacks, payments made to various governmental agencies (for
obtaining license, permissions or for some other purpose), security deposits, fuel
expenses for DG sets, maintenance of vehicles and other assets, purchase of petty
items, making salary and wage payments etc. This makes cash management
extremely necessary as it has high probability to fall short of demand.

23
 • SME’s, especially new entrants or small companies generally do not get credit
from their supplier; also they are sometimes enticed by the additional cash
payment discounts offered by the suppliers. This means they generally have to
buy a majority of their raw material against cash payments. Even if they enjoy
some credit from the suppliers (i.e. only after a certain period of time or certain
number of transactions) it is far less than what SME’s have to provide to their
buyers.
• SME’s generally operate on low profit margins, so they want to cash on every
opportunity to make/save money. Hence sometimes due to low volumes and thin
profit margins they are forced to take decisions like to stock surplus raw material,
which is consumed regularly, when the prices are low and are expected to rise in
the near future. Also most of the large enterprises are following the best of the
available techniques for their inventory management like JIT, hence it is the
supplier (SME’s) that have to bear the brunt by keeping adequate inventory to
adhere to the supply schedules provided to them. This activity consumes
cash/investments which create a shortage of funds for the company and it also
increases the holding cost for the company.
• Labor is to be paid for their efforts on a monthly basis and it does not work on the
principle of credit. Wages are mostly paid in cash and in many cases even salary
is paid in cash as people employed do not usually have enough savings with them,
hence they want their wages/salary in time. This means additional pressure and
cash requirement every month. Where as in large enterprises people employed are
hardly paid in cash and in case of any eventuality they always have support from
the financial institutions/banks to finance their current needs.

Hence the above listed points make it imperative to have a regular cash flow for SME’s
as against large enterprises as otherwise it could mean extra cost for the company. The
aim should be to minimize the cost of financing the working capital requirements.

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PROBLEMS RELATED TO INVENTORY MANAGEMENT
PRACTICES

Inventory is a list for goods and materials, or those goods and materials themselves, held
available in stock by a business.

THE REASONS FOR KEEPING STOCK

There are three basic reasons for keeping an inventory:

1. Time - The time lags present in the supply chain, from supplier to user at every
stage, requires that you maintain certain amount of inventory to use in this "lead
time"
2. Uncertainty - Inventories are maintained as buffers to meet uncertainties in
demand, supply and movements of goods.

25
 3. Economies of scale - Ideal condition of "one unit at a time at a place where user
needs it, when he needs it" principle tends to incur lots of costs in terms of
logistics. So bulk buying, movement and storing brings in economies of scale,
thus inventory.

INVENTORY EXAMPLES

While accountants often discuss inventory in terms of goods for sale, organizations -
manufacturers, service-providers and not-for-profits also have inventories (fixtures,
furniture, supplies ...) that they do not intend to sell. Manufacturers', distributors’', and
wholesalers' inventory tends to cluster in warehouses. Retailers’ inventory may exist in a
warehouse or in a shop or store accessible to customers. Inventories not intended for sale
to customers or to clients may be held in any premises an organization uses. Stock ties up
cash and if uncontrolled it will be impossible to know the actual level of stocks and
therefore impossible to control them.

Whilst the reasons for holding stock are covered earlier, most manufacturing
organizations usually divide their "goods for sale" inventory into:

• Raw materials - materials and components scheduled for use in making a

product.
• Work in progress, WIP - materials and components that have begun their
transformation to finished goods.
• Finished goods - goods ready for sale to customers.
• Goods for resale - returned goods that are salable.
• Spare parts

26
Inventory is one aspect which can absorb a large portion of funds, if left unplanned
or else save a substantial amount if properly planned and maintained. Most of the
SME’s have a majority of their working capital blocked in inventory because of the
following reasons:

• Entrepreneurs are generally not aware about the ways and techniques to plan and
manage inventory. As a result they tend to block more than required money in
inventory.
• Large enterprises normally follow the latest techniques for inventory management
and as a result it is the SME’s which are forced to maintain inventory levels to
meet the supply targets, as if they are unable to meet the targets they are liable to
face penalty.
• Sometimes to negotiate with the suppliers for better rates, they are forced to buy
more than required quantities of raw-material.
• In a volatile economic condition like the one prevalent now, due to fluctuating
prices of raw-materials, the entrepreneurs tend to make wrong decisions regarding
buying of raw-materials as it be both beneficial and fatal for the company.

