SMALL AND MEDIUM ENTERPRISE-AN OVERVIEW-

PRESENTED BY

T.P.MISRA

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 units-proposes 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• Old/outdated technology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 borrower”s 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 borrwer”s 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,Auditor”s certificate on 6”monhly 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 pre- operativeexp.,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