Date post: | 07-Apr-2018 |
Category: |
Documents |
Upload: | isha063824 |
View: | 233 times |
Download: | 0 times |
of 83
8/6/2019 Small and Medium Enterprise Project1
1/83
ACKNOWLEDGEMENT
in todays competitive and corporate world, imparting of practicalknowledge is of immense importance and therefore it becomesthe essence of our MBA organizations that are making the markin their respective fields.
All my efforts in this summer training would have been futile had it not beenMrs. Pallavi Jha , manager-SME & EC, ING Vysya bank. I am grateful tomy mentor as she supported, guided and gave me valuable time incoordinating my project.
I am also thankful to all other associated persons who benign attitude mademe to strive for the best. The ambience during the entire training was very
professional. I learnt a lot.
Last but not the least I will thank almighty for his kindness, my parents,family members and friends for their unconditional love.
(Isha Goel)
INDEX
S.NO TOPIC Page No.
1.2. Objective of the project 4
3. About ING Vysya bank6
4. Introduction 85. What are SMEs 96. Significance of SMEs 117. Importance of SMEs in various 12
economies of world8. Contribution of SMEs in India 14
1
8/6/2019 Small and Medium Enterprise Project1
2/83
9. Major problems faced by SMEs 15in India
10. Steps for smoothing of SME lending 18by bank
11. Government initiative for improvement 20of SMEs in India
12. Steps taken by Reserve bank of India 2413. Role of banks in development of SMEs 3014. Instruments of SME finance 3215. Identification & classification of 35
sources of funds in India for SMEdevelopment
16. Suggestions for the improvement of SME 37in India
17. SME products of ING Vysya bank 3918. Product profile 4019. BLT 4020. Case study on BLT 4421. MPower- Rent 4822. Loan/OD against NSC, LIC policies 5223. Secured overdraft against GOI/RBI Bonds 5524. MPower BAL bill discounting 5725. Bill discounted- clean & documentary 6026. Bank guarantee 6227. Inland letter of credit 6528. SME products of other banks 68
2
8/6/2019 Small and Medium Enterprise Project1
3/83
29. SME products of ICICI bank 6930. SME products of Standard Chartered bank 7431. SME products of HDFC bank 7931. Learning 83
3
8/6/2019 Small and Medium Enterprise Project1
4/83
RESEARCH METHODOLOGY
To analyze the SME sector in India & SME products offered by ING Vysyabank I require information from various sources. I have included the SME
products of other banks also, for this I require information from variousbanks.
Data collection method: -
Primary data
Primary data was collected from the different banks with the help of
Focused individual interview
Secondary data
Material available from bank
Websites of various banks
4
8/6/2019 Small and Medium Enterprise Project1
5/83
OBJECTIVE OF PROJECT
The project is to analyze SME sector in India and what are the different
SME products of ING Vysya bank. I have to study following under thisproject:-
What is the position of SME sector in India?
What problem SME sector facing in India.
What steps government is taking for improvement of SME sector inIndia?
What steps reserve bank of India is taking for SME
What is the role of bank in the development of SMEs?
What are the various instruments of SME finance? What steps we should take in the improvement of SMEs in our
country.
What are the various SME products of ING Vysya bank?
What are the various terms and condition of various products.
5
8/6/2019 Small and Medium Enterprise Project1
6/83
ABOUT ING VYSYA BANKING GROUP
INGs mission is to be a leading, global, client-focused, innovative andlow-cost provider of financial services through the distribution channels ofthe clients preference in market where ING can create value.
ING group originated in1990 from the merger between national- NederlandNV, the largest Dutch insurance company and NMB post bank group NV.Combining roots and ambitions, newly formed company calledinternational Nederland group. Market circles soon abbreviated the nameto I-N-G. The company followed suit by changing the statutory name to
ING group N.V.
SINCE 1991, ING has grown from a Dutch company with someinternational business to a multinational with Dutch roots.
ING group is a global financial services company of Dutch originwith 150 years of experience, providing a wide array of banking,insurance and assets management services in over 50 countries.
Over 113000 employees work daily to satisfy a broad customer base.Individuals, families, small business, large corporations, institutionsand governments.
Based on market capitalization, ING is one of the 20 largest financialinstitutions worldwide and in the top-10 in Europe.
ING is the number one financial services company in the Beneluxhome market. ING services its retail clients in these markets with awide range of retail-banking, insurance and asset management.
In their wholesale banking activities they operate worldwide, but alsowith a primary focus on the Benelux countries.
In the United States, ING is a top-5 provider of retirement servicesand life insurance. In Canada, they are the top property and casualtyinsurer.
6
8/6/2019 Small and Medium Enterprise Project1
7/83
ING Direct is a leading direct bank with over 11 million customers innine large countries. In the growth market of Asia, central Europe andSouth America they provide life insurance.
ING group is also a large asset manager with assets undermanagement of almost EURO 500 billion.
ING distinguishes itself internationally as a provider of employeebenefits i.e. arrangements of non-wage benefits, such as pensionplans for companies and their employees.
Another specialization is ING Direct, an internet and Directmarketing concept with which ING is rapidly winning retail.
Furthermore, the company differentiates itself from other financialservices providers by successfully establishing life insurancecompanies in countries with emerging economies, such as Korea,Taiwan, Hungry, Poland, Mexico and Chile.
VYSYA BANK
Vysya bank comes into existencein the year 1930. when the team ofvisionaries came together to found a bank that would extend a helping hand
to those who werent privileged enough to enjoy banking services, vysyabank opened its very first branch and started its operations from Bangalorecity. With a span of time it gained its strong existence in south India. Its
been a long journey since then and the bank has grown in size and stature toencompass every area of present-day banking activity and has carved adistinct identity of being Indias premier private sector bank. The bank maderapid strides to reach the coveted position of being the number one privatesector bank.
ING VYSYA GROUP IN INDIA
In India vysya is into following area of services:-
Banking
Life insurance
Mutual funds
7
8/6/2019 Small and Medium Enterprise Project1
8/83
INTODUCTION
Small and medium enterprise (SMEs) in India has a very important place inthe Indian economy. Their contribution in terms of production, export,
export, employment generation and all round growth of the country is wellknown. The role of SME sector in the nation building is well recognized notonly in India, but also across the globe. The industrial engines of Japan,china, US, Germany and Taiwan are also driven by the SME sector.
Finance/credit is the most critical component in any business process. Anyindustrial sector cannot work to its full capacity without adequate flow offunds. The SME sector is working with low capacity utilization, which,however, has now improved from 33.34% to around 52% percent. Stillthese remain a vast scope for enhancing growth and employment generation.
SMEs occupy a place of strategic importance in the Indian economy.however since the early 1990s, Indian SMEs have been exposed to intensecompetition due to the accelerated process of globalization. Therefore, thesurvival as well as growth of SMEs is under strain. However, globalizationhas also brought, in its wake, newer opportunities for SMEs.
8
8/6/2019 Small and Medium Enterprise Project1
9/83
SMALL AND MEDIUM ENTERPRISE
There is no universal definition ofSME(small and mediumenterprise) different countries follow different definition for the
SME sector. Some use the criteria of turnover; some use thenumber of employees whereas in certain countries, investment inthe enterprise is used to define an SME.
In India,the definition of SMEs has always been based on the productiveplant and machinery. Currently, a unit having gross investment inproductive plant and machinery of up to Rs. 1 crore is classified as an
SME enterprise. In certain sector such as drugs and pharmaceuticals,hosiery, stationary, hand tools, etc, this limit has been raised to Rs. 5 crore
in the past few years. This move has given a fillip to the potential for growthin this sector.
SMES HAVE CERTAIN COMMON CHARACTERISTICS, SOME
OF WHICH ARE HILIGHTED BELOW:
(a) Born out of individual initiatives & skills
SME startups tend to evolve along a single entrepreneur or a small
group of entrepreneurs; in many cases; leveraging on a skill set. There areother SMEs being set up purely as a means of earning livelihood. Theseinclude many trading and retail establishments while most countriescontinue SMEs to manufacturing services, others adopt a broader definitionand include retailing as well.
(b) Greater operational flexibility
The direct involvement of owner(s), coupled with flat hierarchical structuresand less number of people ensure that there is greater operational flexibility.Decision making such as changes in price mix or product mix in response tomarket conditions is faster.
(c) Low cost of production
SMEs have lower overheads. This translates to lower cost of production, atleast up to limited volumes.
9
8/6/2019 Small and Medium Enterprise Project1
10/83
(d) High propensity to adopt technology
Traditionally SMEs have shown a propensity of being able to adopt andinternalize the technology being used by them.
(e) High capacity to innovate export:
SMEs skill in innovation, improvisation and reverse engineering arelegendary. By being able to meet niche requirements, they are also able tocapture export markets where volumes are not huge.
(f) High employment orientation:
SMEs are usually the prime drives of jobs, in some cases creating up to80%. Jobs SMEs tend to be labour intensive per se and are able to generatemore jobs for every unit of investment, compared to their biggercounterparts.
(g) Utilization of locally available human & material resources
SMEs provide jobs locally and hence utilize manpower available locally.Since it is available for them to transport materials over long distances, theyoften improvise with materials, which are available locally.
(h) Reduction of regional imbalances
Unlike large industries where divisibility of operations is more difficult,SMEs enjoy the flexibility of location. Thus, any country, SMEs can befound spread virtually right across, even through some specific location semerge as clusters for units of a similar kind. Nevertheless, the spread ofSMEs is a fact, which enhances their attraction from a national or regional
policy.
