1.1 ) WHAT IS SMALL & MEDIUM ENTERPRISES ?

Small & Medium Enterprises sector constitute the growth engine of the economy with contribution to GDP estimated at 40%, contribution to exports estimated at 50% and employment opportunities to nearly 4 crore persons. The SMEs lead to entrepreneurial development and diversification of the industrial sector, and also provide depth to industrial base of the economy. More employment opportunities are generated and the capital cost per employee is low. With the Services sector dominating the SME, and MNCs outsourcing their various requirements to Indian service providers, the scope for SME finance has increased even further. There is also a favourable environment with the Govt. committed to give fillip to this sector through infrastructure development, skill set development/entrepreneurship development, technology upgradation etc. Sectors like IT and IT-enabled services, biotech, footwear etc have also shown promising potential. With the deregulation of the financial sector , the general ability of the banks to service the credit requirements of the SME sector depends on the underlying transaction costs, efficient recovery processes and available security. There is an immediate need for the banks generally to focus on credit and finance requirements of SMEs. Credit risk in the SME sector is widely dispersed and banks get better yield from SME advances as against the traditional advances where the spread is getting gradually reduced. The MSMED Act 2006 aims to remove the several bottlenecks faced by the SME sector. It defines the Micro, Small and Medium enterprises. The activities are classified into Manufacturing and Service Category. All credit related exposures (both fund-based and non-fund-based) are covered and uniform policy guidelines relating to credit Risk Management, Credit Delivery, Credit Monitoring and Recovery is made applicable to SME sector.

FACTORS AFFECTING MSMES

Some of the key constraints that are being faced by the Indian MSMEs are: Accessing adequate and timely financing on competitive terms, particularly longer tenure loans. Accessing credit on easy terms has become difficult in the backdrop of current global financial crisis and the resultant liquidity constraints in the Indian financial sector, which has held back the growth of SMEs and impeded overall growth and development. The financing constraints faced by Indian SMEs are attributable to a combination of factors that include policy, legal/regulatory framework (in terms of recovery, bankruptcy and contract enforcement), institutional weaknesses (absence of good credit appraisal and risk management/ monitoring tools), and lack of reliable credit information on SMEs. It has become difficult for lenders to be able to assess risk premiums properly, creating differences in the perceived versus real risk profiles of SMEs. Access to skilled manpower, R&D facilities and marketing channels is limited. Availability of finance at cheaper rates, skills about decision-making and good management and accounting practices, and access to modern technology. Bribery and corruption emanates from red-tapism and high-handedness of the bureaucracy. Many economists believe that the License-Permit Raj prevailing in India before the 1990s, affected the growth of businesses and industry. Hence, lesser intervention by the government in the functioning of the market is being demanded. Doing Business 2010: Reforming Through Difficult Times presents quantitative indicators on business regulations and the protection of property rights that can be compared across 183 economies. According to the same report

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India is ranked 133 out of 183 economies. Singapore is the top ranked economy in the Ease of Doing Business.

2.

It requires 13 procedures, takes 30 days, and costs 66.06 % GNI per capita to start a business in India.

3. 4.

India is ranked 169 overall for Starting a Business. It requires 37 procedures, takes 195 days, and costs 2,394.86 % GNI per capita to build a warehouse in India.

5. 6. 7.

India is ranked 175 overall for Dealing with Construction Permits. India is ranked 104 overall for Employing Workers. It requires 5 procedures, takes 44 days, and costs 7.43 % of property value to register the property in India.

8. 9. 10. 11. 12. 13. 14. 15.

India is ranked 93 overall for Registering Property. India is ranked 30 overall for Getting Credit. India is ranked 41 overall for Protecting Investors. India is ranked 169 overall for Paying Taxes. India is ranked 94 overall for Trading Across Borders. India is ranked 182 overall for Enforcing Contracts. India is ranked 138 overall for Closing a Business. In India procedures under the 2002 Securitization Act have become more effective, easing the process and reducing the time required to close a business.

Corporate governance has become a buzz term before the Indian industrial sector, particularly after the outbreak of Satyam scam. According to the Global Corruption

Barometer 2009 that has been prepared by Transparency International, the private sector is perceived to be corrupt by half of those interviewed: a notable increase of eight percentage points compared to five years ago. The public in general is critical of the private sectors role in their countries policy making processes. More than half of respondents held the view that bribery is often used to shape policies and regulations in companies favour. Firms from India, China and Brazil are regarded by their peers as among the most corrupt when doing business abroad. Two major securities scams have already taken place in India: the Harshad Mehta securities fraud and the Ketan Parekh scam.

SOME NEW INITIATIVES TO PROMOTE MSMES In the recent years, Indian authorities have taken several steps to address factors that constrain SME financing and developments, and the World Bank has provided support through an SME Financing and Development Project. The Government of India and the Small Industries Development Bank of India (SIDBI, www.sidbi.com, which is the apex bank for SMEs in India) requested the World Bank to support efforts to remove constraints to SME access to finance (including term financing), and to foster SME development. A Bank project involving funding of US$120 million for SME financing and development was subsequently developed. The Project was approved on November 30, 2004, and became effective on April 4, 2005 and is currently scheduled to close on June 30, 2009. The objective of the Project was to improve SME access to finance and business development services, thereby fostering SME growth, competitiveness and employment. The Small and Medium Enterprises Financing and Development Project has been designed to improve access to