SOME OF THE INITIATIVES TAKEN BY THE

GOI FOR SME’S

The concept of SME’s is not new, nor is the problem faced by them. Since they are the
real backbone of an economy the GOI has taken various measures to promote this
category of industries, although not many have been benefited with the following
measures listed below:

INFRASTRUCTURAL FACILITIES

The GOI in consultation with various state governments took many steps to industrialize
various states with a good number of units engaged in different trades spread throughout
the state. The important measures that were taken in this regard are as follows:

27
 • Provision of outlays for the development of roads and Transportation facilities.
• Establishment of Industrial Estates.
• Establishment of several Industrial Promotion Corporations and Agencies.
• Promotion of subsidies and incentives for the promotion of industries in the
specified backward areas of the states.
• Development of Primary sector and there by to improve the resource Base to the
agro based units.
• Provision of consultancy in the production, marketing, financial and Managerial
areas through different state agencies.

The approach to develop SME industries by govt. will depend on:

• Building skills and promoting technological development.
• Providing infrastructure and credit.
• Reforming policy and simplifying procedure.
• Providing assistance with marketing.
• Encouraging the development of special categories of entrepreneurs (women,
scheduled castes and tribes, backward classes, etc).
THE VARIOUS CREDIT SCHEMES AVAILABLE TO SMEs

Credit Guarantee Fund Scheme for Small and Medium Industries:-

There are an estimated 128.44 lakh registered and unregistered micro and small
enterprises (MSEs) in the country at the end of March 2007, providing employment to an
estimated 309.11 lakh persons. The MSE sector contributes about 39% of the
manufacturing sector output and 33% of the nation’s exports. Of all the problems faced
by the MSEs, non-availability of timely and adequate credit at reasonable interest rate is
one of the most important. One of the major causes for low availability of bank finance to
this sector is the high risk perception of the banks in lending to MSEs and consequent
insistence on collaterals which are not easily available with these enterprises. The
problem is more serious for micro enterprises requiring small loans and the first
generation entrepreneurs.

28
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
2000. The corpus of CGTMSE is being contributed by the Government and SIDBI in the
ratio of 4:1 respectively and has contributed Rs.1346.54 crore to the corpus of the Trust
up to September 30, 2007. Based on the future requirement, the corpus is likely to be
raised to Rs.2500 crore.

ELIGIBLE LENDING INSTITUTIONS

The institutions, which are eligible under the scheme, are scheduled commercial banks
(Public Sector Banks/Private Sector Banks/Foreign Banks) and select Regional Rural
Banks (which have been classified under ‘Sustainable Viable’ category by NABARD).
National Small Industries Corporation Ltd. (NSIC), North Eastern Development Finance
Corporation Ltd. (NEDFi) and SIDBI have also been made eligible institutions. As on
September 30, 2007, there are 62 Member Lending Institutions (MLIs) of the Trust,
comprising 28 Public Sector Banks, 13 Private Sector Banks, 18 Regional Rural Banks
and 3 other Institutions viz., NSIC, NEDFI and SIDBI.

ELIGIBLE CREDIT FACILITY

The credit facilities which are eligible to be covered under the scheme are both term
loans and working capital facility up to Rs.50 lakh per borrowing unit, extended without

29
any collateral security or third party guarantee, to a new or existing micro and small
enterprise. For those units covered under the guarantee scheme, which may become sick
owing to factors beyond the control of management, rehabilitation assistance extended by
the lender could also be covered under the guarantee scheme. It is noteworthy that if the
credit facility exceeds Rs.50 lakh, it may still be covered under the scheme but the
guarantee cover will be extended for credit assistance of Rs.50 lakh only.
Another important requirement under the scheme is that the credit facility should be
availed by the borrowing unit from a single lending institution. However, the unit already
assisted by the State Level Institution/NSIC/NEDFi can be covered under the scheme for
the credit facility availed from member bank, subject to fulfillment of other eligibility
criteria. Any credit facility in respect of which risks are additionally covered under a
scheme, operated by Government or other agencies, will not be eligible for coverage
under the scheme.