10
8/6/2019 Small and Medium Enterprise Project1
11/83
SIGNIFICANCE OF SMEs
SMEs is considered the engine of economic growth in both developedand developing countries, as they:
Provide low cost employment since the unit cost of persons employedis lower for SMEs than for large-size units. Assist in regional and local development since SMEs accelerate rural
industrialization by linking it with the more organized urban sector.
Help achieve fair and equitable distribution of wealth by regionaldispersion of economic activities.
Contribute significantly to export revenues because of the low-costlabour intensive nature of its products.
Have a positive effect on the trade balance since SMEs generally useindigenous raw materials.
Assist in fostering a self-help and entrepreneurial culture by bringingtogether skills and capital through various lending and skillenhancement schemes.
Impart the resilience to withstand economic upheavals and maintain areasonable growth rate since being indigenous is the key to
sustainability and self-sufficiency.
11
8/6/2019 Small and Medium Enterprise Project1
12/83
IMPORTANCE OF SMEs IN VARIOUS ECONOMIES OF
WORLDSmall and medium enterprise has always the engine of growth for every
country, in developing as well as in transition economies. Their role inbuilding a solid industrial base can be gauged from that they represent over80 percent of industrial enterprises of most developing countries. They alongwith micro enterprises have been identified as high potential sector foremployment generation and sources of livelihood to millions of people inAsian, African and Latin American countries.
There is a popular misconception that small and medium enterprises do notcount for much in developed countries. Facts, however, reveal that they arealmost as dominant in the economies of the most developed countries as inthe least developed countries.In the EU, SMEs comprise approximately 99% of all firms and employ
between them about 65 million people.Around 99 percent of seven million units in Japan one of the mostindustrially advanced nations of the world are small and mediumenterprises. They account for about 80% of total employment of around 55million persons. Around 52% of the Japanese total exports emerge from thissector.
Similarly, small and medium enterprises constitute around 99% of allbusinesses, employ over half of the workforce and generate 54% of the salesrevenues in USA.
. The following Table reflects the contribution of SMEs in some of thedeveloped economies.
COUNTRY CONTRIBUTION IN TERMS OF
INCRIMENTAL SHARE IN
EMPLOYMENT
MANUFACTURING UNIT
OUTPUT
USA 67% 61%
JAPAN 80% 72%
FRANCE 53% 80%
KOREA 74% 61%
12
8/6/2019 Small and Medium Enterprise Project1
13/83
CONTRIBUTION OF SMEs IN INDIA
In the Indian context, primarily the concept of Small Scale Industry has been
in vogue and the medium enterprise definition is of more recent origin. AnSSI is defined on the basis of limit of historical value of investment in plant& machinery, which at present is up to Rs.10 million. However, in respect ofsome specified items, this investment limit has been hiked to Rs.50 million.For the recently announced Small and Medium Enterprises Fund, the GoIhas approved the limit of investment in plant and machinery above Rs.10million and up to Rs.100 million for defining a unit as a Medium Enterprise.Amongst the developing countries, India has been the first to display specialconsideration to SSIs and basic focus has been to make economical use ofcapital and absorb the abundant labour supply in the country.
Over the years, the SME sector in India has continued to remain animportant sector of the economy with its noteworthy contribution to the
Gross domestic product
Industrial production
Employment generation
Export earningAs a record, over the last three decades, SME shave emerged as one or themost vibrant sector of the economy, accounting for about 95 % of the
industrial unit in the country; 39.52% of the value addition inmanufacturing; 34.03 of the national export; and 6.81% of the GDP.
Contribution of Indian SSIs
Over the years, the SSI sector in India has continued to remain an importantsector of the economy with its noteworthy contribution to the gross domestic
product, industrial production, employment generation and exports. As perthe Third All India Census of SSIs (2001-02), there were 10.52 million SSIunits in the country, of which 1.37 were registered and 9.15 unregistered
units? For the year ended March 2004, the said number increased to 11.52million, providing employment to 27.40 million persons and contributing anoutput of over Rs.3, 480 billion in FY2004.
13
8/6/2019 Small and Medium Enterprise Project1
14/83
(a)Performance of Small Scale Sector
Year No. of units(million nos.)
Production(Billion Rs.)
(at currentprices)
Employment(Million nos.)
Exports(Billion Rs.) (at
current prices)
1993-94 2.38 2416.48 13.93 253.07
1994-95 2.57 2988.86 14.65 290.68
1995-96 2.65 3626.56 15.26 364.70
1996-97 2.80 4118.58 16.00 392.70
1997-98 2.94 4626.41 16.72 444.42
1998-99 3.08 5206.50 17.15 489.79
1999-00 3.21 5728.87 17.85 542.00
2000-01 3.37 6454.96 18.56 599.78
The Tenth Five Year Plan for the Indian economy has set a target of 8percent growth per annum in GDP and to bring down the poverty ratio to 11percent over the next decade. The Plan has also noted that achieving andsustaining such ambitious growth targets would require adequate attention tosmall and medium enterprises which have great potential to offer wageemployment. In order to pursue the growth with employment agenda, heavyreliance is placed on the SME sector.
% of SSI in total exports (2003-2004)
Product % of SSI in total exports
Sports goods
Readymade garments
Woolen garments, knitwear
Processed foods
Marine products
Leather products
Plastic products
100
90
35
65
29
80
45
14
8/6/2019 Small and Medium Enterprise Project1
15/83
Cosmetic, basic chemicals&pharmaceutical products
Engineering goods
55
30
MAJOR PROBLEM FACED BY SMEs IN INDIA
Major problems/challenges faced by SME sector in India are:
Availability of collateral free loans
Cost of loans
Delayed payments
Marketing
Challenges emanating from WTO related issues
Sickness
1. Collateral
The limit for collateral free loans to tiny sector is Rs. 0.5million and that forother SSI units was Rs. 0.1 million. This limit has since been raised to Rs.0.5 million for other SSI units also. Many small-scale entrepreneurs arefacing difficulties in providing collateral security as per the requirements ofthe financing banks. The limit of 0.5 million has been further increased toRs.1.5 million in respects of SSI units with good track record and financial
position. The problem is addressed to a certain extent with the introductionof the Credit Guarantee Fund Trust Scheme under which collateral free loansup to a limit of Rs. 2.5 million are guaranteed.
2. Cost of Loans
The high cost of borrowings was a major constraint affecting the growth ofthe sector. The Bank Rate changes by the RBI combined with CRR and reporate charges have emerged as signaling devices for interest rate changes. Thereduction in Bank rate announced in the last Monetary and Credit Policy oroutside the policy from time to time has resulted in a consequentialreduction in the lending rates. Banks have now the flexibility to offer
15
8/6/2019 Small and Medium Enterprise Project1
16/83
lending rates on a fixed rate or on a floating rate. The reduction in interestrates and the offer of floating rates will help the SSI units to procure funds atlower costs than what was prevailing in earlier years.
3. Delayed Payments
Considerable delay in settlement of dues/payment of bills by the large-scale buyers to the SSI units adversely affected the recycling of funds andbusiness operation of SSI units. Though the Government has enacted theDelayed Payments Act, many of the SSI units are reluctant to pursue casesagainst major buyers. The Act since amended in 1998 has made itcompulsory that the payment of SSI suppliers should be made within 120days. To improve the plight of SSI entrepreneurs due to delayed payments,steps for strengthening and popularizing factoring services, without recourseto the SSI suppliers may have to be thought of seriously.
The banks have also been advised about sub-allotting overall limits to thelarge borrowers specifically for meeting the payment obligations in respectof purchases from SSI. It is expected that these measures will improve thesituation of delayed payments.
4. Marketing
Marketing remains the most critical area for the SSI Sector as some of theunits are very small and so is there output individually. Adopting consortiumapproach could best solve the marketing problems of the SSI sector? Besidesfinance for marketing related activities, the Development Institutions/SSI
Associations, etc could make dissemination of requisite information ondemand pattern, futuristic trend, etc. available.
5. Challenges emanating from the WTO
To face the challenges emanating from the WTO agreement, SSI unitsirrespective of their size need technology up-gradation and modernization.Awareness about the implications of WTO agreement has to be created. The
preparation for competitiveness needs to be done by the Government as wellas entrepreneurs and the corporate. The Government should provide goodinfrastructure and create level playing field for the industry. Considering the
fund constraints with SSI Sector Government has introduced the creditlinked capital subsidy scheme for Technology up gradation of Small ScaleIndustries under which 12% back ended capital subsidy would be admissibleon the loans advanced to the SSIs by banks/financial institutions fortechnology up gradation in certain select sectors.