finance for SMEs. The lending from the original project covered 927 SMEs spread across 10 Indian states. A US$ 400 million additional financing loan to the SIDBI was signed on 5 June, 2009 by representatives from the Government of India, SIDBI and the World Bank. The Securities and Exchange Board of India (SEBI, http://www.sebi.gov.in/) issued norms on separate stock exchanges for SMEs during November, 2009 so as to give them more options to raise capital. At present, around 90% of the 2.61 crore MSMEs depend on either banks or informal sources to finance their business. Setting up of a separate stock exchange for SMEs is not so simple. Two requirements are to be fulfilled. One is to reduce the cost of compliance and the second is to safeguard the investors from any undue risk. The SEBI has laid the groundwork to allow SMEs to list on SME Exchanges. SMEs have always complained of difficulty in accessing to both debt and equity capital. It is perceived that registration of companies from the SME sector is essential so as to raise capital from the stock exchange. SMERA (www.smera.in) is Indias premier credit rating agency in the micro, small, & medium enterprise segment. It focuses primarily on the Indian SME segment. The primary objective is to provide ratings that are comprehensive, transparent and reliable. It takes into account the financial condition and several qualitative factors that have bearing on credit worthiness of the SME . The credit guaranty fund and credit linked capital subsidy scheme has been built in order to support the SMEs. Credit rating helps in cost efficiency and innovation to be undertaken by SMEs, and helps the bank to go for less riskier lending venture, provided the credit rating is done

in a scientific way. The Exim Bank of India in India has also provided financial solutions to the SMEs. SMEs IN INDIA 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. SMEs always represented the model of socio-economic policies of Government of India which emphasized judicious use of foreign exchange for import of capital goods and inputs; labour intensive mode of production; employment generation; non concentration of diffusion of economic power in the hands of few (as in the case of big houses); discouraging monopolistic practices of production and marketing; and finally effective contribution to foreign exchange earning of the nation with low import-intensive operations. It was also coupled with the policy of de-concentration of industrial activities in few geographical centers. It can be observed that by and large, SMEs in India met the expectations of the Government in this respect. SMEs developed in a manner, which made it possible for them to achieve the following objectives: High contribution to domestic production 1. 2. Significant export earnings Low investment requirements

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Operational flexibility Location wise mobility Low intensive imports Capacities to develop appropriate indigenous technology Import substitution Contribution towards defense production Technology oriented industries Competitiveness in domestic and export markets At the same time one has to understand the limitations of SMEs, which are:

1. 2. 3. 4. 5. 6.

Low Capital base Concentration of functions in one / two persons Inadequate exposure to international environment Inability to face impact of WTO regime Inadequate contribution towards R & D Lack of professionalism In spite of these limitations, the SMEs have made significant contribution towards technological development and exports. SMEs have been established in almost all-major sectors in the Indian industry such as:

1. 2. 3. 4. 5.

Food Processing Agricultural Inputs Chemicals & Pharmaceuticals Engineering; Electricals; Electronics Electro-medical equipment

6. 7. 8. 9. 10. 11. 12.

Textiles and Garments Leather and leather goods Meat products Bio-engineering Sports goods Plastics products Computer Software, etc. As a result of globalization and liberalization, coupled with WTO regime, Indian SMEs have been passing through a transitional period. With slowing down of economy in India and abroad, particularly USA and European Union and enhanced competition from China and a few low cost centers of production from abroad many units have been facing a tough time.

Those SMEs who have strong technological base, international business outlook, competitive
spirit and willingness to restructure themselves shall withstand the present challenges and come out with shining colours to make their own contribution to the Indian economy.

SMES IN MAHARASHTRA
Since its inception in May 1960, (and even earlier as a part of Bombay State) Maharashtra has been in the forefront of industrialization. The state has always followed progressive industrial policies and industry friendly measures. Through a network of District Industries Centre (DICs), it offers maximum guidance 8and assistance to SMEs. Many SMEs promoted by local entrepreneurs as also by NRIs and foreigners have come up in Maharashtra covering a broad spectrum of industrial activity.

The quality of products of SMEs from Maharashtra is high. Some of them have acquired technology from abroad. Adequate budget is provided for R & D operations. Many units are promoted by techno-entrepreneurs. In view of the objective of the study, it was considered necessary to undertake a survey of SMEs from major parts of Maharashtra covering following sectors: Engineering; Electricals; Food Processing; Chemicals and Pharmaceuticals. The field survey consisted of visits to industries in the following cities / regions:
Western Maharashtra Pune Kolhapur Satara Nasik Ahemadnagar Ratanagiri Sawantwadi Kudal Aurangabad Nanded Latur Deed Nagpur Amravati Mumbai Thane Belapur Konkan Region Marathwada Vidarbha Greater Mumbai

A total of 40 units in various sectors were contacted and finally 23 units were shortlisted for inclusion in the study report. While making a final choice of the units from target sectors, following factors were considered. 1. 2. 3. 4. Set up of the unit and management Technology status and product profile Turnover & exports Scientific manpower

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Technology / Process / Product on offer CONCLUSION The micro,small and medium enterprises in India has been a recession-proof one. The impact of global economic crisis on fixed investment, production, employment and output of micro, small and medium enterprises was very negligible. However, labour productivity was fluctuated

highly during the period. This could be due to the fears arising from global economic crisis. Even though the production of the industry has increased, the payments for employees may be reduced. It is the need of the hour to study the comparative performance by making a decomposed analysis of small scale industries into clusters and dispersed units.