SMALL SCALE SERVICE & BUSINESS ENTERPRISES (SSSBE’S):

SSSBE’s industry related service/ business enterprises with investment upto Rs 500,000
in fixed assets, excluding land and building, are called Small Scale Service/ Business
Enterprises (SSSBE’s). This limit has been raised to Rs.1 million w.e.f. September 2000

Credit - The Lifeline Of Smes of all the elements that go into a business, credit is
perhaps the most crucial. The best of plans can come to naught if adequate finance is not
available at the right time. MSEs need credit support not only for running the enterprise
& operational requirements but also for diversification, modernization/ up gradation of
facilities, capacity, expansion etc. In respect of MSEs, the problem of credit becomes all
the more critical when ever any episodic event occurs such as a large order, rejection of
consignment, inordinate delay in payment etc. In general, MSEs operate on tight budgets,
often financed through owner's own contribution, loans from friends and relatives and

30
some bank credit. Government of India recognized the need for a focused credit policy
for MSEs in the early days of promotion of MSEs. This in turn led to a credit policy with
the following components:-

PRIORITY SECTOR LENDING:

Credit to the small scale sector is ensured as part of the priority sector lending by banks.
Banks are required to compulsory ensure that defined percentage (currently 40%) of their
overall lending is made to priority sectors as classified by Government. These sectors
include agriculture, small industries, export etc. The inclusion of small industries in this
list makes them eligible for this earmarked credit.

IMPROVING THE CREDIT FLOW:

NAYAK COMMITTEE (1991-92)

Nayak Committee set up by the Reserve Bank of India in December 1991 (Report came
in September 1992) dealt with aspects of adequacy and timeliness of credit to SMEs.
Nayak Committee found that SMEs was getting working capital to the extent of 8.1% of
its annual output which was less than the normative requirement of 20%. Accordingly,
Nayak Committee recommended that the SSI sector should obtain 20% of its annual
projected turnover by way of working capital. Based on these, as well as other
recommendations of the Nayak Committee, RBI issued a number of guidelines advising
the banks to grant working capital to the extent of 20% of the projected annual turnover,
timely disposal of loan applications and setting up of specialized bank branches for SME

31
loaning in areas of higher SME concentration. This norm is applicable to units with
annual turnover up to Rs.5 crores.

SEVEN POINT ACTION PLAN (1995-96)

As a follow up of Nayak Committee recommendations, the Union Finance Minister in the

Budget Speech of 1995-96, announced a Seven Point Action Plan for improving the flow
of credit to SME sector. This included:-
• Setting up of specialized SSI bank branches;
• Adequate delegation of powers at branch and regional levels;
• Conducting sample surveys of their performing SME accounts by banks;
• Sanction of composite loans as far as possible;
• Regular meeting with SSI entrepreneurs;
• Sensitization of bank managers towards working of SME Sector; and
• Simplification of procedural formalities by banks.
• Action has been taken by banks on the above action plan.

KAPUR COMMITTEE (1997-98)

Reserve Bank of India (RBI) had in December 1997 appointed a One Man Committee
headed by Shri S.L. Kapur, the then Member, Board for Industrial & Financial
Reconstruction (BIFR), to review inter-alia: the working of credit delivery system of
SME industries with a view to making the system more effective, simple and efficient to
administer; and to make suggestions for simplification and improvement in system and
procedures. The Committee submitted its Report to RBI on 30th June 1998, which
contains recommendations. Out of 126 recommendations, 103 have been examined by
RBI and decision taken thereon. Banks/ Financial Institutions and other agencies have

32
already implemented 86 recommendations. Some of the important measures taken
pursuant to the Recommendations of the

Committee include:-
• Delinking of SIDBI from IDBI.
• Opening of more specialized branches.
• Enhancement in the limits of Composite Loan from Rs. 2 lakhs to Rs. 5 lakhs.
• Setting of DRTs.
• Introduction of Credit Guarantee Scheme.

THE CREDIT FACILITIES FROM NABARD

NABARD is set up as an apex Development Bank with a mandate for facilitating credit
flow for promotion and development of agriculture, smallscale industries, cottage and
village industries, handicrafts and other rural crafts. It also has the mandate to support all
other allied economic activities in rural areas, promote integrated and sustainable rural
development and secure prosperity of rural areas. In discharging its role as a facilitator
for rural prosperity NABARD is entrusted with:
• Providing refinance to lending institutions in rural areas
• Bringing about or promoting institutional development and
• Evaluating, monitoring and inspecting the client banks
Besides this pivotal role, NABARD also:
• Acts as a coordinator in the operations of rural credit institutions
• Extends assistance to the government, the Reserve Bank of India and other
organizations in matters relating to rural development
• Offers training and research facilities for banks, cooperatives and organizations
working in the field of rural development
• Helps the state governments in reaching their targets of providing assistance to
eligible institutions in agriculture and rural development Acts as regulator for
cooperative banks and RRBs