16
8/6/2019 Small and Medium Enterprise Project1
17/83
6. Sickness
Growing incidence of sickness of SSIs is yet another area of concern. Whenthe sickness prolongs it leads to the closure of units and unemployment.Lately mortality of the SSI units has been showing increasing trend. This has
wider implications including locking of funds of the lending institutions,loss of scarce material resources and loss of employment. The number ofsick SSI units as a percentage to the total number of SSI units is around 10.The number of units identified as potentially viable as a percentage to totalsick SSI units is around 8. The causes of sickness are both internal andexternal. The major causes are limited financial resources, lack oforganizational, financial and management skills and expertise, diversion offunds, diversification/expansion before stabilization, non-availability of
power supply shortage of raw materials, marketing difficulties, delayed andinadequate credit, globalization and liberalization of the economy, obsoletetechnology, inadequate infrastructure, etc. With a view to ensuring that
potentially viable sick SSI units are provided with the timely and adequateassistance by all agencies concerned, there are State Level Inter InstitutionalCommittees (SLIIC) constituted in each state involving State Government,Financial institutions, commercial banks and SIDBI. SSI Associations arealso invited to the meetings of this committee. A sub-committee of SLIIChas also been set up in each state to examine the individual cases referred toit for rehabilitation. To address the incidence of growing sickness in thesector RBI has recently issued a complete set of revised guidelines drawn up
on the basis of the recommendations of a Working Group constituted by itfor the purpose.
7.LACKOF TECHNOLOGICAL ADVANCEMENT UPGRADATION:
to compete on the international scale, reasonable economies of scale andcontinuous investment in technology up gradation have become a necessity.Technology is key element contributing to productivity quality,competitiveness and market acceptability of products the very rapid rate oftechnology advancement requires the learning and application updatedtechnology in design and manufacture of products for retaining aninternational competitive edge and in this major respect SMEs are lagging
behind and are suffering severely mainly because of the low capital base andsalability of the operation.
8. REACH OF NATIONALIZED BANK
These are limited by informational biases and as per the current survey bythe FICCI the present network of the specialized SME bank branches across
17
8/6/2019 Small and Medium Enterprise Project1
18/83
the country are sufficient to cater less than 5% of the total SSI units in thecountry that stands at around 3.75 million units. That has resulted into
private and cooperative banks better off despite their higher rates because ofthe relative absence of days-functionalities in them. Specialized FIs are the
best off in this regard like SIDBI to cater needs of the industry.
STEPS FOR SMOOTHING OF SME LENDING BY BANKS
in order to ensure working of the small and medium enterprise, the followingsteps could be taken as remedial measures by the bank to boost the growthof the SMEs and to meet their financial problems.
1. COLLATERAL
Existence of collateral that can be offered to bank could, therefore, lookat collateral when pursuing the question of SME lending. It can also bestated that the borrower s willingness to accept a collateralized loancontract offering lower interest( relative to unsecured loans) will beinversely related to its default risk.
However, not all SMEs would be able to offer collateral to banks.Hence, reserve bank of India (RBI) allows banks, with a good track
record and financial position on SSI units, to dispencre with a good tackrecord and financial position on SSI units, to dispence with collateralrequirements for loans up to Rs.25 lakhs.
2. RELATIONSHIP
The length of the relationship of a bank and its SME customer isalso important factor in reducing information asymmetry, as anestablished relationship helps to creates economies of scale ininformation asymmetry, as an established relationship helps to createeconomies of scale in information production. A relationship between asme and a bank of considerable duration allows the bank to build up agood picture of the SME, the industry within it operates and the caliber ofthe people running the business. The closer the relationship, the better arethe signals received by the bank regarding managerial attributes and
business prospects.
18
8/6/2019 Small and Medium Enterprise Project1
19/83
3. QUALITY OF INFORMATION: -
SMEs are required to provide accurate and qualitative information to thebanks for them to understand a reliable risk assessment. Accurate riskassessment obviously relies upon good information regarding the smeand its prospects. Hence it is suggested that bank should make efforts toencourage SMEs to improve the quality of information provide.
4. CUSTOMER CONSIDERATION: -
the SME market is somewhat different to the corporate market in thatcorporate customers generally have a wide range of financing options tochoose from and are not as dependent on the bank financing as in thecase with SMEs can take necessary steps, with the aid of publicinitiative pressure on the case of SME lending.
19
8/6/2019 Small and Medium Enterprise Project1
20/83
GOVERNMENT INITIATIVE FOR IMPROVEMENT OF
SME IN INDIA
1. ESTABLISHMENT OF SIDBI
There exists a well-structured institutional set up both in the public andprivate sectors to cater to the credit needs of SMEs. The Small IndustriesDevelopment Bank of India (SIDBI) was set up in April 1990, as the
principal financial institution for financing and development of SSIs andcoordination of institutions engaged in similar activities. A fair code of
practices has been adopted by the Bank in its day-today operations whilefunctioning as an apex financial institution for the sector.
Four basic objectives are set out in the SIDBI Charter. They are:
Financing Promotion Development Co-ordination
Development outlook
The major issues confronting SSIs are identified to be:
Technology obsolescence Managerial inadequacies Delayed Payments Poor Quality Incidence of Sickness Lack of Appropriate Infrastructure and Lack of Marketing Network Lack of technological advancement Reach of nationalized bank
20
8/6/2019 Small and Medium Enterprise Project1
21/83
2. SME RATING AGENCY OF INDIA LIMITED(SMERA)
SMERA is a joint initiative by SIDBI, Dun & Bradstreet Information
Services India Private Limited (D&B), Credit Information Bureau (India)Limited (CIBIL and several leading banks in the country.
SMERA is the country's first rating agency that focuses primarily on theIndian SME segment. SMERA's primary objective is to provide ratings thatare comprehensive, transparent and reliable. This would facilitate greaterand easier flow of credit from the banking sector to SMEs.
WHAT IS SME RATING
SMERA Rating is an independent third-party comprehensiveassessment of the overall condition of the SME,conducted by SME Rating Agency of India Limited
It takes into account the financial condition and several qualitativefactors that have bearing on creditworthiness of the SME
SMERA Rating consists of 2 parts, a Composite Appraisal/Conditionindicator and a size indicator
SMERA Rating categorizes SMEs based on size, so as to enable fair
evaluation of each SME amongst its peers
An SME unit having SMERA Rating would enhance its market standingamongst trading partners and prospective customers
BENEFITS
1. Wide Recognition and Acceptance
2. MOU with Banks
3. Favorable borrowing terms
4. Faster Access to Credit
5. Lower Rating Fees
6. D-U-N-S NO
7. SMERA: An initiative of leaders
8. Fair evaluation amongst peers
21
8/6/2019 Small and Medium Enterprise Project1
22/83
9. Benefits to SME & SSI Units
10. Benefits to Banks
11. Industry-benchmarked ratings
3. SMALL ENTERPRISE FINANCIAL CENTERS (SEFC)
In another policy measure, the existing branches of SIDBI in select clusterhave been designated as SEFC that would now take up co-financing of termloan requirement of SSI along with bank branches. Further, the expertise ofSIDBI in appraisal of credit requirement of SSI could also be leaver aged bythe commercial banks.
4. SME FUNDSIDBI is also currently operating a Rs. 10000s crores SME fund for makingavailable adequate and timely credit to SMES. the fund is operational sinceApril1,2004 and is envisaged to be utilized over the next, two years i.e.financial year 2005 and 2006.direct assistance from fund is extended bySIDBI at an interest rate of 2% below the banks PLR i.e. 9.5%
5. CREDIT LINKED CAPITAL SUBSIDY SCHEME (CLCSS)
the government of India has launched the credit linked capital subsidyscheme (CLCSS) , which aims at facilitating technology up-gradation ofSMEs in specified products/sub-sector.
22
8/6/2019 Small and Medium Enterprise Project1
23/83
INDIA: WORLD BANK TO SUPPORT SMALL AND
MEDIUM ENTERPRISES
WASHINGTON To support the development of Indias small and
medium enterprises (SMEs) sector, the World Bank approved a US$120million loan to the Small Industries Development Bank of India (SIDBI),backed by a Government of India guarantee. This loan is aimed atimproving SME access to finance and business development services,thereby fostering SME growth, competitiveness and employment creation.The Project is designed to improve SMEs access to finance anddevelopment, and it includes the following three components:
I) Credit facility: The credit facility will primarily address the financing
constraints faced by commercial banks, and hence, enable SME clients toaccess longer term funds needed for capital formation and technological up-gradation.
II) Risk Sharing Facility: The objective of the risk sharing facility is toimmediately accelerate commercial banks lending to SMEs, through thesetting up of an commercially viable, self sustaining guarantee facility thatwill provide partial credit risk cover to banks for their SME lending.
III) Policy and Institutional Development Technical Assistance: Thiscomponent will help address the medium term policy, regulatory andinstitutional constraints that hamper the efficiency of the SME credit marketin India. The technical assistance will be financed through proposed grantsfrom the Department for International Development (DFID), and costsharing by local counter parties.This project is an important step towards ensuring that small and mediumenterprises have a fair shot at accessing financing and other services, which
are critical to their competitiveness, says Michael Carter, the World
Banks Country Director for India. Moreover, the project will also help theprivate sector realize its full potential as an engine of growth and poverty
reduction in India.
The US$120 million loan from the International Bank for Reconstructionand Development (IBRD) is a fixed spread loan, repayable in 15 years(including a five year grace period).The all inclusive cost of this loan isaround LIBOR+40 basis points.
