Micro, Small and Medium Enterprises (MSMEs) have been recognised as one of the most important sectors for the development of any economy all over the world

Executive SummaryMicro, Small and Medium Enterprises (MSMEs) are critical to the nations economy. They contribute approximately 40% of Indias domestic production, almost 50% of total exports and 45% of industrial employment. More important, they are the second largest manpower employer overall after agriculture. MSMEs in India are mostly in the unorganized sector and are the source of livelihood for millions of people. The social contribution made by MSMEs is even more significant than its economic contribution. Within the MSME sector, the small sector serves as a seed-bed for nurturing entrepreneurial talent and originating units to grow eventually to medium and large enterprises. The promotion of MSMEs, therefore, becomes a major area for policy focus. Regeneration of MSMEs must receive public support particularly for the village, cottage and micro level enterprises.Micro, Small and Medium Enterprises (MSMEs) are a critical economic factor in poorer countries as well as the more developed economies in the world today. They make up a majority of the domestic business transactions and at the same time play an important role in international trade. Given their size and diversity of sectors in which they function, MSMEs are highly adaptable between the developed and developing economies, provided that they have a facilitating environment to grow. With trade barriers falling, Indian MSMEs were initially apprehensive of their ability to survive in a globally competitive environment, but over a period of time, they realized that it also provided them with greater opportunities to become part of a global supply chain as large manufacturing companies are outsourcing their production to low- Cost economies.Need for the studyThe MSME sector is a very vast area and contributing nearly 7% of GDP. This study is useful for the MSME organizations as it contains RBI guidelines for raising funds for MSME sector, eligibility criteria and norms. It helps new entrepreneurs to know whether they will get the credit from the banks or not according to their business plan and how much they can get according to their financial structure. The wide range of information regarding the lending norms and conditions will help the business man to take decision about funding of long term, working capital and other requirements of the organization. Objectives of the study To learn the financing procedures for MSMEs i.e.

To study the chain of events of processing a loan proposal- from receiving the application from the borrower, doing credit rating of the borrower and the company, analyzing the financial statements, sanctioning to disbursement and the post sanction reviews for MSMEs.

To study the borrowers opinion towards fund raising norms and other criteria.

To study the structure of MSMEs.

Scope of the studyThe study was intended to obtain the information about:

To study the Credit Appraisal Methods.

In understanding the commercial, financial & technical viability of the project proposed & its funding pattern.

To know the knowledge of the borrowers and their responses on different criteria. Industry ProfileCanara Bank

Founded in 1906, Canara Bank is one of the premier banks in India, with a network of 2578 branches across the country. The bank was the first two launch networked ATMs in India and obtain an ISO certification. Canara bank has also achieved the distinction of being the countrys highest net profit earner among nationalized banks for the year march 2007.

The bank has already carved a niche in providing IT-based services such as networked ATMs, anywhere banking, Telebanking, Remote access Terminals, Internet and Mobile banking, Debit cards, etc. Canara bank a vision to help improve the economic condition of the common people of India by inculcating the habit of savings in rural areas As part of its vision of using technology to provide affordable banking services to the vast rural population of India, Canara bank has extend the performance and cost benefits of enterprises Linux to its customers. With a modernized branch infrastructure, Canara bank hopes to serve customers in a timely and efficient manner, reinforcing its image of being a customer savvy bank.Founded as 'Canara Bank Hindu Permanent Fund' in 1906, by late, Mr. Ammembal Subba Rao Pai, a philanthropist, this small seed blossomed into a limited company as 'Canara Bank Ltd.' in 1910 and became Canara Bank in 1969 after nationalization.

''A good bank is not only the financial heart of the community, but also one with an obligation of helping in every possible manner to improve the economic conditions of the common people".

Canara Bank Founding Principles To remove Superstition and ignorance. To spread education among all to sub -serve the first principle.

To inculcate the habit of thrift and savings.

To transform the financial institution not only as the financial heart of the community but the social heart as well.

To assist the needy.

To work with sense of service and dedication.

To develop a concern for fellow human being and sensitivity to the surroundings with a view to make changes/remove hardships and sufferings.

Sound founding principles, enlightened leadership, unique work culture and remarkable adaptability to changing banking environment have enabled Canara Bank to be a frontline banking institution of global standards.

As Canara bank founded in 1906, Canara Bank is one of the premier banks in India, with a network of 2578 branches across the country. The bank was the first to launch networked ATMs in India and obtain an ISO Certification. Canara Bank has also achieved the distinction of being the country's highest net profit earner among nationalized banks for the year March 2007.

The bank has already carved a niche in providing IT -based services such as Networked ATMs, Anywhere Banking, Tele-banking, Remote Access Tensional, Internet & Mobile Banking, Debit Cards, etc. Canara Bank has a vision to help improve the economic condition of the common people of India by inculcating the habit of savings in rural areas.The Bank Today

Canara Bank is one of the premier banks in the country, accredited with umpteen distinctions. The present stature of the Bank is due to its strong fundamentals and quality customer orientations. Profit making since inception, the Bank today constitutes a perfect blend of commercial and social banking.

For the year March 2007, the Bank clocked the highest net profit ( RS.1110 crore) among nationalized banks, with significant improvement in capital adequacy ratio (13.50%) and asset quality (net NPA ratio of 0.94%).

The Bank has already carved a niche in providing IT -based services. With 100% computerization of the branches, the bank provides a wide array of services, such as, Networked ATMs, Anywhere Banking, Telebanking, and Remote Access Terminal also Internet & Mobile Banking, Debit Card etc. The Bank was the first among banks to launch networked ATMs and obtain ISO Certification. Commercial consideration has, no way, diluted the Bank's role in national priorities. Canara Bank is in fact the first bank to be conferred FICCl award for contribution to rural development.CANARA BANK SERVICESVision: To emerge as a Best PracticesBank by pursuing global benchmarks in profitability, operational efficiency, asset quality, risk management and expanding the global reach.Mission: To provide quality banking services with enhanced customer orientation, higher value creation for stakeholders and to continue as a responsive corporate social citizen by effectively blending commercial pursuits with social banking.Anywhere Banking:

Anywhere Banking is a technology-based, customer-friendly service designed to provide greater convenience to our customers. With Anywhere Banking facility, once customer has an account with any of the select branches, Customer can operate it from any other designated branch across 85 cities.

FACILITIES:

Individuals I joint account holders (operated severally) maintaining Current I 58 I OD

Accounts:1. Withdrawal of cash

2. Remittance of cash

3. Transfer of funds

4. Balance enquiry

5. Issue of mini statement

6. Depositing local cheques for collection7. Purchase of Demand draft

Firms SL Companies I Other Bodies maintaining Current I OD I OCC Accounts:

1. Transfer of funds between accounts; from one Anywhere Banking branch to another anywhere banking branch.

2. Depositing of local checks for collection and crediting to the respective account at any Anywhere Banking branch.

ELIGIBILITY:

Account holders should have maintained a minimum average balance of Rs.5,OOO / - in SB account and Rs.10,000/ - In Current account in the last six months

FEATURES:

1. Cash withdrawal up to Rs.50, OOO/ - per occasion

2. Transactions permitted on production of identity card issued exclusively for

ANYWHERE BANKING FACILITY

3. Facilities of both intra-city and inter-city transactions.

4. HOME CLEARING - on line debit of checks drawn on our own A WB branches within the city / clearing zone.

Tele services

Access information about your account right from your home, office or from anywhere over telephone, a round the clock teller answering the enquiries from anywhere presenting voice information at any time

Personal Banking:

Deposits

Savings Bank Account

Current Account

Term Deposits

- Fixed Deposits

- Kamadhenu Deposits

- Recurring Deposits

- Can flexi Deposits

Loans & Advances

Retail Loan Products

- Home Improvement Loan

Can cash

- Can mobile

- Can budget

- Teachers Loan

Card Services

Insurance

NRI

- NRE (Non Resident External Rupee Account)

- NRO (Non Resident Ordinary Account)

- FCNR (Foreign Currency Non Resident Accounts -Banks) - RFC Deposits

Loans & Advances

- Housing Loan

- Home Improvement

- Can carry (Consumer Durables)

- Can cash (Shares)

- Can mobile (vehicle)

HETs INSTITUTE OF MANAGEMENT STUDIES HUBLI Page 16

General Facilities

-Safe Custody Services

-Safe Deposits Locker

-Nomination facility

Other Services/Facilities

-N R I Branches

-N R I Services

-Remittance Facility

-Facilities for Returning Indians

Rural Financing

-Agriculture & Rural Credit

-Kisan Credit

-Loans for setting up Agri Clinic

-Minor Irrigation Loans

-Farm Machinery Loans

-Farm Development Loans

-Vehicle Loan for Agriculturists

-Loans for Plantation Crops

-Vidyasagar (Educational Loan)- Housing Loan

- Loans to SSIs

- Charter for SSIs

- Other Priority Sector Loans

- Government Sponsored Schemes

- Lead Bank Activities

- Agricultural Consultancy Services

Social Banking

- Rural Development Schemes

- CBJRDT Institutes

- Women Development

- Social Banking

- Community Concerns - RUDSETIs

International Banking Services

Canara Bank entered fore arena in 1953 with the opening of its first Foreign Exchange Department in Mumbai Today Canara Bank the 4th largest Bank in India catering to the cross border trade & remittances and financing of foreign trade.

