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SMALL AND MEDIUM ENTERPRISE

-AN OVERVIEW-

DEFINITIONS
Micro Enterprise: Investment in P&M25 lacs
manufacturing & upto Rs 10 lacs in equipment in
service sector
S.S.I-Investment in p&m does not exceed
Rs500lacs in P&M and Rs10 to 200 lacs in
equipment in service sector
Medium Enterprise: Above 500 lacs and upto
Rs1000lacs in P&M in manufacturing and Above
rs 200 lacs upto Rs500 lacs in

DEFINITIONS
Equipment in service sectorncillary unitsproposes to supply 50% of its production or
services
Tiny units-Investment in p&m does not
exceed Rs25lacs
Village & cottage industry.--population not
exceeding 50000.

DEFINITION CONTD.
Women enterprises--SSI related related
service where share of the women as partner
shareholders,directors not less than 51%.
Export oriented units--exports at least 30% of
its production.
SSSBE--An industry related service business
enterprises with investment in fixed assets
upto 5lacs except land&bldg

Importance of S.S.I.
Provides employment next to Agri.
Accounts 40% of the total export of the
country
Plays crucial role in the economy.

Inherent advantage of S.S.I


1-Shorter gestation period
2-Low cost of establishment
3-Widely dispersed building wider
industrial base.
4-Low capital intensive.
5-Potential for employment
6-Effective mobilisation rural resource

Why S.S.I fails

Inordinate delay in sanction of credit limit


Need based lending not extended
Big units deleberately promote ancillaries
Placed order in large nos of small ones
Gets payment on the whims & fancies of
big units
Disadvantageous position of raising funds

Inherent weakness of S.S.I.

Lacking basic infrastructure


Old/outdated technology
Poorly placed in market situation
Promoters lack specialisation
Weak capital base &lesser access to capital
market
Lacking managerial&professional skills

Inherent weakness of SSI contd.

Face resource crunch


Poor accounting system
No planning budgeting or monitoring
Short term fund are deployed for long term
uses
Pre operative expenses are not considered
in project appraisal

Role of Govt.of India& R.B.I

Banks should convey timely sanction


Loan applications to be timely disposed
Need based & timely credit to be extended
Simplified & uniform application form
Rejection of application form should be done with
approval of higher authorities
Collaterals upto 1lac not to be insisted

Role of GoI & R.B.I. Contd.


Financial assistance for meetig T/L&W/C
be given
Interest on delayed payment to SSI and
ancillary undertaking act 1993.
Target for financing priority secctor where
SSI is a constituent

Bankers approach to SSI


financing

Anxiety to secure banks fund at any cost


Stop discounting bills of SSI units
Discourage to draw against book debts
Current ratio is lowered due to high
receivables
Branches are not equiped nor trained
Borrowers are not educated.

Activities not covered under SSI

SSI units set up by state/central govts.


Hotels,Tourism,Cinema house
Tea processing blending ,Diagonistic center
Pharmaceutical companies working on loan
licencing policy

Structured approach in SSI


financig
DEHEJIA COMMITTEE RECOM.
1-Tendency to avail short term credit more
than requirement
2-Tendency to divert short term funds for
acquisition of non current assets
3-Approach of the bank is security oriented
4-Correct credit assessment is not done

Dehejia committee
recommendation
Appraisal of credit application based on
present & projected financial position
Bank with one bank to avoid multiple
financing
Cash credit requirement should be
segregated into hardcore &short term
component

Puri Committee recommendation


Uniformity & simplicity of loan application
No viable scheme shall be turned down for
want of margin
Largely be guided for viability not to insist
collaterals
Repayment considered as per sustenance
Loaning power,uniform appraisal

Tandon committee
recomendations

Norms for inventory & receivables


Approach to lending
Identification of excess borrwing
No slip back in current ratio except
expansion, diversification,reduction of
public deposit ,payment of statutory
dues,full capacity utilisation

Chore committee
recommendation

Periodical review
Quarterly information system QIS-I,II,III
Peak nonpeak level limit
Regulation of drawal of funds
Ad hoc limits
Enhancement of borrowers contribution

NAYAK COMMITTEE
RECOMMENDATION
Banks should step up the credit flow to meet the legitmate requirement of
SSI through preparing an annual budget for new units,functioning
units,&sick SSIunits
Single financing agency to meet T/L,W/c, requirement
upto20lacs&10lacs respectively.The single window scheme of SIDIBI
enables the same agency to cater the need.
Inventory norms &Ist method of lending not applicable to ssi units upto
50lacs(raised to 100lacs).As such fudbased facility upto 10lacs &10 to
50 lacs are subjected to inventory&receivable norms & ist method of
lending respectively
The banks lend on the basis of 1st method of lending to those units
engaged in marketing&trading of SSI products.subjected to condition
that dealing with100% products &due settled in30days.

Nayak committee (contd)

Banks have been advised to give preferences to village industries,tiny


industries,& other SSI while extending finance to SSIs.