23
8/6/2019 Small and Medium Enterprise Project1
24/83
STEPS TAKEN BY RESERVE BANK OF INDIA
Policy Package for Stepping up Credit to Small and Medium
Enterprises --Announcements made by the Union Finance Minister
The Hon'ble Finance Minister, Government of India has announced certainmeasures in the Parliament on August 10, 2005 for stepping up credit tosmall and medium enterprises (copy of the policy package enclosed), whichare required to be implemented by all public sector banks. Accordingly,
banks may take action as under:
1. Policy Package for stepping up credit to Small and Medium Enterprises2. From SSI to SME: Defining the New Paradigm3. Measures to increase the quantum of credit to SMEs at the right price
4. Outreach of Formal Credit: Opening of New Accounts5. Nursing the Sick Units Back to Health: Debt Restructuring6 Credit Guarantee Fund Trust Scheme for Small Industries (CGTSI)8. Cluster based approach9. Setting up of Watchdogs: Monitoring and Review
1. Policy Package for stepping up credit to Small and MediumEnterprises
The small-scale industries (SSI) produce about 8000 products, contribute40% of the industrial output and offer the largest employment afteragriculture. The sector, therefore, presents an opportunity to the nation toharness local competitive advantages for achieving global dominance. Inrecognition of these aspects, the National Common Minimum Programmedmakes the following declarations for accelerating the development of small-scale sector.
"Household and artesian manufacturing will be given greater technological,investment and marketing support. Smallscale industry will be freed fromInspector Raj and given full credit, technological and marketing support.Infrastructure up gradation in major industrial clusters will receive urgentattention."
24
8/6/2019 Small and Medium Enterprise Project1
25/83
2. From SSI to SME: Defining the New Paradigm
2.1 Government policy as well as credit policy has so far concentrated onmanufacturing units in the small-scale sector. The lowering of trade barriersacross the globe has increased the minimum viable scale of enterprises. Thesize of the unit and technology employed for firms to be globallycompetitive is now of a higher order. The definition of small-scale sectorneeds to be revisited and the policy should consider inclusion of services andtrade sectors within its ambit. In keeping with global practice,. there is also aneed to broaden the current concept of the sector and include the mediumenterprises in a composite sector of Small and Medium Enterprises (SMEs).A comprehensive legislation, which would enable the paradigm shift fromsmall-scale industry to small and medium enterprises under consideration ofParliament. The Reserve Bank of India, had meanwhile set up an Internal
Group which has recommended:
"Current SSI/tiny industries definition may continue. Units with investmentin plant and machinery in excess of SSI limit and up to Rs.10 crore may betreated as Medium Enterprises (ME). The definition may be reviewed afterenactment of the Small and Medium Enterprises Development Bill. OnlySSI financing will be included in Priority Sector."
2.2 It is proposed to accept the recommendation with regard to the creditfacilities being offered by the banking sector and accordingly request theReserve Bank of India to advise the banks to frame a policy for enhancingthe flow of credit to both small and medium enterprises, within the overallframework of credit policy of banks to small and medium enterprises.
2.3. The challenges being faced by the small and medium scale sector maybe briefly set out as follows-
a. Small and Medium Enterprises (SME), particularly the tiny segment of
the small enterprises has inadequate access to finance due to lack offinancial information and non-formal business practices. SMEs also lackaccess to private equity and venture capital and have a very limited access tosecondary market instruments.
b. SMEs face fragmented markets in respect of their inputs as well asproducts and are vulnerable to market fluctuations.
25
8/6/2019 Small and Medium Enterprise Project1
26/83
c. SMEs lack easy access to inter-state and international markets.
d. The access of SMEs to technology and product innovations is alsolimited. There is lack of awareness of global best practices.
e. SMEs face considerable delays in the settlement of dues/payment of billsby the large-scale buyers.
With the deregulation of the financial sector, the ability of the banks toservice the credit requirements of the SME sector depends on the underlyingtransaction costs, efficient recovery processes and available security. Thereis an immediate need for the banking sector to focus on credit and financerequirements of SMEs.
3. Measures to increase the quantum of credit to SMEs at the right price
3.1 Public Sector Banks will be advised to fix their own targets for fundingSMEs in order to achieve a minimum 20% year on year growth in credit toSMEs. The objective is to double the flow of credit from Rs.67,600 crore in2004-05 to Rs.135,200 crore to the SME sector by 2009-10, i.e. within a
period of 5 years.3.2 Public Sector Banks will be advised to follow a transparent rating systemwith cost of credit being linked to the credit rating of the enterprise.
3.3 SIDBI in association with Credit Information Bureau(India) Ltd.(CIBIL)will expedite setting up a credit rating agency.
3.4 SIDBI in association with Indian Banks Association (IBA) wouldcollect and poo common data on risk in each identified cluster and develop
an IT-enabled application, appraisal and monitoring system for small(including tiny) enterprises. This would help reduce transaction cost as wellas improve credit flow to small (including tiny) enterprises in the clusters.
3.5 The National Small Industries Corporation has recently introduced aCredit Rating Scheme for encouraging SSI units to get them credit rated byreputed credit rating agencies. Public Sector Banks will be advised to
26
8/6/2019 Small and Medium Enterprise Project1
27/83
consider these ratings appropriately and as per availability, and structuretheir rates suitably.
3.6 SIDBI has developed a Credit Appraisal & Rating Tool (CART) as wellas a Risk Assessment Model (RAM) and a comprehensive rating model forrisk assessment of credit proposals for SMEs. Public sector banks will beadvised to take advantage of these models as appropriate and reduce theirtransaction costs.4. Outreach of Formal Credit: Opening of New Accounts
The commercial banks (including regional rural banks) with over 67,000branches will make concerted efforts to provide credit cover on an average
to at least 5 new tiny, small and medium enterprises at each of their semiurban/urban branches per year5. Nursing the Sick Units Back to Health: Debt Restructuring
Reserve Bank will issue detailed guidelines relating to debt restructuringmechanism so as to ensure restructuring of debt of all eligible small andmedium enterprises at terms which are not less favorable than the CorporateDebt Restructuring (CDR) mechanism in the banking sector. Therestructuring would follow upon a request to that effect from the borrowingunit. All accounts, except those classified as loss assets will be eligible forrestructuring, provided the industrial units are viable or potentially viable.
Based on the Reserve Banks guidelines, banks may formulate, with theapproval of their Boards of Directors, more liberal policies relating torestructuring of accounts. Until the banks formulate their own policies,Reserve Banks guidelines will be operative.
A one-time settlement scheme to apply to small-scale NPA accounts in thebooks of the banks as on March 31, 2004 will be introduced. The schemewill be in force up to March 31, 2006.
27
8/6/2019 Small and Medium Enterprise Project1
28/83
6. Facilitative Measures
Reserve Bank had issued a detailed master circular on March 2005 on thetime to be taken for disposing of loan applications of SSI units, the limit upto which banks are obliged to grant collateral-free and composite loans,norms for computation of working capital credit limits to SSI units, openingof at least one specialized SSI branch in each district, etc. Taking theseguidelines as indicative minimum, banks will formulate a comprehensiveand more liberal policy relating to advances to SME sector. Until the banksformulate such a policy, the extant instructions of Reserve Bank will beapplicable to advances granted or to be granted by banks to SME units.
7. Credit Guarantee Fund Trust Scheme for Small Industries (CGTSI)
At present, Member Lending Institutions (MLIs), like banks, are providedguarantee cover of 75% of the amount of default by CGTSI,I respect of termloan and/or working capital facilities up to Rs.25 lakh extended by the MLIsto new and existing SSI units/IT/software units/small scale service businessenterprises (SSSBEs), without collateral security and/or third partyguarantee. One-time guarantee fee of 2.5% and annual service fee of 0.75%of the credit facility sanctioned are currently charged by CGTSI from theMLIs. In order to reduce the cost of guarantee to the weaker segments of the
borrowers, particularly tiny units, the CGTSI will be advised to reduce theone-time guarantee fee from 2.5% to 1.5% for all (i) loans up to Rs.2 lakh,(ii) eligible women entrepreneurs, and (iii) eligible borrowers located in the
North Eastern regions (Sikkim) and Jammu & Kashmir. Further, publicsector banks will be encouraged to absorb the annual service fee in excess of0.25% in respect of guarantee for all (i) loans up to Rs.2 lakh, (ii) eligiblewomen entrepreneurs, and (iii) eligible borrowers located in the NorthEastern regions (Sikkim) and Jammu & Kashmir.
8. Cluster based approach
Cluster based approach for financing SME sector offers possibilities ofreduction of transaction costs and mitigation of risk. About 388 clusters havealready been identified. Cluster based approach now be treated as a thrustarea. Banks will increasingly adopt the cluster-based approach for SMEfinancing. To broaden the financing options for infrastructure developmentin clusters through public private partnership, SIDBI will formulate ascheme in consultation with the stakeholders.
28
8/6/2019 Small and Medium Enterprise Project1
29/83
SIDBI has already initiated the process of establishing Small EnterprisesFinancial Centers in select clusters. Risk profile of each cluster would bestudied by a professional credit rating agency and such risk profile reportswould be made available to commercial banks. Each lead bank of a districtwill consider adoption of at least one cluster9. Setting up of Watchdogs: Monitoring and Review
The following supervisory arrangements will be ensured:
a. The existing institutional arrangements for review of credit to SSI sectorlike the Standing Advisory Committee in Reserve Bank of India and cells atthe banks head office level as well as at important regional centers will bemade more rigorous and regular. They will also review the flow of credit to
small (SSI) and medium enterprises.
b. At the Regional offices, the Reserve Bank will constitute empoweredcommittees with the Regional Director of the Reserve Bank as the Chairmanto review the progress in SME financing and rehabilitation of sick small(SSI) and medium units and to coordinate with other banks/financialinstitutions and the state governments in removing bottlenecks, if any, toensure smooth flow of credit to the sector. The said Regional levelcommittees may decide on the need to have similar committees atcluster/district levels.
c. The banks will ensure specialized SME branches in identifiedclusters/centers with preponderance of small enterprises to enable theentrepreneurs to have easy access to the bank credit and to equip bank
personnel to develop requisite expertise. The existing specialized SSIbranches may be also be redesigned as SME branches.
d. Boards of banks will be advised to review the progress in achieving theself-set targets as also rehabilitation and restructuring of SME accounts on a
quarterly basis to ensure that the required emphasis is given to this sector.
e. For wider dissemination and easy accessibility, the policy guidelinesformulated by Boards of banks as well as instructions/guidelines issued byReserve Bank will be displayed on the respective websites of Public SectorBanks as well as website of SIDBI. The banks would also be advised to
prominently display all the facilities/schemes offered by them to the smallentrepreneurs at each of their branches.
