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M.S.RAMAIAH INSTITUTE OF
TECHNOLOGY
Autonomous Institution affiliated to VTU Vidhya
Soudha, M.S.R.Nagar,M.S.R.I.T post, Bangalore –
560054
SEMINAR
ON
“PROBLEMS IN SMEs”
Submitted By
Prasanna C.U
USN: 1MS08MBA34
CONTENTS
Introduction
o Teething troubles
o Financial problems
o Production problems
Department of Management Studies Page 2
MSRIT
o Marketing problems
o Technology problems
o Infrastructure problems
Learning Experience
Conclusion
Literature Cited
OVERVIEW
The small and medium manufacturing enterprises (SMEs) sector, the heterogeneous group
of enterprises, constitute a vibrant and dynamic sector of the Indian economy. This sector
has recorded consistently rising growth in terms of production, investment, creation of
employment and phenomenal growth in exports over the years. The post liberalization era
in the Indian economy has enhanced the opportunities and challenges for this sector. With
their dynamism, flexibility and innovative drive they are increasingly focusing on improved
production methods, penetrative marketing strategies and management capabilities to
sustain and strengthen their operations. In most developing countries, as also in India,
Department of Management Studies Page 3
MSRIT
Small Enterprises have been viewed as an engine of employment generation. SME Sector
in India creates largest employment opportunities for the Indian populace, next only to
Agriculture.
Units in Small and Medium Enterprises (SME) Sector include all units in tiny and Small
Scale industrial (SSI) sector and also those industrial units whose investment in plant and
machinery is up to INR 100 million. as per definition of RBI (defined in RPCD Circular
No. RPCD.PLFNS.BC. 31/ 06.02.31/ 2005-06 dated August 19, 2005)
The direct involvement of owner(s), coupled with flat hierarchical structures and less
number of people ensure that there is greater operational flexibility. Decision making such
as changes in price mix or product mix in response to market conditions is faster.
(c) Low cost of production
SMEs have lower overheads. This translates to lower cost of production, at least upto
limited volumes.
(d) High propensity to adopt technology
Traditionally SMEs have shown a propensity of being able to adopt and internalize the
technology being used by them.
(e) High capacity to innovate export
SMEs skill in innovation, improvisation and reverse engineering are legendary. By being
able to meet niche requirements, they are also able to
capture export markets where volumes are not huge.
(f) High employment orientation
SMEs are usually the prime drives of jobs, in some cases creating upto 80%. Jobs SMEs
tend to be labor intensive per se and are able to generate more jobs for every unit of
investment, compared to their bigger counterparts.
Nevertheless, the spread of SMEs is a fact which enhances their attraction from a national
or regional policy.
SIGNIFICANCE OF SMEs:
• Act as nursery for entrepreneurship: MSMEs provide a natural habitat for entrepreneurs.
Through this platform, the latent/ raw talent available locally can hone their skills and
talents, to experiments, to innovate and transform their ideas into goods and services
needed by the society.
Small and Medium Enterprises (SMEs) are often confronted with problems that is
uncommon to the larger companies and multi-national corporations. These problems
include the following:
TEETHING TROUBLES:
The first step viz the preparation of project report, calls for the collection of data on the
marketability of the product chosen, the availability of raw materials, the manufacturing
techniques involved the choice of machinery and location. While large unit can afford to
pay a fat fee to a consultant for the preparation of the project report, the small industrialist
has to generally rely on himself.
FINANCIAL PROBLEMS:
All kinds of business enterprises require sufficient funds in order to meet their fixed as well
as working capital requirements. Finance is one of the critical inputs for growth and
development of the micro,small and medium enterprises. They need credit support not only
for running the enterprise and operational requirements but also for diversification,
modernization/upgradation of facilities, capacity expansion, etc.
Inadequate access to credit is a major problem facing micro, small and medium enterprises.
Generally, such enterprises operate on tight budgets, often financed through owner's own
contribution, loans from friends and relatives and some bank credit. They are often unable
to procure adequate financial resources for the purchase of machinery, equipment and raw
materials as well as for meeting day-to-day expenses. This is because, on account of their
low goodwill and little fixed investment, they find it difficult to borrow at reasonable
interest rates. As a result, they have to depend largely on internal resources.
In respect of MSMEs, the problem of credit becomes all the more serious whenever any
difficult situation occurs such as a large order, rejection of consignment, inordinate delay in
payment, etc. Sometimes, they have to close down their operations due to shortage of
funds. Also, there is little or no scope for expansion and growth due to dearth of capital.
Hence, economies of scale are not available.
