Small Scale Industries

I. Introduction

Small Scale Industries (SSI) play a pivotal role in the employment generation and export promotion strategies, among others, of industrialization in many develop as well as developing countries including India. Considering their unique features, governments in both industrialized and developing countries provide a wide variety of programmes to assist small and medium scale enterprises.

The primary justifications for the special policy support to SSI are:

1. They have the capacity to produce a large number and variety of goods with relatively low investment, that they offer greater employment opportunities per unit of capital investment as compared to large enterprises and that the scope for organizing their growth on a decentralized pattern over a large area results in achieving distinct socio-economic advantages such as better and fuller utilization of untapped resources of capital and skill and more equitable distribution of national income.

2. It is appropriate, therefore, that each country should have developed its own strategy for the development of SSI and has offered liberal concessions and attractive incentives for entrepreneurship growth and SSI development.

SSI on the whole has bright prospects, but due to individual enterprise’s weakness in scale and limitations in personnel, information, management and especially financing, the development of these enterprises does not go smoothly (Wang, 2004). Particularly, improving the SSI entrepreneur’s access to financing services is justified on the ground that a robust industrial base contains a flourishing SSI sector and that increasing SSI access to services normally available to larger, established firms.

II. Small Scale Industries

2.1Small Scale and Ancillary Industries

Small scale industrial units are those engaged in the manufacture, processing or preservation of goods and whose investment in plant and machinery (original cost) does not exceed Rs.1 crore. These would, inter alia, include units engaged in mining or quarrying, servicing and repairing of machinery. In the case of ancillary units, the investment in plant and machinery (original cost) should also not exceed Rs. 1 crore to be classified under small-scale industry.

The investment limit of Rs. 1 crore for classification as SSI has been enhanced to Rs.5 crore in respect of certain specified items under hosiery, hand tools, drugs & pharmaceuticals, stationery items and sports goods by the Government of India.

2.2. Tiny Enterprises

The status of ‘Tiny Enterprises’ may be given to all small scale units whose investment in plant & machinery is up to Rs. 25 lac, irrespective of the location of the unit.

III. Small Scale Industries – Financing

Finance is a key input of production, distribution and development. During the pre-independence period, financial constraints had hampered the rapid growth of industries in the country. After the independence, the Government has built up a network of specialized financial institutions to provide financial assistance to all types of industries including small scale industries.

A growing economy needs the support of financial structure for the industrial development. In India, commercial banks have shouldered the special responsibilities for meeting the financial needs of the diverse sectors of the economy at various stages of development. They have evolved various modes and instruments of financing, designed various organization innovations, moved away from traditional commercial banking and stepped into development banks and responsive to socio-economic needs.

The commercial banks are now meeting the financial requirements of entrepreneurs.
For the medium to large term requirements, State Financial Corporation and other similar financing agencies step into their needs. An appropriate type of credit is granted for the construction of the factory building, purchase of plant and machinery, equipments and for working capital requirements. The loans are advanced for the expansion, renovation and modernization of plant and machinery. Bank and financial institutions provide export finance needed by small industries for letters of credit, issuance of guarantees, extension of pre-shipment and post shipment credit facilities.

3.1 Types of Industrial Finance:

Depending upon the nature of the activity, the entrepreneurs require 3 types of finances viz., short, medium term and long term finances.

Short Term Finance: This refers to the funds required for a period of less than one year, usually required to meet variables, seasonal or temporary working capital requirements. Banks provide short-term finance to meet these requirements. Other important sources of finances available are trade credit, installment credit and customer advances.

Medium term finance: The period of one year to five years may be regarded as a medium term. This is required for permanent working capital, small expansions, replacements, and modifications, etc. The fund could be raised by (1) issue of shares, (2) Issue of Debentures (3) Borrowing from banks and other financial institutions, (4) Ploughing back of profits from the existing concerns.

Long term finance: Long term period exceeds a period of 5 years. The finance is required for procuring fixed assets, for the establishment of a new business, substantial expansion of existing business, modernization, introduction of technology, etc. The fund could be raised by (1) issue of shares, (2) Issue of Debentures (3) Loans from financial institutions, (4) Ploughing back of profits from the existing concerns.

3.2 Means of finance: Credit Flow

Credit is the prime input for sustained growth of small scale sector and its availability continues to be a matter of concern. Credit provided for creation of fixed assets like land, building, plant and machinery is called long term credit. Credit provided for running the industry for its day to day requirement for purchasing raw material and other inputs like electricity and water etc. and for payment of wages and salaries is called short term credit or working capital.

Institutional Arrangement

Small Scale Industrial Sector is provided working capital by commercial banks and in some cases by cooperative banks and regional rural banks. Term loans are provided by State Financial Corporations (SFCs), Small Industries Development Corporations (SIDCs), National Small Industries Corporation (NSIC) and National Bank for Agriculture and Rural Development (NABARD). Financial assistance from NSIC and to some extent from SIDCs is available in the form of supply of machinery on hire purchase basis/deferred payment basis. Small sized SSI and tiny units also get some term loans from commercial banks alongwith working capital in the form of composite loans.

