1

Chapter1: INTRODUCTION.
Every economy has enterprises of various sizes that contribute to the
output in the economy. These may be large, medium and small
enterprises. Small and medium enterprises constitute a key link in the
process of socio-economic transformation of underdeveloped social
structures. It is ,no doubt , true that in the case of the dominantly rural
countries, processes of transformation either germinating within the rural
segment or bringing the latter within its orbit of influence will play a
crucial role and should , therefore, occupy an important position in their
development strategy, It is , however , equally true that both rural and
urban processes are inseparably interwoven in the socio-economic fabric
of the country and strategies of rural development cannot be
operationalised outside that total developmental process, thus, straddling
the rural-urban continuum.
The small and medium enterprises are a significant segment of the
Indian economy .The basic objectives underlying the development of
small and medium scale industries are:
1. Increase in the supply of manufactured goods
2. Promotion of capital formation, the development of indigenous
entrepreneurial talents and skills
3. The creation of employment opportunities.
In addition, they include such socio-economic goals as
decentralization and dispersal of manufacturing activities from the
metropolitan to the non- metropolitan and rural areas, the reduction of
regional economic imbalances within a country and the diffusion of
entrepreneurial and managerial abilities and skills as well as of
technology on a broader canvas.
2

1.1: OBJECTIVES.
To know about SME Banking.
To study the recent trends in SME Banking.
To understand the impact of SME Banking on Indian economy.
To evaluate the future of SME Banking.
1.2: RESEARCH METHODOLOGY.
The report based on the objectives like what are the recent trends in SME
Banking, its impact on economy, to study about what banking facilities
are available for SME Banking. To fulfill the objectives secondary data is
gathered through journals, magazines, websites, etc. Primary data is
collected through the questionnaire given to the banks.
1.Research Design.
This project is based on the primary as well as secondary data, however
primary data collection is given more importance since it is overhearing
factor in attitude studied. One of the most important users of research
methodology is that it helps in identifying the problem, collecting,
analyzing the required information and providing alternative solution.
2.Sampling.
Sampling procedure.
The sample is collected through personal visits to the banks and through
filling up the questionnaire prepared.


3

Sample design.
The report is done with the help of graphs and pie diagrams.
Sample size: 6 Banks.
3.Questionnaire
1) How do you classify your customers in this field of SME Banking?





2) Are there any bank policies for financing of SME which have to be
adhered to? YES/ NO



3) Are there any special interest rates for SME? YES/ NO

4) What is the current interest rate prevailing in the SME sector?

_______________________________________________________________
5) Are there any RBI incentives for SME Banking? YES /
NO


NAME OF THE BANK:


4

4.Research questions.
The basic objective of my project is to find out banking facilities
available for Small and Medium enterprises.
5.Tools of Analysis.
The project is done with the help of Graphs and pie diagrams.
The analysis of primary data is done by using graphical presentation and
pie diagrams.
1.3: SOURCES OF DATA.
Primary data: Primary data is collected on the basis of questionnaire
prepared for the banks. For the project under consideration, the primary
data related to respondents was obtained by conducting a survey with a
questionnaire for respondents. Data from the institutions was collected
through the personal interview.
Secondary data: Secondary data is collected by referring to books and
secondary information available on the web.
Bibliography:
1. Universal Banking- O.P Agarwal
2. Entrepreneurship and Management of Small and Medium
Enterprises- Vasant Desai
Webliography:
1. www.rbi.org.in
2. www.scibd.com
5

1.4: SCOPE OF STUDY.
The project tries to make out the initial credit funding scenario in the
SME sector, from the point of view of an outsider. The project includes
study of procedure of obtaining start-up term loans and all the difficulties
faced while obtaining it. The problems mainly may include procedural,
technical, financial problems and also other important problems that an
aspiring urban entrepreneur might face while starting his own venture.
The study here has also covered general procedure of obtaining loans as
described by various institutions and entrepreneurs. Apart from all these
it also includes various schemes of assistance that are made available to
new urban SMEs.
1.5: CHAPTERWISE SCHEMES.
The project report has been divided into 5 chapters each consisting of
subsections dealing with various aspects coming in purview of the
project. Following is the layout of the chapters-
1. Introduction.
2. SME Banking.
3. SIDBI (Small Industries Development Bank of India.)
4. Analysis of Data.
5. Conclusion.




6

Chapter 2: INTRODUCTION TO SME BANKING.
SME finance is the funding of small and medium sized enterprises, and
represents a major function of the general business finance market in
which capital for different types of firms are supplied, acquired, and
costed or priced. Capital is supplied through the business finance market
in the form of bank loans and overdrafts; leasing and hire-purchase
arrangements; equity/corporate bond issues; venture capital or private
equity; and asset-based finance such as factoring and invoice discounting.
However, not all business finance is external/commercially supplied
through the market. Much finance is internally generated by businesses
out of their own earnings and/or supplied informally as trade credit, that
is, delays in paying for purchases of goods and services.
The economic and banking importance of the small and medium
enterprise (SME) sector is well recognized in academic and policy
literature. It is also acknowledged that these actors in the economy may
be under-served, especially in terms of finance. This has led to significant
debate on the best methods to serve this sector.
Although there have been numerous schemes and programmes in
different economic environments, there are a number of distinctive
recurring approaches to SME finance.
Collateral based lending offered by traditional banks and finance
companies is usually made up of a combination of asset-based
finance, contribution based finance, and factoring based finance, using
reliable debtors or contracts.
Information based lending usually incorporates financial statement
lending, credit scoring, and relationship lending.
7