Recognising the importance of easy and adequate availability of credit for ensuring
sustainable growth of the MSME sector, the government has undertaken several measures:
Provision of finance to the sector is a part of the 'Priority Sector Lending Policy' of the
banks (both domestic and foreign banks operating in India. For the public and private sector
banks, 40% of the net bank credit (NBC) is earmarked for the priority sector. For the
foreign banks, 32% of the NBC is earmarked for the priority sector, of which 10% is
earmarked for the small scale sector. In the case of foreign banks operating in India which
fail to achieve the priority sector lending target or sub-targets, an amount equivalent to the
shortfall is required to be deposited with SIDBI for one year at the interest rate of 8 percent
per annum.
SIDBI has been set up with the mission to empower the Micro, Small and Medium
Enterprises (MSME) sector with a view to contributing to the process of economic growth,
employment generation and balanced regional development. It is the principal financial
institution responsible for promotion, financing and development of the sector. Apart from
extending financial assistance to the sector, it coordinates the functions of institutions
engaged in similar activities. The four basic objectives of SIDBI for orderly growth of
industry in the small scale sector are:
Financing
Promotion
Development
Co-ordination
SIDBI's major operations are in the areas of (i) refinance assistance (ii) direct lending and
(iii) development and support services.
Taking into account the fact that a majority of such enterprises which are at the lower-end
of the sector are outside the ambit of institutional finance. Hence, concerted efforts have
been made by SIDBI to promote micro finance across the country to enable the
unemployed persons to set up their own ventures. There are more than 100 Micro Finance
Institutions (MFIs) developed by SIDBI that are engaged in implementation of its micro
finance programme. SIDBI has disbursed about Rs.1700 crore (cumulative) under its
programme, benefiting around 50 lakh beneficiaries.
At the State level, State Financial Corporations (SFCs) along with the State Industrial
Development Corporations (SIDCs) are the main sources of long-term finance for the
sector. State Financial Corporations, the state-level institutions have played an important
role in the development of small and medium enterprises in their respective states with the
main objectives of financing and promoting these enterprises for achieving balanced
regional growth, catalyse investment, generate employment and widen the ownership base
of industry.
Credit Guarantee Cover Fund Scheme for Small Industries was launched jointly by the
Government of India and SIDBI (on a 4:1 contribution basis) in August 2000, with a view
to ensure greater flow of credit to the sector without collateral security. It picked up during
the last two years of the Tenth Plan and till the end of March 2007, 68062 proposals were
approved and guarantee covers for Rs 1705 crore were issued. up during the last two years
of the Tenth Plan and till the end of March 2007, 68062 proposals were approved and
guarantee covers for Rs 1705 crore were issued.
Policy Package for Stepping up Credit to Small and Medium Enterprises (SMEs), was
launched with the objective of doubling the flow of credit to this sector within a period of
five years. The measures in the policy package, inter alia, include banks to achieve a
minimum 20% year-on-year growth in credit to the MSME sector and cover on an average
at least 5 new MSMEs at each of their semi-urban/urban branches per year.
PRODUCTION PROBLEMS:
Non-availability of quality raw materials on a timely basis in an adequate quantity is one of the
main problems faced by micro, small and medium enterprises. There is acute shortage of even
the basic raw materials required by small scale units. These units are under a handicap in
obtaining raw materials of requisite quality at reasonable prices. They do not get the benefits of
bulk buying. For instance, the handloom industry is facing shortage of yarn. Small scale
industries also face shortage of power due to which they are unable to make full utilization of
plant capacity. Majority of them cannot afford to install their own power generating plants to
ensure uninterrupted operations.
National Small Industries Corporation (NSIC) and State Small Scale Industries Development
Corporations are involved in making efforts for providing some raw materials to MSME sector.
NSIC aims to help small scale units by financing purchase of raw material (both indigenous and
imported), thus allowing them to focus on manufacturing quality products. It facilitates
availability of scarce raw material either through the domestic market or by importing.
State Directorate of Industries distributes scarce raw materials to small units. They have set up
depots for distribution of raw materials to small scale industries (SSIs). The Central
Government has introduced a buffer stock scheme to ensure availability of scarce raw materials
to this sector.
Raw Material Assistance Scheme of NSIC aims at helping small scale industries by way of
financing the purchase of raw material (both indigenous & imported). This gives an opportunity
to SSIs to focus better on manufacturing quality products. Benefits of the Scheme
NSIC takes care of all the procedures, documentation & issue of Letter of credit in case
of imports.