The Bank finance exports at pre-shipment stage as well as post shipment stage, which can be availed either in foreign currency or Indian Rupee s. In addition we facilitate for fainting. That is, discounting of deferred export receivables on 'without recourse basis' from an overseas forfeiting agency. The Bank has been the pioneer in financing of LC based International Trade transactions in India.

The Bank not only finance at customers option in foreign currency at pre-shipment and post- shipment stages at LIB OR related rates but also finance the import leg in foreign currency where imported inputs are required for exp0l1s. The Bank has the expertise in handling project exports of goods and services.

The Bank has an excellent worldwide correspondent relationship and have the capability to handle any export, import, remittance and related transactions anywhere in the world and in any currency.

Non fund based transactions like adding confirmations to LC, issuing inward and outward Bid bonds & guarantees, establishing LCs for import into India, arranging buyer's credit at attractive terms etc. are our forte. Canara Bank has a branch in London and holly owned subside in Hong Kong. We have a joint venture with SBI at Moscow under the name Commercial Bank of India LLC. We have recently opened a Representative Office at Shanghai, People Republic of china. They are engaged in Trade finance and have expertise on the Indian market scenario. The Bank also manages 2 Exchange houses in the Gulf and arrangement with 20 Exchange Houses and 18 Banks for drawing on DDs from Gulf Countries on our select branches thought out India. The Bank has 5 fore dealing rooms located in Mumbai, New Delhi, Calcutta, Chennai and Bangalore in India. We provide a whole range of services and products like purchases and sale of 7 world currencies forward booking and other fore hedging instrument like currency swaps.

MICRO, SMALL AND MEDIUM ENTERPRISE (MSME) FINANCINGMicro, Small and Medium Enterprises (MSMEs) have been recognised as one of the most important sectors for the development of any economy all over the world. This sector constitutes more than 80% of all business organisations all over the world. In India too, its share is more than 90 %. This sector ensures that the processes of economic growth in our country are inclusive, employment-friendly and they contribute to greater regional balance in levels of development.

During the last decade alone, the MSME sector has progressed from the production of simple consumer goods to the manufacture of many sophisticated products like T.V. Sets, micro-ware components, electro-medical equipment etc. Product range varies from simple items produced with traditional technology to high-tech products, produced with sophisticated state of the art technology. Other than this, the micro, tiny and small scale sector have been engaged in the production of goods like wood products, hosiery and garments, cotton textiles, beverages and tobacco products, food products, jute textile, leather & leather products, transport equipments etc. These industries produce over 7500 commodities.

Understanding the importance of this sector the government has brought about the enactment of the Micro, Small and Medium Enterprises Development Act. To strengthen this important sector and to create more national awareness about its growing importance in our national economic life there have been amendments to the Khadi and Village Industries Commission Act, a comprehensive Package for Promotion of Micro and Small Enterprises has been announced and a National Commission for Enterprises in the Unorganized Sector have been set up. The National Manufacturing Competitiveness Programme has contributed to the graduation of tiny and small scale units in micro and medium enterprises and in the process strengthened the industrial base of our economy. As per the very latest statement of issued by SIDBI, the MSME sector currently contributes 8 percent of the country's GDP, 45 percent of the manufactured output and 40 percent of its exports providing employment to about 60 million persons through 26 million enterprises. With the passing of Micro, Small and Medium Enterprises Development Act in June 2006, various components of this sector have been given a clear cut definition.Definition of Micro, Small and Medium Enterprises (MSME)(a) Enterprises engaged in the manufacture or production, processing or preservation of goods as specified below:

i. A micro enterprise is an enterprise where investment in plant and machinery does not exceed Rs. 25 lac;

ii. A small enterprise is an enterprise where the investment in plant and machinery is more than Rs. 25 lac but does not exceed Rs. 5 crore; and

iii. A medium enterprise is an enterprise where the investment in plant and machinery is more than Rs.5 crore but does not exceed Rs.10 crore.

In case of the above enterprises, investment in plant and machinery is the original cost excluding land and building and the items specified by the Ministry of Small Scale Industries.(b) Enterprises engaged in providing or rendering of services and whose investment in equipment (original cost excluding land and building and furniture, fittings and other items not directly related to the service rendered or as may be notified under the MSMED Act, 2006) are specified below:

i. A micro enterprise is an enterprise where the investment in equipment does not exceed Rs. 10 lac;

ii. A small enterprise is an enterprise where the investment in equipment is more than Rs.10 lac but does not exceed Rs. 2 crore; and

iii. A medium enterprise is an enterprise where the investment in equipment more than Rs. 2 crore but does not exceed Rs. 5 crore.

The enterprises included under this sector are:

Small road & water transport operators. (owning a fleet of vehicles not exceeding ten vehicles) Retail trade. (with credit limits not exceeding Rs.10lakh)

Small business. (whose original cost price of the equipment used for the purpose of business does not exceed Rs.20 lac) and

Professional & self-employed persons. (Whose borrowing limits do not exceed Rs.10 lac of which not more than Rs.2 lac should be for working capital requirements except in case of professionally qualified medical practitioners setting up of practice in semi-urban and rural areas, the borrowing limits should not exceed Rs.15 lac with a sub-ceiling of Rs.3 lac for working capital requirements.As may be seen from the above definition, the segment which was earlier known as tiny sector, have been recognized through a formal definition (investment in plant and machinery upto Rs. 25 lac) and has been given the term Micro Enterprise. The investment ceiling in investment in plant and machinery has been raised upto Rs.5.0 crore for small enterprises engaged in production or manufacturing as against Rs.1.0 crore earlier. It is expected that this enhancement will allow these enterprises to go for technology upgradation and modernization which is one of the prime requirements for enhancing competitiveness in the context of liberalization, globalization and to fulfil the conditions of WTO. Also, for the first time, official recognition and definition has been given to medium enterprisesengaged in production or manufacturing as those having investment in plant and machinery between Rs. 5 crore and Rs. 10 crore. The term industries has been replaces by the concept of enterprisesto include the service sector. The Importance of Small and Medium Enterprises (SMEs) in any economy cannot be overlooked as they form a major chunk in the economic activity of nations. They play a key role in industrialization of a developing country like India.

They have unique advantages due to:-

Their size

Their comparatively high labor-capital ratio

need a shorter gestation period

focus on relatively smaller markets

need lower investments

ensure a more equitable distribution of national income

facilitate an effective mobilization of resources of capital and skills which might otherwise remain unutilized and

Stimulate the growth of industrial entrepreneurship. Micro, Small and Medium Enterprises Act, 2006