Refinance to these institutions is provided by the Small Industries Development Bank of India (SIDBI). Such refinance comprises assistance provided to State Financial Corporation Bills, Finance Scheme, Special Capital/Seed Capital Scheme, new debt instruments and to National Small Industries Corporation. Long term loan are provided to the smalls scale industrial units by SFCs mainly through Single Window Scheme and National Equity Fund as also direct assistance provided to State Financial Corporations in the form of refinance. Some part of working capital for pre-operative expenses is also provided by State Financial Corporations to Small Scale Industrial Units under the Single Window Scheme.

3.2.1 Credit to SSI Sector from Public Sector Banks

The table below gives the positions with regard to flow of credit to SSI Sector:-

At the end of March 2005

At the end of March 2006

At the end of March 2007

At the end of March 2008

At the end of March 2009

Net Bank Credit

1,69,038

1,84,381

1,89,684,

2,18,219

2,46,203

Credit to SSI

25,843

29,485

31,542

38,109

42,674

No. of SSI Accounts (in lakhs)

32.25

33.77

N.A.

29.64

N.A.

SSI Credit as percentage of Net Bank Credit

15.29

15.99

16.6

17.5

17.33

There is a marginal decline in share of credit to SSI sector as a percentage of net bank credit.

3.2.2 Credit to Tiny Sector

The Table below gives the status of credit flow to tiny sector since 1995:-

At the end of March 1995

At the end of March 1996

At the end of March 1997

At the end of March 1998

Net Credit to Tiny Sector

7734

8183

9515

10273.13

Tiny credit as percentage of net SSI credit

29.93

27.76

30.2

27.0

The advances outstanding against Tiny sector increased from Rs.9515 crores at the end of March, 1997 to Rs. 10273 crores at the end of March, 1998. The share of tiny sector in the advances to SSI sector has, however, decreased from 30.2% at the end of March 1997 to 27.0% at the end of March, 1998. As per RBI guidelines, 40% priority sector lending going to SSI has to go to tiny units with investment in plant and machinery below Rs. 5 lakhs and another 20% to tiny units with investment in plant and machinery between Rs. 5 lakhs and Rs. 25 lakhs. Thus, against the target of 60% of SSI credit for tiny units, actual flow at 27% is very low.

3.2.3 Nayak Committee

Nayak Committee was set up by the Reserve Bank of India in December. Nayak Committee, RBI issued a number of circulars 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 SSI loaning in areas of higher SSI concentration.

As a follow up of Nayak Committee recommendations, Finance Minister in the Budget speech of 1995-96, announced a Seven Point Action Plan for improving the flow of credit to small scale sector consisting of the following:

i) Time bound action for setting up specialized SSI branches in 85 identified districts; at least 100 such dedicated branches to be opened before the need of 1995-96.

ii) Adequate delegation of powers at the branch and regional levels.

iii) Banks to conduct sample surveys of their performing SI accounts to find out whether they are getting adequate credit.

iv) Steps to be taken to see as far as possible that composite loans (covering both term loans and working capital) are sanctioned to SSI entrepreneurs.

v) Regular meetings by banks at zonal and regional levels with SSI entrepreneurs.

vi) Need to sensitize bank mangers and reorient them regarding working of the SSI sector. vii) Simplification of procedural formalities by banks for SSI entrepreneurs.

3.2.4 Steps taken by Reserve Bank of India to improve credit flow to SSI sector

a) The Government had raised the investment limit for SSIs from Rs.60 lakhs to Rs.300 lakhs and for tiny units from Rs.5 lakhs to Rs.25 lakhs. In order to ensure that credit is available to all segments of tiny sector. RBI has issued instructions that out of the funds normally available to SSI sector, 40% be given to units with investment in plant and machinery up to Rs. 5 lakhs; 20% for units with investment between Rs. 5 lakhs to Rs.25 lakhs and remaining 40% for other units.

b) Public sector banks have been advised to operationalise more specialised SSI branches at centres where there is a potential for financing many SSI borrowers. As on March 1998, 370 specialised SSI branches are working in the country.

c) To extend ‘Single Window Scheme’ of SIDBI to all districts to meet the financial requirements (both term loan & working capital) of SSIs.

d) With a view to moderating the cost of credit to SSI units, banks are advised to accord SSI units with a good track record the benefits of lower spread over the Prime Lending Rate.

e) In order to take expeditious decision on credit proposals of SSI units, banks have been advised to delegate enhanced powers to the branch managers of the specialised SSI branch so that most of the credit proposals are decided at the branch level.

3.2.5 Monitoring

Credit to SSIs is monitored periodically by Reserve Bank of India, Department of SSI & ARI, National Advisory Committee of SIDBI, State Level Bankers Committee and District Level Coordination Committees of the Bank.

3.2.6 Fresh initiatives announced in the Budget of 2008-2009

In this budget speech the Finance Minister has announced the following measures for improving credit supply to SSI sector

a) A new credit insurance scheme launched.