MARKETING PROBLEMS:
Out of several problems faced by small and medium scale entrepreneurs, the absence of
adequate marketing and export facilities is one of their main concerns. Almost all types of
business enterprises face marketing problems, but the small and medium scale enterprises
face greater difficulty in the marketing and distribution of their products. Some of these
are:-
Small and medium entrepreneurs tend to face tough competition from the products
and sales/ marketing strategies of large scale firm's entrepreneurs. They, at times,
find it very difficult to cope with large scale entrepreneurs in terms of cost, quality,
standards, popularity, meeting ever-changing demands/ preferences of consumers,
etc.
Most of them do not have their own marketing network. So, they ultimately have to
rely on outside sources for distributing their products. This also tends to raise the
cost of their products and services.
Most of them do not have good knowledge and/ or experience of various marketing
concepts and strategies. As a result, they are unable to understand quickly and
accurately the prevailing as well as constantly changing market trends. Furthermore,
inspite of having huge potentialities of extensive market for their products, they are
mainly unwilling to opt for efficient marketing techniques.
They also lack the resources and funds needed for effective sales promotion. Many
of such enterprises cannot afford to spend much on advertising, sales promotion,
market research, etc.
They find it difficult to sell their output at remunerative prices because of higher cost
of production and non-standardised quality of products.
They also have to sell their products at throwaway prices due to their weak
bargaining power (especially in dealing with big buyers) and urgent needs of funds.
Thus, it is right to say that most of small and medium entrepreneurs do not correctly
understand as to what kind of products are actually needed by the market, how big/small is
the market, when the products are needed and how to deliver such products. All these
problems keeps them mainly isolated from the market trends and conditions and, thus, tend
to restrict their operations.
Besides, small and medium scale enterprises are the most significant contributor in the field
of India's exports. There has been a prominent increase in the exports from this sector of
both traditional and non-traditional goods including jewellery, garments, leather, hand
tools, engineering goods, software, etc. Also, the enterprises with good export performance
have greater stability in the economy. But, there is still lot of problems in exporting the
products by small and medium entrepreneurs to other regions/ countries/ areas. They are
not very familiar with the steps and formalities involved in exporting goods from India.
They need to be made aware of all the steps involved in the process, such as, registration of
exporters; selection of export market and buyers; receipt of enquiries, letter of intent, letter
of credit, bill of lading, etc; insurance coverage; obtaining shipping order; certificate of
origin; sending documents to importers; etc.
MANAGERIAL PROBLEMS:
Small scale firms are generally managed by the owners who very often does not possess the
skills required for the efficient management of the enterprise. There is lack of proper
division of work and benefits of specialization are not available. some owner-managers are
reluctant to adopt modern methods of organisation and management. There is instability in
business because the sickness and dearth of the owner manager directly affects the survival
and growth of the small firm.
human resource development, information technology, and e- commerce, etc. Also, it aims
to make them aware about emerging practices in the field of industrial management.
National Institute for Micro, small and Medium Enterprises (ni-msme) has taken gigantic
strides to become the premier institution for the promotion, development and
modernization of the Small and Medium Enterprise sector. An autonomous arm of the
Ministry of Micro, Small and Medium Enterprises (MSMEs), the institute strives to achieve
its avowed objectives through a gamut of operations ranging from training, consultancy,
research and education, to extension and information services
TECHNOLOGY PROBLEMS:
Majority of the small scale units use old techniques of production and outdated machinery
and equipment. Upgradation of the technology and achieving economies of scale is one of
the major problems facing the sector. They cannot afford new machines and equipments
and are therefore not in a position to use the latest techniques of production. They do not
find it possible to conduct research and development on a continuing basis. Therefore,
productivity and quality in small scale firms tends to be low while unit cost of production is
generally high.
But with liberalization of the economy, the MSMEs are facing stiff competition from
imports and need technological upgradation in order to produce better quality products at
cheap rates.
As far as sourcing technology is concerned, small businesses face the following three
essential problems:-
Obtaining information about technology is the first important issue. For most of
them, information about available technology options is through word of mouth or
from a visit to an advanced unit. Few have access to technical literature, professional
journals or information about new product launches. But with the advent of internet,
new vistas are opening up through electronic journals, catalogue downloads and
advanced search facilities.
Actual procurement of the technology is the next important issue because even if
information is obtained, there are barriers to import of technology and other
problems relating to technology transfer, vendor capability, after sales support,
import procedures, etc which impede procurement.
Acquiring finance for technology upgradation is also a problem. Small enterprises
generally look to external sources of funding for upgrading technology as
withdrawing money from business entails its own costs.
With a view to foster the growth of MSME sector in the country, government has taken up
several initiatives:
In order to reduce the cost of funds, a scheme called Credit Linked Capital Subsidy Scheme
(CLCSS) for Technology Upgradation in Small Scale Industries has been put into place. It
aims at facilitating technology upgradation by providing upfront capital subsidy to small
scale industry units, including tiny, khadi, village and coir industrial units, on institutional
finance (credit) availed of by them for modernisation of their production equipment (plant
and machinery) and techniques.