With the passing of Micro, Small and Medium Enterprises Development Act in June 2006, various components of this sector have been given a clear cut definition. For the first time, micro enterprises, the segment which was earlier known as tiny sector, have been recognized through a formal definition (investment in plant and machinery upto Rs. 25 lakh). For the first time, a reasonable investment ceiling in investment in plant and machinery upto Rs. 5 crore has been prescribed for small enterprises engaged in production or manufacturing as against Rs. 1 crore earlier. It is expected that this enhancement will allow these enterprises to go for technology upgradation and modernization which is one of the prime requirements for enhancing competitiveness in the context of liberalization, globalization and WTO conditional ties. For the first time, official recognition and definition has been given to .medium enterprises. Engaged in production or manufacturing as those having investment in plant and machinery between Rs. 5 crore and Rs. 10 crore. And for the first time, the concept of enterprises has been accorded its due role replacing the term .industries.. This shows the growing importance of service sector in employment generation. Since finance is required by the enterprises to meet various needs, particularly fixed capital and working capital, it is essential to estimate the size of MSMEs in the country. As per the annual report of Ministry of SSI, the estimated number of SSIs, including tiny/micro units in the country, at the end of fiscal 2004-05 was 11.86 million. Though, so far no firm data are available about the number of small scale enterprises which would get added due to enhancement of investment ceiling from Rs. 1 crore to Rs. 5 crore and due to inclusion of medium enterprises upto investment of Rs. 10 crore, it is roughly estimated that the number of such enterprises would be about two-third of the existing factory units other than existing SSI factory units. It is estimated that out of 5.8 lakh factory units, about 3.5 lakh are existing SSI factory units and 1 lakh newly defined SSIs and medium enterprises. Thus assuming a growth rate of 9% in the SSI Sector (going by past trend) and due to addition of higher segment of SSI and inclusion of medium enterprises, the number of MSME in the country may be around 13 million now, consisting of 12.9 million small and micro enterprises and 0.1 million new high investment small enterprises and medium enterprises. This estimate does not include traditional industries like handloom, handicraft, k of fiscal 2004-05 was 11.86 million. Though, so far no firm data are available about the number of small scale enterprises which would get added due to enhancement of investment ceiling from Rs. 1 crore to Rs. 5 crore and due to inclusion of medium enterprises upto investment of Rs. 10 crore, it is roughly estimated that the number of such enterprises would be about two-third of the existing factory units other than existing SSI factory units. It is estimated that out of 5.8 lakh factory units, about 3.5 lakh are existing SSI factory units and 1 lakh newly defined SSIs and medium enterprises. Thus assuming a growth rate of 9% in the SSI Sector (going by past trend) and due to addition of higher segment of SSI and inclusion of medium enterprises, the number of MSME in the country may be around 13 million now, consisting of 12.9 million small and micro enterprises and 0.1 million new high investment small enterprises and medium enterprises. This estimate does not include traditional industries like handloom, handicraft, khadi and village industries, coir and sericulture.Origin and Growth of MSME (The Growth Engine of Indian Economy): Industries have been an integral part of the Indian Economy since the Harappan era. However, the entrepreneurial spirit of India was stifled during the long British rule, as also reflected in the GDP growth rate of 0.9% during the first half of the 20th century. Then came the Swadeshi movement, part of the Indian independence movement in the first quarter of the last century, which proved to be a successful economic strategy to remove the British Empire from power and improve economic conditions in India by boycotting the British products and the revival of domestic-made products and production techniques. Gandhiji believed that alienation and exploitation often occur when production and consumption are divorced from their social and cultural context, and that local enterprise is a way to avoid these problems. With the advent of planned economy from 1951 and the subsequent industrial policy followed by Government of India, both planners and Government earmarked a special role for small-scale industries and medium scale industries in the Indian economy. Due protection was accorded to both sectors, and particularly for small scale industries from 1951 to 1991, till the nation adopted a policy of liberalization and globalization. Certain products were reserved for small-scale units for a long time, though this list of products is decreasing due to change in industrial policies and climate. In 1998 SSI Board came into existence with IIA as its member since inception. Later on, it was replaced by National Board of MSME (NBMSME), IIA was again nominated a member of this board.With the enactment of MSMED Act in 2006, followed by merging of Ministry of Agro and Rural Industries & Ministry of Small Scale Industries into the present Ministry of Micro Small & Medium (MSME), two important changes took place: 1) the concept of enterprise replaced the former concept of industry, 2) the resultant change was recognition & coverage of services by the Ministry of MSME.The latest landmark development has been the constitution of the High level Task force on MSMEs by the Hon.PM in the year 2009 in NBMSME, representatives of only 4 MSME associations from all over the country were included in the task force. Role of SMEs in Indian Economy The SMEs have recently emerged as a strong, dynamic and vibrant sector of the Indian economy and playing an important and significant role in the socio economic development of the country. The importance of the SMEs is well established and recognized in the sense that these are more labor intensive and more employment provider as compared to other enterprises. Further they have capacity to adjust with changing environment and expected to earn more and quick returns. This sector provides more and enormous opportunities being less capital intensive and having huge growth in demand in the domestic market size, raw material, procurement, man power training and having intensive promotion and support by the Govt. Despite the global and domestic recession registered the higher growth rate than the overall industrial sector in terms of number of units, production, employment and exports.

Employment Generation: The SMEs provide significant contribution in achieving the socio-economic objective of the employment generation. The SMEs are the second largest provider of the employment after agriculture. The small scale sector has recorded an impressive growth in employment from 3 percent in 1991-92 to 45 percent in the year 2001-02.As per Quick Result of the 4th All India Census of MSME 2006-07, there were 260.81 lac MSMEs in India (15.33 lac registered working and 245.48 lac unregistered enterprises); which provided employment to about 594.61 lac persons. Out of these, 28 percent were in manufacturing sector and 72 percent in the service sector. During the year 2008-09, the number of MSMEs has increased to about 285.16 lac form the 272.79 lac in the previous year, thus registering a growth rate of 4.53 percent. The employment has increased to about 659.35 lac during the year 2008-09 from 626.34 lac during the previous year.

Contribution to Gross Domestic Product: The SMEs are significantly contributing to the overall growth in terms of GDP. The SMEs contribute to 8% of the GDP of India and contribute 45% of the gross manufactured output of Indian economy. The total production of SMEs which valued Rs 61228 crores in the year 1985-86, increased to Rs 625000 crore in the year 2009-2010.

Potential for Global Investors: SMEs in India, has offered wide opportunities and potential to global investors looking access to growing markets in India. The process of economic reforms liberalization, privatization, globalization and market reforms while exposing the Indian SMEs to increasing domestic and global competition, has opened attractive possibilities of access to larger market of stronger and deeper linkages with large enterprises.

Contribution to Exports: SMEs contribute about 40% of the total exports. SMEs are dominant players in the exports from our country. The prominent exports include Engineering goods, Gems and Precious Stones, Chemicals, Readymade garments, cotton cloth, handicrafts, sports goods, plastic and leather products and processed food.

Engine of Economic Growth: SMEs play a vital role in the overall industrial economy of the country by contributing significantly to the manufacturing output, employment and exports. Consequent upon enhanced technological capabilities, improving product and service quality to global standards by innovations, SMEs are achieving sustained growth.

Promote Equitable Development: The SMEs especially due to enhanced current emphasis to microfinance availability in all parts of the rural areas in the country is ensuring the equitable development in the country by removing regional imbalances.

Increase in Production: The total production of SMEs valued Rs 6, 25,000 crores in the year 2009-2010.SMEs contributes about 40% of the gross manufacture to Indian economy. These recorded an economy. These recorded an increment of 31.21 lac in the year 2009.SMEs contribute 45-50% of the Indian Exports.

Rapid globalization and emerging new technologies have drastically reduced the importance of economics of scale in many activities, thereby increasing the potential contribution of SMEs. In USA, SME Sector accounts for 50% of GDP, in Hong Kong & Singapore 22%. In Thailand, out of the total number of enterprises 96% are SMEs and they are the driving force behind the expanding economy.NEEDS OF THE MSME FINANCING:The financing of SMEs by the Banks is quite old. The concepts and priorities have been changing over a period of time. The SMEs play an important role in the production and distribution of goods and services and also act mediator between producers and consumers. A neglect of this sector may lead to vital gap in the economy. The share of SMEs in our countrys Gross Domestic Product is on the increase. A vast scope exists for financing this sector profitability. In quite good number of the SMEs, the business is either family owned or inherited. The advances to them are more stable and less prone to become Non-performing Assets and Sick Assets. The supervision, follow up and control of these advances is comparatively easy and cheap. These provide stable business with less overheads and generally profitable business. The SMEs generally hold sound and good collateral securities in the form of immovable properties. Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) was set up by Govt. of India and SIDBI in the year of 2000-01 with a corpus of RS. 125 crores. The CGTMSE provided guarantees to banks and financial institutions to facilitate collateral free loans to MSE sector. This enabled better availability of credit facility and flow of funds within the MSE sector. Guarantee cover is given to collateral free loans disbursement by Member Lending Institutions (MLI).

They have three parameters are used to evaluate the success of a credit guarantee scheme: financial additionality, economic additionality and sustainability of scheme. The Government of India had launched many Schemes necessary for technological up gradation and modernization, protection of workers affected by technological up gradation and modernization, infrastructure development, entrepreneurship development.