IMPORTANT BANKING OPERATIONAL


CLARIFICATION ON NAYAK COMMITTEE
RECOMMENDATIONS

The assessment of credit limitsfor all borrwers enjoying credit limits


less than 1crores--(fund based)is to be granted on higher of the 2 limits
assessed on the basis of traditional &turn over methods
Where the w/c cycle is shorter than 3months the w/c requirements
would be less than 25%of the PTO
If the liquid surplus available is more than 5%of the T/Othe limit can

Operational clearification on
Nayak commt. Contd.

fixed at a lower than 20% of the T/O


The units having operating cycle more than 3monhs should be
provided proper limits since 20% T/O is the minimum
In case of seasonal industries peak/nonpeak level should be considered
instead of annual turn over.
Creditos & OCL are to be considered as source of funds for building
C/A & will be treated in the same manner as in traditional method
The borrwers contribution should be 5%ofT/O except where the w/c
cycle is not taken as3 monthsThe margin will proportionately increase
with increase in period of operating cycle.Care to maintain 1:4 ratio
should be ensured. Higher liquidity surplus could be considered.
Dilution less than 5% could be considered except in sick units

Operational clearification on
Nayak commt. Recomm.

The sub limits against various componets of stock,Receivables are


sanctioned based on norms of inventory & receivables .Banks should
adopt a flexible approach.
Monitoring of borrowal account based on stock ,book debt
statements.actual turn over on monhly basis,Auditors certificate on
6monhly basis.This would help in arriving effective operational
limits.
In order to check the validity of projection of existing units actuals for
last 5 years ,esimates ,prjections including true analysis of industries to
which the borrowing unit belongs is useful.Other information like
modernisation, expansion,manufg.
Capacity,govt.policy,taxation,external&internal factors are relevent.

Kapur committee
recommendation
Delegation of sanctioning power
To be delegated to sanction 20% of limit as
adhoc limit
Banks to consider composite loan limit upto
5lacs (enhanced to 10lacs)
Project requiring credit upto 25lacs should be
sannctioned by banks or sfc .For loans
>25las sidibi with banks to have MOU sign

Kapur committ. Recm. contd


sfc & selected public sector banks. The
securities shall be shared on pari pasu basis.
Application forms used--2lacs-->10lacs, 15
lacs--->50lacs,upto 1crore--->50lacs to 2cr.
For considering applications acommittee
approach should be considered & disposed
of with in1month.

Kapur committ.recm. Contd.


One field officer in specialised branch should
handle at least 50ssi accounts
A charter of credit entitlements hae to be
displayed at the banking hall.Selective
specialised banks have to experiments with
new products such as Factoring services.
The loan application should be examined by
an officer with adequate experience.

Kapur committ. Rcom. Contd.


Refer-april1998,co/br/84/71 dated4-6-1992
Where banks have first charge on fixed assets
,they should not ask cash margins from ssi
borrowers for non-fundedfacilities provided
there is adequate surplus to cover .
Special term loans be granted to meet preoperativeexp.,technicalfee,collaborationcost,
invst.inR&D,marketingexp..

Kapur committ.recom.contd.
Exemption of collaterals upto 1lac
Upto 10lacs the collaterals plus netmeans of
3rd party guarentee should not exceed
50%of fund & non fund based business.
Banks should at least should finance 10% of
its accounts without collaterals.

Working capital requirement of


SSI units

EXISTNG UNITS
Balance sheet,profit&loss accounts.
Cash & credit sales
Cash& credit purchases of raw materials
Basis for manufacturing cost&overheads
basis for administration expenses
liquid surplus available
opening&closing stock balance
manufacturing process details&marketing arrangements

W/C requirement--new units

Projected balancesheet
Projected profit&loss account
Basis for projecting manuf.exp.&admn.exp.
Period involved in various stage of
operating cycle
Prportion of cash&credit sales
Liquid surplus presently available

W/C assessment ---new units


Manufacturing process details
Closing stock of RM,SIP,FG,&receivable
estimate
Demand&supply &marketing arrangement

Factors determine W/C

Policies for production


Manufacturing process
seasonality
pace of turn over

Fixing the quantum of W/C


RM--place of availability,mode of
availability,minimum quantity stipulation,
seasonality,price variation,lead time,
S.I.P.---Technology used,no. of processes,
Finished Goods--market for sale,Selling
arrangements, product quality
Receivables--Demand &supply position

Fixing quantum of W/C contd.


--Receivables-----other competitors,credit
period,credit policy,discount allowed,
buyers financial soundness,

Fixed assets financing through


Term Loan

The appraisal of the term loan covers 4 broad aspects of the project
such as TECHNICAL, FINANCIAL,ECONOMIC.MANAGERIAL
FINANCIAL--COST OF THE PROJECT
Land&site development,Building,Plant&Machinery,Techinical Know
how&other misc related charges,expenses on training,misc.fixed assets
preliminary exp.,preoperative expenses,provision for contigencies,
margin for working capital.
MEANS OF FINANCE
Share capital,reserve&surplus,retained earnings,long term
borrowings,deferred payments,other sources.

PRESENTING A CREDIT
PROPOSAL

Documentation of creation of entity


Names,address,brief biodata &details of assets &liabilities
Particulars of securities other than primary
Copies of assessment orders of income-tax,wealth tax,sales
tax,excise duty assessment order .
Documents authorising the approval of---SSI registration
certificate,power sanction letter,NOC from muncipal
/pollution control board etc.
Details of borrwings
Audited balance sheet/profit &loss account

Presenting a credit proposal


Details of associates
Loan application form
In case of term loan a project report covering
-projected balance sheet,profit &loss a/c,cash/fund
flow,DSCR chart,break even
chart,depriciation,int.rate chart,copy of tittle of
land,estmate of construction,quotation,list of
existing plant&machinery,copy of import licence

Post sanction monitoring of SSI


advances

A.Getting the sanction accepted


B.Documentation
C.Flow of information
Dperiodical inspection
E.Insurance
F.Periodical review/renewal of credit limits