Inability to provide adequate security to banks and low recovery are often sighted as major constraint in flow of investment credit of SSI units. The problem is more acute for export oriented and tiny sector enterprises. To alleviate this problem, the Finance Minister announced that a new credit insurance scheme will be launched.

b) Composite Loan Scheme Limit Enhanced to Rs. 5 Lakhs

The composite loan scheme of SIDBI and commercial banks is designed to case operational difficulties of the small borrowers by presiding term loan and working capital through a single window. The limit for composite loans currently at Rs. 2 lakhs has been enhanced to Rs. 5 lakhs.

c) Working Capital Limit Enhanced to Rs. 5 Crores

For SSI units the working capital limit is determined by the banks on the basis of simple calculation of 20% of their annual turnover. The turnover limit for this purpose has been enhanced from Rs. 4 Crore to Rs. 5 Crore.

d) Credit Delivery to Tiny Sector

To increase the outreach of banks to the tiny sector, leading by banks to Non-Banking Financial Companies (NBFCs) or other financial intermediaries for purposes of on-lending to the tiny sector is being included within the definition of priority sector for bank lending.

3.2.7 High level committee for credit (Kapur committee)

In December, 1997, Reserve Bank of India has appointed a One-Man Committee under the Chairmanship of Shri S.L. Kapur, former Secretary (SSI), Government of India, to suggest measures for improving the delivery system and simplification of procedures for credit to small scale industrial sector. The Committee has submitted its report to RBI on 30th June, 1998. Some of the major recommendations of the Committee are:-

i) Special treatment to smaller among small industries

ii) Enhancement in the quantum of composite loans
iii) Removal of procedural difficulties in the path of SSI advances
iv) Sorting out issues relating to mortgages of land including removal of stamp duty and permitting equitable mortgages
v) Allowing access to low-cost funds to Small Industries Development Bank of India (SIDBI) for refinancing SSI loans
vi) Non-obtaining of collaterals for loans up to Rs.2 lakhs;
vii) Setting up of a collateral reserve fund to provide support to first party guarantees;
viii) Setting up of a Small Industries Infrastructure Development Fund for developing industrial areas in/around metropolitan and urban areas;
ix) Change in the definition of sick SSI units;
x) Giving statutory powers to State Level Inter-Institutional (SLIIC);
xi) Setting up of a separate guarantee organisation and opening of 1,000 additional specialised branches; and
xii)Enhancement of SIDBI’s role and status to match with that of National Bank for Agriculture and Rural Development (NABARD).

Kapur Committee has made 126 recommendations out of which RBI has already accepted 40 recommendations for implementation.

3.2.8 Amendment of interest on delayed payment act

To tackle the problem of settlement of dues of SSI units by large companies. Interest on Delayed Payment Act has been amended. The following amendments ahve been made in the Act.

a) The payment has to be made within 120 days to the SSI supplier from the date of acceptance of the goods by the buyer.

b) Interest on delayed payment has been revised from 5% above the floor rate to one and half time the prime lending rate charged by SBI.

c) Mechanism has been prescribed for settling disputes by Industry Facilitation Councils to be set up by State Governments through notification.

3.3 Small Industries Development Bank of India (SIDBI)

SIDBI was set up by an Act of Parliament, as an apex institution for promotion, financing and development of industries in small scale sector and for coordinating the functions of other institutions engaged in similar activities. It commenced operations on April 2, 1990. SIDBI extends direct/indirect financial assistance to SSIs, assisting the entire spectrum of small and tiny sector industries on All India basis.

The range of assistance comprising financing, extension support and promotional, are made available through appropriate schemes of direct and indirect assistance for the following purposes:-

· Setting up of new projects

· Expansion, diversification, modernisation, technology upgradation, quality improvement, rehabilitation of existing units

· Strengthening of marketing capabilities of SSI units.

· Development of infrastructure for SSIs and

· Export promotion.

3.3.1 Direct Assistance Schemes

SIDBI directly assists SSIs under Project Finance Scheme, Equipment Finance Scheme, Marketing Scheme, Vendor Development Scheme, Infrastructural Development Scheme, ISO-9000, Technology Development & Modernisation Fund, Venture Capital Scheme, assistance for leasing to NBFCs, SFCs, SIDCs and resource support to institutions involved in the development and financing of small scale sector.

These Schemes are mainly targeted at addressing some of the major problems of SSIs in areas such as high tech project, marketing, infrastructural development, delayed realisation of bills, obsolescence of technology, quality improvement, export financing and venture capital assistance.

3.3.2 Indirect Assistance Schemes

Under its indirect schemes, SIDBI extends refinance of loans to small scale sector by Primary Lending Institutions (PLIs) viz. SFCs, SIDCs and Banks. At present, such refinance assistance is extended to 892 PLIs and these PLIs extend credit through a net work of more than 65,000 branches all over the country.

All the Schemes of SIDBI both direct and indirect assistance are in operation in all the States of the country through 39 regional/branch offices of SIDBI.

3.3.3 Promotional and Development Activities

SIDBI is actively involved in promoting tiny and small scale industries by means of its promotional and developmental activities through suitable professional agencies for organising Entrepreneurship Development Programmes, Technology Upgradation & Modernisation Programmes, Micro Credit Schemes and assistance under Mahila Vikas Nidhi to bring about economic empowerment of women specially the rural poor by providing them avenues for training and employment opportunities.