29
8/6/2019 Small and Medium Enterprise Project1
30/83
ROLE OF BANKS IN THE DEVELOPMENT OF SMES
After several decades, the focus on the small and medium enterprises hasshifted from offering sops, to assessing their creditability and debtrepayment capabilities. The government and RBI have announced policy
packages to this effect and rating agencies have spurted to help banks andfinancial institutions make SME lending a profitable venture.
The small and medium enterprise (SME) sector has come into sharp focuswith a policy package announced by the government recently, envisaging
public sector banks to fix their own targets for funding this sector in order toachieve a minimum 20 per cent year-on-year growth in credit to the sector.In addition, these banks are required to follow a transparent rating systemwith cost of credit linked to the credit rating of the enterprise. Further, the
package requires commercial banks to make concerted efforts to providecredit cover on an average to at least five new tiny, small and mediumenterprises per year.
Though it appears to be a tall order for the banking sector, the guidelineshave been embraced with enthusiasm. Several banks, including foreign
banks like Citibank and Standard Chartered Bank have set up special cellsand branches dedicated to SME lending.
The SME sectors preferred by bankers for lending include bulk drugs,
knitwear and auto-ancillary goods. Textiles, pharmaceutical companies,chemicals and dyes sectors also continue to find favour with banks as these
businesses are thriving.
Enterprises like gems and jewellery, seafood processing, sports good etc arenot preferred, as banks have suffered huge non-performing assets on accountof lending to these sectors over the past few years.
However, the new government package is accompanied by reworkedguidelines from the Reserve Bank of India on the debt restructuringmechanism for SMEs with outstanding of up to Rs 10 crore. This can help
banks assess the SMEs, which they now perceive as untouchable.
According to the RBI guidelines, banks could decide the acceptable viabilitybenchmark, consistent with the unit becoming viable in seven years and therepayment period for restructured debt not exceeding 10 years.
30
8/6/2019 Small and Medium Enterprise Project1
31/83
Accounts classified by banks as loss assets would not be eligible forrestructuring. Additional finance would be treated as a standard asset in allaccounts up to a period of one year after the date when first payment ofinterest or of principal, whichever is earlier, was due. RBI has also asked
banks to formulate a debt-restructuring scheme for SMEs. These guidelinesare geared to help banks renew their focus on this sector.
Crisil has stepped in to provide a rating service for the SME sector.According to this rating programmed, SMEs would be rated on a scale ofone to eight, with scale one indicating the highest credit quality and the scaleeight, hinting at default possibilities. The ratings assigned to SMEs wouldalso function as a self-improvement tool for them.
To top all initiatives, SBI, ICICI Bank and Standard Chartered Bank, have
agreed to join hands with the Small Industries Development Bank of India(SIDBI) to float a rating agency for the SME segment. The rating agency,Small and Medium Enterprises Rating Agency (SMERA), inauguratedrecently, will rate the companys overall strength, unlike most ratingagencies whose core business are to rate debt instruments.
While Sidbi will have largest share of 22 per cent followed by SBI, ICICIBank and international credit Information Company Dun & Bradstreet,which would be at 10-13 per cent. Five other public sector banks hold about28 per cent. These are Punjab National Bank, Bank of Baroda, Bank of
India, Canara Bank and Union Bank of India. Credit Information Bureau ofIndia (CIBIL) is also likely to join the company shortly.
Most small and medium companies rely on extremely expensive fundssourced from the unorganized financial sector. Part reason why bank creditis denied to many small units, despite repayment capacity not being suspect,is that lenders often do not have the capability to assess their risk. Ratingagencies are a step in this direction.
With a brand new government package, reworked guidelines for lending bythe RBI and the facility of rating enterprises not just for their creditabilityand debt repayments, banks can now refocus on the SME sector.
31
8/6/2019 Small and Medium Enterprise Project1
32/83
INSTRUMENTS OF SME FINANCINGIn spite of various initiatives taken by the Government, banks and FIs, SMEsface certain challenges, which are universal in nature. These problems relate
to the issue of collaterals, cost of loans, delay in receivables, obsoletetechnology, marketing, etc. In order to address the above problems in theIndian context, some innovative instruments of financing have beenintroduced and institutional set up created. Some of the major initiativesinclude -
Credit Guarantee Fund Trust for Small Industries
. Government of India, in association with SIDBI, has set up a CreditGuarantee Fund Trust for Small Industries (CGTSI) to implement theguarantee scheme. The corpus of the Trust is proposed to be enhanced from
the present level of Rs.7 billion to Rs.25 billion. The main objective of theTrust is to facilitate hassle free credit to the SSI sector and encourage banksto shift from security based lending to merit based lending. SSI loans up toRs.2.5 million are eligible to be covered under the scheme and CGTSI hasso far extended guarantees to member lending institutions for around 18,000units in the last three years of its operations, covering a loan amountof Rs.3 billion. The CGTSI contemplates to triple its business in the currentyear, as compared to the previous year. Some new guaranteeing techniqueslike mutual credit guarantee scheme on the lines of similar schemes in Italy
and other European countries are also being developed.Risk Sharing Facility
While the CGTSI extends guarantee cover for the loans up to Rs.2.5 million,there is a need for offering guarantees for loans extended by banks beyondthe above limit. Under a World Bank led Project on Financing andDevelopment of SMEs, a possibility of introducing a Risk Sharing Facilityfor the SME sector is being examined, wherein the risk in lending by banksto SMEs could be shared on pari passu basis between the originating banksand the suggested entity. Of course, the facility would be available at a cost.
This mechanism, as and when in place, would mitigate the credit risks of thebanks and upscale SME financing.
Venture Capital Funding
. With regard to new sources of financing, many countries are consideringliberalizing the rules regarding venture capital investments. In India also,various measures have been taken in this direction. SIDBI, along with some
32
8/6/2019 Small and Medium Enterprise Project1
33/83
other institutions, has taken a lead in promoting venture capital funding inthe country. The Bank has contributed in setting up of 16 State level /Regional level funds; set up a National Fund for Software and IT Industrywith a corpus of Rs.1 billion and recently launched a new SME GrowthFund of Rs.1 billion corpus. This Fund would focus on units in
pharma, biotech, light engineering, software and other KBIs. The SMEGrowth Fund corpus is contemplated to be enhanced to Rs.5 billion.Micro Credit
Realizing the potential of micro finance in stimulating economic growth,SIDBI has laid emphasis on increasing the capacity of the sector to handlecredit and growth in the disbursements of micro finance. SIDBI Foundationfor Micro Credit, presently functioning as a Department of SIDBI, hassanctioned an aggregate financial assistance of Rs.710 million in FY2004.
The cumulative number of beneficiaries assisted under the programmer inthe last 4 years aggregated over 1 million, mostly women. The outstanding
portfolio under the programmed as at end-March 2004 is likely to beincreased from a level of Rs.910 million to Rs.2 billion by the end of thisyear.Small and Medium Enterprises Fund
The most important amongst the sect oral initiatives taken by the GoI andSIDBI is launching of an SME Fund of Rs.100 billion, with a view to givingimpetus to the fund flow to the SME sector. SIDBI has been advised tostructure the Fund and its operations have commenced with effect fromApril 2004. Under the Fund, assistance is being provided to SMEs at aninterest rate of 200 basis points below the Banks PLR. Direct assistance is
being extended to SMEs through SIDBIs own offices at 9.5 percent rate ofinterest as also by way of providing refinance to the primary lendinginstitutions. Refinance to SFCs is available in the interest rate band of 7.5
percent to 8 percent. The SME Fund provides for routing of assistance,besides SFCs, through commercial banks as well. The Fund, besides upscaling the flow of assistance to SMEs, addresses the issue of cross sector
parity in the cost of loans.
33
8/6/2019 Small and Medium Enterprise Project1
34/83
Setting up of a Dedicated Credit Rating Agency for SMEs
In order to address the demand side issues of credit and provide comfort tothe bank officials, initiatives have been taken to support the mechanisms ofinformation sharing and credit rating. With a view to providing creditenhancement and comfort to the bank officials at the field level in theirtaking bona fide credit decisions, SIDBI has decided to launch a dedicatedcredit rating agency for SMEs in association with leading public sector
banks. The Bank is in dialogue with select public sector banks and creditrating agencies for this purpose and the proposed entity is likely tocommence its operations during the current year..Portfolio Purchase Scheme / Asset Securitization
With a view to widening the scope of assistance to SMEs, the process of
asset securitization offers opportunities to purchase the SME portfolio fromoriginators and channels funds to the sector. The portfolio so purchased can
be either retained by the purchaser or sold to the investors in the capitalmarkets through structuring of suitable instruments. The Government ofIndia has recently permitted SIDBI to undertake business through assetsecuritization.