Viability based financing is especially associated with venture capital.
Reliable for all the small ticket loan.
The importance of SME sector is well-recognized world over owing
to its significant contribution in achieving various socio-economic
objectives, such as employment generation, contribution to national
output and exports, fostering new entrepreneurship and to provide
depth to the industrial base of the economy. India has a vibrant SME
sector that plays an important role in sustaining economic growth,
increasing trade, generating employment and creating new
entrepreneurship in India. Indian SMEs require business advisory
services to enhance their international competitiveness in a highly
competitive globalizing world. The SMEs find the services of
reputed national and international consultants as not cost effective
and often, not adequately focused. Recognizing this knowledge gap,
Exim Bank of India has been endeavoring to provide a suite of
services to its SME clients. These include providing business leads,
handholding during the process of winning an export contract and
thus assisting the generation of export business on success fee basis,
countries/ sector information dissemination, capacity building in
niche areas such as quality, safety, export marketing, etc. and
financial advisory services such as loan syndication, etc.

8

2.1: ECONOMIC IMPORTANCE OF SMEs.
The SME sector is important to national economies because it contributes
significantly to employment and GDP, and because its growth is linked
with the formalizing of an economy. In many countries, the majority of
jobs are provided by SMEs. In the 30 high-income countries of the
organization for economic Cooperation and development (OECD), SMEs
are registered enterprises with fewer than 250 employees which represent
over two-thirds of formal employment. In low-income countries, this
figure tends to be smaller, especially where the informal sector is large;
but it is still significant.
The following figure illustrates the importance of the SME sector to job
creation using the median contributions of SMEs to formal employment
from a sample of low, middle as well as high income countries.



0
10
20
30
40
50
60
70
80
Low income Middle
Income
High Income
EMPLOYMENT OPPORTUNITY PROVIDED BY
SME
EMPLOYMENT OPPORTUNITY
PROVIDED BY SME
9

The SME sectors contribution to GDP also confirms its economic
importance. In high-income countries, and some middle-income
countries, the sector accounts for over half of national output. In low-
income countries too, SMEs play a sizable role, though the informal
economy is more dominant.
The fact that the role of SMEs in an economy appears to increase with
country income level might indicate that SMEs are themselves a driver of
economic growth. While this remains an open question, formalization has
emerged as a potential channel through which a growing SME sector is
linked with economic growth.
The following figure presents the picture of informal economy and the
SME sector together which generates about 6570 percent of GDP across
all country income levels.
GDP CONTRIBUTION


0
50
100
150
200
250
Low Income Middle Income High Income
10

Here, the changes are mainly made in the division of the amount between
SMEs and informal enterprises. In other words, higher-income countries
where SMEs contribute more to GDP have smaller informal sectors. If
informality has created inefficiencies related to operating underground,
then the transformation of informal firms into registered SMEs can boost
economic growth.
SME Banking is gaining more importance is economically valuable
because of the sectors importance in each country. In low-income
countries, the role of banks may be critical if the prospect of bank
financing can create enough incentive that informal firms will register as
SMEs in order to receive loans. In addition to this, it also indicates that as
a country develops, the SME market will also increases in size.
2.2: POLICIES GOVERNING SMEs.
Policies constitute the framework or guidelines for appropriate decisions
at various levels. They generally consist of statement that affects the
working of a sector of the economy. The working of small and medium
enterprises is molded by a number of government policies that affect the
working of the enterprises in this sector, which are the base for effective
plan development. The following policy decision factors which have
bearing in identifying prima facie feasible and promising investment
opportunities are:
1. Industrial Policy Resolution and Import Export Policy (1994-97)
2. The Pricing Policy and Textile Policy.
3. Policy for Khadi and village industries.
4. Industrial Estates programme.
5. Policy for Development of Handloom Industry and Promotion of
Ancillary Industries etc.
11

2.3: OBJECTIVES.
The primary objective of the small and medium enterprises policy during
the nineties was to impart more vitality and growth impetus to the sector
so that the sector could contribute in terms of growth of output,
employment and export.
The other objectives includes decentralizing and delicensing the sector ,
to deregulate and debureaucratise the sector , to review all statutes
regulations and procedures and effect and suitable modifications where
necessary , to promote small enterprises, especially industries in tiny
sector , to motivate small and sound entrepreneurs to set up new green
enterprises in the country , to involve traditional and reputed voluntary
organizations in the intensive development , to maintain a sustained
growth in productivity and attain competitiveness in the market economy,
especially in the international markets , to industrialize backward areas of
the country , To accelerate the process of development of modern small
enterprises, tiny enterprises and village industries through appropriate
incentives, institutional support and infrastructure investments. The total
development of the new policy is towards creating atmosphere conducive
to the development of entrepreneurship and technological progress.