It is essential for the Reserve Bank of India (RBI) has also been emphasizing on the flow of bank credit to micro enterprises in rural and semi-urban areas set up by vulnerable sections of society including women. A number of initiatives have been taken in this regard and banks have been advised to provide maximum support to Self Help Groups.

Newer forms of SME financing need to be fostered viz., venture capital and leasing. Commercial banks and local government funding agencies would need to play a major role in venture capital financing

SCOPE AND OBJECTIVES OF THE MSME FINANCING

The main objective of CGTSI is to facilitate hassle-free credit to the SSI sector and encourage banks to shift from collateral-based or security-oriented lending. The Small Scale Industries Development Bank of India (SIDBI) has also encouraged the growth of the venture capital industry for hi-tech SME units in India by promoting 13 State / regional level funds and setting up an all India Venture Fund. It has been well recognized that the investment limit of Rs.10 million for the remaining SSI units leaves little scope for such producers to achieve economies of scale and scope and become competitive. Some informal groups have been set up by the Reserve Bank to analyze various micro-finance issues relating to (I) structure and sustainability; (ii) funding; (iii) regulations; and (IV) capacity building. It is the main objective of RBI. It is the wider scope in RBI for formulating and evaluating the policies. It also generates the credit availability by the banks to provide SME unit.

The main objective of SME financing for the improvements would only increase an inclusive growth and economic development in our economy. To endeavor to achieve the objective of a cumulative growth of 40% in the number of registered enterprises and enhance this sector & its contribution to GDP from the present 8% to 10% by the end of 12th Plan.

MSME finance and credit issues:Finance forms the most critical input for a business enterprise whether large or small. All firms require financing to grow and survive. Sources may be external, such as loans, equity infusions, subsidies and government grants, or internal such as generated cash flows. Many firms are self financed in the beginning. Once the firms reach certain degree of maturity in the development of their product line and customer base, external finance becomes available. The problem of MSMEs regarding their need for finance is peculiar and very different from the requirement of finance by the large scale enterprises. The reason for peculiarity is that most of the SSIs operate on tight budgets and the business is often financed through the owners own contribution and loans from friends and relatives. They avail the minimum possible bank credit. In this scenario they sometimes need working capital loan under emergency situations for a short term.These situations may arise due to an unexpected large order, or due to rejection of a consignment or an inordinate delay in payments. It is under such situations that they look for institutional finance but the flow of institutional finance is linked with the creditworthiness of the enterprise. Small enterprises, due to their small size and low capital base, generally find it difficult to satisfy the conditions laid down by the banks, particularly, in establishing the viability of the project, meeting collateral requirements and making timely repayment of loans. Hence, they do not find a place among the preferred clients of the banks.These problems have not gone unnoticed by the Government of India. it has recognised the need for a focused credit policy for MSMEs and earlier more importantly the SSIs. The Government has realised that timely availability of credit is one of the most important factors for a small scale unit. To improve the flow of credit, the RBI has constituted several committees and working groups since 1991. Notable among the committees are Nayak Committee, Kapur Committee and Ganguly Committee. Appropriate measures are taken by the RBI and Government from time to time based upon the decision of the Standing Committee on SSI set up at the RBI. A multi-level institutional structure exists for financing of small enterprises and non-farm enterprises in India. This consists of commercial banks, cooperative banks, RRBs, State Financial Corporations. Credit to Micro and Small enterprises comes under priority sector lending programme of banks. The Reserve Bank of India (RBI) constantly reviews the flow of credit to this sector. An exclusive refinancing bank, called Small Industries Development Bank of India (SIDBI) was set up in 1990. The issue of providing micro credit to micro enterprises through development of SHG-Banks Linkage rests mainly with National Bank for Agricultural and Rural Development (NABARD). Priority Sector LendingThe Government of India through the instrument of Reserve Bank of India (RBI) mandates certain type of lending on the Banks operating in India irrespective of their origin. RBI sets targets in terms of percentage (of total money lent by the Banks) to be lent to certain sectors, which in RBI's perception would not have had access to organised lending market or could not afford to pay the interest at the commercial rate. This type of lending is called Priority Sector Lending. Financing of Small Scale Industry, Small business, Agricultural Activities and Export activities fall under this category. This is also called directed credit in Indian Banking system.Financing Priority Sector in the economy is not strictly on commercial basis as not only the general approach is liberal but also the rate of interest charged on such loans is less. Part of the cost of these concessions are borne by RBI, by means of refinancing such loans at concessional rate. Indian Banks, therefore, contribute towards economic development of the country by subsidizing the business activities undertaken by entrepreneurs in the areas which are consider "priority sector" by RBI. The Reserve Bank of India is making an all out effort to increase the role of the financial institutions in the small scale sector. It has asked the commercial banks to chalk out their branch expansion strategies keeping in mind the growth potential and the economic development needs of MSME. The RBI wants that this expansion should be especially in the case of the under-banked regions where the population per branch is more than the National average of 16000 person per branch.Policy Package for Stepping up Credit to Small and Medium Enterprises (SMEs), was launched with the objective of doubling the flow of credit to this sector within a period of five years. The main objectives of this policy are as follows:

i. Banks to achieve a minimum 20% year-on-year growth in credit to the MSME sector, and ii. Cover on an average at least 5 new MSMEs at each of their semi-urban/urban branches per year.

iii. In order to ensure that credit is available to all segments of the Small Enterprises sector, banks should ensure that :-

40 per cent of the total advances to small enterprises sector should go to micro (manufacturing) enterprises having investment in plant and machinery up to Rs. 5 lakh and micro (service) enterprises having investment in equipment up to Rs. 2 lakh. 20 per cent of the total advances to small enterprises sector should go to micro (manufacturing) enterprises with investment in plant and machinery above Rs. 5 lakh and up to Rs. 25 lakh, and micro (service) enterprises with investment in equipment above Rs. 2 lakh and up to Rs. 10 lakh. (Thus 60 per cent of small enterprises advances should go to the micro enterprises)

Schemes under the above policy packageScheme of Small Enterprises Financial Centres (SEFCs):As per announcement made by the Governor in the Annual Policy Statement 2005-06, a scheme for strategic alliance between branches of banks and SIDBI located in clusters, named as Small Enterprises Financial Centres has been formulated in consultation with the Ministry of SSI and Banking Division, Ministry of Finance, Government of India, SIDBI, IBA and select banks .SIDBI has so far executed MoU with 15 banks so far (Bank of India, UCO Bank, YES Bank, Bank of Baroda, Oriental Bank of Commerce, Punjab National Bank, Dena Bank, Andhra Bank, Indian Bank, Corporation Bank, IDBI Bank, Indian Overseas Bank, Union Bank of India, State Bank of India and Federal Bank).

Deposit by Foreign Banks with SIDBI towards shortfall in priority sector lending

The foreign banks having shortfall in lending to stipulate priority sector targets /sub-targets will be required to contribute to Small Enterprises Development Fund (SEDF) to be set up by Small Industries Development Bank of India (SIDBI), or for such other purpose as may be stipulated by Reserve bank of India.

The corpus of SEDF shall be decided by Reserve Bank of India on a year-to-year basis. The tenor of the deposits shall be for a period of three years or as decided by Reserve Bank from time to time. Fifty percent of the corpus shall be contributed by foreign banks having shortfall in lending to priority sector target of 32 per cent of ANBC. The balance fifty per cent of the corpus shall be contributed by foreign banks having aggregate shortfall in lending to Small Enterprises sector and export sector of 10 per cent and 12 per cent respectively, of ANBC or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher, on a pro-rata basis. The contribution required to be made by foreign banks would, however, not be more than the amount of shortfall in priority sector lending target/sub-target of the foreign banks.

Role of Small Industries Development Bank of India (SIDBI) to be enhancedSIDBI was set up with the mission to empower the Micro, Small and Medium Enterprises (MSME) sector with a view to contributing to the process of economic growth, employment generation and balanced regional development. It is the principal financial institution responsible for promotion, financing and development of the sector. Apart from extending financial assistance to the sector, it coordinates the functions of institutions engaged in similar activities. The four basic objectives of SIDBI for orderly growth of industry in the small scale sector are:

Financing

Promotion

Development

Co-ordination

Taking into account the fact that the majority of such enterprises are at the lower-end of the sector and are outside the ambit of institutional finance. Hence, concerted efforts have been made by SIDBI to promote micro finance across the country to enable the unemployed persons to set up their own ventures. There are more than 100 Micro Finance Institutions (MFIs) developed by SIDBI that are engaged in implementation of its micro finance programme. Also, Credit Guarantee Cover Fund Scheme for Small Industries was launched jointly by the Government of India and SIDBI (on a 4:1 contribution basis) in August 2000, with a view to ensure greater flow of credit to the sector without collateral security. It picked up during the last two years of the Tenth Plan and till the end of March 2007, 68062 proposals were approved and guarantee covers for Rs 1705 crore were issued.