33
SOME OF THE MILESTONES IN NABARD'S ACTIVITIES ARE:

• District Rural Industries Project (DRIP) has generated employment for 23.34 lakh
persons with 10.95 lakh units in 105 districts.
• Credit functions, involving preparation of potential-linked credit plans annually
for all districts of the country for identification of credit potential, monitoring the
flow of ground level rural credit, issuing policy and operational guidelines to rural
financing institutions and providing credit facilities to eligible institutions under
various programmes
• Development functions, concerning reinforcement of the credit functions and
making credit more productive
• Supervisory functions, ensuring the proper functioning of cooperative banks and
regional rural banks

FINANCIAL INCLUSION

Indian economy in general and banking services in particular have made rapid strides in
the recent past. However, a sizeable section of the population, particularly the vulnerable
groups, such as weaker sections and low income groups, continue to remain excluded
from even the most basic opportunities and services provided by the financial sector. To
address the issue of such financial exclusion in a holistic manner, it is essential to ensure
that a range of financial services is available to every individual. These services are:
• A no-frills banking account for making and receiving payments,
• A savings product suited to the pattern of cash flows of a poor household,

34
 • Money transfer facilities,
• Small loans and overdrafts for productive, personal and other purposes, &
• Micro-insurance (life and non-life)

In order to address the issues of financial inclusion, the Government of India constituted
a “Committee on Financial Inclusion” under the Chairmanship of Dr. C. Rangarajan. The
Committee submitted its final report to Hon'ble Union Finance Minister on 04 January
2008.

NATIONAL EQUITY FUND SCHEME (NEF)

PURPOSE
To meet gap in prescribed minimum promoters' contribution and/or in equity.

ELIGIBLE BORROWERS
Small and Medium entrepreneurs for setting up new projects in tiny / small scale sector
and rehabilitation of potentially viable sick SME units irrespective of the location.
Existing tiny and SME industrial units and service enterprises [tiny enterprises would
include all industrial units and service industries (except Road Transport Operators)
satisfying the investment ceiling prescribed for tiny enterprises] undertaking expansion,
modernization, technology up gradation and diversification can also be considered
irrespective of the location.

NORMS
• Scheme operated through SFCs / twin function SIDCs / Scheduled Commercial
Banks / Select Urban Co-operative Banks
• Cost of project - Not to exceed Rs.5 million
• Soft Loan limit - 25% of cost of project subject to a maximum of Rs.10, 00,000
per project.
• Service Charges - 5% p.a. on soft loan

35
DIRECT CREDIT SCHEMES
• SSIs
• Service sector units with project cost upto Rs.25 crore
• Medium Sector Enterprises (MSE) and
• Service sector units with project cost above Rs.25 crore and upto Rs.250 crore.

ELIGIBLE BORROWERS
• New or existing SSI units.
• SSI unit graduating to medium scale, and
• Service sector units with an overall project cost not exceeding Rs.25 crore.
• New or existing medium sector enterprises, and
• Service sector units with an overall project cost above Rs.25 crore and upto
Rs.250 crore with Bank's assistance not exceeding Rs. 50 crore.

CONSTITUTION
The unit should generally be a private limited / public limited company. However,
partnership firms, sole proprietorship concerns and Societies and Trusts would also be
considered on a case to case basis. The unit should generally be a private limited / public
limited company

NATURE OF ASSISTANCE
Term loan and other forms of assistance such as Working Capital Term Loan and bills
discounting (on selective basis). Term loan and other forms of assistance such as
Working Capital Term Loan, suppliers' & purchasers' bills discounting. Investment
products such as debentures, optionally convertible cumulative preference shares, zero
coupon bonds, etc.

CURRENCY OF LOAN
In Rupee or foreign currency

36
In Rupee or foreign currency

TECHNOLOGY UP GRADATION FUND SCHEME FOR TEXTILE

INDUSTRIES (TUFS)

PURPOSE
TUFS has been launched with a view to sustaining as well as improving the
competitiveness and overall long term viability of the textile sector. The scheme intends
to provide timely and adequate capital at internationally comparable rates of interest in
order to upgrade the textile industry's technology level.