12

2.4: BENEFITS OF SME TO VARIOUS SECTORS
Each sector comprises of the following
TINY
SECTOR
HANDLOOM
SECTOR
HANDICRAFT
SECTOR
OTHER
SECTORS
Investment Project Package
Scheme
Supply of raw
materials
Improve
Quality
Development
of service
sector
Welfare Package
Scheme
Market
Development
Ensure better
flow of credit
Location Organization and
Developmental
schemes
Expansion of
training facilities
Other
schemes

2.5: SETTING-UP OF SMALL AND MEDIUM
ENTERPRISES.
The process of setting up a small and medium enterprises has been
indicated below, which has been drawn on the basis of practical
experience gained in its promotion. It indicates all the important stages in
the setting up of a small scale industry. The objectives of the promotional
regulations are to provide an impetus to the small-scale industry and
regulate the supply of machinery, electricity, water, premises, finance,
raw materials and markets. The process of production and marketing is
governed by a series of rules and regulations. In a way, these regulations
are a boon to the small entrepreneur.
13

2.6: PARAMETERS FOR TERM LOANS FOR
SMALL AND MEDIUM ENTERPRISES.
While sanctioning term loans, Bank should study the project report
submitted by the borrower and satisfy about the technical viability,
financial feasibility, economic viability and managerial competence of
the venture to be undertaken by the borrowers. The application or the
project report should normally throw light on all these areas. If however,
such details are not readily available from the papers submitted by the
borrowers then Banks would collect all the relevant particulars while
interviewing the borrowers. The project report which is submitted by the
borrower should throw light on the following areas. This could be
depicted with the help of following chart:
1. Industry Analysis:
The environment within and outside the country is vital for
determining the type of project one should opt for.
2. Economic Analysis:
The demand and supply position of a particular type of product
under consideration, competitors share of the market along with their
marketing strategies, export potential of the product, consumer
preferences are matters requiring proper attention in such type of
analysis.
3. Cost of Project:
Cost of land, site development, buildings, plant and machinery, utilities
such as power, fuel, water, vehicles, technical knowhow together with
working capital margins, preliminary expenses, provision for
contingencies etc determine the total value of the project.

14

4. Technical Analysis:
Technical know-how, plant layout, production process, installed and
operating capacity of plant and machinery form the core of such analysis.
5. Financial Analysis:
Estimates of production costs, revenue, tax liabilities profitability and
sensitivity of profits to different elements of costs and revenue, financial
position and cash flows, working capital requirements, return on
investment, promoters contribution together with debt and equity
financing are items which need to be looked into for financial viability.
6. Social Cost Benefit Analysis:
Ecological matters, value additions, technology absorptions, level of
import substitution should also be considered in such analysis.
7. Project Implementation Schedule:
Date of commencement, duration of the project and date of completion of
the project through network analysis all these factors should also be
adhered to in order to make the project feasible.
2.7: CRITERIA FOR OBTAINING TERM LOANS.
1. Technical Viability:
The basic requirements which are necessary for starting a project includes
availability of Land, Technical know-how , Capacity of the unit, Plant
and Machinery , Man power , Availability of raw material and Other
utilities and necessities like power, water and other infrastructure roads
etc.
2. Financial Feasibility:
The conversion of all these factors into monetary terms indicating the
funds required and sources of such funds will have to be understood and
judged. The cost of project and means of finance may indicate the amount
spent and raised so far and the additional amount required to complete the
15

project. It also helps in determining what whether adequate returns are
generated or not.
3. Fund flow statement:
After the project cost is ascertained, Banks needs to study the funds flow
statements for the next 3 to 5 years to justify the repayment capacity.
Here the sources of funds includes cash/profit before taxation, interest,
increase in term loans, unsecured deposits and bank borrowings etc
whereas on the other hand deployment of funds includes preliminary
expenses, investment in capital expenditure, increase in current assets,
decrease in long term loans by repayment, increase in investments etc.
4. Economic Feasibility:
Market is the soul of any project. The success of any project depends on
its sound market potential. Banks needs to study and analyze the market
regarding where the product is likely to be sold, what share the demand
product is likely to increase and what share of this demand in the
borrower is likely to command. For this purpose Banks will have to take
into account the present competitors in the line, the quantity proposed be
marketed, efforts planned, network of distributors or agents etc.
5. Credit Appraisal:
Credit appraisal refers to the study of past data and it also includes study
of prospects of the company which is also an important parameter to be
considered in which would help the bank for making judgments.
6. Managerial Competence:
The most important factor behind any project is its manpower that is the
promoter. Even if the project is viable on all the above grounds but still it
16