34
8/6/2019 Small and Medium Enterprise Project1
35/83
IDENTIFICATION & CLASSIFICATION OF SOURCES OF FUNDS
IN INDIA FOR SME DEVELOPMENT
India has nearly 3 million SMEs, which account for almost 50 percentindustrial output and 42 percent of Indias total export. They constitute themost important employment generating sector and an effective tool for
balanced regional development. They account for 50 percent of privatesector employment and 30-40 percent of value addition in manufacturing.They produce a diverse range of products (about 8000) including consumeritems, and capital and intermediate goods. As the nations integrate into aglobal village, these SMEs will have to respond accordingly, and thusdeserves special attention. To enable SMEs to overcome their technological
backwardness and to have easier access to new technologies, they need to begiven an environment where they have easier access to funds. This report
identifies the various sources of funds available for SME development(scale up, innovation or R&D, diversification or new initiatives, start ups)and their applicability: -
1. Equity funds2. Venture capital3. Strategic investors4. Financial Institutions5. Non-Banking financial companies
A detailed report on the Institutions providing the funds consists of:-1. Client / opportunities the institution be suited to :a. Size of investment/s pool
b. Current exposurec. Mode of financing2. Size of investments per deal (range):3. Paybacka. Tenure
b. Rates of return
4. Collateral expected5. Invested selection criterion6. SWOT analysis of the entity external and internal issuesA grid has been prepared which differentiates between institutes (investors)on the basis of investor selection criteria, average size & range ofinvestments, pool of funds, recommendations and opportunities offered.
35
8/6/2019 Small and Medium Enterprise Project1
36/83
INSTITUTIONAL FINANCE FOR SMALL & MEDIUM
ENTERPRISE (SMEs)
The following agencies through their various schemes provide finance to
small-scale industries sector under the overall policies and guidelinesevolved by reserve bank of India.
At national level:1. Small industries development bank of India2. National bank for agriculture and rural development3. National small industries corporation4. Khadi and village industries commission5. Nationalized banks6. Development commissioner, small-scale industries (DCSSI)
At state level1. State financial corporation (SFCs)2. State industrial development corporation (SIDCs)-
infrastructure/finance.3. State cooperative banks4. Khadi & village industries board.
At regional & district level:
1. Regional rural banks (RRB)2. District central cooperative banks.3. Primary cooperative banks4. Branches of sate level institution & nationalized banks about 65000 in
number5. Khadi & village industries commission6. District industries center (DIC)
36
8/6/2019 Small and Medium Enterprise Project1
37/83
SUGGESTION FOR THE IMPROVEMENT OF SMEs
IN INDIA
In the current scenario, market forces will primarily determine the growthand success of SMEs rather than by reservation, preferentialtreatment, etc. so to equip them to meet the competitivechallenges the following suggestions can be seriouslyconsidered.
1. INFORMATION ASYMMETRIES: -
One of the major problems that the bankers face was the highlevels of information asymmetries between the banker and the SMEswhich when combined with low transaction values, make it unviable foe
each institution to try and resolve them individually to counter thismassive problem prevalent in the system. Creation of national level creditinformation bureaus, national identity cards, payment tracking andencouraging extensive usage of cards as alternatives for cash whenmaking payments are some of the ways in which these informationasymmetries may be dealt at a systematic level.
2. ABSENCE OF VIABLE AND WELL REGULATED
COMMUNITY LEVEL INSTTITUTION FOR BANKING: -
The absence of well-regulated institution has made the private andcooperative banks better off despite their higher interest rates because ofthe relative absence of dys- functionalities in PSUbank like poorregulation and supervision, a paucity of relevant skills and distortedmanagement incentives, which have together served to seriously limit theefficiency and growth of this institution. Specialized financial institutionis the best in this regard like SIDBI to cater to needs of the industry.
3. BUILDING STRONG FACILITATIVE REGULATION FOR
SECURITISATIONOF ASSETS AND CREDIT DERIVATIVES:
By creating incentives for specialization amongst banks through strongfacilities regulation for securitization of assets (including priority sectorassets) and credit derivates, this specialized originator will invest in thecapabilities required to serve these customer communities and will getcompensated for their efforts by the premium at which they are able tosell the assets that they originate.
37
8/6/2019 Small and Medium Enterprise Project1
38/83
4. STRENTHENING THE LEGAL FRAME WORK: -
To strengthen the framework for tackling loan defaults and contractenforcement, recently the government of India took measure to enactthe securitization and reconstruction of financial assets andenforcement of security interest act (SARFAESI) in 2002. Also new
bankruptcy legislatin was enacted in end 2003.
5. ADEQUATE MANPOWER: -
There is a wide spread network of technical and vocationaltraining institutes and polytechnics throughout the country. Thosewho graduate from these institutes are unable to find suitable
remunerative jobs. On the other hand, the SMEs lack adequatetechnicians and trained manpower that have the requisite skills to helpthem in the production of their goods and services. Thus, there is amismatch between the demand and supply of this type of manpower.
38
8/6/2019 Small and Medium Enterprise Project1
39/83
SME PRODUCTS OFFERED BY ING VYSYA
BANK
ING Vysya Bank has a track record of serving SME Customers for over 75years. They understand how much of hard work goes into establishing asuccessful SME and that establishing and running a successful businesstakes hard work, money and planning. ING Vysya Bank looks not only attheir customers immediate banking requirement, but also the long-termneeds of their business as it expands. ING Vysya bank approach is to make
banking easy, timely and reliable so that you could focus on your businesssafe in the knowledge that we would be there to take care of all your bankingrequirements.
Their solutions are designed to meet customers varying needs. They offer acomplete range of banking services to small & medium sized corporate suchas Business Accounts, Working capital, Cash Management Services, TradeFinance, Other Non Funded Facilities and Term Loans for BusinessExpansion for your business. In addition we also offer specific structured
products to SSI's, Traders, Distributors and other SME customers.
39
8/6/2019 Small and Medium Enterprise Project1
40/83
PRODUCT PROFILE
FUND BASED
BUSINESS LOAN TRADE
MPOWER-RENT
LOAN/OD AGAINST NSC, LIC POLICIES ETC
SECURED OVERDRAFT AGAINST GOI/RBI
BONDS
MPOWER- BAL BILL DISCOUNTING
BILL DISCOUNTED CLEAN & DOCUMENTARY
NON-FUND BASED
BANK GUARANTEES
INLAND LETTER OF CREDIT
1. BUSINESS LOAN TRADE
The purpose of the loan is to provide necessary working capital and termloan/ composite loan to the small medium enterprise engaged in trading,small businesses and services activities with simplified procedures,
processes, appraisal and concessional pricing. This specific product doesnot coverSSI and manufacturing units.
ELIGIBLE BORROWERS: -
Individuals Self employed persons, women entrepreneurs, agri-businessmen, etc.
HUF, limited companies
Proprietorship concern/ partnership concerns.
40
8/6/2019 Small and Medium Enterprise Project1
41/83
ELIGIBLE ACTIVITIES
Retail Traders And Small Business
Professional including practicing doctors/ consultancy units/ travelagency.
Wholesale distributor and dealers/ stockiest, commissions agents.
Jeweler shops, nursing homes
Transport operators (only for working capital)
THE KEY FACTOR NEED TO BE CONSIDERED FOR
CREDIT DECISION: -
Track record of the business experience of at least 3 years.
Acceptable level of trade activities and its consistency.
Market reputation
Past banking transaction
Risk coverage by way of adequate securities for proposedexposure.
Overall financial standing of business.
Credit need of stock in trade and credit sale.
FACILITIES UNDER WHICH THE CREDIT CAN BE
GIVEN ARE: -
Secured overdraft.
Term loan
VALIDITY OF FACILITY OR TENURE: -
Secured overdraft 2 years
Term loan 4 years
41
8/6/2019 Small and Medium Enterprise Project1
42/83
EXPOSURE OF FACILITY: -
Minimum limit- no limit for existing customers and
minimum of rs.5 lakhs for new customers. Maximum limit 25 lakh
RATE OF INTEREST TO BE CHARGED: -
Secured overdraft IVRR+ .25%
Term loan IVRR +.50%
PROCESSING AND DOCUMENTATION CHARGES: -
Secured overdraft - .50% p.a of the loan amount
Term loan - .50% of the loan amount
QUANTUM AND MARGIN: -
Secured overdraft 20% of the gross projected sales or 3times of the promoters net owned funds in the business whichever is less.
Term loan margin of 25% is kept on the total projectedcoast.
Bank guarantee limits- a minimum margin of 20% by way ofdeposits.
SECURITY: -
Primary security hypothecation of stock and book debts insuch a way that 125% of limit sanctioned is covered.
Collateral security equitable mortgage of the immovablelanded properties other than agricultural land, in such a way
42
8/6/2019 Small and Medium Enterprise Project1
43/83
that 125% of the limit sanctioned is covered. Market value ofthe properties as determined by the banks approved value.And in case of liquid securities such as life insurance policiesand government securities should cover 100% of credit
exposure.
43
8/6/2019 Small and Medium Enterprise Project1
44/83
CASE STUDY ON BLT
In order to understand the working of the business loan trade a case is taken.To ensure the credit worthiness of the customer with which bank is dealing,
bank requires various kinds of documents.
