FINAL REPORT

ON
BANKING FOR SME IN INDIA

MASTERS OF BUSINESS ADMINISTRATION (BANKING AND INSURANCE)

2006-2008

Karan Raina
Roll no.38

August 2008

Dr. R.K. MITTAL

University School Of Management Studies

Guru Gobind Singh Indraprastha University, Delhi
August 2008
 FINAL REPORT
ON
BANKING FOR SME IN INDIA

A Report submitted to
University School Of Management Studies
Guru Gobind Singh Indraprastha University, Delhi

In Partial Fulfillment
Of the Requirements for the Degree
MASTERS OF BUSINESS ADMINISTRATION
(BANKING AND INSURANCE)
of Guru Gobind Singh Indraprstha University

Submitted by
Karan Raina

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 ACKNOWLEDGEMENT

I take this opportunity to thank my Parents, the Almighty and all those without whom this
endeavor of mine would not have been completed. I owe this to my guide, Dr.R.K.Mittal,
Dean, University School Of Management Studies, Guru Gobind Singh Indraprastha
University, Delhi, for his support, consultancy, encouragement, and patience which helped
me to complete this venture. I express my gratitude and sincere thanks to him for his
continuous and endless effort in guidance to me.

It would be prudent to commence this report with a sincere tribute to all those who played
an indispensable role in the accomplishment of this work and obliged whenever and
wherever their able guidance was required.

No task is a single man’s effort. Cooperation and coordination of various people at various
places go into the successful implementation. It is a great pleasure to have the opportunity
to extend my heart-felt thanks to everybody who helped me through the completion of this
project.

My acknowledgement would be incomplete without paying my gratitude to my friends for

their timely and valuable suggestions whenever required.

Karan Raina

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 TABLE OF CONTENTS

Sr. No Particulars Page No.

Acknowledgements iii

1 Abstract vi

2 Introduction 1
2.1 Objective 3
2.2 Methodology 4
2.3 Limitations of the Study 5

3 Indian Banking System: Historical Perspective 6

3.1 Current scenario 8
3.2 Bank and consumer finance 11

4 Small and medium enterprises 14

4.1 Meaning of SMEs in Different Countries 18
4.2 Contribution of Small and Medium Enterprises (SMEs) 20
4.3 Problems of SME’s 22

5 5.1 Financing the SME 25

5.2 Banks reluctances 27
5.3 Instrument of SME financing 28
5.4 Stages of financing 31
5.5 Limitations of traditional financing 34

6 6.1 SWOT Analysis 38

6.2 Role of the Government 39
6.3 Measures to Improve Access to Financing 39
6.4 Initiatives in India 41
6.5 SMEs Need Innovative Financing Tools 42

7 7.1 Win - Win situation for banks 47

7.2 NPA management 48
7.3 Banks see immense scope in SME 52

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 7.4 Future course of action 54

8 ICICI Bank 56
8.1 Overview 57
8.2 ICICI’s SME Division 59
8.3 SME Business Space 60
8.4 Various products and services for SME 61
8.5 Challenges Ahead 71
8.6 For leading in SME banking 72

9 Suggestions for Improvement 74

10 Conclusion 76

11 Bibliography 77

TABLE OF CONTENTS

Chapters Page No.

1. ACKNOWLEDGEMENT iii

2. ABSTRACT vi

3. INTRODUCTION
Objective
Methodology
Limitations of the Study

4. INDIAN BANKING SYSTEM: HISTORICAL PERSPECTIVE

Current scenario
Bank and consumer finance

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5. SMALL AND MEDIUM ENTERPRISES
Meaning of SMEs in Different Countries
Contribution of Small and Medium Enterprises (SMEs)
Problems of SME’s

6. FINANCING THE SME

Banks reluctances
Instrument of SME financing
Stages of financing
Limitations of traditional financing

7. SWOT Analysis
Role of the Government
Measures to Improve Access to Financing
Initiatives in India
SMEs Need Innovative Financing Tools

8. WIN - WIN SITUATION FOR BANKS

NPA management
Banks see immense scope in SME
Future course of action

9. ICICI BANK

10. SUGGESTIONS FOR IMPROVEMENT

11. CONCLUSION

BIBLIOGRAPHY

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 ABSTRACT

With the liberalization of the banking sector followed by liberalization of the economy
another area which could be seen mushrooming and having considerable growth potential
was Small and Medium Enterprises

Since the 1980s and, more particularly, in the 1990s, there have been marked changes in
the policy climate across the globe towards freer markets and reduced government
intervention. The global economy is characterized by greater integration, a more
liberalized international trade regime following the set up of the World Trade
Organization (WTO), a rapid pace of technological change, especially in some high-
growth areas such as information and knowledge-based industries, and intensified
international competition. India's economic policies are in the process of being
restructured, through the second generation reforms, to adjust to the emerging challenges.

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The main emphasis of future policy will be to promote the growth of this dynamic sector
through focused, sustained and wide-ranging interventions, as the SME sector has so far
been insulated to a large extent from pressures of competition both domestically and
internationally.

SMEs, in any economy account for around 70% of employment, around 35% of exports
and a majority of earnings to the nation. Despite this, SMEs have faced problems in
obtaining finance for their modernization, up gradation and projects.

Thus with a growing recognition worldwide that small and medium enterprises (SMEs)
have an important role to play in the present context given their greater resource-use
efficiency, capacity for employment generation, technological innovation, promoting
inter-sectoral linkages, raising exports and developing entrepreneurial skills. Their
locational flexibility is an important advantage in reducing regional imbalances. The
future of SMEs is of major policy concern given their strategic importance in any
discussion of reshaping the industrial sector. This is more so in the case of India, which
has one of the longest histories of government support to the small-scale industrial sector
since independence compared to most developing countries.
Thus we see that SME Sector has enormous potential and hence it cannot be neglected.

Although earlier banks were reluctant to provide financing to SME sector due to
Insufficient data on the SMEs, the lack of credible published information about their
financial health, the high vulnerability of small players in a liberalizing market and the
inadequacy of risk management systems in banks but now with SME’s export orientation
and more reliable financial data available banks want to explore this opportunity and make
a win-win situation both for themselves as well for the SME’s. The various means of
financing provided by the banks and various products and services offered is also covered.

ICICI is a prominent player in the SME segment and provides a wide range of products
for the SME segment such as current account, various kinds of loan facility, forex based
services, bank guarantees, letter of credit etc.

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Since this sector is still nascent in terms of banking preview so there are a lot of
challenges that would be faced by ICICI such as Lower cost of acquisition of clients,
to churn and retain credit worthy clients, Maintain high quality portfolio, Optimise
interest and fee based income.. ICICI would there by chalk out a proper plan out of
action which would involve measures like multichannel delivery, managing customer
expectations, Segmentation based on customer knowledge, Product offering based on
customer demand in order to stand out as leader in SME banking.

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