may not succeed if the promoter does not possess the ability, capacity and
skill to launch the venture. All these factors help Bank to frame an
opinion about the project and if the bank is satisfied on all the above
grounds then it may recommend sanctioning credit facilities.
7. Break Even Analysis:
Another important tool which is used for measurement includes Break
Even Analysis. Break Even point is that point at which the value of sales
equates the cost of sales. It is thus a no-profit-no loss stage. With the
help of such Break Even Point, the viability of the project can be
evaluated, indicating the level of production below which the unit will
incur losses. In the context of analysis of credit appraisal, this Break Even
Analysis assumes importance for arriving at credit decision.
8. Operating Statements:
This parameter includes various components such as production during
the year, sales, cost of sales that is raw material consumed, power and
fuel, direct labor and wages, repairs and maintenance other
manufacturing expenses if any, depreciation, interest on loan, selling
general and administrative expenses, net cash accruals and repayment
obligations.
9. Working Capital Requirement:
Working capital refers to the difference between current assets and
current liabilities. Every company needs working capital to meet the day
to day requirements of any business. Here Current Assets includes stock ,
debtors, prepaid expenses, bills receivable, advance tax, cash in hand,
cash at Bank where as Current Liabilities includes bank overdraft, bills
payable, outstanding expenses, provision for taxation, creditors etc.
17

10. Ratio analysis:
Ratio refers the comparison between two or more similar data so as to
compare them for obtaining the desired result. Ratio Analysis varies from
one organization to another, but the purpose behind such analysis remains
the same. Banks may judge their financial positions based on various
ratios which includes solvency ratio, liquidity ratio, debt-equity ratio,
gross profit ratio, net profit ratio, fixed assets turnover ratio etc.
2.8: FINANCIAL ASSISTANCE TO SMALL AND
MEDIUM ENTERPRISES
The primary objective of this scheme is to encourage industrial enterprise
to overcome the impact of modernization and to adopt improved and
latest technology and methods of production and prevent mechanical and
technological obsolescence. Modernization may include replacement or
renovation of the plant and machinery or acquisition of balancing
equipment for fuller and more effective utilization installed capacity.
Units to be eligible for modernization assistance should have been
operational for at least 5 years. In the case of replacement or renovation,
the machinery should have been in use at the unit for a period of at least 5
years.
Proposals for modernization should establish the benefits that would
accrue by way of reduction in unit cost of production, technology
improvement, improved productivity, both in quality and quantity, better
profitability, etc. The cost acquisition of technical know-how would also
be eligible. The projects proposals should clearly bring out these aspects.
Other things being equal, export-oriented and import-substitution
18

schemes will be accorded higher priority. The development programmes
should primarily aim at:
1. Up gradation of process, technology and product
2. Export-orientation and Import-substitution
3. Energy-saving and financial feasibility
4. Anti-pollution measures
5. Conservation/substitution of scarce raw materials and other
inputs, including recycling/recovery of wastes and by-products.
6. Improvement in capacity utilization within the existing
capacity, through increase in productivity and debottlenecking.
7. Improvements in material handling.


19

Chapter3: SIDBI (Small Industries Development
Bank Of India).
Small Industries Development Bank of India (SIDBI) was established as
a wholly owned subsidiary of Industrial Development Bank of India
(IDBI) under the Small Industries Development of India Act 1989. It is
the principal institution for promotion, financing and development of
industries in the small-scale sector. It also coordinates the functions of
institutions engaged in similar activities. For this purpose, SIDBI has
taken over the responsibility of administrating Small Industries
Development Fund and National Equity Fund from IDBI.
SIDBI started its operations from April 1990 with an initial authorised
capital of Rs. 250 crore, which could be increased to Rs. 1000 crore. It
also took over the outstanding portfolio of IDBI relating to small scale
sector held under Small Industries Development Fund as on March
31,1990 worth over Rs. 4000 crore.
The idea of setting up Small Industries Development Bank (SIDBI), in
response to a long standing demand from the SMEs sector as an apex
level national institution for promotion, financing and development of
industries in the SME sector, embodied an opportunity to set up a
proactive, responsive and forward looking institution to serve the current
emerging needs of SME in the country. As a precursor to the setting up of
the new institution, the SME fund was created by Industrial Development
Bank of India (IDBI) in 1986 exclusively for refinancing, bills
rediscounting and equity support to the SME. SIDBI started off from a
strong base: percentage of IDBI, backing of a special statute the Small
Industries Development Bank of India Act 1989.
20

3.1: PURPOSE OF SIDBI.
Small Industries Development Bank of India (SIDBI) was established
with the purpose to boost up small scale industries. Actually, small scale
industries were getting finished in lack of proper economic resources
whereas this was best option for the livelihood of middle class people
living in small cities and towns. SIDBI provided these economic
resources to small scale industries. Today, SIDBI is helping not only tiny,
small and middle industry rather this bank is also progressing by leaps
and bounds. Statistically, it could be explained as follows -
Growth Rate 22% during the financial year 2009-2010
Profits Increased by 41%
Dividend Declared 25% during the financial year 2009-2010