SPECIAL FEATURES
For SSIs: The borrowers can avail of any one of the following benefits: 5% interest
reimbursement on the interest actually charged in respect of rupee loan or coverage of
exchange rate fluctuation not exceeding 5% p.a. from the base rate or cost of forward
cover premium upto 5% p.a. on the base rate of exchange in respect of foreign currency
OR 12% Credit Linked Capital Subsidy on eligible investment made for modernization,
for SME Textile and Jute Industries in respect of Rupee Loans; The units are permitted to
make new investment eligible under TUGS upto Rs. One crore or till the unit reaches SSI
limit, whichever is higher. OR 20% Credit linked Capital subsidy (CLCS @20%) on
machinery cost exclusively for power loom units in SSI sector. The cost of modern
weaving machinery admissible is upto Rs. 60 lakh (i.e. Subsidy ceiling is Rs. 12 lakh).

For units’ graduating out of SSI and Medium Sector Enterprises (MSEs): The
borrowers can avail 5% interest reimbursement on the interest actually charged in respect
of rupee loan or coverage of exchange rate fluctuation not exceeding 5% p.a. from the
base rate or cost of forward cover premium upto 5% p.a. on the base rate of exchange in
respect of foreign currency loan.

ELIGIBLE BORROWERS

37
SME units, SME units graduating out of the sector after implementation of the scheme
and MSEs in the Textile sector and Cotton Ginning and Pressing sector can be covered.
Debt Equity Ratio Not to exceed 2:1 for the company/firm/concern as a whole

DIRECT DISCOUNTING SCHEME - EQUIPMENT (DDS-E)

PURPOSE
To enable manufacturers - sellers in SME sector / service sector including construction /
selling agents to offer deferred payment terms for credit sales and realize sale proceeds
by discounting bills of exchange / promissory notes arise out of such sales.

ELIGIBLE BORROWERS
Limits are sanctioned by SIDBI to well established concerns / corporate bodies buying
machinery / capital equipment from SME units. Limits are also sanctioned to well
established SME manufacturers - sellers

NORMS
Usance of Bills - Normally 3-5 years
Minimum transaction value - Rs.1, 00,000

COMPOSITE LOAN SCHEME (CLS)

PURPOSE
Assistance for equipment and/or working capital as also for work sheds

ELIGIBLE BORROWERS
Artisans, village and cottage industries and small and medium industries

38
NORMS
Loan Limit - Not to exceed Rs.2.5 million

SINGLE WINDOW SCHEME (SWS)

PURPOSE
To provide both term loan for fixed assets and loan for working capital through the same
agency. The total working capital requirement of such units inclusive of all fund based
facilities may be taken into account for determining the working capital facility eligible
for refinance

ELIGIBLE BORROWERS
Entrepreneurs setting up new projects in SSI / tiny sector, new promoters acquiring
unencumbered fixed assets of existing SSI concerns from PLIs, as also existing well run
units undertaking modernization / technology up gradation and potentially viable sick
units undertaking rehabilitation scheme

NORMS
Scheme operated through SFCs / twin function IDCs / scheduled commercial banks /
eligible state co-operative banks / scheduled urban cooperative banks Term Loan - Not to
exceed Rs.20 million

NEED OF THE HOUR

Most of the research studies on financing of SMEs have highlighted the need to link
availability of finance to SMEs to the delivery of business development to improve its
viability. It is therefore necessary to evolve a model that shall provide for a partnership in
39
between SMEs and banks. The partnership concept takes care of sharing of risk in
business proportionate to their respective financial involvement. Moreover, if we extend
the partnership concept further, it would also help borrower to get more acceptable rate of
interest. In fact, such partnership concept may lead to sharing of earnings instead of
charging interest on loan as is prevalent in Islamic sharing of earnings instead of charging
interest on loan as is prevalent in Islamic banking which of late is growing in importance
due to present rise in oil prices.
Moreover, it is necessary to build reliable information on SMEs to help assess market
opportunities and risk management. There is also an urgent need to develop equity
market for SMEs. This may be done by spreading success stories of SMEs in India. It has
been the findings of many research studies that SMEs mostly depend upon external
capital and this should not be only loans from banks but should be partly equity raised
from the market besides the nominal equity held by the promoter. In this the supportive
role of mutual funds and venture capitals could be of great help in developing capital
market for SMEs. Further, securitization is another area to be developed to take care of
non-performing assets (NPAs) that are blocking regular flow of funds to credit
institutions catering to SMEs.

It is obvious that in India gradually banks should adopt relationship lending technology
and treat transaction lending technology as a complimentary and not a substitute strategy.
Along with this risk cover and sharing of risk may help further improving SMEs
financing by banks in India. Also more needs to be done to spread awareness about the
various initiatives that are undertaken by the Government of India.