Common guidelines/Instructions for Lending to Small Enterprises by RBI1. Disposal of Applications

All loan applications for MSE units upto a credit limit of Rs. 25000/- should be disposed of within 2 weeks and those upto Rs. 5 lakh within 4 weeks provided, the loan applications are complete in all respects and accompanied by a " check list".

2. Collateral

The RBI has instructed that no collateral security is required for obtaining loans till Rs.5 Lac by MSE (both manufacturing or production and providing or rendering of services, including those units financed under the Prime Minister Employment Generation Programme of KVIC). Banks may on the basis of good track record and financial position of the MSME units, increase the limit of dispensation of collateral requirement for loans up to Rs.25 lac (with the approval of the appropriate authority).

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

4. Specialised SME branches

Public sector banks have been advised to open at least one specialised branch in each district. Further, banks have been permitted to categorise their SME general banking branches having 60% or more of their advances to SME sector in order to encourage them to open more specialised SME branches for providing better service to this sector as a whole. 5. 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 MSME units which inter-alia stipulates

agreement between seller and buyer shall not exceed more than 120 days

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, banks have 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.

After the enactment of the Micro, Small and Medium Enterprises Development (MSMED), Act 2006, the existing provisions of the Interest on Delayed Payment Act, 1998 to Small Scale and Ancillary Industrial Undertakings, have been strengthened as under:

i. In case the buyer to make payment on or before the date agreed on between him and the supplier in writing or, in case of no agreement before the appointed day. The agreement between seller and buyer shall not exceed more than 45 days.

ii. In case the buyer fails to make payment of the amount to the supplier, he shall be liable to pay compound interest with monthly rests to the supplier on the amount from the appointed day or, on the date agreed on, at three times of the Bank Rate notified by Reserve Bank.

iii. For any goods supplied or services rendered by the supplier, the buyer shall be liable to pay the interest as advised at (ii) above.

iv. In case of dispute with regard to any amount due, a reference shall be made to the Micro and Small Enterprises Facilitation Council, constituted by the respective State Government.

6. Guidelines on rehabilitation of sick SSI units (based on Kohli Working group recommendations)

As per the definition, a unit is considered as sick when any of the borrowed account of the unit remains substandard for more than 6 months 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 criteria will enable banks to detect sickness at an early stage and facilitate corrective action for revival of the unit. As per the 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 banks/FIs 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/ RBI has framed broad parameters for grant of relief and concessions for revival of potentially viable sick SSI units.

The FIs and commercial banks have been advised to put in place loan policies governing extension of credit facilities, Restructuring/Rehabilitation policy for revival of potentially viable sick units/enterprises and nondiscretionary One Time Settlement scheme for recovery of non-performing loans for the MSE sector, with the approval of the Board of Directors and implement recommendations with regard to timely and adequate flow of credit to the MSE sector.

7. State Level Inter Institutional Committee

In order to deal with the problems of co-ordination for rehabilitation of sick micro and small units, State Level Inter-Institutional Committees (SLIICs) have been set up in all the States. The meetings of these Committees are convened by Regional Offices of RBI and presided over by the Secretary, Industry of the concerned State Government. It provides a useful forum for adequate interfacing between the State Government Officials and State Level Institutions on the one side and the term lending institutions and banks on the other. It closely monitors timely sanction of working capital to units which have been provided term loans by SFCs, implementation of special schemes such as Margin Money Scheme of State Government, National Equity Fund Scheme of SIDBI, and reviews general problems faced by industries and sickness in MSE sector based on the data furnished by banks.

8. Empowered Committee on MSMEs

As part of the announcement made by the Union Finance Minister, at the Regional Offices of Reserve Bank of India, Empowered Committees on MSMEs have been constituted under the Chairmanship of the Regional Directors with the representatives of SLBC(State Level Bankers Committee) Convenor, senior level officers from two banks having predominant share in MSME financing in the state, representative of SIDBI Regional Office, the Director of Industries of the State Government, one or two senior level representatives from the MSME/SSI Associations in the state, and a senior level officer from SFC/SIDC as members. The Committee will meet periodically and review the progress in MSME financing as also rehabilitation of sick Micro, Small and Medium units. It will also coordinate with other banks/financial institutions and the state government in removing bottlenecks, if any, to ensure smooth flow of credit to the sector. The committees may decide the need to have similar committees at cluster/district levels.

9. Debt Restructuring Mechanism for SMEs

As part of the policy for stepping up credit to small and medium enterprises, a debt restructuring mechanism for units in SME sector has been formulated by Department of Banking Operations & Development of Reserve Bank of India and advised all commercial on 2005-06. These detailed guidelines have been issued to ensure restructuring of debt of all eligible small and medium enterprises.

10. Cluster Approach

60 clusters have been identified by the Ministry of Micro, Small and Medium Enterprises, Government of India for focused development of Small Enterprises sector. All SLBC Convenor banks have been advised to incorporate in their Annual Credit Plans, the credit requirement in the clusters identified by the Ministry of Micro, Small and Medium Enterprises, Government of India.

As per Ganguly Committee recommendations banks have been advised that a full-service approach to cater to the diverse needs of the MSE sector may be achieved through extending banking services to recognized MSE clusters by adopting a 4-C approach namely, Customer focus, Cost control, Cross sell and Contain risk. A cluster based approach to lending is considered to be beneficial:

a. in dealing with well-defined and recognized groups;

b. availability of appropriate information for risk assessment and

c. Monitoring by the lending institutions.

Clusters may be identified based on factors such as trade record, competitiveness and growth prospects and/or other cluster specific data.

Apart from the above, the Ministry of Micro, Small and Medium Enterprises has approved a list of clusters under the Scheme of Fund for Regeneration of Traditional Industries (SFURTI) and Micro and Small Enterprises Cluster Development Programme (MSE-CDP) located in 121 Minority Concentration Districts.

Accordingly, appropriate measures have been taken to improve the credit flow to the identified clusters of micro and small entrepreneurs from the Minorities Communities residing in the minority concentrated districts of the country.

11. Continuation of the Credit Linked Capital Subsidy Scheme (CLSS) for Technology Upgradation of Micro and Small Enterprises

Government of India, Ministry of Micro, Small and Medium Enterprises has approved CLSS for the XI Th Plan with the condition of ceiling on the loan under the scheme is Rs. 1 crore. With the rate of subsidy being 15% for all units of micro and small enterprises. Calculation of admissible subsidy will be done with reference to the purchase price of plant and machinery instead of term loan disbursed to the beneficiary unit and SIDBI and NABARD will continue to be implementing agencies of the scheme.

Though the Indian Government along with the Reserve Bank of India it has come to the conclusion that non-availability of timely and adequate funds at reasonable cost is one of the most important problems facing the MSME sector. Take, for instance, credit. Since the nineties the share of commercial bank credit that goes to the SSI sector is falling (though growing in absolute terms). Some of the major causes for low availability of bank finance to this sector are the high-risk perception, inadequate data and usage of external credit rating (there is need to scale up external ratings), weak corporate financial systems, early stage high transaction cost for small loans and high costs of the banks in lending to MSMEs. The lack of adequate collateral further hampers availability of funds to the sector. Innovative Financing

The small enterprises have, so far, depended mostly on banks and traditional modes of financing namely term loan and working capital from banks. Micro finance through MFIs (Micro Financing Institutions) and SHGs, (Self-Help Groups) is an innovative means of financing, but is its initial stage and at best only an indirect form of bank finance. Unlike large enterprises which raise finance from capital market and external sources like foreign financial investors besides commercial banks, small enterprises and other non-farm enterprises are solely dependent on banks.

With the growing financial need, emergence of new product lines, emergence of risky and untried ventures, it is high time that some innovative means of financing for the non-farm unorganized enterprises are explored.

SIDBI, the premium institute in the country, dealing with alleviating the problems of the MSME sector is exploring all the possibility of linking SMEs, with capital market. Financial instruments have to be designed to link SMEs with the huge amount of money of capital market. The emergence of clusters and with emphasis on making them as the strategy of SME development, would make it possible to rope in capital market to SME financing. This will bring new capital to this sector.