3.2: OBJECTIVES OF SIDBI.
Four basic objectives are set out in the SIDBI Charter. They are as
follows:
Financing
Promotion
Development
Co-ordination
The above objectives help in achieving orderly growth of industry in the
small scale sector. The Charter has provided SIDBI considerable
flexibility in adopting appropriate operational strategies to meet these
objectives. The activities of SIDBI, as they have evolved over the period
21

of time, now meet almost all the requirements of small scale industries
which fall into a wide spectrum constituting modern and technologically
superior units at one end and traditional units at the other.
Here, the major issues confronting SMEs are identified as follows -
Technology obsolescence and Lack of Appropriate Infrastructure
Managerial inadequacies
Delayed Payments
Poor Quality
Incidence of Sickness
Lack of Marketing Network
Initiating steps for technological up gradation and modernisation
of existing units
Expanding the channels for marketing the products of the small
scale sector
Promotion of employment-oriented industries, especially in semi-
urban areas to create more employment opportunities and thereby
checking migration of population to urban areas.
3.3: FUNCTIONS OF SIDBI.
SIDBI provides assistance to the small-scale industries sector in the
country through the existing banking and other financial institutions, such
as, State Financial Corporations, State Industrial Development
Corporations, commercial banks, cooperative banks and RRBs. etc. The
major functions of SIDBI are given below:
(i) Refinances loans and advances
(ii) Discounting and rediscounting of bills
(iii) Extends seed capital and loan assistance
(iv) Grants direct assistance
22

(v) Provides services like factoring, leasing, etc. to small units.
(vi) Extends financial support to State Small Industries
Corporations.
3.4: ROLE OF SIDBI IN THE DEVELOPMENT OF
SMEs.
SIDBI has emerged as a major purveyor of a wide variety of financial
services to the SME sector. At present financial assistance being provide
by SIDBI covers direct equity participation , equity type loan on soft
terms, loan, working capital- both rupee finance and foreign currencies,
bills discounting ,venture capital support and different forms of resource
support to banks and other institutions. The proportion of direct
assistance in the total portfolio of SIDBI has increased significantly.
3.5:RECENT TRENDS IN SME BANKING.
SME Banking is an industry in transition. From a market that was
considered too difficult to serve, it has now become a strategic target of
banks worldwide. The missing middle, describing the gap in financial
services provided to SMEs, is shrinking. SME banking appears to be
growing the fastest in emerging markets (low-and middle-income
countries) where this gap has been the widest. More and more emerging
market banks are developing strategies and creating SME units. In recent
times, investments in SME financial institutions had grown dramatically
over the last five years. Competition in other markets is one reason cited
for commercial banks moving downstream to serve SMEs. Also,
governments around the world now recognize the importance of the SME
sector and have worked to support its access to finance, sometimes by
addressing legal and regulatory barriers or building credit infrastructure.
But the key to the growth of SME banking may be that banks are starting
23

to understand the particular needs and preferences of SMEs, and are
developing tailored approaches to overcome the historical challenges of
high credit risk and cost to serve. One sign that banks are unlocking some
of the potential in the market is that they are reporting higher returns on
assets from their SME operations. Also, contrary to common perception,
the SME market is served by a wide spectrum of banks, not just smaller
banks with relationship-based models.
Today, despite the significant challenges posed by the current (2009)
global economic crisis, and the uncertainty ahead, many banks seem to be
holding fast to their strong commitment to the SME sector, especially in
emerging markets. While the full impact of the crisis is not yet apparent,
banks maintaining their focus on SMEs often cite a strong belief in the
importance of the SME sector to the national economy as a whole.
In addition to the above other latest trends in the field of SME Banking
are as follows:
a) Superior importance of non-traditional channels, with customers
presenting a greater propensity for the usage of internet banking as
a source of decreasing costs in transaction.
b) Greater tendency to shop-around obtaining 3 or 4 proposals before
taking the final decision, namely in what concerns credit lines.
c) Tendency of SMEs to outsource its activities not directly related to
their business, for instance in collections from customers, opening
opportunities for factoring and renting solutions.
d) Increase internationalization of SMEs leading to strong
investments on the modernization of their production line and the
establishment of local partnership in the potential markets etc.
24

3.6: EFFORTS TAKEN BY BANK FOR GROWTH
OF SMEs.
To effectively serve SMEs, banks have had to change the way they do
business, and manage risk, at each stage of the banking value chain. This
begins with working to understand the market, and how it differs from
both the retail and commercial segments. Next, in developing products
and services, banks have begun to understand that SME banking means
much more than SME lending and are, therefore, prioritizing non lending
products in order to provide total customer value. Leading banks report
that more than 60 percent of their SME revenues come from noncredit
products.
Banks have found ways to manage both costs and credit risk as they
acquire and screen clients. A banks current portfolio provides both a
low-cost starting point for generating new business and a source of
valuable data that can enable it to understand and predict the risks
associated with SME clients.
Developing this capacity to predict risk without completely reliable
financial information, by using tools such as credit scoring, has enabled
banks to more effectively screen potential clients. In serving SME clients,
banks are improving efficiency by using mass-market approaches for
smaller enterprises and using direct delivery channels where appropriate.
They also build their revenue base by prioritizing cross selling to existing
clients. Finally, banks are also adapting latest technology and various new
tools and techniques; they are also engaged in building capacity to
effectively use these tools for managing information and knowledge in
their service of the SME market, especially in understanding profitability
and risk. The experience of individual banks such as ICICI Bank, Wells
25