Small Industries Development Bank of India (SIDBI) in collaboration with United Nations-
Asian Pacific Centre for Transfer of Technology (UN-APCTT) had established Technology
Bureau for Small Enterprises (TBSE) to bring synergy between Technology and Finance
for Small and Medium Enterprise (SME) sector. The objectives of the company are to:
identify business partners willing to collaborate and extend support to tie up financial
assistance and other requirements such as drafting agreements, obtaining various
approvals and preparation of business plans required for transfer of technology.
provides financial syndication through banks and financial institutions.
Besides, National Small Industries Corporation Ltd. (NSIC) has taken up an initiative to
enhance technology options for small scale industries. An ISO 9001 certified company, it
has been working to fulfill its mission of promoting, aiding and fostering the growth of
small scale industries and industry related small scale services/business enterprises in the
country. Over a period of five decades of transition, growth and development, NSIC has
proved its strength within the country and abroad by promoting modernization, upgradation
of technology, quality consciousness, strengthening linkages with large medium enterprises
and enhancing exports - projects and products from small industries.
Also, Small Industries Development Organization (SIDO) has set up 10 Tool Rooms and
Training Centres in the country in order to assist small scale units in their technical
upgradation by providing good quality toolings.
Besides, National Small Industries Corporation Ltd. (NSIC) has taken up an initiative to
enhance technology options for small scale industries. An ISO 9001 certified company, it
has been working to fulfill its mission of promoting, aiding and fostering the growth of
small scale industries and industry related small scale services/business enterprises in the
country. Over a period of five decades of transition, growth and development, NSIC has
proved its strength within the country and abroad by promoting modernization, upgradation
of technology, quality consciousness, strengthening linkages with large medium enterprises
and enhancing exports - projects and products from small industries.
Also, Small Industries Development Organization (SIDO) has set up 10 Tool Rooms and
Training Centres in the country in order to assist small scale units in their technical
upgradation by providing good quality toolings.
INFRASTRUCTURE PROBLEMS:
Adequate infrastructure facilities are necessary for the overall development of every sector
of the economy. In the wake of liberalisation and globalisation, its presence and importance
for the proper growth of small and medium enterprises cannot be underestimated. Both the
Central and the State Governments are making continuous efforts to upgrade the
infrastructural set up of the various States/ Union Territories (UTs)/ Districts of the
country. Inspite of all this, the small and medium scale entrepreneurs are constantly facing
the problem of infrastructural bottlenecks, which restricts their day-to-day business
operations as well as their future growth prospects.
Some of the major problems faced by small scale entrepreneurs with respect to
infrastructure are:-
Lack of proper airways and waterways facilities also restricts the growth prospects of
those medium/small scale firms whose target market is located abroad.
Small and Medium scale enterprises face shortage of power supply, due to which
they are unable to make full utilization of plant capacity. Most of them find it
difficult to install their own power generating plants, so as to ensure their
uninterrupted operations, due to lack of required funds.
Most of them are located in rural areas or remote areas of the country, due to which
they find it difficult to communicate with people outside the region. This is because
of non-existence of proper telecom network.
Hence, small and medium scale entrepreneurs continued to face the problem of
infrastructure bottlenecks in terms of presence of inadequate transportation facilities, low/
no access to sound power supply, lack of proper communications channels, inadequate
marketing facilities, lack of funds, etc. All this affects the long run profit earning capacity
of such entrepreneurs as well as inhibits the chances of survival of enterprises run by the
LEARNING EXPERIENCE:
The process of privatization, liberalization and globalization has affected the whole
economy. It has increased the sphere of competition in national as well as international
markets and has created the environment where fittest will survive and inefficient will be
weeded out. Therefore the policies when implemented in letter and spirit are expected to
make SMEs more competitive nationally and globally as well. Above all, it will inculcate
entrepreneurial culture and generate employment for youth and instill a sense of pride
among them.
• Arrangements may be made by the government to ensure the supply of trained and
professional managers for the small scale sector.
• Provide special incentives for encouraging larger flow of Venture Capital & Private
Equity funds into the sector.
• There is an urgent need to devise measures to tackle the problem of loss of fiscal
benefits when the micro and small-scale units graduate into larger units, etc.
BIBILOGRAPHY
Books:
Journals:
Websites:
• www.business.gov.in
• www.smallindustryindia.com
• www.dcmsme.gov.in
• www.lubindia.org/ssi/
• www.wikipedia.org
• www.smeworldonline.com