SIDBI’s assistance to:

(i) Tiny Units – about 89.2 per cent of the number of projects assisted under Refinance Scheme during 2006-07 were tiny, receiving assistance upto Rs. 5 lakh per project. The sanctions for such projects accounted for 39.6% of the total amount of sanctions in 2006-07 as against 36.0% during the previous year.

(ii) Women entrepreneurs – under various schemes assistance amounting to Rs. 19.07 crores was given to 1067 women entrepreneurs during 2006-07.

(iii) Backward areas – during 2006-07, projects enanating from backward areas received assistance to the tune of Rs. 775 crores of sanction which accounted for 37% of total assistance under Refinance Scheme of SIDBI.

3.3.5 Measures to simplify Rules/Regulations

– To fill the gaps in the existing structure of credit delivery mechanism to the small scale sector, Small Industries Development Bank of India (SIDBI) keeps on effecting simplification of procedures, liberalisation of new schemes and introduction of new schemes.

– Endeavour of SIDBI is to ensure that no worthwhile proposal is denied credit for want of funds.

– Norms laid down by Reserve Bank of India and Government of India are followed by SIDBI for granting assistance to SSI units.

Liberalisation effected

(i) Enhancement in the ceiling on loan amount of the Composite Loan Scheme to Rs. 2 lakh from the earlier ceiling of Rs. 50,000/- to ensure timely availability of term loan and working capital to the small units. The scheme was also liberalised to include units in all areas other than metropolitan areas.

(ii) Scope of Technology Development & Modernisation Fund Scheme and Refinance Scheme for Technology Development & Modernisation has been expanded to cover non-exporting SSIs/ancillary units graduating out of SSI sector for assistance under the scheme.

(iii) Scope of Single Window Scheme has been enlarged to cover modernisation, technology upgradation in addition to new SSI units. Project outlay under the scheme has been gradually raised from s. 30 lakhs to Rs. 100 lakhs. Simultaneously, the sub-limits for working capital and term loan components has been done away with.

3.3.6 Main Schemes of SIDBI

A brief summary of the Schemes available with SIDBI. More details are available under the Section Policies & Schemes.

National Equity Fund Scheme which provides equity support to small entrepreneurs setting up projects in Tiny Sector.

Technology Development & Modernisation Fund Scheme for providing finance to existing SSI units for technology upgradation/modernisation.

Single Window Scheme to provide both term loan for fixed assets and loan for working capital capital through the same agency.

Composite Loan Scheme for equipment and/or working capital and also for worksheds to artisans, village and cottage industries in Tiny Sector.

Mahila Udyam Nidhi (MUN) Scheme provides equity support to women entrepreneurs for setting up projects in Tiny Sector.

Scheme for financing activities: Relating to marketing of SSI products which provides assistance for undertaking various marketing related activities such as marketing research, R&D, product upgradation, participation in trade fairs and exhibitions, advertising branding, establishing distribution networks including show room, retail outlet, wears-housing facility, etc.

Equipment Finance Scheme for acquisition of machinery/equipment including Diesel Generator Sets which are not related to any specific project.

Venture Capital Scheme to encourage SSI ventures/sub- contracting units to acquire capital equipment, as also requisite technology for building up of export capabilities/import substitution including cost of total quality management and acquisition of ISO-9000 certification and for expansion of capacity.

ISO 9000 Scheme to meet the expenses on consultancy, documentation, audit, certification fee, equipment and calibrating instruments required for obtaining ISO 9000 certification.

Micro Credit Scheme to meet the requirement of well managed Voluntary Agencies that are in existence for at least 5 years; have a good track record and have established network and experience in small savings-cum-credit programmes with Self Help Groups (SHGs) individuals.

New Schemes

ü To enhance the export capabilities of SSI units.

ü Scheme for Marketing Assistance.

ü Infrastructure Development Scheme.

ü Scheme for acquisition of ISO 9000 certification.

ü Factoring Services and

ü Bills Re-discounting Scheme against inland supply bills of SSIs.

Major schemes

Technology Development & Modernisation Fund

SIDBI has set up Technology Development & Modernisation Fund (TDMF) scheme for direct assistance of small sale industries to encourage existing industrial units in the sector, to modernise their production facilities and adopt improved and updated technology so as to strengthen their export capabilities. Assistance under the scheme is available for meeting the expenditure on purchase of capital equipment acquisition of technical know-how, upgradation of process technology and products with thrust on quality improvement, improvement in packaging and cost of TQM and acquisition of ISO-9000 series certification.

SIDBI in July 1996 had permitted SFCs and promotional banks to grant loans for modernisation projects costing upto Rs. 50 lakhs. The Coverage of the TDMF scheme has been enlarged w.e.f. 1.9.1997. Non-exporting units and units which are graduating out of SSI sector are now eligible to avail assistance under this scheme.