Fargo and Standard Chartered demonstrate innovative approaches to
SME banking so as to offer more and more better quality products and
services to the customers. Some of these innovations include multi-level
service segmentation, creative involvement in equity financing of SMEs
etc. Thus the prime objective of all banks includes Customer Satisfaction.
3.7: EXPANSION OF SME MARKET
The SME market includes a wide range of firm types and sizes. SMEs are
often family owned, and in most cases, the owner is the primary financial
decision maker. For Instance, sole proprietorships alone make up at least
52 percent of SMEs in Egypt and 58 percent in Taiwan. The SME
segment can be visualized as a pyramid, with most firms falling into the
smallest size category and the fewest firms falling into the largest size
category.
Banks looking to enter the market or expand their SME operations will be
able to draw from the lessons of other banks experience to date. These
lessons apply to operations in five strategic areas which are as follows-
(1) Primary focus is on its execution capabilities
(2) Market segmentation and availability of various products and services
(3) Sales culture and delivery channels
(4) Efficient credit risk management
(5) Adoption of new technology and up gradation of existing technology.
Before putting these lessons to use, however, banks need to follow a
process for market entry that begins with understanding the specific
opportunity in the SME sector and ends with developing a strategy and
implementation plan. Two tools that facilitate this process include market
26

assessment and an operational diagnostic. Here, market assessment is
mainly concerned with determining the size and nature of the opportunity
as well as the competitive landscape where as on the other hand an
operational diagnostic helps to highlight a banks strengths as well as
weakness. Hence serving SMEs is proving to be profitable and rewarding
for individual banks, and assisting the growth of SMEs will benefit
national economies as well. Banks looking to seize opportunities in the
market can use this as a means to learn about SMEs.
The SME market has been perceived in the past by banks as risky, costly,
and difficult to serve. However, mounting evidence suggests that banks
are finding effective solutions to challenges such as determining credit
risk and lowering operating costs, and are profitably serving the SME
sector. For these banks, unmet SME demand for financial services has
become an indicator of opportunity to expand their market share and
increase profit.
Products and packages that increase share of wallet and meet a range of
customer needs help banks establish a portfolio of high-value, loyal
clients. Leading banks have increased their product offering to SMEs
which is depicted by the following figure

27

EXPANSION OF SME MARKET







3.8: SME BANKING BY VARIOUS BANKS.
Small and medium enterprises are central to economic development,
particularly in emerging markets. In order for SMEs to grow and their
positive impact on the economy to continue, they need access to financial
services, which has historically been severely constrained.
The banking sector includes commercial and investment banks, leasing
companies, Micro Finance Institutions (MFIs), and other related
institutions. Commercial banks are the most important financial
intermediaries in most economies, as they link savings and investments.
Commercial banks are distinguished in that they normally lend to, rather
than invest in, SMEs. So the commercial banks unlike other specialized
finance providers offer a broad suite of products and services including
deposit, credit, transaction and advisory services. They also focus on
enterprises in the formal sector, rather than informal microenterprises
0
10
20
30
40
50
60
70
80
90
Big market Small market
Developed countries
Developing countries
28

which Micro Finance Institutions traditionally serve. The scope of SME
banking in comparison to other areas of SME finance includes leasing,
private equity, trade finance, micro finance etc. The SME banking market
consists of firms whose financial requirements are too large for
microfinance, but are too small to be effectively served by Corporate
Banking Models. SMEs do operate in different ways than large
enterprises, and may be less sophisticated financially, lacking in business
planning and cash flow management expertise. SMEs serve as a middle
ground for the economy, often transacting with large corporations and
providing links to the formal sector for micro entrepreneurs. They are
active at nearly every point in the value chain as producers, suppliers,
distributors, retailers, and service providers, often in symbiotic
relationships with larger businesses.
Bank products can also enable SMEs to take on more and larger
contracts. A small or medium enterprise may have a potential order from
a customer in place, but need cash up front to complete the order. Banks
can provide short-term working capital to such enterprises to purchase
supplies, pay employees, and meet obligations to clients. Providing help
with order fulfillment can extend across borders as well, with trade
financing assistance. For instance, with a letter of credit, exporting SMEs
can offer customers better payment terms because a bank pays the
enterprise based upon documentation of the sale and extends credit to the
customer of the enterprise.
Finally, SMEs have important operational needs that banks can meet with
non lending products that include deposits and savings, transactional
products, and advisory services. Some of these products can effectively
enable SMEs to outsource financial functions to the bank which includes-
29

Deposit and savings products: Deposit and savings products
provide businesses with basic financial management tools to help
organize revenues and savings. Additionally, mutual funds and
other investment products provide businesses with opportunities to
obtain earnings on excess capital.
Transactional products: Transactional products facilitate SME
access to and use of available cash. Automatic payroll and payment
collection, debit cards, and currency exchange are transactional
bank offerings that lower the cost of doing business and streamline
potentially complicated processes.
Advisory products: SMEs can benefit from help in producing
reliable financial statements, developing business plans, and
selecting appropriate financing products. These advisory services
can improve SME access to finance by enhancing its capacity to
apply for credit.
SME banking had been assumed to require difficulty-scale relationship
lending methods. However, many SME banking operations today make
use of sophisticated high-volume approaches, use statistical inputs in
credit risk assessment, and cost-effectively provide non lending products
at scale. Banks have also been able to develop synergies with existing
bank operations, for example, by integrating the service of SMEs with
that of the personal banking of the owner through retail or private
banking portfolios.
Risk-adjusted pricing models have also been important tools enabling
banks to profitably serve SMEs. Rather than avoid risk, banks have found
ways to incorporate the risks of serving SMEs into their pricing of
financial products. Some banks are able to use risk calculations to
develop multiple pricing approaches within the SME segment. SMEs
30