Audited balance sheet of last two years and there profit & lossaccount, in this case we have audited balance sheet and profit & lossaccount of 2005-2006 & 2006-2007
Provisional balance sheet of current year in this case we haveprovisional balance sheet of 2007-2008
And 1 year projected balance sheet, in this case we have provisionalbalance sheet of 2008-2009
Photocopy of property to be mortgaged
Copy of income tax/sales tax return. Net worth statement of proprietor
CASE DETAIL
A. ABOUT US
Name ABC (P) Ltd.
Address B11, sector- 5, Noida-201301Operating from Owned premisesConstitution Company Distance from
branch5 kms
Year of
establishment
28-July-93 No of familymembers
Managed by V.K. Singhal &R.P.Singhal
No of employee
B. OWNERSHIP AND MANAGEMENT
Name % Ageas on
Age Position Experience Qualification Net worthINR
Lakhs
Mr.S.P.Singhal
100% Director 20 years Graduate 90
Mr.R.PSinghal
100% Director 40 years 32
44
8/6/2019 Small and Medium Enterprise Project1
45/83
HISTORY OF CHANGE IN THE DEED/ MOA
2000-01 The company was incorporated in 1993
and was into manufacturing textiles aswell. But in 2000-01, the company wastaken over by Mr. V.K.Singhal &R.P.Singhal (Directors). The business thencomprised of only trading of textiles.
FACILITIES AND OUTSTANDING REQUEST FROM ING VYSYA
BANK (AMOUNT IN INR LAKHS)
Nr. Existing Proposed Facility description, its purposeand security offered
1 INR 10 INR 40 SOD for working capital EM of surrender value of LIC policies
DETALS OF SECURITIES
Nr. Value Valuation
Date
Ownership and
relationship with
borrower
Particular
INR 45 Self Resident/comm.land and building,Gaziabad
INR 10 Spouse Resident property,Gaziabad
INR 9 Self Surrender value of LIC policies
Other details: -
Industry /business status- Good
Client history growth in turnover- Satisfactory
Competitive position - Adequate
Suppliers- Adequate
Customers- Satisfactory
Liquidity- Satisfactory
Leverage (TOL/TNW)- Satisfactory
Sales growth- Good
45
8/6/2019 Small and Medium Enterprise Project1
46/83
PBDIT/Sales- Marginal
DSCR- Satisfactory
Integrity- Satisfactory
Family standing- Adequate
Management competence- Satisfactory Management commitment- Excellent
Succession- Satisfactory
Employee quality- Adequate
Internal control- Marginal
Repayment record- Good
Compliance record- Strong
BRIEF COMMENT ON PERFORMANCE AND
PROJECTIONS
M/s ABC (P) Ltd. Is one of the leading wholesale traders of handloomsitems, shawls, blankets etc. situated at pikuwa, which is a hub of handloomitems. The company was incorporated on 28th july1993 with the registrarof companies, Delhi & Haryana. Initially it was a manufacturer and trader oftextile items. But in 2000-01, the company was taken over by Mr.V.K.Singhal & Mr. S.P.Singhal (Directors). The business then comprised of
only trading of textiles. The party has been banking with us from last 6 yearsand the account requested for a BLT limit of Rs. 50 lakhs.
The firm had achieved sales of INR 249.78 lakhs during FY 2006-07(audited) and INR 227.18 lakhs during FY 2005-06. it has projected stablesales of INR 300 lakhs and INR 300 lakhs and 330 lkhs for the FY 2007-2008 and 2008-2009 respectively. They are poised to achieve the projectionstaking into account the past trends. The sales up to 31st July of the currentyear are around Rs. 1 crore.
The firm had achieved net profit of INR 0.41 lakhs during FY 2006-2007 &INR 0.08 lakhs during FY 2005-2006. the inventory days is projected to beat 91 days is projected to be at 91 days as on 31/03/08 against that of 29days as on 31/03/07. the payable days to be at 95 days as on 31/03/08against that of 93 days as on 31/03/07. the receivable days is projected to be114 days as on 31/03/08 as against 127 days as on 31/03/07.
ASSESSMENT OF RATIOS (ALL AMOUNT IN INR LAKHS)
46
8/6/2019 Small and Medium Enterprise Project1
47/83
Particulars Norms Actual Provisional Compliance
TOL/TNW Not toexceed 6.0:1
4.91 (2006-2007)
2.01(2007-2008)
Yes
Units in
profits
Last two
years
.08 (2006-
2007)
.42 (2007-
2008)
Yes
Turnover:limit
Not toexceed 20%
13.33% Yes
On the basis of above interpretation we can easily assess that ABC (P) Ltd.is eligible for loan under BLT.
Assessment of maximum quantum allowed under the product (all
amount INR lakhs)
Criteria Assessment
1) 20% of projected turnover Rs. 300 lakhs * 20% = Rs. 60Lakhs
2) 3 times promoters net ownedfunds
Rs. 36 Lakhs * 3 = INR 108 lakhs
Lower of 1) or2) as aforesaid INR 60 lakhs; we arerecommending INR 40 lakhs
We are recommending Rs. 40 lakhs because the collateral they aregiving are of worth Rs. 64 lakhs which is just 128% of Rs. 50 lakhsand the prescribed limit for collateral is 150% of the proposedlimit, so the eligible amount is Rs. 40 lakhs.
2. MPOWER-RENT
Owners of the properties who have leased their properties to the eligibletenants are granted term loan, under this scheme. By discounting/scrutinizing the lease rentals receivables. Product features and relativeoperative instruction are mentioned in this chapter.
ELIGIBLE BORROWERS
47
8/6/2019 Small and Medium Enterprise Project1
48/83
Individuals
Sole proprietorship concerns
Partnership firms
Public & private limited companies
Trusts
Registered bodies like educational institutions
Association of persons owning properties
ELIGIBLE PROPERTIES
Commercial properties situated in prime locality in metroand urban areas with unencumbered, clear and marketable
title and with easy marketability.
Original title deeds should be available.
Approval from appropriate authorities for construction andvarious other approvals should be available.
Value of property should be at least 125%/150% of theloan amount, depending upon the tenor of loan.
PURPOSE OF LOAN
Investment by promoters and their friends and relatives inenterprises byway of subordinate unsecured loans.
Repayment of high cost borrowings
Meeting gaps in working capital requirement of their business.
Capital investment
Any other purpose acceptable to the bank, but not for anyspeculative purpose.
NATURE OF CREDIT FACILITYES
Term loan repayable through EMIs
MINIMUM & MAXIMUM FINANCE
Minimum: 25 lakh
48
8/6/2019 Small and Medium Enterprise Project1
49/83
EXTENT OF FINANCE
Loan amount will be calculated on the basis of net monthly rent by
deducting the following items from the gross monthly rent.
a) TDS at the prevailing rates. b) Actual expenses such as taxes, insurance, maintenance etc.
subject to a minimum of 5% of the rent.
If the rent payable is split up into actual rent and amenities charges,both these amounts can be reckoned to compute the eligible loanamount.
Advance rent/security deposits received from the tenant need not be
deducted from the rent receivable provided the lease period is morethan the currency of the loan.
The loan amount will be arrived at based on the net monthly rent, rateof interest, and period.
Suitable downward adjustments have to be made to the actualrent payable to ensure that the fair market rent is consideredto compute the eligible loan amount.
SECURITY
Charge over the leased property by way of simple/ equitablemortgage.
Hypothecation of lease rental
Collateral security is linked to the period of loan as mentioned below:a) Up to six years: 125%
b) Above six years: 150%
GUARANTEE
Personal guarantee of partners/ promoter directors of theborrowing firm/ company
Third party guarantee, if available, preferably of legalheirs in case of individuals.
49
8/6/2019 Small and Medium Enterprise Project1
50/83
GENERAL GUIDELINES
Borrower
Credit investigation report should be prepared Borrower/ group companies should not be defaulter to any bank.
The following documents should be obtained:1. Loan application2. IT/ wealth tax return, assets liabilities statement of
individual and promoter3. Financial statement of the firm / companies /
institutions/ association of person for the last twoyears.
4. Details of other business / income of the landlord.
Tenant (lessee)
Well-known multinational public sector undertaking including theirsubsidiaries, banks. All India financial institutions, national &international airlines, insurance companies, central governmentoffices without insisting on there financial statements.
Entertain well- reputed companies only in the private sector withoutinsisting on details verification of their financials.
New companies promoted by high net worth individuals.
Lease agreement
The minimum lease period (lock-in-period) should be three years,
where the building is constructed exclusively to suit the requirementof the tenant. The same may be relaxed in other cases.
Lease agreement should not be modified without the banks approval.
LOAN DOCUMENTS TO BE OBTAINED
Term loan agreement
50
8/6/2019 Small and Medium Enterprise Project1
51/83
Hypothecation of lease rentals in banks favor
Guarantee agreement in respect of personal guarantee/ third partyguarantee if applicable.
Tripartite agreement or irrevocable power of attorney in favor of the
bank or direct payment of rent to the bank. Mortgage documents
Board resolution in case of corporate borrowers.
Original lease deed between lessor and lease. Original lease deed may be returned to the borrower in exceptional cases, by retaining acertified true copy for the banks records.
Any other document as per legal advice or as specified by the bank infutures.