Making various Risk-capital options available to the MSME sector is essential and a lot of them are being tried internationally and now in India. They may be summarised as follows:

Risk Capital Options

Some of the major risk capital options available for MSME sector internationally and in India are given below. These need to be introduced and/or strengthened:

Venture Capital

Venture funds typically provide equity and may or may not also provide tied credit. Good quality venture funding can improve the credit rating of the company allowing it to access commercial loans or other forms of finance. However, there are some expected problems with exit that can impact funds entry into these areas. For the MSME, it has possible disadvantages of reduced operational flexibility, etc.

Ventures like bio-tech, food processing, IT, pharmaceutical and other knowledge based sectors in India need creation of venture capital funds to meet the equity requirements. In the initial phase of their working. Knowledge sector including BPO, KPO, Life sciences, on-line business, technology-enabled design and manufacturing as well as in emerging areas of Nano-technology and environmental technology.

Factoring Service

Third area of innovative financing, which needs popularization in India, is the development of factoring services. This is necessary since a major problem faced by MSMEs, is delayed payment from the units to whom they have supplied goods. Banks can work as factors on behalf of MSMEs, to collect the dues on their behalf by discounting the bills at nominal service charge. Likewise, other means of financing SMEs, such as lease finance, hire-purchase finance and propagation of incubation centres could be undertaken to inject additional fund to the MSMEs in order to bridge the financial gap.Angel Investors

Angels are typically high net worth individuals who wish to invest some of their surplus funds in new ventures. They can prove to be a good source of capital and advice at an early stage in the development of the company. For the investor, they bring opportunity to make high returns from investing at an early stage in an MSME. The problem areas are unwillingness of MSME to bring in an external investor in case of equity sale, the high risk for investor and risk of relationship between the investor and the MSME manager breaking down.

Public Listing

MSMEs with a good track record can access funding from the public through the public listing process first through the initial public offer (IPO). A functioning IPO regime for MSMEs will enable the entry of other types of risk capital in the earlier stages. However, the IPO route is limited to bigger MSMEs having an established strong record of past performance and reputation in the market.

Following supplements to risk capital can also be explored:

Loan Funds

A pure loan fund supported by the Structural Funds can be leveraged by using private capital. While Loan schemes are a major source of capital for MSMEs, usually lenders will require collateral or will go through a credit scoring process which may discriminate against start-up companies.

8

Guarantee Associations

Guarantee Funds or Guarantee Associations issue guarantees to MSMEs in order to facilitate access to external finance (mainly loan-based, but also equity) in return for a fee to cover both the risk and administrative and processing costs. They facilitate access to loan finance on improved financial terms for MSMEs and reduce the degree of risk for the lending institution. However, they cover only part of the credit risk and often apply to only a limited range of financial instruments. Requires the creation and/or existence of strong associations which typically take many years to set-up and operationalize.

Micro Finance

Micro finance is typically designed for businesses with small financing requirements. It can meet the market failure in starting and developing micro businesses. However, apart from high cost of setting and administering loans, it caters to only small requirements and generally requires the presence of a homogenous and well networked social group.

Changes required in the FI/Banking System to implement the schemes of SIDBITo enable the FII or the Banks to bring about these innovative tools of innovative financing a risk-credit ecosystem needs to have the following elements:

Availability of risk capital at every stage. Availability of good quality entrepreneurs. Mentoring/advisory credit with hand holding. Appropriate and adequate exit options for all stakeholders. Appropriately incentivising risk-capital providers. Reducing informational imperfections. Ability to accept risks failure in early stage financing.To enable the supply of good 'quality' entrepreneurs and projects, following areas need to be focused upon:

Incubators

Business incubators need to be set in partnership with technical and higher educational institutions to help the potential entrepreneur in the early stages. They aid the creation of higher 'quality' projects for later stage funding. Recognition of incubators as a priority sector activity can help in spreading incubators both in the public and private sectors. The incubators in India primarily provide the infrastructure setup with hand holding. There is need to linkup to risk capital for incubate companies, particularly start-ups, to take care of expenses relating to manpower, IPR, initial marketing, product development etc. Further, the incubators need to develop strong linkages with Angel Networks and Venture Capital Funds to provide equity at start-up stage.

Angel Networks

Internationally, these have been highly successful in providing both risk-capital as well as mentoring for budding entrepreneurs, many of them at the seed stage itself. There are certain taxation and exit issues affecting the growth of this sector in India. Appropriate and adequate policy action aimed specifically at this source of funds is required.

Small Cap Exchange

As the characteristics of small companies do not match the requirements of the stock exchanges servicing larger companies, there is a need to accelerate the setting up of a small cap exchange, either independently or as a part of the established exchanges. Equally important is ensuring easier IPOs for MSMEs as exit will make it easier for VCs and other types of risk capital providers to unlock their investment in the units.

Incentives for institutional and individual risk-credit providers

The risk capital in early stage investment particularly in small companies have a high risk high return portfolio with a small number of ventures succeeding. Appropriate tax and other incentives need to be designed for different types of risk-capital providers. Incentives of Risk capital have been devised in some countries to encourage entrepreneurship and start-up ventures. Such models can be studied for possibility of replication in India.

Publishing Success Stories

Publishing success stories particularly of first generation entrepreneurs, is a high motivator for job seekers to take risk and set up ventures.

Corporatisation

Awareness needs to be created among MSMEs about advantages of conversion from Proprietorship / Partnership to a corporate entity (after reaching a certain size of stature). The corporate structure with greater transparency enables flow of capital Vis-a Vis Partnership / Proprietorship concernsInsolvency

In early stage financing, the failures due to technology, marketing etc are high. This requires a regime that allows for second chance options in case of genuine failures.

Information/Skill Gaps

Institutional solutions as outlined above would be much more effective if they are also accompanied by capacity improvements. Moreover, there are also gaps in information and skill availability both for entrepreneurs as well as finance providers. Some examples discussed were:

Entrepreneurship development programs at graduate level

Organizing of Business Plan Competitions in colleges

R&D centres and technical institutions

Institute referral services, laboratory facilities

Process certifications via technical institutions and universities

Promotion of greater faculty and industry interaction by building in appropriate flexibilities and incentives for research staff in research and academic institutions Strengthening the entrepreneurs accessibility to expertise in a range of areas such as assistance with IPR filings

Enable access to marketing, HR and other business development services etc

Ensuring risk-capital provider's easy access to multiple sources of information on the industry, activity and the entrepreneur (Government support is required for such information to be made available on a large enough scale)Research MethodologyDATA COLLECTION METHOD

Primary data: Primary data collected through studying the case of the enterprise.Secondary Data: Secondary data collected from bank circulars, bank guidelines book and internet. Brief Findings Current system of MSME Finance. Canara Bank has a system of checks and balance in place of extension of credit.

The aspect covered under the present system is multiple credit approvals, independent audit and risk review and risk rating system for various categories of system and corresponding pricing mechanism. The bank maintains a diversified portfolio of risk assets, and ensures on going control of risk considerations .All credit exposures above RS 5 Crores are assigned risk waiting assigned by domestic credit rating agencies recognized by RBI.The data for the present study has been used from Secondary source. In consonance to the objectives of study, the secondary data shall be used from the published Annual Reports of the Bank and from Credit Plans of the Banks. The primary data in the form of case study and a representative SME population of various sub segments on random sampling basis. The case study was collected from micro, small and medium enterprises randomly representing all sectors and activities of SMEs. The tabulated data as per the requirements of the objectives of the study has been analysed with appropriate ratio analysis method.Data Analysis & Interpretation

Canara Bank approach towards MSME Finance:SMEs are growth engines for development of Economy. Our bank has therefore for internal purposes given focused attention to finance all Commercial enterprises i.e. enterprises which may be outside the purview of regulatory definition of SME but having turnover upto Rs 150.00 crores and new infrastructure and real estate projects where the project cost is upto Rs. 50/- crores by treating them as part of SME segment.

SME Banking business will thus include the following across the bank:

Micro, Small and Medium Enterprises as per regulatory definition irrespective geographical location, i.e. rural, semi-urban, urban, metro areas.

All other entities with their annual sales turnover of Rs. 1/- crore to Rs. 150/- crores and new infrastructure and real estate projects, where the project cost is upto Rs. 50/- crores.

SMEs which are Associate/sister concerns of Wholesale Banking customers.

Clubs, Trusts, etc.

Financing under various Government schemes launched for MSME Sector.

However, such units, which are outside the purview of regulatory definition will not form part of Priority Sector lending.