have proven willing to pay these risk-adjusted prices because they value
the services provided and because alternative providers are often more
costly. As a result, banks have been able to successfully serve this new
and untapped market. Thus, SMEs are the fulcrum of the economies we
work in, and the fulcrum of our banking strategy. Banking SMEs may be
riskier than banking corporations, but we price for the risk, and banking
SMEs is more profitably. There is a lot of capacity in the SME market.
3.9:KEY PROGRAMS FOR SME DEVELOPMENT.
Key programs for SME development includes:
1. Building the capacity and capability of SMEs, specifically in the areas
of entrepreneur development, human capital development, advisory
services, awareness and outreach, technology enhancement and product
development.
2. Strengthening an enabling infrastructure for SME development. This
involves developing and enhancing physical infrastructure and
information management as well as ensuring conducive regulations and
operating requirements relating to SMEs.
3. Enhancing access to financing by SMEs, which involves developing
and strengthening institutional arrangements to support SME financing
requirements.
The focus of such programs was mainly on the manufacturing and related
sectors, while consideration has also been given to ensure that sufficient
programs are implemented to support SMEs in the services sector, which
has the highest contribution to GDP.
3.10: SME BANKING TODAY.
The SME banking industry is young and growing. While the full effect of
the current financial crisis on this industry is uncertain, the general
31

orientation of emerging market banks toward SMEs does not appear to
have changed. Contrary to conventional wisdom, it is not exclusively
small banks that successfully serve SMEs. Many large banks have also
moved downstream to serve SMEs and are now dominant players in
their markets. Also serving the market are a few Micro Financial
Institutions that have moved upstream, although this remains relatively
rare. The significant gap in SME access to finance between high and low
income countries has been attributed to factors in the operating
environment, such as regulation and macro economic conditions.
However, these factors have generally not prevented the growth of the
industry. Most governments have policies to support SME finance,
though there is no single framework for effective support.
On the other hand banks have served small businesses to some extent for
generations, SME banking has only recently emerged as a distinct
industry. The significant expansion in lending to small businesses in the
developed world over the last couple of decades may be one reason why
only 30 percent of OECD (developed) countries report a gap in debt
financing of SMEs. These banks here are optimistic about the SME
market; these results indicate that the opportunity, in terms of unmet
demand, may be larger in developing countries.
3.11: ROLE OF SME BANKING.
The SME banking industry appears to be growing rapidly in emerging
markets; access to finance is generally still easier for a small firm in a
developed country than a firm of any size in a developing country.
Developing country banks surveyed in Bank Financing for SMEs around
the World, report more collateral requirements, less lending for
investment, and higher interest rates than developed country banks. These
differences dwarf those between lending to the small, medium, or large
32

enterprise segments, and they point to the historical impact of the
operating environment on the banking industry in general, and SME
banking in particular. However, bank innovation, sometimes combined
with improvements in the operating environment, has enabled the growth
of SME banking.
3.12: CHALLENGES FACED BY SME BANKING.
The main challenges banks are facing nowadays when approaching the
SME market can be summarized as follows:
a) Increase competition in this segment, where all the banks are
putting a strong commercial effort, and resulting in high pressure
on prices.
b) Better knowledge by the customer of the banks products and
services, leading to a higher bargaining position in terms of
negotiation.
c) Shopping decision more and more related to pricing and less to the
existing relationship with the bank, leading to a greater pressure for
price reduction.
d) Increase sophistication of SMEs needs, as a result of the higher
professionalization of their structures, namely hiring CFOs with
great experience and expertise on financial area.
3.13: STRATEGIES TO OVERCOME PROBLEMS
OF SME BANKING.
The success of every bank depends upon the services offered by them.
Customer forms the key part of very business. Without customers no
organization can succeed. So banks also have to provide various services
and products as per their customers needs and requirements. Here it is
the customer who determines what a business is. What the business thinks
33

it produces is not of first importance - especially not to the future of the
business and to its success. What the customer thinks he is buying and
considers 'value' is decisive. It determines what a business is, what it
produces and whether it will prosper or not.
Customer service is one of the greatest keys to any entitys success. They
are the ones who can literally make or break any business. This is so
because your entire business, marketing, sales and profits depend on your
customers. All the institutions may be in business to generate profits by
selling various products and services but to those people who need and
want to buy it. So it is clearly evident from all this that nothing else is as
important for a bank as their customers. Hence the prime aim of banks is
only to provide various services and products to their customers so as to
satisfy their needs and requirements.
3.14: FUTURE OF SME AND SME BANKING.
The SME segment has lately come into the limelight, with increased
focus from several government institutions, corporate bodies and banks,
and is viewed as agents of growth. Apart from the policy focus and
governments thrust towards promoting the SME segment, globalization
and Indias robust economic growth has opened several latent business
opportunities for this segment. However, there is a serious lack of
structured information on Indias SME sector. A sincere attempt to fulfill
this shortcoming should be made which was our principal rationale in
undertaking this exercise. This unique publication is in recognition of the
significant contribution made by SMEs to Indias industrial development.
It is estimated that SMEs account for almost 90% of industrial units in
India and 40% of value addition in the manufacturing sector. They
contribute 35% to Indias merchandise exports. This one-point reference
34