National Equity Fund

National Equity Fund (NEF) under Small Industries Development Bank of India (SIDBI) provides equity type assistance to SSI units, tiny units at one per cent service charges. The scope of this scheme was widened in 1995-96 to cover all areas excepting Metropolitan areas, raising the limit of loan from Rs. 1.5 lakhs to Rs. 2.5 lakhs and covering both existing as well as new units:

(a) The following are eligible for assistance under the scheme:-

i. New projects in tiny and small scale sectors for manufacture, preservation or processing of goods irrespective of the location (except for the units in Metropolitan areas).

ii. Existing tiny and small scale industrial units and service enterprises as mentioned above (including those which have availed of NEF assistance earlier), undertaking expansion, modernisation, technology upgradation and diversification irrespective of location (except in Metropolitan areas).

iii. Sick units in the tiny and small scale sectors including service enterprises as mentioned above, which are considered potentially viable, irrespective of the location of the units (except for the units in Metropolitan areas).

iv. All industrial activities and service activities (except Road Transport Operators).

(b) Project cost (including margin money for working capital) should not exceed Rs. 10 lakhs in the case of new projects in the case of existing units and service enterprises, the outlay on expansion/modernisation/technology upgradation or diversification or rehabilitation should not exceed Rs. 10 lakh per project.

(c) There is no change in the existing level of promoters’ contribution at 10% of the project cost. However, the ceiling on soft loan assistance under the Scheme has been enhanced from the present level of 15% lakh per project to 25% of the project cost subject to a maximum of Rs. 2.5 lakh per project.

3.4 State Financial Corporations (SFCs)

In pursuance of the SFCs Act, 1951, SFCs were set up mainly to finance small and medium scale units. Their area of operation is generally restricted to the concerned States. SFCs also assist small scale units for their modernisation and technology upgradation programmes by providing soft loans, restructuring the sick small scale units through rehabilitation schemes and through equity type assistance under SIDBI’s seed capital scheme.

At present, there are 18 SFCs (including TIIC which was set up as a company) in existence for more than 40 years and operate as Regional Development Banks. The SFCs have played an important role in the evolution and growth of small and medium scale industries in their respective states. They provide financial assistance to industrial units by way of term loans, direct subscription to equity, guarantees, etc. Over the years SFCs have expanded their activities and coverage of assistance.

One-Man Committee set up by RBI under the Chairmanship of former Secretary, SSI&ARI, to look into various problems regarding credit flow to SSI sector and support appropriate measures for their redressal has given the following recommendations in its report submitted to RBI which are being processed by them:-

– Restructuring of weaker SFCs by the Government.

– Funds for lending under Single Window Scheme by SFCs should be placed by SIDBI with the SFCs in adequate measures.

– Each SFC should get into an MOU with one or two Public Sector banks and participate in joint lending in which both term loan and working capital is provided jointly. For example, 80 per cent of the term loan could be given by SFC and 20 per cent by bank. In case of working capital which may be sanctioned at the same time as term loan, the proportion could be reversed, i.e., 80 per cent by bank and 20 per cent by SFC. However, the working capital account be managed and supervised by the bank through its specialised SSI branches.

– SIDBI should sign MOUs with the State Governments to provide some assistance to SFC prior to the approval of assistance packages by the Government of India/SIDBI.

– The staff of SFCs has to be adequately trained and SIDBI may be asked to make arrangements for this purpose.

3.5 National Small Industries Corporation (NSIC)

3.5.1 Bill Financing

Bills drawn by small scale units for the supplies made to the reputed and well established enterprises and duly accepted by them will be financed / discounted by NSIC for a maximum period of 90 days.

3.5.2 Working Capital Finance

Finance for augmenting working capital of viable and well managed units, on selective basis in case of emergent requirements, to enable them to payoff their purchases of consumable stores and spares and production related overheads particularly electricity bills, statutory dues, etc.

3.5.3 Export Development Finance

Finance for export development to export oriented units for meeting their emergent requirements. Pre and post shipment finance shall also be provided to such units at usual terms & conditions.

3.5.4 Equipment Leasing Scheme

The object of the Leasing Scheme is to assist SSI Units to procure industrial equipment for modernisation, expansion and diversification of their industries.

ELIGIBILITY

Exclusively for existing & financially viable SSI units including ancillary units, duly registered as SSI units with the Directorate of Industries.

BENEFITS

Ø 100% financing at very liberal terms with easy repayment schedule.

Ø Simple formalities and speedy sanction.

Ø Single window system for imported equipment. The Corporation undertakes to complete formalities like procuring import licence, opening of Letter of Credit etc.

Ø Tax rebate on full 5 year lease rental.

VI. Documentation for Loan Application

1. Balance Sheet and Profit Loss Statement for last three consecutive years of firms held by promoters.
2. Income Tax Assessment Certificates of Partners/Directors
3. Proof of Possession of Land/Building
4. Architects estimate for construction cost
5. Partnership deed/Memorandum and Articles of Associations of Company.
6. Project Report
7. Budgetary Quotations of Plant and Machinery

A sanction or rejection letter is issued by bank after its assessment of the application. After receiving a sanction letter applicants need to indicate in writing their acceptance of terms and conditions laid down by FI/ Banks. Subsequent loan is disbursed according to the phased implementation of the project. In today’s environment there are other choices apart from commercial banks and Government owned financial institutions. These options include venture capital funds and non-government finance companies.