3. LOAN/OD AGAINST NSC, LIC POLICIES
INTRODUCTION
Investment made in securities like RBI relief bond, National savingcertificate (NSCs), kisan vikas patras (KVS) and Insurance policies ofLIC and other private Insurance companies has lock-in period beforewhich the securities cannot be pre-closed by the investor but they canavail loans from banks against the same.
51
8/6/2019 Small and Medium Enterprise Project1
52/83
Keeping in view the opportunity available, this scheme envisages grantof secured overdraft facility / misc. loan for business and other purposesagainst the security of NSCs, KVPs, insurance policies standing in thename of individuals/ partnership firms / companies / trusts etc.
ELGIBLE BORROWERS
Sole proprietorship concerns
Partnership firms
Public & private limited companies
Trusts
Registered bodies like educational institutions
Societies and association of persons
SECURITIES ACCEPTABLE
NSCs / KVPs /Insurance policies in the name of proprietor, partner,director, Trustees, member firms, companies, their family members andclose relatives.
PURPOSE OF THE LOAN
1. Investment by promoters and their friends and relatives in enterprisesby way of subordinated unsecured loans to strengthen their capitalbase.
2. Repayment of high cost borrowing.3. Meeting the gaps In working capital requirements due to mismatches
in cash flows.4. Capital investment5. Any other purpose acceptable to the bank but not for speculative
purpose.
NATURE OF CREDIT FACILITY
Overdraft/misc loan against the security of NSCs, KVPs, and insurancepolicies.
MINIMUM & MAXIMUM FINANCE
52
8/6/2019 Small and Medium Enterprise Project1
53/83
1. Minimum Rs. 2.00 lacs2. Maximum Rs 1.00 crore per borrower.
EXTENT OF FINANCE
NSCs / KVPs
1. 90% of the face value in respect of NSC/ KVP of more than 2 yearsold.
2. 75% of the face value in respect of NSC/KVP more than 1 year oldand up to 2 years.
3. NSCs/ KVPs aged 1 year and below should not be considered.4. Interest accrued should not be reckoned for calculation of eligible loan
amount.
Insurance policies1. 90% of the surrender value
SECURITY
1. Personal guarantee of the security holder2. The insurance policies shall be assigned to the bank/NSCs and KVPs
be transferred in the name of the bank.
VALDITY PERIOD OF THE LIMIT
Secured overdraft (SOD)
1. 2 years from the date of sanction or due date of NSC/ KVP/ Insurancepolicy whichever is earlier.
Term loan
1. 4 years from the date of sanction or due date of NSC/KVP/Insurancepolicy whichever is earlier.
RATE OF INTEREST
53
8/6/2019 Small and Medium Enterprise Project1
54/83
AMOUNT OF OD/TL FACILITY RATE OF INTEREST
Rs. 2 lacs & up to Rs. 30 Lacs IVRR minus 2.0% p.a
Above Rs. 30 lacs & up to Rs.40
Lacs
IVRR minus 2.50% p.a
Above Rs. 40 lacs & up to Rs.50Lacs
IVRR minus 2.75% p.a
Above Rs. 50 lacs IVRR minus 3.0% p.a
PROCESSING CHARGES
1. Processing charges shall be 0.10% for the fresh sanction made and0.05% for every renewal thereafter
2. Regional head, SBU will have the discretion to waive the processingcharges.
4. SECURED OVERDRAFT AGAINST GOI/RBI BONDS
INTRODUCTION
Govt. of India RBI relief bond is issued by the reserve bank of India toindividuals, joint holders, minors and HUF without an option for pre-closure
by the investors. Bonds are not issued in the name of companies, trusts etc.the tenor of the bond are not issued in the name of companies, trust etc. thetenor of the bond is five years. Under this scheme, finance is extended tosole proprietorship concerns, partnership firms, companies against the bondstanding in the individual name of the proprietors/partners/director etc. this
54
8/6/2019 Small and Medium Enterprise Project1
55/83
scheme does not cover the finance made direct to the investor, which fallsunder the purview of retail SBU.
ELGIBLE BORROWERS
1. Sole proprietorship concern2. Partnership firms3. Public & private limited companies4. Trusts5. Registered bodies like educational institutions, societies and
associations of persons.
BONDS ACCETABLE
1. RBI bonds should be in the names of proprietor, partner, director,trustees, members, their family members and close relatives.
2. Proper linkage should exist between the bondholder and the borrower.The bondholder can be made as co-borrower. The bondholders can bemade as co-borrower to get the bond transferred in the name of bank.
3. All the series of RBI relief bond are acceptable viz. 8.50%, 9%, 10%,and in both the form i.e. in physical and in bond ledger account withany bank or any institution.
4. Bonds issued from 2003 are not acceptable, since they cannot be
transferred.5. Before taking up the proposal, branches should verify the bonds being
offered to ensure that loans can be availed against the same that thesame are transferable in the name of the bank.
PURPOSE OF LOAN
1. To provide funds for investment by promoters and friends and
relatives in enterprise by way of subordinated unsecured loans tostrengthen their capital base.
2. For repayment of high cost borrowing.3. To meet gaps in working capital requirements due to mismatches in
cash flows.4. For capital investment.5. Any other purpose acceptable to the bank, but not for any speculative
purpose whatsoever.
55
8/6/2019 Small and Medium Enterprise Project1
56/83
NATURE OF CREDIT FACILITY
1. Secured overdraft facility for business and other purposes
2. facility can be sanctioned till the maturity of the bond, subject to themanual review.
MINIMUM AND MAXIMUM FINANCE
1. Minimum: Rs. 10 lacs per borrower2. Maximum: Rs 1 crore per borrower
RATE OF INTEREST
1. The rate of interest is linked to the size of the loan as indicated below,instead of CRR/FRR ratings.
a) If OD facility is in between Rs.10 lacs to less than Rs. 30 lacs IVRR minus 2.0% p.a
b) If OD facility is in between Rs.30 lacs to less than Rs. 40 lacs IVRR minus 2.50% p.a
c) If OD facility is in between Rs.40 lacs to less than Rs. 50 lacs IVRR minus 2.75% p.a
d) If OD facility is Rs.50 and above IVRR minus 3.0% p.a
5. MPOWER- BAL BILL DISCOUNTING
INTRODUCTION
The product MPower bal bill discounting was introduced to provideworking capital (post sales) finance to the vendors supplying spare parts andaccessories to M/s. Bajaj Auto limited (BAL) by discounting the relevant
bills drawn on BAL. Details of the scheme and related aspects are providedin this chapter.
56
8/6/2019 Small and Medium Enterprise Project1
57/83
PROCESS IN BRIEF
1. Vendor will supply the material to BAL, on receipt of order.2. On receipt of material BAL will issue a delivery challan (DC) with
an endorsement goods accepted and also a receipt-cum-invoice(RCI).
3. RCI is the primary document to be held by the bank and against whichthe finance is provided to the borrower @90% of the bill amount.
4. An irrevocable power of attorney (POA) is obtained by the bank toreceive the bill proceeds directly and registered with BAL.
5. Based on the POA, BAL directly remits the amount to the bank at theend of the usance period of the bill, which is generally 45 to 60 days.
PRODUCT FEATURES
Eligible borrowers
Vendors who have been supplying to BAL for the past 2 years havingvendor code issued by BAL to its approved vendors.
PURPOSE OF LOAN
For meeting working capital requirement.
NATURE OF CREDIT FACILITY
1. Usance bill discounting.
2. Bill with usance period of 45 to 60 days drawn on BAL againstspares/ accessories supplied will be discounted and payments will bereceived directly from BAL.
MINIMUM AND MAXIMUM FINANCE
57
8/6/2019 Small and Medium Enterprise Project1
58/83
1. The maximum finance provided against the bills shall not exceed 90% ofthe bill amount2.Maximum limit per borrower shall not exceed Rs.5 crores.
EXTENT OF FINANCE
Credit limit are determined for each borrower based on his sales turnoverwith BAL, to an extent of 20% of the annual turnover of the previous year(or projected turnover to BAL for the next year.)
SECURITY
Personal guarantee of all the director/ partners.
VALIDITY PERIOD OF THE SANCTIONS
The facility shall be, initially, for a period of 1 year and can be renewed atthe end of each year.
RATE OF INTEREST
ROI is 7% p.a
PROCESSING FEES
Nil
RISK ACCEPTANCE CRITERIA
Minimum current ratio of 1, TOL/TNW ratio of not more than 5 and debtequity ratio of not more than 1.5.
APPROVING AUTHORITIES
Credit limit should be approved as per the existing delegated power.
58
8/6/2019 Small and Medium Enterprise Project1
59/83
BILL DISCOUNTED-CLEAN & DOCUMENTRY
INTRODUCTION
Usance bills are bills drawn and made payments after a specified time. Theymay be made payable after date or after sight. Usance bills may bedrawn as delivery against payment (DP) or delivery against acceptance (DA)terms.
59
8/6/2019 Small and Medium Enterprise Project1
60/83
Finance can be extended by discounting usance bills classifying them asbills discounted-clean /documentary as the case may be. Operationalinstructions for bill discounted are provided in this chapter.
GENERAL GUIDELINES
1. The usance of a bill to be discounted should not exceed 6 months andpreferably be within 90 days.
2. Usance bill may be in form of promissory note or bills of exchange.3. Usance bills whether paid locally or at outstation must be discounted
to the payee or to the drawer if the payee happens to be a bank, onlyafter it is accepted by the drawee. An acceptance is not necessary inrespect of a usance promissory note.
4. a credit report has to be prepared on the drawees of