Case Study on the MSME Finance at Canara Bank

In accordance towards the secrecy of the bank, the actual name of the enterprise was changed to M/s. XYZ limited Company. To have a detailed study and real life experience I in the guidance of my mentor did this case analysis. Here is the brief details of the learning:

Details of the Enterprise:

M/s. XYZ Limited Company

It is a Manufacturing Company which manufactures sportswear, shoes and apparels

Proprietorship.

Account holder in Canara Bank GT Road Branch

The above enterprise approached the bank and demanded the Following:

To get financial aid from the bank under MSME Finance

Drawing Power of Rs. 3000000

The bank in order to give a boost to this priority sector did the following action:

The borrower was asked to firstly fill the application forms which depend upon the type of sector

The bank firstly identified the business i.e. its under micro, small or medium

The duration of the proprietors in the field of the business is also checked so as to see their experience and goodwill in the business

Then the bank demanded for the proofs of the business that is the income tax paid by the enterprise and the proprietors, also the CIBIL (Credit information Bureau (India) Limited) rating is checked to avoid the fraud and misuse of the given amount

The hypothecation of stocks in trade (raw material + finished products + work in progress)

Also decide whether the rate of interest would be compounded Monthly/Quarterly/YearlyAdvantages of the above parameters: To Investors Short Term source of finance

Outside the purview of Section 370 of Indian Companies Act 1956

No tax deducted at source

Flexibility

To Banks Safety of funds

Certainty of payment

Profitability

Credit Appraisal ProcessReceipt of application from applicant

Receipt of documents(Balance sheet, KYC papers, Different govt. registration no., MOA, AOA, and properties documents

Pre-sanction visit by bank officers

Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC, Caution list etc

Title clearance reports of the properties to be obtained from empanelled Advocates

Valuation reports of the properties to be obtained from empanelled valuer/engineers

Preparation of financial data

Proposal preparation

Assessment of proposal

Sanction/approval of proposal by appropriate sanctioning authority

Documentations, agreements, mortgages

Disbursement of Loan

Post sanction activities such as receiving stock statements, review of accounts, renew of accounts, etc (On regular basis)

CREDIT PROCESS

Pre-Sanction Process Indicative list of Activities in the Appraisal Function

A. Preliminary appraisal Obtain the following:

i. Application for working capital Finance

ii. Audited financial for the previous three years

iii. Details of existing borrowing arrangements

iv. Reports from existing Banker on the application copy

v. Financial statements, borrowings relationship of Associate firm/group companies

vi. Profile of promoters /senior management personnel

If request includes project financing, obtain additional:

i. Project report

ii. Appraisal report form financial institutions in case Appraisal has been done by them

iii. NOC form term lenders if already financed by them

iv. Report form Merchant bankers in case capital market is being accessed

Examine the following:

i. Banks lending policy/RBI guidelines, policies

ii. Prudential Exposure norms

iii. Industry Exposure restrictions

iv. Group Exposure restrictions

v. Industry related risk factor List of defaulters

vi. Caution lists

vii. Compliances regarding transfer of borrower accounts from one bank to another, it applicable

viii. Gov. regulation/legislation impacting on the industry ix. Acceptability of the promoters

x. Applications status vis--vis other units in the industry

xi. Financial status in broad term and whether it is acceptable

xii. Examine also the following in case of request of project financexiii. Weather the project cost is prima facie acceptable

xiv. Debt/equity gearing proposed and whether acceptable

xv. Promoters ability to access capital market for debt/equity support

xvi. Whether critical aspect of project demand, product cost profitability etc. are prima facie in order

xvii. Arrived at a preliminary decision to support or not to support the request.

B. Detailed appraisal Carry out a detailed appraisal alter a pre-sanction visit to applicant Company/their office/project site.

Working capital facilities Examine/Analyze/Assess;

i. Financials (in the prescribed form)

ii. Financial ratio and other ratios relevant to the project- Dividend policy

iii. Other aspects viz.

Depreciation method and Revaluation method

Record of defaults (tax duties etc.)

Pending suits having financial implications (custom excise etc.)

Qualification of balance sheets, Auditor remarks etc.

iv. Trends in sale and probability

v. Past deviation in sale and profit projections

vi. Product capacity & use-past and projected

vii. Estimate/ projections of sales values

viii. Estimated working capital gap with reference to acceptable buildup of inventory/receivable/other current asset.

ix. Project levels whether acceptable

By sourcing information where necessary from: Stock Exchange Directory financial journals/ publications, professional entities like INFAC, CMIE etc. with emphasis on following aspects:

Market share of the units under comparison

Unique features

Profitability factors

Financial pattern of the business

Inventory receivable levels

Capacity utilizations

Production efficiency and costs

Bank borrowing patterns

Financial ratio & other relevant ratio

Credit rating Draw up trading for:

Working capital

Term finance

Opinion reports Compile opinion report on partners/promoters and the proposed guarantors

Review of the proposal Strength and weakness of the exposure proposed

Risk factor and steps proposed to mitigate them

Deviations proposed from usual norms of the bank and the reasons

Proposal of sanction: Prepare a draft proposal in prescribed format with required back-up details and with recommendations for sanction

Sanction Indicative list of Activities Involve in the sanction Function

Peruse the proposal to see if the report prima facie presents the proposal; remit it back to the Assessor for the required data/clarifications.

Examine critically the following aspect of the proposed exposure

1. Banks lending policy

2. Borrowers status in the industry

3. Industry aspect

4. Experience with units in similar industry

5. Overall strength of the borrower

6. Project level of operation

7. Risk Factors critical to the exposure and adequacy of safeguards there against proposed.

8. Value of existing connection with the borrower

9. Credit risk rating

10. Security pricing charges and concessions proposed for the exposure and covenants stipulated vis--vis the risk perception

POST SANCTION PROCESS 1. Follow up The follow-up functions will cover the following:

(a) Ensuring on an ongoing basis compliance with terms and conditions of sanction through the system of control measures/feedback viz. Inspection visits, prescribed financial/ operation statements from the borrower interaction with borrower etc.(b) Tracking performance of the borrower, ensuring safety and recoverability of the advances

(c) Ensuring compliance with all the internal and external reporting requirements covering the advances.

Indicative list of the activities involved in the Follow-up function is as follows:

Conveying sanction of advances to the borrower detailing the terms and conditions and obtaining acceptance thereof

Preparation-submission of control returns for sanction

CMA reporting of sanction where applicable

Completion of applicable documentation; maintaining custody and validity of the documents.

Creation of charge over security and completion of all relevant and applicable formalities, including:

1. Creation of Registered or Equitable mortgage

2. Creation of second charge

3. Registration of charge with ROC

4. Periodical search of charge with ROC

Ongoing scrutiny of transaction in the various accounts by perusal of leaders, registers, vouchers etc. to watch for proper conduct of the accounts, healthy turnover therein and proper- end use of funds.

Ongoing verification of assets charged as security, to ensure availability and safety of the assets.

Maintaining ongoing contact with the borrower and co-leaders and keeping abreast of developments in the borrower entities and business environment.

Preparation of reviews of IRAC, identification of deterioration assets and initiations of corrective action where warranted.

Account wise follow up of NPAs for recovery /rehabilitation, preparation of related recommendations to appropriate authority for approval.

Supervision I. Supervision function should primarily ensure that the effective fallow of advances is in the place of the asset quality of good order is maintained. Supervisor should look out for early warning signals, identity incipient sickness and initiate proactive remedial actions.

II. Indicative list of activities involved in supervision function is as follows

Ensuring proper flow-up of advances and observations at the operating level of the system laid down by the bank. Periodic and random examination of statements received, control register and files/record covering the advance will assist this process.

Ensuring the security documents are kept current and that all related documentation formalities are observed by the officials responsible.

Ensure that the function at the follow-up level are performed diligently and as per extant instructions of the bank.

Monitoring and Controlling I. Monitoring and controlling function ensures that effective supervision is maintained on advance and appropriate responses are initiated whenever early warning signals are seen. The function also tracks customer satisfaction and provides responses where necessary.

II. Indicative list of activity involved in monitoring control function are as follows:

Ensure that the effective supervision id maintained on advance by the lower level functionaries responsible for follow-up and supervision scrutiny of returns / reports received from these line functionaries, interaction with them, feedback from the customer, commentary in inspection/audit reports etc. will assess this process.

Monitoring high value advances through specific focus on these in the return/report received on advance and by keeping watch on the developments in the borrower company/industry

Ensuring non-recurrence at the operating level of the company noticed lapses/irregularities pointed out in various audit reports.