VII. Financing Norms:

FOR LENDERS

1. The all India financial institutions stipulate a promoter’s contribution norm of 20% of the total project cost for industrial estates set up in notified less developed area and a 22.5% norm in other cases. In the case of estates costing less than Rs. 300 lakhs, the following margin money have been stipulated by IDBI to make them eligible for financing:

* 15% margin for estates set up by technician entrepreneurs or unemployed engineers where the sheds are to be acquired by them on hire basis.

* 20 to 30% margin for co-operative estates where the sheds are entirely by small scale units.

* 30 to 35% margin for estates set up by joint stock companies whose shareholders occupies majority of the sheds.

* 40 to 50% margin for estates set up by proprietary and partnership concerns.

* Banks may consider on merit, proposals received from State Industrial Development Corporations (SIDCs) and State Financial Corporations (SFCs) for sanction of term Finance/loans in the form of lines of credit.

* Such term finance/loans to the extent granted for/to the Small Scale Industrial (SSI) Units, will be treated as priority sector lending, subject to the observation of following Conditions:

I. SFC/ SIDC should maintain separate and distinct accounts of fresh disbursements made to SSI units and outstanding amounts there against.

II. Periodical statements to be obtained from SFC/ SIDC to monitor the position.

III. Annually, a certificate issued by SFC/ SIDC statutory auditors certifying that the outstanding borrowings from banks were fully covered by the non-overdue loans outstanding in respect of fresh disbursements made to SSI units from out of term finance/ lines of credit granted by banks.

IV. The rate of interest to be charged by banks on such term finance/ loans/ lines of credit will be in conformity with the directives on interest rates issued by the Reserve Bank from time to time.

* In order to ensure adequate credit to this sector, the credit requirements of village industries and other SSI units having aggregate fund-based working capital limits upto Rs. 5 crores from the banking system, will be computed on the basis of a minimum of 20 percent of their projected annual turnover for new as well as existing units.

FOR BORROWERS

1. Based on the recommendations made by the Working Groups and High Powered Committees, appointed by the Government of India and the Reserve Bank of India, a set of comprehensive guidelines to be followed for advances to all categories of borrowers in the SSI sector were evolved.

2. Processing of Applications

2.1. Issue of Acknowledgement of Loan Applications

Bank should give acknowledgement for loan applications received from the borrowers towards this purpose, while getting fresh stocks of application forms printed, it may be ensured that these forms have perforated portion for acknowledgement to be completed and issued by the receiving branch. Each branch may affix on the main application form as well as the corresponding portion for acknowledgement, a running serial number. While using the existing stock of application forms till then, an acknowledgement (separately prepared) should be given for each application, care being taken to ensure that the serial number given on the acknowledgement is also recorded on the main application.

2.2. Disposal of Applications

All loan applications for SSI up to a credit limit of Rs.25,000/- be disposed of within 2 weeks and those up to Rs.5 lac within 4 weeks and those above Rs.5 lac. within 8 to 9 weeks provided the loan applications are complete in all respects and accompanied by a ‘check list’.

2.3. Register of Rejected Applications

A register should be maintained at branch wherein the date of receipt, sanction/rejection/ disbursement with reasons therefore etc., should be recorded. The register should be made available to all inspecting agencies.

Ø Rejection of applications for fresh limits/enhancement of existing limits should not be done without the approval of the next higher authority.

Ø Sanction of reduced limits should be reported to the next higher authority immediately with full details for review and confirmation.

2.4 Assessment of working capital

Guiding formats for appraisal of SSI loan proposal up to Rs. 25 lac and up to Rs. 2 crore have been shown in Appendix.

2.5 Margin

15% to 25% as per H.O. guidelines and prevailing schemes of the bank.

2.6 Collaterals

No collateral security is required for SSI borrowal accounts having overall limit upto Rs. 5 lac. Bank may, however, on the basis of good track record and financial position of the SSI units, increase the limit of dispensation of collateral requirement for loans up to Rs.15 lac and even further increase limit upto Rs. 25 lac if CGTSI Scheme is applied to get insurance coverage.

2.7. Composite loan

A composite loan limit of Rs.1 crore can be sanctioned by banks to enable the SSI entrepreneurs to avail of their working capital and term loan requirement through Single Window.

2.8. Delayed payment

Under the Amendment Act, 1998 of interest on Delayed Payment to Small Scale and Ancillary Industrial Undertakings, penal provisions have been incorporated to take care of delayed payments to SSI units which inter-alia stipulates a) agreement between seller and buyer shall not exceed more than 120 days, b) payment of interest by the buyers at the rate of one and a half times the prime lending rate (PLR) of SBI for any delay beyond the agreed period not exceeding 120 days. Further, Bank has been advised to fix sub-limits within the overall working capital limits to the large borrowers specifically for meeting the payment obligation in respect of purchases from SSI.