document will provide a platform that enhances the visibility of these
integral players in Indias economic growth story. The publication was a
challenge and involved contacting over 1,000 companies, screening them
on the basis of turnover, investment and employee size. The end result is
a repository of authenticated information on the truly small and medium
enterprises that have a turnover of less than Rs 1,000
Current trends in the auto component industry are indicative of a period
of high growth at least for another decade. With expectations of over
20% consistent annual growth till 2010, several Indian companies are
actively pursuing capacity expansion and entering into joint ventures
with foreign component manufacturers. India has also emerged as an
outsourcing hub for auto parts. The insights given in this publication
based on a statistical analysis of data collected from companies points to
some interesting benchmarks for the auto component companies in the
small and medium segment. The SME publication preserves the lineage
of providing information and knowledge that facilitate informed business
decisions. Thus India has drawn on its time-tested expertise in the
information business to the benefit of the small and medium companies.






35

Chapter 4: ANALYSIS OF DATA.
Analysis of SMEbanking:
Analysis of SME Banking have been done from the point of view of
following banks-
1. BANK OF BARODA
2. AXIS BANK
3. STATE BANK OF INDIA
4. BANK OF MAHARASHTRA
5. SYNDICATE BANK
6. CITY UNION BANK
1. HOW DO YOU CLASSIFY YOUR CUSTOMERS IN THIS
FIELD OF SME BANKING?

REMARKS: SME classification is based on investment in Plant and
Machinery for manufacturing units.
PLANT AND MACHINERY
1. Micro unit Less than 25 lakhs
2. Small Scale Industries Not exceeding 5 crores
3. Medium Scale Industries Not exceeding 10 crores
0
20
40
60
80
100
120
Micro Units
Small Scale Industries
Medium Scale Industries
36


2. ARE THERE ANY BANK POLICIES FOR FINANCING
OF SME WHICH HAVE TO BE ADHERED TO?


REMARKS BY STATE BANK OF INDIA
Liberal policy
1. Up to 1 crores no collateral covered under CGTMSE Scheme
2. Below 25 lakhs SME Credit Card
3. Above 25 lakhs SME Smart Card

REMARK BY CITY UNION BANK
Collateral free loan is available under CGFT Scheme.





0
20
40
60
80
100
120
YES
YES
37

3. ARE THERE ANY SPECIAL INTEREST RATES FOR
SME?


REMARK BY STATE BANK OF INDIA
The interest rate for SME is LOW as compared to other schemes.

4. WHAT IS THE CURRENT INTEREST RATE
PREVAILING IN THE SME SECTOR?

0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
NO
YES
13%
14%
15%
11%
11%
14%
Interest Rates
Bank of Baroda
Axis Bank
State Bank of India
Bank of Maharashtra
Syndicate Bank
City Union Bank
38

REMARKS BY BANK OF MAHARASHTRA
Interest for the year at Base Rate of the Bank + 0.50% at present
11% per annum with monthly compounding. The interest rate in
subsequent year for advances over Rs 25 lakhs will be determined
based on internal credit risk rating of the account. The interest rate
is always less than the interest rate on other commercial advances.
REMARKS BY CITY UNION BANK
Up to and inclusive of Rs 5 lacs 13.75%
Above Rs 5 lacs and up to Rs 20 lacs 14.00%
Above Rs 20 lacs and up to Rs 50 lacs 14.25%
Above Rs 50 lacs and up to Rs 100 lacs 14.75%

5. ARE THERE ANY RBI INCENTIVES FOR SME
BANKING?




REMARK BY STATE BANK OF INDIA
There are no RBI Incentives as such because it is
covered under Priority Sector Advances.
0
10
20
30
40
50
60
70
80
90
100
NO
YES
39

Chapter 5: CONCLUSION.
What prompts a person to take risk? Definitely not to earn livelihood.
There are many ways to earn livelihood. It has to be sense of achieving
something; a sense of pride in doing something . World does not lack
such kind of people. But there is vast difference in number of people who
aspire to achieve something and the number of people who can dare
anything to achieve it! Harsh realities with obstacle dissuade the rest.
Thus perhaps many people might want to start their own business
probably because of many difficulties coming in their way.
SME form the backbone of any economy and SME are vital for growth
of developing countries like India so financing of SME is considered to
be very important issue for any economy. Because of this reason most of
the banks, may it be nationalized banks or Private sector banks, all are
bringing different schemes for SME finance. So more efforts must be
taken to spread SME Banking worldwide so that all the citizens are aware
about it and are capable of utilizing it for their own benefit.
SME sector that consists of millions in our country producing more than
40% of our GDP can definitely play a very positive role if proper support
is given by removing bottlenecks in the project.