Ongoing monitoring of asset portfolio by tracking changes from time to time; chalk out and arrange for carrying out specific action to ensure high standard asset content.

Extending guidelines to down the line functionaries on the follow-up and supervision of the exposures at risk.

Assessment of Risk, Profitability and Efficiency: 1. Industry Risks

2. Management Risks

3. Operational Risks

4. Collateral Security

5. Financial Risks

Industry Risks: I. Production stage

i. Raw materials

ii. Power, Fuel, Labor

iii. Technology

iv. Infrastructure

v. R & D

II. Post Production Process

i. Demand

ii. Competition

iii. Marketing arrangements

Management risks: Promoters

i. Experience of the group

ii. Management proficiency

iii. Experience of promoters

iv. Employed executives

c) Operational risks: i. Supply of information to banks

ii. Record of irregularity

iii. Limit management

iv. Compliance of sanction stipulations

d) Collateral security: Collateral cover

e) Financial risks: I. Liquidity

i. Current ratio

ii. Non-working capital

II. Profitability

i. Operational profit

ii. Return of capital employed

iii. Net profit

III. Interest coverage

i. PBDIT / Interest

ii. Term indebtness

iii. Overall indebtnessiv. Efficiency in utilization of current assets Interpretation: Above tables shows how Banks assess the risk, profitability and efficiency. In order to award loan to the business entity banks has to look in to the risk, return and efficiency by using the past and present information available about the company. Banks consider the following factors to assess the risk.

Industry Risk Here the banks will look in to the all risk factors that related to an industry. Include the production stage risk and post production risk. Production stage risk assessed by considering the factors like raw materials, technology, Infrastructure etc and post production risk involves demand, competition and marketing challenges.

Management Risk Promotes experience, management proficiency, employed executives are the factors which comes here.

Operational risk Here banks look in to the past records of the customers transactions. Supply of information to the bank, record of the irregularities and compliance of sanctions and stipulations are considered here.

Collateral security The collateral cover offered by the customer review comes here.

Financial risk Liquidity, profitability and interest coverage ratios are assessed here to determine short term and long term solvency of the company.

CREDIT APPRAISAL STANDARDS: QUALITATIVE: At the outset, the proposition is examined from the angle of viability and also from the bank prudential levels of exposure to the borrower, group and industry. Thereafter, a view is taken about banks past experience with the promoters, if there is a track record to go by. Where it is a new connection for the bank but the entrepreneurs are already in business, opinion reports from existing bankers and published data if available are carefully perused.

In case of a maiden venture, in addition to the drill mentioned heretofore, an element of subjectivity has to be perforce introduced as scant historical data would be available and weightage has to be placed on impressions gained out of the serious dialogues with the promoters and his business contacts.QUANTITATIVE: Working capital: the basic quantitative parameters underpinning the Banks credit appraisal are as follows:

1. Liquidity: current ratio (CR) of 1.33 will generally be considered as a benchmark level of liquidity. However, the approach has to be flexible. Cr of 1.33 is only indicative and may not be deemed mandatory. In cases where the Cr is projected at a level lower than the benchmark or a slippage in the CR is proposed, it alone will not be a reason for rejection of the loan proposal or for sanction of loan. In such cases, the reasons for low CR should be carefully examined and in deserving cases the CR as projected may be accepted. In cases where projected CR is found acceptable, working capital finance as requested may be sanctioned.

2. Net working capital: although this is a corollary of current ratio, the movements in Net working capital are watched to ascertain whether there is a mismatch of long term sources via-a-vis long term uses for purposes which may not be readily acceptable to the Bank so that corrective measures can be suggested.

3. Financial Soundness: this will be dependent upon the owners stake or the leverage. Here again the benchmark will be different for manufacturing, trading, hire purchase and leasing concerns. For industrial ventures Total outside Liability/Tangible Net Worth ratio of 6.0 is reasonable but deviations in selective cases for understandable reasons may be accepted by the sanctioning authority.

4. Turn over: the trend in turn-over is carefully gone into both in terms of quantity and value as also market share wherever such data are available. What is more important is to establish a steady output if not a rising trend in quantitative terms because sales realization may be varying on account of price fluctuations.

5. Profits: while net Profit is the ultimate yardstick, cash accruals, i.e. profit before depreciation and taxation conveys the more comparable picture in view of changes in rate of depreciation and taxation which may have taken place in the intervening years. However, for the sake of proper assessment, the non-operating incomes are excluded, as these are usually one time or extraordinary income. Companies incurring net losses consistently over 2 or more years will be given special attention, their accounts closely monitored, and if necessary, exit options explored.

6. Credit Rating: wherever a Credit Rating Agency for any instrument has rated the company, this will be taken into account while arriving at a final decision. However, as the credit rating involves additional expenditure, bank would not normally insist on this tool if such an agency had already looked into the company finances.

7. Capital Market: where the companys shares are listed in stock exchanges, the movement of the price of its share, the market value of shares like those of competitors in the same industry, response to public/right issues are also kept in view as these are reflective of the corporate image in the eyes of the investors community. Term Loan / Deferred Payment Guarantees 1. In case of term loans and deferred payment guarantees, the project report is obtained from the customer, which may have been compiled either in-house or by a firm or consultants/ merchant bankers. The technical feasibility and economic viability is vetted by the Bank and wherever it is felt necessary.

Promoters contribution of at least 20% in the total equity is what bank normally expects. But the promoter contribution may vary largely in mega projects. Therefore, there cannot be a definitive benchmark. The sanctioning authority will have the necessary discretion to permit deviations.Financial tools used in credit assessment: Financial performance, the tool in its current form uses various parameters for rating a borrower on its financial strength. These various parameters give us an idea of the different sources of risk being faced by a company in different areas.

Sl.No.ParameterWeightage (%)

1Management Risk45

2Business Risk30

3Financial Risk45

Management Risk: These are the risks constitutes about the details of the customers i.e. whether the promoters are professionally qualified and highly experienced in the business or well supported by experienced professional employees or not or the promoters are having high individual net worth and has extreme capability to raise fresh funds and not purely dependent on bank funds. The customers are graded with the parameters given in the Annexure I.Business Risk:

This risk is measured on the basis of competitors, availability of raw material and finished goods. The Parameters are given in the Annexure II.Financial Risk: The financial risk involves the ratio analysis of the balance sheet of the enterprise i.e. current Ratio, total net worth, net profit margin, etc. The parameters are given in the Annexure III.Analysis of the Balance Sheet as per the case study:

M/s. XYZ Limited Company for ending year 31.03.2013

LiabilitiesDetailsAmountAssetsDetailsAmounts

Partner Capital a/c

1556917.51Fixed Assets803487.85

SECURED LOAN

Canara Bank

CURRENT LIABILITIES

Creditors

Salary Payable

Wages Payable

Electricity Payable

Audit Fee Payable

CST Payable

CHQ issued but not cleared491962.94

952500

42600

49583

42500

12000

15500

4985163247997.94

660699.00CURRENT ASSETS

Closing Stock

Sundry Debtors

Cash In Hand2571728

2045200

45198.604662126.6

TOTAL5465614.45Total5465614.45

M/s. XYZ Limited CompanyTrading & Profit & Loss Account For the Ending Year 31.03.2013ParticularsAmountParticularsAmount

To Opening Stock

To Purchase

To Packing

To Electricity

To FOC

To Wages

To GP2554731.00

9030800.55

23050.00

212500.00

12580

595000

1371116.45By Sales

By Closing Stock11435500.00

2571728.00

Total14007228.00Total14007228

To Bank Charges & Inst.

To A/c Charges

To Salary to Partners

INTT. To Partners

Travelling

To Petrol & Diesel

To Audit Fee

To Printing & Stationery

To Repair & Replacement

To Postage & Courier

To Telephone Exp.

To Insurance Exp.

To Misc. Exp.

To Salary

To Charity

To Consultancy Fees

To Depreciation

To Net Profit333966.4518500.00

96000.00

105961.00

55800.00

89500.00

7000.00

28700.00

34390.00

8900.00

38500.00

38900.00

4560.00

285200.00

5100.00

5000.00

145169.00

69970.00By Gross Profit1371116.45

Total1371116.45Total1371116.45

Net Profit Margin:Importance of this ratio

A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings.Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Profit margin is displayed as a percentage.

Formula

Net Profit/SalesLooking at the earnings of a company often doesn't tell the