2.9 Revised guidelines on rehabilitation of sick SSI units

As per the revised definition, a unit is considered as sick when any of the borrowal account of the unit remains substandard for more than 6 months i.e. if the principal or interest remain overdue for a period exceeding one year. The requirement of overdue period exceeding one year will remain unchanged even if the period for classification of account as substandard is reduced in due course, or, there is erosion in the net worth due to accumulated cash losses to the extent of 50% of its net worth during the previous accounting year and the unit has been in commercial production for at least two years. The revised criteria will enable Bank to detect sickness at an early stage and facilitate corrective action for revival of the unit. As per the revised guidelines the rehabilitation package should be fully implemented within six months from the date the unit is declared as potentially viable/ viable. During this six months period of identifying and implementing rehabilitation package Bank/Fls are required to do “holding operation” which will allow the sick unit to draw funds from the cash credit account at least to the extent of deposit of sale proceeds.

3.Repayment Schedule:

In respect of loans being refinanced by the IDBI, a repayment period of 7 to 10 years including an initial moratorium of 2 to 3 years is prescribed. On specific cases, the period may be extended upto 12 years or 15 years as the case may be.

4.Security:

The financial institution stipulates that the sheds constructed in the industrial estate should be allotted only on rental basis and no hire purchase or outright sale is permitted in order to enable mortgage of sheds with the lending institutions toward security for the loan. In case where no mortgage of land and sheds constructed in the industrial estate is not possible, an unconditional bank guarantee for repayment of loan and interest is insisted upon.

VII. Analysis of growth of SSI’s

During Budget 2008-2009

1. The proposal that has been cornering much interest of industry players is minimum alternate tax (MAT), which has now been levied on technology companies. Though all technology firms have been brought under the ambit of MAT, the impact will not be much for big IT firms.

2. The Budget doesn’t allow pass-through status to VC start-ups in sunrise sectors of BPO, media, advertising, financial services and mobile value added services.

3. Another budgetary reform that could also prove to be a thorn in the path for the SMEs is the 12.5% service tax on leased premises. President of Nasscom, Kiran Karnik, calls the increase as “unjust”. “It is usually the small guy who leases property. The big companies own their land,”

4. FM has proposed to exempt from service tax all services provided by technology business incubators. In turn, their incubatees whose annual turnover does not exceed Rs 50 lakh will be exempt from service tax for the first three years.

How it affects SSIs

1. It was presented against a backdrop of high expectations with the economy having moved into the high growth trajectory of 8.5 per cent, supported by a strong growth in services and industry sector.

2. Yet many observers believe that big-ticket reform in Budget 2007-08 have not been taken on the way they should have and tax changes have left most quarters wanting, as substantial giveaways had been anticipated.

3. Small players felt serious impact on their net profits as now they would also have to shell out 11.33 percent MAT in addition to the 12 percent tax which they already pay. Also the small-sized BPO players suffered due to this levy.

4. The IT industry is happy with the proposal to grant pass-through status to VCFs investing in biotechnology and IT companies. But removal of this pass-through status for other areas such as mobile VAS and BPO had a negative impact.

Targets under priority sector lending

There are no targets set by domestic banks (both public sector and private sector banks) and foreign banks for lending to SSI’s. as given in data below

The targets and sub-targets set under priority sector lending for domestic and foreign banks operating in India are furnished below:

Domestic banks (both public sector and private sector banks)

Foreign banks operating in India

Total Priority Sector advances

40 percent of NBC

32 percent of NBC

Total agricultural advances

18 percent of NBC

No target

SSI advances

No target

10 percent of NBC

Export credit

Export credit does not form part of priority sector

12 percent of NBC

Advances to weaker sections

10 percent of NBC

No target

Source: http://exim.indiamart.com/budget-2008-09/

{note: NBC denotes net bank credit}

Reaction on the Budget 2008-09

Overall, the reaction on this Budget is not favourable. However, SMEs will get an advantage because bank credits will now be more easily available and those SMEs rated will stand to gain in terms of faster process, lower interest rates. Also, after the SME Bill was passed a few months back, the overall concentration on SME sector has increased. It
is reassuring that the powers that be recognise SME contribution to the growth of the economy. CII itself has been working hard on the segment and takes up their cause all the time.

On a more general note, today It is vital that the outlook has to be more global and less domestic if the competitive forces, have to be addressed in a planned, phased and a time bound manner. Hence specific policy areas such as the labour laws, legislative framework, reservation policy, credit and equity participation, technology, export thrust need
to be looked at.

Growth Of Industry: Recent Trends (in percentage)

Weights

May May

2008 2009

Industry

100

4.4 2.7

Mining

10.2

5.5 3.7

Manufacturing

79.4

4.5 2.5

Electricity

10.5

2.0 3.3

Use Based Classification

Basic

35.6

3.0 3.8

Intermediate

26.5

1.9 6.1

Capital

9.3

4.3 -3.6

Consumer Goods

28.7

7.4 1.2

Consumer non Durables

23.3

9.0 -2.3

Consumer Durables

5.4

2.8 12.4

16 industry sectors

Food Products

9.1

-9.3 -14.7

Beverages, Tobacco and Related Products

2.4

34.6 -10.3

Cotton Textiles

5.5

4.4 -4.1

Wool, Silk and man-made fibre textiles

2.3

11.2 -7.6

Jute and other vegetable fibre Textiles (except cotton)