LIST OF KEY FINANCIAL INSTITUTIONS

• INDUSTRIAL FINANCE CORPORATION OF INDIA (IFCI)

40
 • INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA
(ICICI)
• INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)
• EXPORT-IMPORT BANK OF INDIA (EXIM BANK)
• INDUSTRIAL RECONSTRUCTION BANK OF INDIA (IRBI)
• SHIPPING CREDIT AND INVESTMENT CORPORATION OF INDIA (SCICI)
• INFRASTRUCTURE LEASING AND FINANCIAL SERVICES LTD. (IL&FS)
• TECHNOLOGY DEVELOPMENT AND INFORMATION CORPORATION
OF INDIA LTD. (TDICI)
• RISK CAPITAL AND TECHNOLOGY FINANCE CORPORATION LTD.
(RCTFC)
• TOURISM FINANCE CORPORATION OF INDIA (TFCI)
• NATIONAL BANK FOR AGRICULTURAL AND RURAL DEVELOPMENT
(NABARD)
• NATIONAL SMALL INDUSTRIES CORPRATION (NSIC)
• STATE FINANCIAL CORPORATIONS (SFCs)
• STATE INDUSTRIAL DEVELOPMENT CORPORATIONS
• STATE INDUSTRIAL INVESTMENT CORPORATIONS (SIICs)
• STATE SMALL INDUSTRIES DEVELOPMENT CORPORATIONS (SSIDCs)
• SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI)
• NATIONAL CO-OPERATIVE DEV=ELOPMENT CORPORATION (NCDC)

SUGGESTIONS

The following suggestions are made to resolve the various issues of Small Scale Sector.

41
• The industry promoting agencies should take care of the well being of small scale
sector and they should initiate such measures which would result in the further
promotion of small scale units in the country.
• It is right time to adopt the idea of limited partnership with a view to boost up the
financial resources in small scale sector and to encourage small entrepreneurs to
bear the risk.
• Timely finance should be made available to the small units keeping in view their
needs.
• The borrowings should be made cheaper by lowering the rate of interest on
landings of commercial banks.
• The re-orientation program, workshops and seminars should be organized at
district level to provide latest information about various schemes to the small
entrepreneurs.
• Banks should also provide consultancy services and professional guidance at the
time of setting up for considering the long-term and short-term financial
requirements of a small unit for lending purposes.
• Small entrepreneurs should make feasibility studies before they finalize their
projects. They should undertake only such projects which are technically,
operationally and economically and financially viable.
• The process followed by the government in sanctioning the loan is cumbersome;
hence it is suggested to make the process easier in sectioning the credit facilities
to the SMES.
• The entrepreneurs are of the opinion that, the funding institutions are taking much
time in sanctioning the loan. Hence it is suggested that the funding institutions
should make the process easy required for offering credit to the entrepreneurs.
• The Entrepreneurs are of the opinion that they are not getting proper assistance
from the Government employees in documentation to obtain the loan from the
funding institutions. Hence it is suggested that the government employees should
be very cooperative and help the entrepreneurs in documentation for obtaining the
credit.

42
 • The laws in place to safeguard the delayed payments of SME’s are weak at the
implementation stage. A lot needs to be done to really make it effective. Infact it
has been found that the government undertakings are also on the list of large
enterprises that delay payments on a regular basis. So some corrective actions
need to be taken by the GOI in this regard.

CONCLUSIONS
From the above major findings of the study the following conclusions are drawn:

• The growth of small and medium scale industries in the country has been
significant in the recent past.
43
• Various backward/remote areas are moving towards industrialization through
Small and medium Scale Sector.
• Industrial promoting agencies have made a mark in the development of state as
well as the district industrially.
• Capital base of small units is very poor and they are facing several financial crisis.
• Shortage of finance is the main problem responsible for a host of problems.
• The SMEs are not aware of the credit schemes offered by the commercial banks
and nodal agencies.
• The delays in sanctioning of the loan and the neglecting attitude of the bank
officials are the main causes behind the bad perception of SMEs towards the
banks.
• The Central Government should take the initiative in propagating the credit
facilities for the SMEs through the channel of NGOs.
• Financial problems are the root cause for all the problems faced by the SMEs. The
State Government should encourage this segment through its Finance
Corporation.
• The entrepreneurs should be motivated to run successfully of their units by taking
the advantage of various credit facilities

BIBLIOGRAPHY

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