0.6

-9.0 -20.0

Textile Products (including Wearing Apparel)

2.5

8.7 9.8

Wood and Wood Products; Furniture and

Fixtures

2.7

-30.6 15.3

Paper & Paper Products and Printing, Publishing & Allied Industries

2.6

3.6 -0.6

Leather and Leather & Fur Products

1.1

9.5 -9.6

Basic Chemicals & Chemical Products (except products of Petroleum & Coal)

14.0

8.7 4.6

Rubber, Plastic, Petroleum and Coal Products

5.7

-10.2 16.4

Non-Metallic Mineral Products

4.4

1.3 6.1

Basic Metal and Alloy Industries

7.5

4.1 5.4

Metal Products and Parts, except Machinery and Equipment

2.8

-4.2 -5.7

Machinery and Equipment other than Transport equipment

9.6

4.8 2.7

Transport Equipment and Parts

4.0

12.3 2.3

Other Manufacturing Industries

2.5

-8.5 27.3

IX. Budget announcement 2009-2010

1.FM’s move to raise the exemption limit for small scale industry (SSI) from Rs 1 crore to Rs 1.5 crore. The small scale industries will also get a major fillip with the excise duty exemption being raised from Rs 1 crore to Rs 1.5 crore.

However, the industry does not seem to agree with the size of sops issued to the sector.

2. The Budget says that the excise limit for the small industries has been increased to Rs 1.5 crore. But if you look at the state of the SME sector, this figure appears outdated by 2-3 years. We had expected this limit to be at least Rs 3 crore.”

The textile sector in particular, will definitely benefit from the proposed Scheme for Integrated textiles parks, which is set to increase from Rs 189 crore to Rs 425 crore. Moreover, the increased allocation to Technology Upgradation Fund scheme (TUF) will boost more investment in the textile sector.

Government’s Initiative

The clarion call of our Prime Minister that emphasis should be

Ø On achieving a high rate of growth coupled with redistributive justice and balanced development .

Ø To remove the complex structure of administered interest rates guided by the social concerns resulted in cross-subsidization, which not only distorted the interest rate mechanism but also adversely affected the viability and profitability of banks, was an overhang problem more to do with the bad quality of appraisal and lending by the banks.

Ø Directed the commercial banks to double the credit to the small and tiny enterprises in 5 years, on the lines mandated to the agriculture sector, though, is a welcome step and needs to be fast tracked to be doubled in 3 years

Ø Commercial banks should definitely have suitable risk management framework, oriented towards their requirements dictated by the size and complexity of business, risk philosophy, market perceptions and the expected level of capital and not as a one size fits all code and standard as done for all the banks and for all sectors of the economy.

These initiative of the of the Finance Minister last year would greatly help the small and tiny enterprise to modernize thereby increasing their competitiveness. This would further encourage the dispersal of industries, increasing their employment generation capacity and to continue its silent and strong contributions to exports and most importantly to enable them to play their due role in the market, as a necessary appendage of the economy, bringing true meaning and contributing positively to the recent slogan of the Government and the Planning Commission of a more faster and Inclusive Growth, a reality.

X. Challenges

CHALLENGE: Can SSIs cope with the de-reservation policy adopted by government

CII has suggested for a phased and gradual dereservation of the products that are exclusively reserved for the SSI sector. The market, on its own, will very efficiently and impartially allocate which items are to be manufactured by the SSI sector and those that need to be manufactured by medium-scale and large-scale sectors. Hence, each sector will produce only those items that it can manufacture more efficiently than the other sectors. Finally, country as a whole will benefit with efficient resource allocation

CHALLENGE: How vital is it for SSIs to have an international network?

The international network of SSIs is vital where “capacity building” holds the key to globalisation. The removal of trade barriers to facilitate cross-border commerce and the increase in cross-border financial flows, have largely been undertaken by MNCs, financial institutions and government. SSIs will need to be creative in finding ways through technology to be part of the global value chain that is mostly enjoyed by large corporations.

As we are all aware, Asia has mainly been used for production efficiencies – involving cheap labour, cooperative governments keen on attracting FDI have made the regulatory environment and industrial-relations easier.

CHALLENGE: The casualty has been reduced finance to the SSI.s and the tiny sector, who have taken a very fatal hit.

This has driven a majority of them to sickness, incipient and in various other stages and many of them to mortality. Moreover the high cost of funds, which even this reduced financing has entailed, has robbed them of what little incentive was left for them to upgrade technologically and to modernize, leaving them to the wolves and also rendering them uncompetitive. In this context, the structural rigidities emanating from the availability of liquidity in the system – but as a paradox the liquidity not flowing to the needed and producing SSI and tiny sector – needs to be addressed surgically and radically and on a war footing.

Bibliography

Http://exim.indiamart.com/ssi-finance/index.html

http://www.tradeindia.com/budget/sme.html

http://www.dnb.co.in/SME%20Awards/SME%20In%20India.asp

http://www.thehindubusinessline.com/2008/03/13/stories/2008031350980900.htm

www.india.nic.in